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PPP Introduction and Overview - Appendix A - Project Finance

1a2. Basic Considerations of PPP Project Finance

  • An agreement to complete the project and a commitment to provide all the funding necessary to complete the project;
  • Established demand for the project outputs such that the project will generate sufficient cash to meet all its operating expenses and debt servicing requirements, even if the project fails to perform on account of force majeure or for any other reason. This could also be in the form of an agreement by a party purchasing the project output; and
  • Assurance for the availability of adequate funds during the Operations Phase of the project to maintain and restore the project in operating condition.

It is important to stress that the project finance structure should be designed to optimize the costs of finance for the project. It should also underpin the allocation of risks between the public and private sectors, as agreed in the PPP contract. In particular, the project financing should ensure that financial and other risks are well managed within and between the PPP Company shareholders, sponsors and its financiers. This should give comfort to the government that the private partner, and particularly its funders, are both incentivized and empowered to promptly deal with problems that may occur in the project. Indeed, to a very large extent, the project finance structure should ensure that the interests of the main lenders to the project are aligned with those of the government.

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