The rise of project finance for long-term infrastructure PPP projects proves that financing structures are important to project success. Project finance involves creating a distinct legal and economic entity to act as the counterparty to various contracts involved in a PPP and to get the financial resources required to develop and manage a project. Setting up a special purpose vehicle is the necessary first step for the private sector to deliver infrastructure through a PPP.
Project finance is vital for improving investment management and governance, but it needs to be structured in a way that allocates risk to the parties that are best able to manage them. A solid corporate governance structure for project finance can improve the management of risk in infrastructure projects. Because of the many risks present in large PPP transactions, project finance is structured to match risks and their corresponding returns to the parties best able to manage them. Facilitating the equitable and rational distribution of risk creates an environment in which investors can work together easily. Project finance also allows the leveraging of long-term debt, which is necessary to finance high-capital expenses. The use of project finance as a financing tool may also help mitigate information asymmetry problems that are typically present in large infrastructure PPP projects.