3

- _Build, Operate, Transfer (BOT) projects,_ where the private sector has the primary responsibility for financing, developing, and operating the facility for a fixed period of time, which should be sufficient to both repay debt and provide the required return on investment. At the end of the concession, assets are transferred to the government under terms agreed to in the contract. Perhaps the most familiar form of participation in transport infrastructure, this has been employed in many different variations.<sup>4</sup>

- _Build, Own, and Operate (BOO),_ where the private sector obtains the ownership and control of the facilities, with no transfer to the public sector.

Within these broad categories is a continuum of organizational forms for private participation in which the risk level taken on by the private sector increases until it gets fully assumed. Project finance and regulatory issues arise genreally from the organizational forms organized around concessions, franchises, and variations of Build-Operate-Transfer (BOT) projects with or without concessions.

# What is **Project Finance?**

Project finance has typically been used in those sectors that require large capital expenditures, that have long-lived assets, and that require long periods to amortize investment costs and generate required rates of return for both creditors and equity holders. Historically, project finance has been used to describe financings in which the lenders look to the cash flows of an investment project for repayment, without recourse to either equity sponsors or the public sector to make up any shortfall.

In its simplest terms, project finance usually has the following features which are build around the contractual commitments to each other:

- A special purpose vehicle is created to undertake the project; the idea is to isolate as much as possible the project from other activities in which the various players may be involved to force the transparency of the financing commitments made to the project; ),More specially, the project itself is treated as a separate entity from the sponsors, and this entity borrows funds solely based on the project's cash flows and the equity in the entity itself.. This independence allows the project to be separated from the equity investors' balance sheet; therefore it is frequently referred to as "off-balance sheet financing".

- Bank debt is expected to be the primary debt funding source but this depends to an increasing extent on the nature of the project and the overall macroeconomic environment;

- Sponsor equity is committed, and sometimes paid up-front, prior to the provision of any debt finance but the way this is paid can vary significantly across project types; where construction companies are potentially significant players, they will bring equity in cash and in kind since they are interested in amortizing their equipment in the context of the

> 4 These include Build-Own-Operate-Transfer (BOOT), Build-Lease-Transfer (BLT), Build-Transfer-Operate (BTO), Design-Build-Finance-Operate (DBFO), and Design-Construct-Manage-Finance (DCMF). S Summarized and adapted from Macquarie Corporate Finance Ltd., _Project Finance: The Guide to Financing Transport Projects,_ Euromoney Publications, 1996, p. 5.