LENDERS' PERSPECTIVE

The financial institutions such as banks, insurance companies, and pension funds provide the major portion of the funding to PPP projects in the form of debt financing. Financing PPP projects is a profitable lending opportunity for lenders as the margin they earn are normally above those for a similar-sized corporate loan. However, unlike corporate loan, the borrower in case of PPP projects, the project company, does not have any business record to serve as the basis for lending decision. The lending decision is basically based on whether the project cash flows are sufficient to ensure rapid repayment of the loan. The key concern of the lenders is therefore to ensure that the project predicted annualized balance sheet is credible and financially sound such that the project is able to fulfil its debt service obligations in a time bound manner. As a result, they tend to focus on the various downside risks which could affect the viability of the project and require assurance that their liabilities and risks are being addressed and mitigated. Lenders ensure that the level of risk exposure is within their tolerance limit. They are reluctant to assume risks which are either uninsurable or insurable at a reasonable cost and will seek the support of one of the parties to the PPP projects (either granting authority or equity investors) to assume those risks.

Lenders' as part of the decision making process to decide whether to extend debt financing to the project undertake a due diligence exercise. This has been carried out to ascertain that: (i) the project can be completed on time and within the budget; (ii) the project predicted revenues can be achieved with reasonable certainty; and (iii) net project cash flow from project operation is enough to service the debt and project economics is robust enough to overcome any temporary financial problems that may arise during the concession period.

In addition to this, lenders also demand certain security arrangements to be put in place to safeguard their financial interests. Lenders exercise strict control over how the project revenue and capital will be utilised and insist that escrow account should be put in place. The escrow account defines the hierarchy of flow of capital and revenues to the parties during the concession period as per the formulated agreement of seniority. This arrangement is to convince that lenders will be repaid first. Government supports in the form of financial aid, and traffic revenue guarantee are also sought by lenders in case the project economics is not strong and ensure that enough financial resources are available to meet the debt service obligations.