Many governments have established publicly-owned development banks or other finance institutions, which may provide a range of financial products to PPP projects. These financial institutions may be capitalized by the government, and can often also access concessional financing. Where these entities operate more or less as commercial finance institutions they may be better-placed to assess the viability of a proposed PPP project than the government itself-although some such institutions can also be exposed to political pressure that may undermine the quality of due diligence or project structuring.
In some cases, established development banks may expand their activities into the PPP sector. For example, the Banco Nacional de Desenvolvimento Econômico e Social in Brazil (BNDES) has been a major lender to private infrastructure projects in Brazil-appraising risk and providing finance in a similar way to a private commercial bank [#29, Annual Report].
Alternatively, governments may establish finance institutions specifically to serve PPPs, and sometimes other infrastructure investments. For example, the India Infrastructure Finance Company Limited (IIFCL) was established in 2006 to provide long-term debt to viable infrastructure projects undertaken by public or private companies. In Indonesia, the Indonesia Infrastructure Guarantee Fund (IIGF) was established in 2009 as a state-owned company to provide guarantees for infrastructure projects under PPP schemes. However, as described by Klingebiel and Ruster in their paper on infrastructure facilities [#172], unless policy and institutional frameworks are developed to provide a pipeline of bankable projects then government-backed financing facilities are unlikely to provide the hoped-for results.
Government-owned finance institutions can also be used to provide PPP policy coordination and enforcement, by establishing clear rules and requirements for when financing will be available. This can particularly apply when a financial institution is set up specifically to serve the needs of a PPP program. For example, in Mexico most PPPs have been implemented with the support of FONADIN, an infrastructure investment fund under the national development bank BANOBRAS. The operating rules for FONADIN de facto established the rules and procedures by which PPP projects will be implemented, as described in Box 1.12: Mexico's FONADIN.
Box 1.12: Mexico's FONADIN Prior to 2012, Mexico had no PPP Law. However, most government agencies that implement projects through PPP schemes did so with the support of the Fondo Nacional de Infraestructura (FONADIN). Exceptions are typically projects that are "self-financing"-that is, projects that generate revenues that are sufficient to cover the costs; the two government entities that generally follow this path are CFE (the national electric company) and PEMEX (the national oil company). In addition to providing subsidized lending and, in some cases grants, FONADIN can help agencies in providing grants for the preliminary studies for the project, preparing the project documentation and implementing the tender process. In practice, this has meant that the Presidential Decree that established FONADIN in 2008 has effectively governed most PPP projects. Under that decree, the Rules of Operation of FONADIN set out the scope, and the processes and procedures to identify, assess, and approve PPP projects. Source: BANOBRAS (2000) FONADIN Reglas de Operacion (Operation Rules) |
Key References: How PPPs Are Financed | |
Reference | Description |
Farquharson, Torres de Mästle, and Yescombe, with Encinas (2011) How to Engage with the Private Sector in Public-Private Partnerships in Emerging Markets, World Bank/PPIAF | Chapter 5 provides an overview of private finance for PPPs, focusing in particular on challenges faced in developing countries |
E. R. Yescombe (2013) Public-Private Partnerships: Principles of Policy and Finance, 2nd edition, Elsevier Science, Oxford | Provides comprehensive coverage of PPP financing: putting PPPs in context; describing financial analysis of PPPs and how this informs investment decisions by both public and private parties; debt financing structures and sources; how PPP financing plans are constructed; and how financing requirements are reflected in contractual terms |
Delmon, Jeffrey (2009) Private Sector Investment in Infrastructure: Project Finance, PPP Projects and Risks (2nd ed.), London: Kluwer Law International | Also covers a wide range of topics on PPP financing. These include an introduction to project finance structures and typical terms (Chapter 2); typical contractual arrangements for a PPP (Chapter 3); and bankability (Chapter 4) |
Daube, Vollrath & Alfen (2007) A Comparison of Project Finance and the Forfaiting Model as Financing Forms for PPPs in Germany, International Journal of Project Management, 28(4) 376-387 | Describes the forfaiting model used in Germany as an alternative to project finance, to lower financing costs for PPP projects |
David Ehrhardt & Tim Irwin (2004) Avoiding Customer and Taxpayer Bailouts in Private Infrastructure Projects: Policy toward Leverage, Risk Allocation, and Bankruptcy, World Bank Policy Research Working Paper 3274 | Describes how high leverage combined with high-risk projects and a reluctance to allow a PPP company to go bankrupt can create problems for PPPs, and suggests options to help address the problem. Includes case studies of PPPs in Australia, the United Kingdom, Brazil, and Mexico. |
Clive Harris & Sri Kumar Tadimalla (2008) 'Financing the Boom in Public-Private Partnerships in Indian Infrastructure: Trends and Policy Implications', Gridlines 45, World Bank/PPIAF | Describes how financing structures for PPPs in India have evolved as the use of PPPs has increased since the mid-1990s-in particular, noting an increasing proportion of debt financing-and provides some policy lessons |
Federal Highway Administration (2010) Project Finance Primer, US Department of Transportation, Washington, D.C. | Outlines the United States financing mechanisms for highway infrastructure. Chapter 4 describes three mechanisms by which the United States government may provide credit assistance to private investors in roads. |
Department of Economic Affairs (2008) Scheme and Guidelines for Financial Support to Public Private Partnerships in Infrastructure. New Delhi, India: PPP Cell, Ministry of Finance, Government of India | Describes India's Viability Gap Financing scheme for providing capital subsidies to private infrastructure projects |
United Kingdom, House of Commons, Committee of Public Accounts (2010) Financing PFI Projects in the Credit Crisis and the Treasury's Response, House of Commons 553, Ninth Report of Session 2010-11, London | United Kingdom Treasury outlines their response to the financial crisis, which included establishing an Infrastructure Finance Unit to provide lending at commercial terms to projects unable to raise debt from commercial banks |
Edward Farquharson & Javier Encinas (2010) The UK Infrastructure Finance Unit: Supporting PPP Financing During the Global Liquidity Crisis, World Bank | Summarizes the United Kingdom's experience with PFI during the financial crisis, and describes the Treasury Infrastructure Finance Unit |
Burger, Tyson, Karpowicz & Delgado Coelho (2009) The Effects of the Financial Crisis on Public-Private Partnerships, Working Paper WP/09/144, International Monetary Fund | Investigates the impact of the global financial crisis on PPPs, and the circumstances under which providing support to new and existing projects is justified |
Richard Foster (2010) Preserving the Integrity of the PPP Model in Victoria, Australia, during the Global Financial Crisis, World Bank | Describes how the government of the State of Victoria, Australia, adapted its PPP program to the global financial crisis, by making changes on a project-by-project basis to how certain financial risks were allocated |
EPEC, European PPP Expertise Centre (2009) The Financial Crisis and the PPP Market: Potential Remedial Actions, Luxembourg | Provides ideas for governments on ways to support PPPs during the Global Financial Crisis. These include changes to procurement approaches, providing State guarantees or co-lending, particularly as a short-term measure, and adapting PPP structures to attract different types of investor. |