Tapping liquidity

Kuawait has established a government body to assess the viability of PPPs.

In the wake of the financial crisis, governments are looking to project finance to meet the increasing need for water infrastructure, says Ashok Sukumaran, MWH.

The water needs of Middle Eastern countries are growing at a significant rate. The cost of providing this valuable resource is increasing, while non-renewable water reserves are shrinking. In the wake of the financial crisis, traditional concepts of funding water infrastructure to are being challenged.

In this context, project finance mechanisms are increasingly used to achieve good quality service provision and value for money, putting paid to standard public sector spending and borrowing considerations that were established in the mid-1990s.

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FEATURED COMMENT A very informative article. Good to know that GCC entities are exploring new ways to finance their projects and developm   1 Comments Read more comments »

What is Project Finance?
Project finance is used where the public sector or government agency chooses to procure a large infrastructure scheme or project using private sector participation.

It entails the creation of commercial structures and financing packages for major infrastructure projects by sponsors with their contractors and other project parties, to provide infrastructure facilities which deliver goods and services and generate operational cashflows. Private sector participation can range in the form of short-term contractual service provision through to long-term concession arrangements.

Project finance differs from corporate finance, which is primarily lent against a company’s balance sheet and projections extrapolating from its past cash flow and profit record.

In project financing, the financier usually has little or no recourse to the non-project assets of the borrower or the sponsors of the project. In this situation, the credit risk associated with the borrower is not as important as in an ordinary loan transaction – what is most important is the identification, analysis, allocation and management of every risk associated with the project.

Risk assessment - the crucial first step
 As financiers are only able to recoup their investments through the project, and would not be recompensed in case of a commercial failure, governments will do well to prove that this investment is worth the risk.

Governmental agencies should understand that the key to the development of such schemes is that the entire scheme must be ‘bankable’. A bankable deal is where investors and lenders have gained a sufficient level of comfort with the key features of the transaction and the associated project risk profile.

Only if the infrastructure project is bankable will it attract investors and lenders with sufficient investment funding and debt finance on acceptable terms to enable projects to proceed.

This highlights the importance of identifying risks during the conception of an infrastructure project and the need to understand the ownership of the risks. Risk is typically the first item that investors and bankers alike look to assess.