Financing Infrastructure Projects A practical guide Second Edition

Contents Foreword xi
About the authors xiii
Glossary/Defined Terms 1
1 Introduction 21
1.1 Introduction 21
1.2 Rationale for investment in infrastructure –
the infrastructure gap 22
1.3 The change from public financing to project
finance 24
1.4 Financing infrastructure projects 25
Bibliography 25
2 Project finance as a tool for financing
infrastructure projects 27
2.1 Introduction 27
2.2 Definition of project finance 27
2.3 Infrastructure sectors within project finance 28
2.4 Basic features of project finance 28
2.5 Project finance post the global financial crisis 30
2.6 Differences between project finance and
corporate finance 30
2.7 A variety of financial instruments 30
2.8 A variety of stakeholders and contractual
arrangements 32
2.9 Stakeholders 33
2.10 A variety of risks 34
2.11 Summary 35
Bibliography 35
3 Public finance for infrastructure projects 37
3.1 Introduction 37
3.2 Typical allocation of government funds 37
3.3 Sources of government funds 38
3.4 Over-indebted governments 39
3.5 Procurement options analysis 40
3.6 Private sector interface 41
3.7 Methods of procuring projects 42
3.8 Selecting a delivery model 47
3.9 Role of government investment plans 48
3.10 Mixed impact of regulation and the legal
environment 49
3.11 Summary 50
Bibliography 50
4 Financial instruments 51
4.1 Introduction 51
4.2 Financial instruments 52
4.3 Debt instruments 54
4.4 Loans and currency 58
4.5 Equity 59
4.6 Bonds 60
4.7 Other financing instruments 63
4.8 Debt characteristics of infrastructure assets 65
4.9 Summary 68
Bibliography 68
5 Financial engineering 69
5.1 Introduction 69
5.2 Financial engineering tools 69
5.3 Financial futures 73
5.4 Swaps 77
5.5 Options 80
5.6 Asset-backed securities 86
5.7 Summary 87
Bibliography 87
6 Financial markets 89
6.1 Introduction 89
6.2 Functions of financial markets 89
6.3 Money market 91
6.4 Bond market 92
6.5 Equities market 93
6.6 Foreign exhange (FX) market 95
6.7 Derivatives market 95
6.8 Globalisation of financial markets 95
6.9 Market efficiency 96
6.10 Summary 96
Bibliography 97
7 Financial institutions 99
7.1 Introduction 99
7.2 Financial institutions 99
7.3 International financial institutions 101
7.4 Export finance and guarantee agencies 110
7.5 Country strategies 112
7.6 Multilateral and bilateral international
financial institutions 112
7.7 Recent developments in international
Financial institutions 113
7.8 Summary 115
Bibliography 115
8 Insurance and bonding 117
8.1 Introduction 117
8.2 Insurance 117
8.3 Trends in global insurance 119
8.4 Insurance in project finance 120
8.5 Insurance due diligence 122
8.6 Bonding 122
8.7 Summary 126
Bibliography 127
9 Public-private partnerships 129
9.1 Introduction 129
9.2 Defining PPPs 129
9.3 Types of PPPs 130
9.4 Advantages and disadvantages of the
PPP model 131
9.5 Basic principles and characteristics of PPPs 135
9.6 PPP framework 136
9.7 Maturity of the PPP model 136
9.8 Examples of PPPs in infrastructure 136
9.9 Value for money in PPPs 138
9.10 PPP project process 139
9.11 Structuring a PPP 140
9.12 Summary 140
Bibliography 141
10 Privatisation as a method of financing
infrastructure projects 143
10.1 Introduction 143
10.2 Definition and justification of privatisation 143
10.3 Types of privatisation 144
10.4 Prerequisites for privatisation 146
10.5 Benefits of privatisation 147
10.6 Disadvantages of privatisation 149
10.7 Regulation and privatisation 150
10.8 Financial structures 151
10.9 Global trends in privatisation 155
10.10 Summary 156
Bibliography 156
11 Typical risks in the procurement of
infrastructure projects 157
11.1 Introduction 157
11.2 Typical risks in project financing 157
11.3 Due diligence in project finance 157
11.4 Financial risk 158
11.5 Non-financial risk 162
11.6 Summary 168
Bibliography 168
12 Risk management – identifying, analysing
and responding to risks 169
12.1 Introduction 169
12.2 Risk management 169
12.3 Risk identification 170
12.4 Risk analysis 174
12.5 Risk response process 178
12.6 Summary 180
Bibliography 180
13 Structuring and financing project finance
transactions 183
13.1 Introduction 183
13.2 Project finance structuring cycle 183
13.3 Structuring a project finance transaction 183
13.4 Project finance contractual documentation 190
13.5 Credit risks (bankability) 205
13.6 Cash flow waterfall 205
13.7 Loan refinancing 205
13.8 Loan restructuring 211
13.9 Summary 211
Bibliography 212
14 Case-study 1 – PPP schools project in the
United Kingdom 213
14.1 Introduction 213
14.2 Project background 213
14.3 ProjectCo X- structure chart 216
14.4 ProjectCo X- design and construction 216
14.5 ProjectCo X – operation and maintenance 217
14.6 ProjectCo X – project counterparties 219
14.7 Summary of key project documentation 220
14.8 ProjectCo X – financing structure 225
14.9 ProjectCo X – cash flow analysis and
cash flow waterfall 230
14.10 ProjectCo X – due diligence summary 236
14.11 ProjectCo X – transaction risk analysis 238
14.12 Conclusion 241
15 Case study 2 – liquefied natural gas (LNG) train
in the Middle East 243
15.1 Introduction 243
15.2 Project background 243
15.3 Structure chart 244
15.4 Design and construction 245
15.5 Operation and maintenance 246
15.6 Upstream development 247
15.7 LNG industry analysis 248
15.8 Project counterparties 251
15.9 Summary of key project documentation 251
15.10 Financing structure 257
15.11 Cash flow analysis and cash flow waterfall 263
15.12 Due diligence summary 266
15.13 Transaction risk analysis 268
15.14 Conclusion 273
Index 275