How are projects typically financed?
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).
Traditionally government projects in Oman have been self-funded however private participation in public projects is increasingly sought to fill the funding gap and for knowledge transfer as the government intensifies efforts to diversify the economy.
Limited recourse financing structures whereby security is provided only in respect of project assets have been employed successfully for large-scale water and power projects.
Smaller projects such as residential and tourist developments are usually funded through corporate finance on a full recourse basis.
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.
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.
Either with private wealth or with Bank financing.
It is common for major construction projects to be funded using international project finance methods using a combination of debt and equity. Bridging and mezzanine finance are also commonly used. While for local projects it is common to use corporate debt from local banks.
Other options may include financing from the capital markets and the bonds market, but this is less developed.
For government related projects, the common forms of financing includes the following: (i) APBN-based financing, (ii) state owned enterprise (Badan Usaha Milik Negara/BUMN) based financing, either based on the corporation initiative or the appointment from the government, (iii) private based financing, and (iv) public private partnership based financing.
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.
In the case of the New Mexico City Airport (NAIm) approximately 60% of the financing will be contributed by the Mexican government through the use of public funds, and approximately 40% is expected to be funded from a combination of bank loans and the offering of debt securities.
On the public sector, projects are normally financed with own-resources, by loans and credits from the multilateral development banks or with PPP contractual schemes to develop and construct major projects such as the fourth generation of highways concessions, one of the most ambitious programs that has been developed under the PPP’s law in Colombia.
On the private sector, bigger projects tend to be developed by project finance models when the assets generate cash flows by itself. Nonetheless, the general rule keeps involving private equity as finance. It is important to mention that, for example, on housing development, it is common to find pre-sales as a way to finance the project.
Construction projects are generally financed by construction loans (or mortgage loans) granted by banks or insurance companies and secured by a mortgage encumbering the property on which the project is erected.
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.
Government or public owned projects, such as most roads, tunnels, schools, libraries, museums, etc., are financed by the government.
Private owned projects are for typically financed through bank loans.
In the public sector, most projects are financed by tax money through the public budgets. A few debt and equity financed public-private partnerships have been implemented (e.g. the Stockholm-Arlanda Rail Link and the New Karolinska Hospital in Stockholm), but this financing form is uncommon and, given Sweden’s strong public finances, there is currently little or no prospect of a significant change of this.
In the private sector, limited-recourse project finance structures are common in some industries, for example the wind power industry.
Construction projects for the Government generally are financed by and through the general revenue. The expenditure for such construction projects charged on the general revenue has to be approved and authorised by the Legislative Council in advance of appropriation.
Construction projects undertaken by non-government public bodies or statutory authorities usually are funded by a combination of revenue generated from commercial activities (such as operation, rental and investment income), additional income specifically generated for the project (such as a surcharge levied on existing users), and loans. Sometimes, statutory authorities may obtain upfront endowments from the general revenue as approved by the Legislative Council to fund the capital costs for construction projects.
Construction projects undertaken by developers in the private sector are financed using some or all of the following ways:
(a) Revenue reserves generated from commercial activities such as sale, rental and/or investment income;
(b) Pre-sale of uncompleted flats. Developers may finance the construction of first-hand residential properties using monies paid by purchasers for the yet-to-be-completed flats; and
(c) Bank loans.
The Hong Kong Monetary Authority places limits on the amount of loan developers are able to obtain from banks, which means that developers invariably have to use a combination of ways in order fully to finance its construction projects.
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 is also the finance method generally used for the UK government’s Private Finance Initiative (PFI) or Public Private Partnership (PPP) projects, which are generally associated with the delivery by the private sector of a public service or facility.
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 to pay for the work. 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. The Maryland project, for example, 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.
In most cases are diverse forms of credit facilities used that are granted by banks. Only for the construction of flats/apartments there is only during the recent years also project financing available.
Public authority and Government-backed projects tend to be self-financed.
For other projects there are a number of financing options available. Commonly, an SPV or joint venture will be established that will obtain a long-term senior bank loan, which will provide the bulk of the finance. This has the added benefit of keeping the borrowing costs off of the parent company’s accounts. The land owner or developer may also provide some of the finance itself. In order to recoup this investment, projects are frequently structured in a way that the developer/land owner is able to generate income before completion.
Short-term “bridge” loans are available, especially in capital intensive phases of construction but these can be costly and are usually avoided unless absolutely necessary.
Finally, some banks in the UAE have been prepared to finance projects, especially prestigious ones, in return for the association generated with the project, although this is not a widespread practice.
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).
Projects are usually financed by equity capital, bank loans and private equity.
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.
The finance mix of construction projects in Greece involves typically equity and bank financing. As regards the public works contracts, contractors finance their works with bank loans, for which they usually assign as security the certifications made by the supervisory authority; such certifications represent the progress of works made and the corresponding right of the contractor to receive a specified amount in the contract payment. 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; it is also not uncommon for Greek banks, depending on the creditworthiness of the borrower, to top up their security with parent company or shareholders' guarantees.
In the past, government projects were not financed and bid out on an EPC basis with the government paying the winning bidder. Private sector projects were financed either on a project finance basis or on the balance sheet of the owner. Recently, the Saudi government has implemented Vision 2030, which is a plan to reduce Saudi Arabia’s dependence on oil and diversify its economy. An important part of Vision 2030 is the use of Private Public Partnership programme to finance government projects on BOO, BTO, BOT and BOOT (and other variations) basis. The PPP programme has kicked off with the Sakaka IPP – the first solar independent power project which will be closely followed by the first wind IPP. Private sector projects had reduced to a minimal due to the downturn in the economy but is expected to pick up after Vision 2030 gets into full swing.
Project financing in Malaysia is similar to that of international practice. Private projects of any size would typically be funded through a combination of equity and debt financing from external lenders.
Government projects are mostly funded by the Government through the Ministry of Finance. Although Private Finance Initiative (PFI) is understood in some jurisdicitons to be a distinct subset of Public Private Partnerships (PPP), in Malaysia, the two terms are used interchangeably. The Government has in recent years sought to limit its risk exposure through the introduction of the Public Private Partnership Unit (UKAS) which is under the purview of the Prime Minister’s Department. UKAS is tasked with planning, evaluating, coordinating, negotiating and monitoring PPP projects. This model has been successfully implemented in recent projects (e.g. the Second Penang Bridge).