There are few resources that can benefit the public as broadly and effectively as access to power. From schools to hospitals and from homes to offices, the existence of abundant, affordable and reliable electricity is the cornerstone of growth. Electricity demand is closely correlated with GDP growth and other socio-economic advances. As such, energy investments demonstrate a clear and quantifiable economic return on completion.

Host government financing occurs when the country uses its balance sheet to finance a project by lending funds or providing additional equity to the buyer so that the buyer can develop the project. The cost of financing varies depending on the source of financing and the creditworthiness of the country. Development finance institutions can provide financing to low-income countries at significantly lower costs, and possibly longer tenors, than financing provided by the private market. This financing is generally referred to as concessional financing. Procurement is generally governed by national rules, so the parties selected to build the project will generally be selected by the buyer through a transparent and competitive process. Every dollar a sovereign uses to fund a project is a dollar that cannot be used for education or other infrastructure.

Developer financing occurs when large private companies can use the strength of their balance sheets to finance a project by providing all the funds required by the project company in the form of equity. These funds may come from retained earnings or may be borrowed by the sponsor from banks or raised by issuing corporate bonds. Developer financing can be a component of a public-private partnership (PPP) depending on the structure of the project. Sponsor funding limits the number of funders that need to be coordinated and avoids the complexity often associated with multi-party funding, especially sovereign guarantees.

Resource-based financing involves a host country engaging a third-party contractor, usually a state-owned company, to design, build, and commission a project in exchange for natural resource rights granted by the host country. In this structure, the third-party contractor is obligated to finance its design, construction and commissioning, with the contractor’s ultimate reimbursement coming from its sale or use of the pledged natural resources. This structure limits the number of funders a host country can deal with and avoids the complexity often associated with multi-party funding. It also has the added benefit of not taking away a sovereign’s available liquidity reserves or access to third-party loans. Host countries may not be able to calculate true transaction costs for several years due to volatility in commodity prices and timing. Although it does not directly impact the host country’s balance sheet, this funding structure requires a sovereign state to forgo potential future natural resource revenues that could be used to pay for other products, services or initiatives. for future generations.

In project finance structures, the host country grants certain concession rights related to the construction, ownership and operation of a project to a special purpose company whose sole business is the construction, ownership and operation of the project. Project financing avoids capacity constraints, opportunity costs and sovereign balance sheet financing. The project company is required to finance the project using: funds injected by its owners in the form of equity investments or loans granted by commercial banks, export credit agencies, development finance institutions, multilateral development banks and export-import banks. Lenders generally lend the majority of the financing required by the project company on a limited recourse basis. This means that the loans are secured by all the assets of the project company (including their contractual rights under the project agreements). Organizing a separate project company ensures that the borrower’s ability to repay debts will not be affected by business lines that are unrelated to the project, but rather will be affected solely by project performance .

If there is no other source of finance available, project finance will allow the project to go ahead and the host country to enjoy the economic benefits of an energy project without spending or mobilizing its resources . Project finance transactions will incur more upfront costs due to multiple private parties, environmental impact assessments, legal fees, and finance coordination fees. Project financing adds layers of complexity to a transaction compared to balance sheet financing.

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