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Structuring and Drafting the Tender and Contract

54.3 Public Loans: Hard or Soft Public Agency Loans

PPPs are generally (in developed countries and EMDEs with a certain degree of financial market development) financed in the local currency[13].

National agencies (national development banks [NDBs] and other national financial institutions) may play a significant role in lending to projects, especially in countries with a lesser degree of financial development (that is, with a potential insufficiency of debt market mechanisms to finance the project).

In some cases, private lenders may not have the capacity to fully underwrite project loans for larger projects. In such instances, a public development bank or public financial agency may help to fill the loan market gap, providing part of the loan (for example, the Banobras in México, and Instituto de Credito Oficial (ICO) in Spain). The most conventional approach is when these agencies act as “co-lenders”, lending on the same conditions as the banking community and subject to their leadership.

In other cases, the financial agency may provide the cornerstone piece of the financial structure (that is, the financing may not be achieved on the terms considered without the involvement of the agency). This is the case for many projects in Brazil with the Brazilian Development Bank (BNDES) lending on favourable or out of the market conditions (for example, loans at longer terms than those provided by the commercial lenders). It may also be the case when the public debt instrument provides special advantages or comfort to the private sector project financiers. For example, under the Transportation Infrastructure Finance and Innovation Act (TIFIA) scheme in the US, the government provides up to 30 percent of the project finance on subordinated terms, thereby increasing the rating of the project and making it more attractive for commercial lenders and/or bond holders).

The use of these mechanisms should be carefully considered, as systematic financing by public agencies may produce a crowding out effect because the banking industry may be unable to compete on the same terms with the public lenders. In addition, through public sector lending (even from a public independent financial agency), the government is indirectly retaining a part of the project risks that the PPP contract has transferred to the private partner.

Strictly speaking, the presence of these agencies does not constitute financial structuring of the contract (that is, structuring the payments to the private partner), as these funds are not from the respective department promoting and procuring the project. However, if the loan conditions are more favourable than those provided by the market, these structures indirectly affect the payment profile of the project and increase affordability.

When the government is relying on public agency loans, it should ensure that the financing is available. Therefore, some preparatory work must be done before tender launch. If the participation of the financial agency is necessary for the feasibility and affordability of the project, it should be available for any bidder. Therefore, the project should be assessed in advance by the financial agency and its requirements for capacity and eligibility should be clear and accessible to all interested parties. They should also be consistent with the qualifications criteria of the tender package.

Box 5.8 explains some examples of national (TIFIA and BNDES) and multilateral public financial agency loans (European Investment Bank [EIB] loans within the European Union [EU]). Chapter zero described the role of other MDBs through A/B loans as well as export credit agency (ECA) financing (see chapter

Public subordinated loans as a support mechanism

In addition to loans provided by financial agencies, loans may also be provided by the very department or procurement agency in charge of the procurement process and contract. The contract may provide for such a loan, on favourable conditions and subordinated terms, to compensate for part of the works.

For example, this is the case in Spain for a number of user-pays toll roads. It is used to fill the feasibility gap in those projects as an alternative to direct and pure (non-revolving) co-financing. The next sub-section describes the particularities of user-pays non-feasible projects.

Like grants, soft loans (on favourable or below-market conditions, in terms of tenor or price) may also be used to reduce the weighted average cost of capital of a project. This then reduces the long-term burden committed in the payment mechanism (in government-pays PPPs), or decreases the feasibility gap (in user-pays PPPs). But unlike a grant, a loan can leave the public debt records unaffected. This is only possible if the loan will not be treated as a public investment in terms of budget or fiscal treatment.

Soft loans, especially when provided by the procuring authority, will have clear implications in the drafting of the contract. The contract should clearly state how to deal with inter-creditor issues (that is, the relationship between the government lending agency and the private sector lenders). A soft loan provided by the procuring authority is usually a subordinated loan (but senior to the equity provided by the investor). It is also common that the soft loan is in the form of a participative loan (for example, as in Spain), that is, the government receives part of the upside of the project in exchange for the below-market conditions (see box 5.8). Remuneration and rights to receive distributions have to be clearly described in the contract.

BOX 5.8: Examples of Revolving Co-financing (public loans)

TIFIA financing mechanism

In the US, the Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA) established a federal credit program for eligible transportation projects of national or regional significance. Under this Act, the U.S. Department of Transportation may provide three forms of credit assistance: secured (direct) loans, loan guarantees, and standby lines of credit.

TIFIA loans (secured loans) are direct federal subordinated loans to project sponsors. They offer flexible repayment terms and provide combined construction and permanent financing of capital costs. These loans are complementary to other financing sources as the TIFIA contribution is limited to 33 percent of total project costs. The senior debt, complemented by the TIFIA loan, must be rated investment grade.

TIFIA loans are available for large surface transportation projects with dedicated revenues for repayment. The TIFIA credit instrument must be supported in whole or in part by user charges or other dedicated non-federal funding sources that also secure the project obligations.

The maximum term for TIFIA loans is 35 years from substantial completion, and repayments must start 5 years after that completion.

Interest rates on TIFIA loans are quite low, set at rates comparable to US Treasury securities. Interest capitalization is allowed for up to 35 percent of the total TIFIA original debt.

BNDES financing

In Brazil, most infrastructure projects are financed by BNDES or other state banks through long-term senior loans at below market conditions. Loans are usually structured as yearly equal principal amortization quotes or yearly equal debt service quotes (principal and interest). Loans are generally asset backed and repayments must start between 3 and 5 years after substantial completion, depending on the sector.

The main characteristics of the mechanism are shown in the chart below:


Maximum leverage (% over eligible costs)

Interest rate

Maximum term

Maximum grace period



TJLP* +1.5%

20 years

5 years



TJLP* +1%

30 years

5 years




20 years

3 years




20 years

3 years



Generally these loans are complemented by another senior funding source (usually bonds or debentures).

European Investment Bank (EIB) loans for Infrastructure

Like other MDBs and international financial institutions (IFIs), the EIB provides financial support by means of loans to governments, but also provides financing to the private sector under PPP schemes. In certain projects, the EIB may provide a direct loan to the special purpose vehicle (SPV) assuming the project credit risk. However, two other routes are more commonly used by the EIB to provide long-term financing to a PPP project.

  • On-lending structures. The EIB will lend the debt amount to a private commercial bank which will “on-lend” the amount of debt to the project company for the same term, but charge a mark-up for the credit risk. The EIB lending is against the intermediate bank creditworthiness, so the private bank is responsible for repaying the loan to the EIB, regardless of the success or failure of the project; and
  • Wrapped loans. As in the previous case, EIB will lend against the creditworthiness of a bank (or another guarantor), but will provide the loan directly to the SPV (against the issuance of a first call guarantee from the bank guaranteeing the debt). The SPV will repay the loan with interest to the EIB (the interest rate will be in line with the credit standing of the guarantor), and will pay a guarantee fee to the institution that provides the guarantee to the EIB.

The EIB participation in EU projects provides additional certainty about the availability of financing. It offers longer terms than those offered by the private lenders, and a lower all-in cost (based on the lower base interest rate of the EIB due to its AAA credit rating).



[13] The situation in which a country needs to rely on cross-border financing is much different. When a country does not have a minimum financial capacity (so as to provide loans in local currency on reasonable terms), it has to rely on cross-border financing. When this is the case, foreign exchange (forex) issues may arise. Multilateral Development Banks (MDBs) have a more relevant role to play in these projects. This has been discussed in chapter 0.5.6.

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