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Selecting Funding Sources and Financing Instruments
This chapter provides an overview of various ways to structure the financial elements of an urban bus public-private partnership (PPP). It explains how external financing instruments come together with revenue sources to achieve project bankability (given the appropriate technical and legal elements). In the process, the chapter outlines key financing and funding instruments that have been used in urban bus systems around the world and discusses their application to urban bus PPP structures. Funding sources and financing instruments are key to the viability of a project’s structure. How they are defined for each function or component of a project may either generate or mitigate a risk. Funding sources are revenues that will be used to pay for project functions and components during the life span of a project. They will be used to cover, for example, up-front costs, investment needs over the project’s life cycle, and expenses associated with operations and maintenance (O&M). Financing instruments allow project planners to bring funding sources’ future cash flows into the present in exchange for remuneration (interest). In this sense, funding sources should be sufficient to repay financial instruments with interest. Financing instruments differ in their conditions (cost, tenure) and the level of risk assumed by the financier (depending on the particular rights and obligations associated with the instrument). Given the importance of public subsidies for maintaining most urban bus projects, this chapter ends with a brief discussion of subsidies.
STRUCTURING A PROJECT’S CAPITAL Corporate finance vs. project finance Project finance differs from corporate finance in that it allows planners to isolate a project’s financing risks into a special-purpose vehicle (SPV) that ring-fences both these risks and cash flows. Project finance is commonly used in large infrastructure projects. In some cases, the capital required for infrastructure exceeds the borrowing capacity of sponsors or project finance is more sustainable for the sponsors’ financial structure than a loan on the books (from an accounting perspective, participation in an SPV looks like an asset, instead of an obligation, and 113
