Project finance and private finance initiative (PFI) structures are used to finance large infrastructure projects like roads. Project finance involves creating a special purpose vehicle (SPV) that is responsible for building and operating the project. The SPV obtains non-recourse financing secured only by the project's cash flows and assets. For PFI roads, the SPV typically obtains 90% of funding from senior bank debt and 10% from equity and subordinated debt investors. The payment mechanism defines how the SPV will be paid based on availability and performance standards to incentivize high quality service delivery.

1. Project Finance
&
Private Finance Initiative(PFI)
Submitted by:
Ajay Parmar

2. Project Finance
Project finance (PF) is one method of financing large scale, capital intensive projects, in which
traditionally only the cash flows generated by the project serve as the source of loan repayment and
only the assets serve as the collateral for a nonrecourse loan.
2 basic types of project financing :
• Limited
• Non-recourse
• In this article PF is “Non-recourse”.

3. Structured Finance (SF)
• A Structured Financial transaction is any transaction that makes use of SPV
• Different types of SF:
a) Equity
b) Bank Debt
c) Bond Issues
• SF has its origin in 2 different Phenomena :
a) Securitization
b) Use of Special purpose entities
• UK projects are combinations of both.
90% - by the bank loans
Remaining 10% - “point finance” (Equity) is provided by the SPV stakeholders

4. Structure of PF within PFI
• The basic features of PF are built around the contractual commitment to PFI so that
1. An SPV is created to undertake the project
2. Projects cash flow is the principal source for the repayment of debt
3. Projects assets are the principal collateral for any borrowings
4. No or very limited recourse for lender’s to the credit of the projects owners
• In PFI road projects : Point Finance (equity and subordinated debt) is around 10%
Senior Debt is around 90%
(Commercial banks and institutions fund this 90%)
• Debt funding can consist of either bank debt or financing of both issues of
combination of both

5. Finance Instruments in PFI projects
• Equity : - SPV shareholders are expected to provide a certain amount of equity capital
- Depending on risk profile of the project , commonly between 10-15% of total project cost
- In case of project failure equity investor likely to bear highest risk of loss
• Bank Debt : - Common means of financing PFI projects
- Provided by commercial banks and financial institutions
• Bond Issues : Source of long dated debt and can be of various forms including :
 Floating rate
 Fixed rate
 Index linked
 Wrapped
 Unwrapped

6. PFI Roads
• In this case PF is utilised as an investment in infrastructure road projects
• Providing :
a) Basic services to industry and household
b) Key inputs into the economy
c) Crucial input to economic activity and growth
• Objective
• Provide High quality public services

8. Payment Mechanism
Defines the financial effect of the allocation of risks, roles and responsibility
Incentive for SPV to perform well
Objective
• Provide realistic, challenging but achievable availability and performance standards
• Provide an Incentive to meet the availability and performance standards
• Match the payments to the outcomes and outputs
• Provide an incentive to the service provider to rectify problems by escalating penalties in
case of any default
• Provide an incentive for the service provider to innovate and secure efficiency gains and
deliver Best Value

9. Conclusion
• The cost of finance will vary with the risk profile and risk allocation
• Private sector lenders can offer an extremely competitive financial package for the project debt
• PF is used by the SPV in PFI projects to limit their financial exposure
• PF has wide range of available financing structures
• Evidence based approach to investment decision making
• PFI roads have proved to be timely, high quality and cost effective providing Value for money