Financing for PPPs follow a project finance structure, wherein the project company becomes the borrower of the senior debt. The financing structure and terms are contractually agreed at the financial close based on the then-market conditions.

During the life of the contract, the project company may wish to refinance.  This could change the composition of financial instruments (bank loan, bonds, etc) and, possibly the financiers.

Debt refinancing can come serve various purposes:

  • Reducing interest costs
  • Increasing debt
  • Extending the debt repayment terms
  • Otherwise improving loan terms
  • Reducing or releasing the reserve accounts
  • Releasing contingent junior capital.

Why do project companies refinance?

There are several reasons why a project company would want to refinance the debt originally used to finance the project, including the following: 

  • Debt maturity: If the PPP project company obtained senior debt with shorter maturities (e.g., mini-perm structure) in the original financial structure, then it poses a refinancing risk.  Various factors can determine the reasons for lack of longer maturity at the original financial structure (e.g., liquidity, project risks, etc). To manage the refinancing risk, the project company would seek to refinance this with a longer term maturity debt at/before end of the term.
  • Opportunity for more favorable terms: Generally the project company will consider refinancing after the project's construction phase when risk is significantly reduced. With a better risk profile, the project company will seek to refinance at a lower cost and on better terms. If the market terms are relatively better than the original close, the project company may also seek to refinance with or without change in the underlying project risk profile. In addition to financial benefits, refinancing may give the project company more flexibility as some of the more restrictive provisions of the original loan agreement could have been negotiated away.
  • Financial difficulty:  In the event that the project company experiences financial difficulty and needs more funding, the company might take on more debt to save the project. This is considered rescue refinancing, and is not expected to produce financing gains for the project company or government authority. 

Is the government authority involved in refinancing?

Debt refinancing requires consent and/or cooperation from the government authority. This is because the authority could have a general right to approve increases in project debt, or the PPP contract may effectively give the government this authority. An increase in debt may destabilize the project company, jeopardizing the service provided under the PPP contract. In addition, the new debt providers may also require different rights from the project, which may change the authority's flexibility. This loss of flexibility along with the notion of accelerated dividends benefitting only the project company sponsors may justify the need for the authority's approval rights. 

Share gains from refinancing

Refinancing can lower overall costs for users of the asset and the government, improve returns to investors, or both. To accommodate this incentive, most PPP contracts define or make reference to some standard methodology for refinancing and how its gains will be treated.

Sharing refinancing gains between the government authority and the project company is justified from an economic standpoint to compensate the authority for project's potentially lower flexibility after a refinancing.

A government authority can ensure that this happens by:

  • Including a clause in the PPP contract or the country's PPP regulation that stipulates that gains must be shared by the project company and the government authority. Different countries prescribe different methodologies for sharing the refinancing gains between the authority and the project company sponsors.
  • Building rights into the PPP contract for the government authority to require or request refinancing of debt should more favorable terms become available. To exercise this right, the authority should have the capacity and ability to identify the potential benefits of refinancing.


Learn More

    • 2014
    • Asian Development Bank (ADB), World Bank Group (WBG), Inter-American Development Bank (IDB), PPIAF

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    PPP Reference Guide Version 2.0

    Over the life of a typical PPP contract—10 to 30 years—things will inevitably happen that could not have been predicted when the contract was signed. It is also likely that the parties will get into a dispute over how the contract should be interpreted, or whether both parties have been performing as agreed. In some cases, these disputes may result in early termination of the contract. These risks cannot be avoided—but they can be managed. Section 3.7.3 provides guidance on how to deal with change in PPPs, including renegotiations and disputes. The PPP Reference Guide presents a global overview of the diversity of approaches and experiences in the implementation of PPPs, providing an entry point to the substantial body of knowledge...

    • 2007
    • E.R. Yescombe
    • Oxford University

    Public-Private Partnerships: Principles of Policy and Finance

    This book reviews the general policy issues which arise for the public sector in considering whether to adopt the PPP procurement route, and the specific application of this policy approach in PPP contracts. This book also offers a systematic and integrated approach to financing PPPs within this public-policy framework. A section on due diligence can be found in Section 6.5.

    • 2010
    • Jirka Gehrt, Jan Peter Klatt, Thorsten Beckers
    • Workgroup for Infrastructure Policy at Berlin Institute of Technology

    Refinancings in Public-Private Partnerships Conceptual Issues and Empirical Results from the UK and Germany

    Public-private partnerships (PPPs) are being increasingly used by authorities to procure public real estate projects. A major characteristic of this procurement approach is the reliance on private capital. Authority’s contractors typically negotiate long-term financing agreements to fulfill capital requirements. A refinancing is an (initially unplanned) redesign of the project’s original financing structure for which we provide an analysis of the private parties’ rationale. After refinancing PPP projects in the UK had led to high profits for the private contractors, authorities started to claim a share in these gains. We discuss possible justifications of authorities claim. We infer that authority approval rights are justified on...

    • 2012
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    A New Approach to Public Private Partnerships

    Increasingly, public services will not be delivered by the public sector itself but from outside. While well-formed partnerships with the private sector have delivered clear benefits, in the realm of PPP models, longer-run private finance partnerships such as the Private Finance Initiative (PFI) raise concerns and a need for reform. There has not only been widespread concern that the public sector and taxpayers have not been gaining value for money over the longer-term but also an insufficient transparency of the financial performance of projects, leading to an increasing tension in the relationship between PFI providers, the public sector and the wider public. This document covers the Government’s new approach to involving private...

    • 2009
    • Jeffrey Delmon
    • World Bank Group (WBG), PPIAF

    Private Sector Investment in Infrastructure

    Project Finance, PPP Projects and Risk 2nd edition

    Investment in infrastructure is critical to economic growth, quality of life, poverty reduction, access to education, good quality healthcare and achieving many of the goals of a robust and dynamic economy. But infrastructure is difficult for the public sector to get right. The private sector (through public-private-participation - PPP) can help with the following: provide more efficient procurement, refocus infrastructure services on consumer satisfaction and life cycle maintenance, place the financial burden of providing infrastructure on consumers rather than taxpayers and provide new sources of investment. This is a translation of the Practical guide on PPPs for policy makers into Russian. The publication provides a practical guide...

    • 2003
    • Department of Treasury and Finance (Victoria, Australia), Infrastructure Partnerships Australia

    Contract Management Guide, Partnerships Victoria

    This Guide has been designed to guide readers to ask the right questions for their particular Partnerships Victoria project to assist them in developing and implementing suitable contract management strategies. While this Guide sets out ‘best practice’ principles relevant to the management of a Partnerships Victoria contract, it is not a variation of or substitute for the terms of the contract. It is intended to better ensure the implementation of the contract.

    • 2004
    • Jose Luis Guasch
    • World Bank Group (WBG)

    Granting and Renegotiating Infrastructure Concessions: Doing it Right

    The book breaks new ground in relation to the design and implementation of concession contracts by culling the lessons of experience from some 1,000 examples and assessing what these lessons mean for future practice. The examples are taken from Latin America where, during the 1990s, governments throughout the region awarded contracts to the private sector to operate a range of public utilities, including electricity; water supply and sanitation; and airport, railway, and port services. The study shows the extent to which the concession award process, the contract design, the regulatory framework, and the overall governance structure tend to drive the success of any reform effort and the likelihood of contract renegotiation.

    • 2014
    • Asian Development Bank (ADB), World Bank Group (WBG), Inter-American Development Bank (IDB), PPIAF

    Renegociación y disputas

    Asociaciones Publico-Privadas: Guia de Referencia Version 2.0

    Durante el ciclo de vida de un contrato de APP típico, 10 a 30 años, sucederán cosas que inevitablemente no se podrían haber anticipado cuando el contrato de  rmó. También es probable que las partes entren en con icto sobre cómo debe interpretarse el contrato, o si ambas partes están actuando según lo acordado. En algunos casos, estos con ictos pueden dar como resultado la terminación anticipada del contrato. Estos riesgos no pueden evitarse, pero se pueden manejar.

For legal and regulatory resources go to PPPIRC

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