Funding of a PFI Project

How is the project funded?

The SPC borrows most of the money needed for any project, with the total funding requirement of the project provided in a ratio of approximately 90:10 of non-recourse debt to equity. Debt is cheaper than equity so maximising this element can lower the overall cost of capital. However, funders recognise the risk of an SPC defaulting on it’s loans and so require shareholders in the SPC to place some of their capital at risk as an incentive to perform.

• Non-recourse debt

Funding for PPP projects is obtained by an SPC in the form of long term bank loans or bonds without recourse to the shareholders and is secured on the assets of the SPC. This means that should the project fail the respective parent companies of the shareholders are protected from having to repay the outstanding debt themselves.

• Equity

Shareholders funds are typically provided in two ways – a subscription of shares and subordinated debt, which is a loan from the shareholders to the SPC. Generally the equity contribution is a combination of both. Equity investment carries a higher risk than non-recourse debt as this pays out a return only after all other liabilities of the SPC have been discharged in full.