The Methodology most used to finance capital-intensive projects was called project financing, and the field was called project finance.
There were many definitions of project fiance, but almost all of them had the following key characteristics.
The main feature is the creation of a Special Purpose Vehicle (SPV), a bankruptcy-remote entity that remained secure if the parent company went under.
The SPV has a limited life (usually the duration of the project, i.e. 20 to 30 years), and it is usually highly leveraged(with debt at 80% ot 90% of total capital).
The cash flows generated through the project are used to cover the operational costs, repay debt and ...view middle of the document...
In a PPP project, the private sector entity builds, extends or renovates a facility while the public sector entity specifies the operating services of the facility.
The government is able to transfer substantial financial, technical and operational risk to the private sector.
The predefined operational period is determined primarily by the length of time needed for the facility’s revenue stream to pay off the company’s debt and provide a reasonable rate of return for its effort and risk.
At the end of this period the private company returns ownership of the project to the government.
Characteristics of Infrastructure as an Asset Class
Infrastructure investments were characterized by long duration, natural inflation hedging, and steady cash flow. Though every infrastructure category is different, there are some common characteristics. First of all, its assets are usually operating as monopolies. The high fixed and financing costs cause entrance barriers for other operators if the nature of the project even allows competition. These projects are often providing such essential services that they cannot be replicated, which leads as well to certain price insensitivity (inelastic demand). Then, these combined features result in stable cash flows, allowing the projects to be considerably high levered. At the same time, infrastructure investments are able to provide inflation hedge. Besides, infrastructure assets has a long duration which often lasted more than 50 years. Moreover, Infrastructure shared many common traits with a variety of assets.