Project Financing of Infrastructure Facilities and Water Supply – Part 1

EmailFacebookGoogle+LinkedInTwitterShare

Authors:
Dobrica Vesić, research fellow at the Institute of International politics and Economics in Belgrade;
Srbijanka Stojić
, JP „Srbijavode“, Belgrade;
Lidija Beko, Faculty of Philosophy, Belgrade.

Introduction

Water economy is the foundation of economy and society, and water is the most important strategic resource of the 21st century. Benjamin Franklin said that basic water value could be understood only when the well ran dry.

Principal of development of water economy in Serbia is to create sustainable, highly qualified and various capacities which will provide the growth of number of employees and the growth of income as well not only in water economy, but in agriculture, transportation, tourism, and other branches, and all that in aim to increase life standard. In centre of attention is sustainable economic development.

By new Law about water in the article 151. the means of financing water economy are foreseen from:1

  1. Republic of Serbia budget
  2. Autonomy Province budget
  3. Water compensation
  4. Concession compensation
  5. Other resources

In the part 2.4. Other financing resources, article 184. other means of resources are determined:

  1. Individual means of legal and physical persons
  2. Means of prevention taken from insurance premium
  3. Assigned credits
  4. Public loans
  5. Donations and others

However, although the basic logic of offering public services directs to their financing from public resources, in practice it was shown that relying only upon public resources is not enough, especially in conditions of financial crisis. The early years experience showed that budget means assigned to water economy, are not only enough, but were reduced each year. Firstly a part of agrarian budget in the budget was being reduced in years, and also a part of water economy in the Ministry of agriculture, forestry and water economy was being reduced.

For the country which in its development pays a lot of attention to design all sorts of infrastructural objects the main question is the condition and other aspects of financial possibilities of water economic capacities, actually objects. In public-private partnerships is an enormous potential for infrastructural projects. It gets special significance due to budget limits and need that Serbia keeps acceptable level of public debt.

European commission (2008) instinct two basic forms of public-private partnerships: tender form and institutional form. Institutional form includes common foundation of a new legal person in purpose of project realisation, while in tender form (which is more often) there is a collaboration of public and private sector exclusively tender like, for example concession.

Public and private sector partnership represents an arrangement between government subjects and private investors where some functions in integral project realisation is assigned to the private partner2.

To make a model of public-private partnership a financial technique is used, called project financing.

 Project Financing

Project financing is also known by the name structural financing, because it requires such a debt structure and property fund which will provide that flow of project financial means will be adequate to debt repayment.

In practice project financing is usually used in capital intensive activities where, very often, project bearers are not credit capable for traditional financial forms or are not ready to take adequate risks and credit obligations. In a model of project financing total risks from the project are arranged onto more partners in order to get a decrease up to the level which is acceptable to each partner.

The lacks of project financing come out of their complexion. Tendering the project may require a significantly more amount of time than in other ways of financing, and legal and economic advisable service expenses may be high. Very often those are international affairs where multinational corporations are involved. Also, due to the risk that loaners take, the expense of capital, actually the interest rate on the given credit might be increased for the premium on risk.

Quantitative methodologies support project financing and include simulation and technique of financial engineering. They optimise the structure of capital and value financial unsteadiness of the project, in risky circumstances, especially when realisation of project is being followed by constructional risk, the risk of potential bankruptcy and economic crisis and as well all other limits which come out as a result of capital lack.

Technique of project financing is changeable in financing infrastructural projects cause financing infrastructure is a lasting, complex and financially demanding project which can be structured in order to provide commercial justification and maintenance. Protection of its own property enables the bearers of project to take over higher risks and the realisation of more demanding projects, while infrastructural quality of products ensures division of risk and relative anticipation of commercial flows (the price and service claims) and so the income of the project.

Project financing found its usage in constructing and restoring objects in a line of public services.

Table 1.The usage of project financing in public sector
Sector Application area
Electric energy Production, distribution, transmission and supplying consumers
Water consumption and drainage Water sources, water and drainage net, water cleaners
Natural gas Production, distribution and supplying consumers
Oil and mineral raw materials Extraction
Telecommunications Fixed and mobile nets
Transportation Air, road, river, railway transportation and pipelines
Health and social protection Health centres, retired homes
Education Educational centres
Other Flat construction, boat decks, swimming pools, sports centres, prisons, garbage stuffed centres, etc.

In a model of project financing total risks from the project are shared onto more partners so to decrease up to the level which is acceptable to each partner.3

Participants of Project Financing

Project financing includes all series of participants who join different kinds of tender relationships with the project society as a legal subject (economic society) who is in charge to supply needed financial means for development and production of project, actually for projecting, constructing and managing the object and the sales of goods and/or services:

Project bearers and other shareholders of project society

  • Project bearer develops a project and organises participation of all other participants
  • He invests his own capital in project society or other subject basing the project realisation
  • If there are more project bearers, they usually form economic society, partnership or some other form of tender connection based on which they define mutual rights and obligations
  • apart from project bearers there are very often other investors of their own (shareholders`) capital and that is how they realise an interest connection with future project business

Loaner

  • Financial institution (or consortium of such institutions) which allow credit to the project company for development and realisation of the project
  • To ensure credit debits they use the property acquired during project process
  • Due to high amounts of credit and need to share the risk in project financing, there are very often syndicated loans, where two or more banks finance the project together.
  • In few cases the project bearers can be shareholders of project society which can additionally finance the project by loans separately tendered with project society

Work leader on the object

he joins the tender relation with project society according to which he does the projection and the execution of project works – most of the time in cooperation with different subcontractors

Business subject who runs the object

  • Management of the object functioning and providing suitable services to consumers, according to long lasting contract with the project society
  • Enterprise managing the object is responsible for its maintenance as well as for the quality and the range of providing services

Suppliers of the key inputs

They enter in long lasting relations with the project society and are obliged to supply suitable inputs4 by already established conditions

The buyer of products or services

  • The result of project financing are the products and/or services that are offered on the market by one or two basic distributive channels – retail or wholesale
  • The choice between the retail and wholesale is defined sometimes by technical accomplishment of infrastructural object or distributive net and/or the market structure.5

Next week: Risk analysis and guarantees


  1. “Official Gazette RS“ No 30 /10, 07. 05. 2010. 

  2. projecting and planning, building, financing, management and maintenance, income reimbursement 

  3. Project financing also includes entrepreneur projects partly financed by credits, for which purposes new trade society must be founded, and whose owners don’t give guarantees with their own real estate and income. However, the risks in this case are huge so that the credits insured by the property of the project itself make an exception. In the first phase of the development the majority of the entrepreneur projects is being financed with its own funds or credits insured with its own property. 

  4. for instance: energy, raw material and other resources 

  5. For example, producers of electric energy can sell its production to distributive companies, while water supply companies by rule offer services to their clients by themselves. 

EmailFacebookGoogle+LinkedInTwitterShare