Project Financing 551from third parties, or, if third party supply is unavailable, for revenue losses due to the project’s inability to
comply with the offtake agreements.
Financial Agreements
Although project finance, in its pure form, involves lending with no recourse, we do not see it in reality.
Lenders look for financial agreements and guarantees for comfort. A financial guarantee could take the form
of a letter of credit or a guarantee from a financially sound third party such as a bank. Some of the ways in
which a sponsor can provide guarantees are:
- Cash Deficiency Agreement: Under this agreement, the project’s owners agree to provide the operating
company with enough funds to maintain a certain level of working capital. - Capital Subscription Agreement: Under this agreement, one or more creditworthy parties are required
to purchase securities for cash when the project company experiences cash shortfall. - Claw-back Agreement: Under this agreement, the sponsors are required to return cash benefits back to
the project when there is a shortfall. The amount depends on the dividends and other benefits received by
the sponsors (from the project).
Claw back agreements, also called cash traps, ensure that lenders continue to receive timely payments. For
example, if the project were not able to maintain the DSCR (debt service coverage ratio) no dividend
distributions would be allowed. If the non-compliance persists, the project may be considered in default and
lenders may seize all cash flow to prepay debt.
The concession agreement between sponsors, SPV and the local authority gives the SPV the right to
recover the project costs and operation and maintenance (O&M) costs through the levy of fees over the
concession period (say 30 years). The base fee rate set in the concession agreement is indexed to the consumer
price index to protect the revenue potential from being eroded by inflation.
The shareholders agreement specifies the inter se rights and obligations of the shareholders. It includes
understanding between shareholders in relation to their shareholding, management of the company, constitution
of the board, reorganization of the company, dividends, capital expenditure, material amendment to the
project document, etc.
Public–Private Sector Partnerships
Until recently, much of the financing of infrastructure development in many countries came from government
sources, multilateral institutions and export financing agencies. Quite often, governments in emerging markets
lack the financial capacity or creditworthiness to support the volume of infrastructure projects required to
develop their economies.
In case of large infrastructure projects it is becoming inevitable for the public and private sectors to come to-
gether and jointly apply their skills and strengths to develop the project more quickly and efficiently. The
joint venture between Railtrack and British Rail in the UK to set up a high-speed rail project is an example
of such a partnership. Such partnerships try to involve the private sector in the process of designing, building,
financing and operating public utilities. The government defines the services required, makes arrangements
that enable the private sector to be the service provider and ensures that public services will be delivered at
a specified quality at competitive prices. A number of public–private financing structures exist. Some of the
schemes that can achieve the objectives are: