In all financing structures, equity financiers own the asset, exercise control over decisions on the asset, and receive any profits that it generates. The proportion of debt to equity is ultimately determined by a project's contractual and capital structures, and how various risks are mitigated.
Debt finance constitutes the largest component of financing for PPP projects. Among debt providers, commercial banks are the largest source of debt finance for infrastructure projects, both in Asia and globally, because of several clear advantages that they have. Banks play an important monitoring role in lending, and bank lending has the flexibility to meet the particular need of infrastructure projects for funds to be gradually disbursed over the long term. Banks can provide debt restructuring when needed, and do so earlier and with greater pricing certainty through the structured tender process of a well-designed PPP. But their ability to provide debt financing for developing Asia's infrastructure needs is limited, partly because bank capital requirements under Basel III have tightened requirements for project finance lending by banks. The underdeveloped capital markets of Asia's emerging economies are also making it harder for PPP projects to tap debt finance (BIS 2016).
Project bonds are another source of debt financing for PPP projects. Bond financing is normally more attractive than bank financing because bond investors can lend at fixed rates and for longer maturities. Bond financing can also be drawn from investors with natural long-term liabilities, compared with the relatively short-term funding sources of banks. Clearly, bonds have several advantages over bank lending for providing the sort of financing that is well suited to long-term PPP contracts, but they are not widely used in developing Asia. The rarity of project bonds reflects an aversion in corporate bond markets to diversity in credit quality, and, as earlier noted, the credit ratings of developing countries in Asia are at the lower end of investment grade or below. Credit enhancement therefore has a vital role to play if project bond financing is to become more widely used in the region.