How are projects typically financed?

Construction (2nd edition)

Australia Small Flag Australia

Private projects may be financed internally or through financier lending. Project financiers will usually require significant oversight of the contractual terms. Government projects are mostly funded by government allocations, however public-private partnerships are often used for procurement of very large economic and social infrastructure. Request for tenders are the traditional way for the government to approach the market.

In June 2018, the NSW Government released a 10 point "Action Plan" to improve construction procurement processes. For example, the NSW Government aims to move away from a reliance on "fixed price, lump sum" procurement methods (that have required projects like the Sydney CBD and South East Light Rail project (currently in dispute between construction contractor and the NSW Government) to be delivered by certain date and within a certain budget) to instead be open to collaborative contracting models (like alliancing). Participants in the non-government sector may also rely on unsolicited proposals to communicate innovative investment ideas for the government to consider.

Belgium Small Flag Belgium

Public construction contracts are usually financed by public authorities, although PPPs (Public-Private Partnerships) often do rely upon private capital, especially within the framework of DBFM-contracts (Design Build Finance and Maintain).

Private construction works are financed either by own funds or by bank loans (mortgage loans).

China Small Flag China

Currently, the construction projects in China are typically financed through: (1) bank loans or non-bank financial institution loans; (2) intercorporate borrowings; (3) issuance of bonds; (4) asset-backed securities; (5) PPP structure (including BOT and TOT); (6) government funding.

Croatia Small Flag Croatia

Infrastructure projects constituting investments in the public sector are financed by development banks or EU funds. The required proportion is financed by public entities.

Germany Small Flag Germany

Building projects are often financed by medium-term and long-term loans. Projects commissioned by public sector entities (“Öffentliche Hand”) are usually funded by the public treasury. In some cases building projects are also financed by public-private- partnerships (PPP).

Greece Small Flag Greece

Construction projects in Greece are usually financed either through equity or project finance. As regards the public works contracts, contractors finance their works with bank loans, for which they usually assign as security the payment certifications made by the supervisory authority. As regards private construction works, again contractors finance their works through bank loans, for which they usually assign as security any claims they have under the construction contract; In order to grant loans, banks may require that the borrower provide additional security (e.g. parent company or shareholders' guarantees).

Switzerland Small Flag Switzerland

Construction projects are generally financed by construction loans (or mortgage loans) granted by banks or insurance companies and secured by mortgages encumbering the property on which the project is erected.

United States Small Flag United States

Most private projects are financed through bank debt. In these situations, the owner or developer secures private financing to undertake and complete the Project. There are instances were public funds can be used to finance private projects, for example through low income housing credits, but such funds typically come with significant conditions. In addition, some state and local governments provide tax credits for certain projects.

Public projects are financed through state or federal funds. Typically, a state or federal agency procuring the construction work cannot contract for that work without appropriated funds. Public funding can come from tax revenues or from special bonds issued to finance the project.

In some instances, state and local governments have turned to public private partnerships (P3s) to develop and construct major projects. For example, Maryland recently enacted legislation authorizing the largest P3 project in the United States. The project will provide for the construction of a major highway. In a typical P3 situation, the government contracts with a private entity who pays for the construction of the project. In return, the private entity operates the asset making revenue from operation of the asset. For example, the Maryland project will include construction of express toll lanes, which the private entity will operate and from which it will retain a portion of the toll revenue.

Austria Small Flag Austria

Projects are usually financed by equity capital, bank loans and private equity.

Cyprus Small Flag Cyprus

Cyprus has embraced alternative financial mechanisms during the past few years in order to overcome its funding challenges and develop its infrastructure without the use of public money.

BOT, DBFO, are some of the project finance mechanisms that have been utilized in Cyprus in order to help the government develop its infrastructure through private sources of funding; relieving it from traditional costs and risks.

Therefore, the government is no longer the sole funding carrier for public infrastructure. Such projects now depend on the multilateral agencies and development banks that finance these types of projects by loan mechanisms.

Brazil Small Flag Brazil

Brazil is currently going through a transformation in the financing industry for infrastructure projects. Historically, government (federal, state and local) were the main financiers of such projects, for a number of reasons. We include the high interest rates on sovereign debt, political instability and unsteady GDP growth.

In the last two decades, the main source of infrastructure financing, in Brazil, has been state owned development banks, specially the BNDES (Banco Nacional de Desenvolvimento Econômico e Social). According to a recent report of ANBIMA (Associação Brasileira das Entidades dos Mercados Financeiros e de Capitais), in the year 2017, BNDES was responsible for 73.2% of all disbursements in long term financing sources.

Brazilians’ criticism to BNDES (for possible political influences in the credit analysis) combined with lower interest rates on Brazilian sovereign debt is leading a change in the infrastructure sector financing. Capital market for infrastructure, in Brazil, is still very incipient, but it is the hope for the industry’s financing.

Law 12.431/2011 established the incentivized infrastructure debentures, which, among other aspects, set forth tax benefits for individuals investing in such debt notes, as a way to foster capital markets for infrastructure financing. In 2014, the incentivized infrastructure debentures accounted for BRL1.83 Billion in long-term financing, corresponding to less than 1% of deployed capital; in 2017, those debt notes corresponded to approximately BRL 22 Billion. The tax benefits on the incentivized infrastructure debentures are in the process of being extended to legal entities as to provide additional market for such notes, and, consequently, more available funds to the industry.

Capital markets are more susceptible to market conditions, when compared to state owned development banks. Hence, to make capital markets a financing source for Brazilian infrastructure, Brazil will have to provide investors with strong signals of political stability and serious commitment to balance its public finance.

Ireland Small Flag Ireland

Projects are typically funded by one of more of the following sources:

  • Bank funding, by way of traditional development finance (through pillar bank, non-pillar bank and non-bank lending) and by way of forward funded development finance.
  • Private equity.
  • Government funding.
  • Public private partnerships.

Mexico Small Flag Mexico

Most of the Public Works Projects are financed and paid with Public Sources. In certain areas such as Energy (Transmission and Distribution) a Financed Public Works Scheme has been very successful for more than 20 years.

United Kingdom Small Flag United Kingdom

Commercial and residential developments are typically financed by a combination of debt and equity finance, with lending secured against the property and sometimes shares in the borrower, supported by a guarantee and step-in rights.

Large infrastructure or industrial projects may be financed via "non-recourse" or "limited recourse" finance, whereby the employer is a special purpose vehicle with limited assets and a high debt to equity ratio, and the lenders' principal recourse is to project cash-flows rather than assets of the project or of equity investors. In addition to repaying debt, project revenues are used to pay for operation and maintenance and provide a return to the borrower and investors. This form of finance limits the exposure to risk of the employer and its shareholders. It was the finance method generally used for the UK government’s programme of Private Finance Initiative (PFI) projects, which enabled the delivery by the private sector of numerous public services and facilities during the 1990s and 2000s, but fell out of political favour and was formally abolished by the Chancellor of the Exchequer in the 2018 Budget.

Spain Small Flag Spain

The financing of the construction of buildings is mainly made through bank credit with mortgage guarantee. It is a line of credit in which, as the work is being built and certified, the bank will unlock the money granted.

The financing of public infrastructures will be controlled by the budget of the Public Administration (State, Autonomous Community or City Council).

Turkey Small Flag Turkey

While there were a handful projects financed through non-recourse project finance model, currently it is somewhat difficult, if not impossible, to use such a scheme. However limited recourse project finance methods are typically used for projects over a certain size. There are also projects financed via leasing, secured term loans, equity finance or balance-sheet finance.

South Africa Small Flag South Africa

Private sector projects are usually financed by debt and equity. Public sector projects are a) self-funded through the treasury, or b) financed by bond issues, commercial and/or development bank loans, or c) are procured through PPP structures.

Commercial and/or residential projects are generally financed by commercial lenders through development loans and are typically secured through mortgage bonds registered over the property and improvements.

France Small Flag France

This will depend on the type of project and on the project owner. Most common sources of financing for construction project are equity, bank loans or financial leases.

Sweden Small Flag Sweden

Publically procured projects are often financed by tax money. Nonetheless, there are a few projects that are both publically and privately financed.

Private projects can be financed by e.g. banks, investment funds or real estate companies. Some private projects are also crowdfunded.

Denmark Small Flag Denmark

Public projects are for the most part financed by tax revenue, but can also be financed in other ways. The first phase of the Copenhagen Metro was partly financed by the sale of land, and the next phase of the metro was partly financed by operating income from the existing metro line as well as sale of land.

In case of public-private partnerships (PPP), the project can – if not financed by loans from banks or financial institutions - be financed directly by the private supplier. This could be a pension fund investing in alternatives to stocks and bonds due to the current low interest environment.

Private projects are typically financed by mortgages or loans from banks or other financial institutes.

South Korea Small Flag South Korea

  • Private projects are typically financed by project owners through a combination of equity and lending. Lending for such projects often includes bank loans or corporate bonds against the anticipated revenue from the project. Only a handful of enterprises finance projects entirely from their own funds.
  • The use of project financing has steadily increased in Korea since 1994, when an act to facilitate funding of infrastructure through private project financing was promulgated. While large corporations tend to rely more frequently on bank loans, smaller companies often seek and obtain financing from mutual-aid associations established pursuant to the Framework Act on the Construction Industry to provide various guarantees and loans necessary to operate such construction enterprises.
  • Corporations also finance projects through Asset Backed Securities (ABS) and Asset Backed Commercial Paper (ABCP).

Updated: June 3, 2019