Funding for large scale infrastructure projects comes from a number of different sources:

(a)        Public

(i)         Traditional public financing

The government may raise finance for the project on its own balance sheet and use this to fund the capital costs of the project. Please see the ALSF Sovereign Debt Handbook Guide for more details on how traditional public financing is achieved by way of loans and capital market issuances.

(ii)       Direct support

The government may choose (or be required by private investors) to offer direct support to the project, usually to assist with attracting additional private investment or to bear some of the risk in the project where the project would not be bankable without the support. This may be done by way of subsidies, grants, equity investment or loans to the project. Examples include:

1. payment of cash e.g. to reimburse bid costs or assistance in kind e.g. to procure land;
2. the provision of mezzanine loans or viability gap financing (see further below);
3.  waiving fees and other payments due to the government e.g. tax holidays or waiver of tax liabilities; and
4. equity investment in the project – becoming a shareholder in the project vehicle (see section 5.9 below).

Most infrastructure PPP projects will involve some technical or financial government support, particularly those in emerging markets. The level and nature of the support will depend on the type of project, the risks involved and the private sector appetite for undertaking the transaction.

(iii)      Viability Gap-Financing (VGF)

This is a grant by the government to support projects which are economically justified but not financially viable, for example because of long gestation periods or because the end-users are not able to pay the necessary user charges to support the level of private finance required to complete the project. VGF schemes help to make a project bankable and attract private investment to the project. The government provides funding for a percentage of construction costs, usually after equity contribution by private investors, and shares the project risk. Usually the government will have strict eligibility criteria for when VGF can be provided, for example, a completed pre-feasibility study showing the project is economically justified and will be financially viable with the provision of VGF.

The grant may be disbursed in line with agreed milestones during construction, usually alongside private sector loan disbursement, taking advantage of lender due diligence and performance monitoring.

In some cases the grant may be deferred and paid as part of a long-term fixed payment stream.

Many countries have VGF schemes, for example, India has had a VGF scheme since 2004; Indonesia since 2013. Certain credit institutions may provide VGF, such as the Private Infrastructure Development Group (PIDG) through its Technical Assistance Facility.

(b)        Private

Finance from the private sector is usually necessary to enable large scale infrastructure PPP projects to go ahead. Private finance can take a number of different forms and can be provided by different entities in the market.

(i)         Senior or mezzanine debt

Debt can be provided to fund a project in many different ways, for example:

(A)       as loans – either corporate finance or project finance. These can be “senior” taking priority in terms of payment and security position, or “mezzanine”, which means that they rank behind the senior debt but above any loans or equity provided by the project investors; and

(B)       capital markets issuance – a capital markets issue by the project company (or issuing subsidiary or sister company) to investors (individuals or more likely specialist infrastructure investment funds).

The rest of this section will focus on loan financing rather than capital markets issuance.

(ii)       Equity

The project investors (also called “sponsors”) will usually invest some of their own money into the project by way of equity and/or shareholder loans. The amount of money invested will depend on the type of project and the risks involved. The riskier the project, the more any banks or other financial investors involved in the project will require the project investors to contribute.

Project investors may be third party investors who have no other involvement in the project, or they may be the sponsors of the project, with an interest in the construction or maintenance contracts or any of the other material project arrangements.

Please see section 5.3 below for further discussion on the equity arrangements on a project finance transaction.

(c)        Multilateral Development Banks / Development Finance Institutions / Export Credit Agencies

These types of institution may provide direct funding by way of loans or they may provide risk mitigation products which will attract commercial bank participation in the project.

Please see section 3.6 (g) below for further discussion on these types of institution.