How are projects typically financed?
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.