Project Finance and the Private Finance Initiative (PFI)

Abstract

Private Finance is one method of financing large-scale, capital intensive projects, in which traditionally only the cash flows generated by the project serve as the source of loan repayment and only the project assets serve as collateral for a non-recourse loan. An important aspect of this form of project finance is that the risks are borne not only by the sponsors but are shared by different types of investors such as equity holders, debt providers, and quasi-equity investors. Therefore, because the risks are shared, the criterion of a project's suitability for financing is whether it is able to stand alone as a distinct legal and economic entity with project assets, project related contracts, and project cash flows separated from those of the sponsors. This form of project financing, since it relies on the security of cash flows, requires a detailed awareness, identification, assessment, and quantification of all the risks. Consequently, a comprehensive and heuristic risk management process is essential for the success of the project. The lenders and other providers of equity and debt play important roles in the implementation of the risk management plan and hence affect the likely overall project success. The structure of this financing and investment on a particular project enables all project stakeholders to take a long-term perspective on the project, thus permitting the various contractors and investors in the project to work together with a common financial interest in creating a whole-of-life, cost-effective project that achieves full client satisfaction and performance to requirements. This article is limited to an examination of the project finance issues in PFI Road Projects in the UK. It presents the conclusions from the detailed analysis of three major UK PFI Road Projects.