Selecting Funding Sources and Financing Instruments | 117
Securitization of public project assets Securitization of public assets often happens when state-owned enterprises (SOEs) and the government are unable or unwilling to issue more debt (because they have a high ratio of debt to GDP). If the SOEs and government are heavily in debt, they may securitize future cash flows arising from user fees (or even their own availability payment) to float bonds and then refinance the whole project.2
Development finance Urban bus projects have a high social rate of return. Therefore, bilateral and multilateral development banks can provide public entities with loans and credit enhancement instruments to finance urban bus projects. Maximizing finance for development principles calls for a subsidiary use of development finance. In this sense, development banks should focus on ensuring viability and need to be careful that they are not crowding out local commercial banks.
PRIVATE FINANCING INSTRUMENTS This section considers several private sector financing instruments.
Senior debt Banks’ commercial loans are the most common senior debt instrument. Such loans can include various financial terms, grace periods, interest rates, and tenures depending on the market and the borrower’s financial status. In Colombia or Mexico, most banks feel more comfortable financing traditional operators than SPVs, because of the bad reputation of the sector. The conditions of the loans vary significantly, depending on the financial status of the borrower. In Mexico, the most common conditions include rates that range from 10 to 15 percent (although some operators could access cheaper rates) with tenures of around six years, equity requirements of 10 to 20 percent, and a six-month grace period.3 Banks usually require a partial-risk public guarantee to consider the project bankable. Other instruments are also available for raising senior debt. Bond issuance
A bond issued by a concessionaire accrues interest for its entirety from day one of placing it with bondholders. This is different from bank borrowing, in which case only funds needed to invest in the project accrue full interest, whereas the unused balance involves only a small commitment fee. To offset the problem of interest accrual, bonds can be issued and placed in tranches. But this process of matching tranches can pose its own problems, especially given the expensive issuing fees charged by bankers and lawyers. Another problem can arise when projects have a long period of capital expenditures (CAPEX) (say, five years), with the largest disbursements in the final years. The concessionaire issuing the bond often pays interest over time, whereas the full principal amount is due at
