How Banks Price Loans to Public‐Private Partnerships: Evidence from the European Markets

Abstract

This article presents the findings of a recent analysis of the drivers of credit spreads in project finance loans to public-private partnerships, or PPPs, an increasingly popular form of procurement worldwide. PPPs are project finance transactions in which project output is a function of government policy in fields such as health, transport, and education. Because of the controversy that now surrounds the use of private finance in PPPs, understanding the determinants of the cost of debt in such highly leveraged projects is of interest to policy makers as well as originators and participants in the transactions. 2007 Morgan Stanley.

Are we planning investments to fail? Consequences of traffic forecast effects on PPP contracts: Portuguese and Brazilian cases

“…The relevance of financial guarantees for infrastructure investments promotion beyond the constraints of bankability or financial viability have already been extensively discussed by literature about PPPs (Blanc-Brude & Strange, 2007;Grimsey & Lewis, 2002;Zhang, Wang, Tiong, Ting, & Ashley, 1998). According to the World Bank's PPP infrastructure resource centre guidelines, the balance between the risks of public support and fiscal prudence may allow governments to be aggressive in encouraging infrastructure investment (PPPIRC, 2014).…”

“…Once safeguarded at the contractual level, private decision may accept larger project risks spreads for their financial decision. In order to persuade private investment towards riskier projects, public budget in form of financial bailouts or subventions have been used as collateral security for those transactions (Blanc-Brude & Strange, 2007;Grimsey & Lewis, 2007, 2002.…”

“…In this structure, the market is responsible for matching government's investment risks with lenders' interest rates. Based on the equilibrium between availability of this two variables, the financial market will be able to assess credit availability and costs for a specific investment (Blanc-Brude & Strange, 2007).…”

Infrastructure Public–Private Partnerships in the Developing World: Lessons from Recent Experience

“…PPPs are structured as 'project finance' arrangements, a model common to infrastructure undertakings and other capital-intensive operations such as natural resource development (Blanc-Brude & Strange, 2007). Under this model, a consortium is established of key investors and partners ('project sponsors') that have specialised expertise in areas such as design, project management, engineering, construction, operations and financing (Yescombe, 2007).…”

What is project finance?

“…This contractual bundle is, then, presented to creditors to secure debt financing, serving as the basis for negotiating the quantity and the cost of external funding. From Figure 1, it is also possible to identify the following key players in PF: (i) the project sponsors -a controlling stake in the equity of the separate company established for the purpose of undertaking the project will typically be owned 4 project sponsor, or by a group of sponsors 5 ; (ii) the host government, and often state-owned enterprises -the project company will in most cases need to obtain a concession from the host government 6 ; (iii) 5 There are four types of sponsors that are often involved in PF transactions and invest in the SPV: (1) industrial sponsors -see PF as an initiative linked to their core business; (2) public sponsors -government or other public bodies whose aims center on social welfare; (3) contract sponsors -they develop, build and run the projects and provide equity and/or subordinated debt to the SPV; and (4) purely financial sponsors -they invest capital with the aim of gathering high returns (e.g., commercial banks, multilateral development banks, and private equity funds). 6 Additionally, sometimes the host government needs to establish a new regulatory framework or provide environmental permits.…”