Infrastructure Project Financing

The growth of the economy is based on the development of the transport network, therefore, effective financing of infrastructure projects plays a key role in modern business.

An increase in the quality and density of roads increases the productivity of all sectors of the economy that use it.

Today, opportunities for financing the construction and modernization of road networks are rapidly expanding and improving.

Long-term bank loans and support from international financial institutions, bond issues, government subsidies and public-private partnerships are helping to develop infrastructure, accelerating the recovery of the global economy from the protracted crisis.

EFSC Investment Gruop, a company with many years of international investment experience, offers advanced financial solutions for the construction of roads, tunnels, bridges and other transport infrastructure around the world.

Among our clients are large private companies and government customers who achieve their goals thanks to flexible financial instruments and qualified services offered by the SI team.

Potential sources of financing for infrastructure projects

The colossal needs of the economy and the growing volumes of financing for the construction of transport infrastructure require increased attention of companies to the following:

• Selection of the most suitable funding source or their various combinations within the framework of the project finance concept (PF).

• Expanding the list of available sources and increasing the pool of financial resources that can be directed to the construction of roads, bridges and road junctions.

Unlike the developed countries of Europe or North America, most of the developing countries of the world still do not pay enough attention to these issues.

Many infrastructure projects continue to be implemented through the allocation of non-repayable financing by the government and local budgets, often without in-depth professional analysis of available financial alternatives.

Meanwhile, experts focus on the numerous advantages of combining traditional and alternative sources of financing, such as long-term loans from commercial banks and international financial institutions, government subsidies, bond issues, and so on. Infrastructure projects benefit significantly from the implementation of project finance models through public-private partnerships (PPPs), as demonstrated in capital-intensive projects in Europe.

When looking for the source of funding, it is important for companies and government agencies to take into account the following properties of this source that affect the investment decision:

• Terms of obtaining funding in the required amount.
• The impact of a specific source on the timing of the project and its individual stages.
• Possibility of changing the terms of financing at a later stage.
• Using the experience of a financial partner to improve the efficiency of project.

It is important to take into account the impact of each source of financing on the investment opportunities of a particular company or government agency, since a competent choice of financial sources allows the borrower to simultaneously build more facilities and service the resulting debt on better terms.

This contributes to a much more efficient satisfaction of the growing needs of society for transport infrastructure without increasing the burden on ordinary taxpayers.

The practice of our financial team shows that there is no single right decision when choosing a source of financing for infrastructure projects. Each project requires a unique set of tools to attract the right resources in line with the investment spending schedule and debt service capabilities.

The construction of roads and bridges usually requires significant capital investments in a short time frame of about 1-2 years. Some infrastructure projects make it possible to recoup costs over several years in the form of road user charges, which requires adapting the loan payment schedule and bond repayment terms accordingly. Other projects are initially unprofitable for private capital, but their construction contributes to the development of the regions and the preservation of the environment.

Accordingly, the approach to financing each project requires a flexible combination of private initiative and experience, government control and external funding.

Sources of such financing can be bond issues, loans, government subsidies, international financial assistance, and so on.

The advantages and disadvantages of different sources of funding for road infrastructure are described in more detail below. If you are looking for a long-term loan for the construction and modernization of infrastructure, contact the financial team of Sedona Investments.

We offer our partners large loans from 10 million euros for up to 20 years, providing comprehensive support in the implementation of large projects around the world.

Long-term loans from commercial banks

Large commercial banks around the world are interested in financing infrastructure projects, providing financing to public companies and private borrowers on flexible terms.

Often we are talking about long-term loans for up to 15-20 years with a grace period for the construction period.

It is a common source of medium to long term financing for public sector companies involved in the construction and maintenance of infrastructure. For this reason, most potential borrowers are well aware of the bank lending procedure and its benefits.

The issuance of large loans by commercial banks is possible only after a expert assessment of the project, which is considered useful and even necessary for the initiators. This allows stakeholders to look at the project from a new point, assessing the risks and measures to minimize them.

Stages of obtaining a bank loan for an infrastructure project:

1. Submission of project documentation to the bank.
2. Project evaluation and negotiation.
3. Making a decision on the allocation of funding.
4. Implementation of the project.
5. Control and monitoring.
6. Payment of debt.

Negotiations on a loan can last from 1-2 months to six months.

A long-term investment loan for the construction and modernization of road infrastructure is provided only in cases where the planned cash flows make it possible to service the debt efficiently enough.

Banks are willing to finance toll roads, bridges, tunnels or other infrastructure facilities that imply a regular source of income.

In some cases, the role of commercial banks in the implementation of infrastructure projects is limited to short-term bridging financing. Bridge loans allow project participants to cover current debts while waiting to receive the necessary funds from the main sources.

For infrastructure projects requiring significant capital expenditures, a syndicated loan may be required.



To finance large infrastructure facilities, commercial banks often create consortia, the number of members of which can number several dozen financial institutions. Syndicated loans allow banks to raise significant amounts and overcome the restrictions associated with the concentration limit.

It may also be advisable to use the services of specialized investment banks. These financial institutions have extensive experience in a particular field, offering the most profitable solutions in the field of road infrastructure lending.

Table: Advantages and disadvantages of commercial loans.

Advantages	Disadvantages
Simple procedure for obtaining a loan	Relatively high interest rates
Long maturity and significant funding, especially in the case of syndicated loans	The loan cannot exceed the debt limit for public sector companies, which is usually set by local financial legislation
A wide range of financial products tailored to the needs of each infrastructure project.	Strict requirements of the bank for the financial activities of borrowers and continuous monitoring of the project

Commercial banks apply strict measures to control the project and ensure that the borrower pays off the debt.

Each bank develops its own procedures for monitoring the project and cash flows, which should be taken into account by the borrower when planning cooperation.

The cost of the loan may be slightly higher compared to alternative funding sources (such as bond issues). This will depend on the scale of the project, the conditions of implementation, the reliability of its participants, the state of the financial market and many other factors. For example, favorable forecasts for road tolls contribute to obtaining a loan on favorable terms.

Loans from international financial institutions

Several international financial institutions provide large long-term loans for infrastructure investments.

These institutions include:

• The World Bank.
• European Bank for Reconstruction and Development.
• European Investment Bank.
• Inter-American Development Bank and others.

Debt financing from international financial institutions is often cheaper than borrowed funds from commercial financial institutions.

These institutions have extensive experience in road infrastructure financing, allowing them to create flexible financial instruments that are well suited to specific types of infrastructure projects.

In addition, international banks can provide advice at the stage of project preparation, sharing their experience and knowledge. The reputation of such large partners helps to increase the investment attractiveness of projects, opening up ample opportunities for companies to raise capital from alternative sources.

Stages of financing infrastructure projects through international loans:

1. Presentation of the project to the international financial institution.
2. Detailed analysis of the project and inspection visits of the bank representatives.
3. Assessment of the feasibility of the investment project.
4. Making a decision on the allocation of financial resources.
5. Signing a loan agreement.
6. Implementation of the infrastructure project.
7. Control and monitoring.
8. Payment of debt.

The payment of the debt to an international financial institution can be adjusted according to the project's capabilities.

Usually, borrowers can agree with the bank to provide a grace period for the construction period and increase the loan repayment period to 25-30 years.

This process is much more complicated than obtaining a loan from commercial banks. International financial institutions usually have strict requirements for legal and financial documentation, as well as conduct inspections to ensure the feasibility and safety of the project. It takes a lot of time and requires the involvement of a team of specialists from the borrower's side.

The procedure for monitoring an investment project in the case of international financial institutions is usually comparable to that used by commercial banks.

Not every company can get such financing.

For example, the World Bank and its structures will require the provision of government guarantees for the loan. In addition, international financial institutions usually set restrictions on their participation in a particular project.

The European Investment Bank will finance no more than 50% of the project cost, but some institutions may limit their participation to even smaller shares.

It is also important to take into account the specific conditions for the provision of financing, which in many cases differ. Organizations targeting the development of key projects in developing countries strive to rationally allocate financial resources. For this reason, the World Bank, for example, does not provide loans for projects that could be financed commercially.

In all cases, companies must ensure that adequate cash flows are achieved in a timely manner in order to service international debt.



Typically, this source of funding is used for the construction of toll roads and other other infrastructure based on the road user charges.

Table: Advantages and disadvantages of international loans.

Advantages	Disadvantages
Relatively low interest rate	The need to repay debt, which burdens the company's balance sheet for many years to come
Flexible financing tailored to the real needs of the infrastructure project	Debt limit for public sector companies that may be set by local law
Attracting foreign specialists with extensive experience in project management	International financial institutions usually limit their participation in projects by a certain percentage
Significant amounts of credit funds	Long complicated procedure for obtaining funding, including a number of expert reviews and inspections
Long term financing	Strict project monitoring and control

If you need assistance in providing an international loan for the construction of infrastructure, please contact representatives of Sedona Investments for advice.

Financing road construction through bond issues

The main advantages of issuing and placing bonds for financing infrastructure projects include a long maturity period of 35 years or more, as well as the attraction of significant resources.

Since the bonds are placed with a wide range of local and international investors, the volume of project financing is not limited by the capabilities of one capital provider.

Funding conditions, including discount and interest on bonds issued, are determined primarily by market conditions. When it comes to attractive investment projects, the issuer has more freedom in determining the terms of financing. However, the terms of redemption of bonds cannot be changed after the placement of securities, unlike the terms of a bank loan.

Investors around the world are showing a growing interest in projects such as toll roads.

Future revenues from these properties guarantee bond redemption, which is why such projects are often financed on better terms with a longer debt maturity period. In addition, financing against the future cash flows of the project does not burden the assets of the project initiators.

Stages of financing infrastructure projects by issuing bonds:

• Preparation for the issue of bonds.
• Publication of the issue prospectus.
• Active promotion of the issue.
• Issue and placement of securities.
• Implementation of the project.
• Redemption of bonds.

Preparations for the issue usually take from 2 months to six months.

The issue of bonds is a rather complex legal procedure that requires control over the issuer's finances and may even require participation in marketing activities.

The bond issuer, which is usually a public sector company, must have a high credit rating to demonstrate its solvency and financial soundness. This is especially important if the issuer plans to place securities on international financial markets outside of his country.

Table: Advantages and disadvantages of bond issue.

Advantages	Disadvantages
Long term financing	High credit rating requirements
Attracting significant financial resources	Debt limit for public sector companies
A wide range of potential investors	Complex monitoring procedures

Be that as it may, infrastructure projects financed through the issue of bonds should provide potential investors with confidence in the payment of debt.

This requires from the issuer a thorough approach to the organization of the issue.

Public offering of bonds on international capital markets involves additional formal procedures that take up the time and energy of your employees, not allowing you to fully focus on key business areas.

Financing infrastructure projects from local budgets

The amount of funding and the possibility of its provision directly depends on the budget of a particular region.

The policy on financing infrastructure projects in each country is limited by legislation, so some projects cannot count on this source of financing in principle.

Obviously, local governments tend to favor more flexible and affordable projects. The advantage of funding from local budgets can be called the simplicity of its provision, since the allocation of funds requires only a positive decision of the competent authorities.

In fact, the initiators of the project will not need to develop complex procedures for debt recovery and servicing financial flows. Although the initial cost of raising and using budget funds is low, this choice can lead to the loss of the potential benefits of other sources of funding.

Table: Financing of road infrastructure from the local budget.

Advantages	Disadvantages
High availability of local sources	Limiting funding to budgetary frameworks
Compliance of financial liabilities with projected cash flows	Long term of project consideration and possible delays in the allocation of funding
Relatively low costs of raising funds	Unpredictable corruption barriers

The disadvantages of this source can be called the limited amount of budget funding, which has an especially acute impact on infrastructure projects in recent years.

Most governments today seek to shift financial responsibility for infrastructure to private capital, thereby reducing budget deficits and saving money for more important projects.

It is also necessary to take into account the factor of corruption, which has a significant impact on the implementation of capital-intensive projects in some countries. This unpredictable factor can undermine financial plans and increase the cost of projects.

Decisions on the allocation of budget funds for road construction may be made with a delay, which is associated with the financial balance of the region. This can disrupt the schedule for purchasing building materials, paying for contracts with a contractor and other costs, negatively affecting the timing. In this case, participants may need to seek interim funding sources to meet commitments to partners, which increases the final cost of the project.

Additional problems associated with the financing of infrastructure projects by state bodies arise due to the numerous contradictions in cooperation between various parts of the administration.

The risks associated with the lack of coordination of regional authorities are especially high in developing countries.

Public private partnership (PPP)

PPP is seen as a convenient way to improve the efficiency of the use of financial resources in capital-intensive infrastructure, healthcare and social projects, where government and state-owned companies have dominated in the past.

According to the OECD, in the period from 1985 to 2005, up to 400 large projects with a total value of $ 175 billion were implemented in the world. After the 2008 crisis, we again saw a gradual recovery in this area, interrupted recently by the coronavirus crisis. Global trends today consist in the shift of financing for infrastructure projects towards developing countries.

But until now, the leaders in the implementation of infrastructure projects based on PPPs are the countries of the European Union and North America, primarily the United States. These projects are of high quality, safety and optimal workload, which testifies to the effectiveness of the PPP model.

Today, public-private partnership tools are helping many countries to modernize roads using private capital, initiative and experience in managing large business projects.

All these advantages of the private sector, coupled with strict control, make strategic projects more effective.

At the same time, private partners take on some of the risks and responsibility for the project, actively participating in financing, construction or operation. PPP allows projects to be carried out without burdening state-owned companies with excessive debt. In this way, the public company benefits from the experience of a private partner and the higher efficiency that is inherent in the private sector.

Stages of organizing a public-private partnership:

1. Development of project requirements.
2. Search for private partners for the construction and operation of the facility.
3. Conducting commercial negotiations with interested parties.
4. Conclusion of a public-private partnership agreement.
5. Construction of an infrastructure facility.
6. Operation of the facility and receipt of payment.
7. Completion of the PPP project.



In the structure of an investment project, the following variants of relations between the public sector and a private partner may arise.

First, the government customer pays no debt, giving the private company the right to charge a fee for using the road or bridg.

Secondly, financing can be carried out using funds from the state budget (taxes), if we are talking about a free public road.

Financing terms for PPP projects can vary widely, but European practice most often indicates an average term of 30 to 40 years with a clear upward trend as the capital intensity of projects increases. The disadvantage of this mechanism is the lengthy and complex preparation of projects, which is directly related to the sluggishness of the state machine. Large PPP projects can be organized for 1-2 years or even more.

The structure of a PPP contract is legally complex and requires participants to have extensive experience gained abroad.

The total financial cost of an infrastructure project through this turnkey mechanism may be higher than the cost of construction and operation by a state-owned company with separate purchases and contracts.

This is largely due to the relatively high cost of capital in the private sector.

Despite the complexity of organizing financing and the high cost of borrowed funds, PPP-based project financing is the best option for large and technically complex projects. All the disadvantages of this financial instrument are offset by its flexibility, experience as a contractor and private initiative.

Table: Advantages and disadvantages of public-private partnerships.

Advantages	Disadvantages
Comprehensive approach to the project	High cost of private capital
Rational distribution of risks and responsibilities between the public customer and the private partners	Complex legal structure of the project
Advantages of business experience and initiatives of leading private companies	High transaction costs
PPP projects are not limited by the debt limit for public sector companies	Long term of project preparation

As can be understood from the above characteristics, the implemented infrastructure projects based on PPP should be of a sufficiently large scale.

It is also necessary to expand the circle of interested private companies (suppliers, contractors) for the effective implementation of the project.

Sedona Investments is ready to finance the construction of almost any facility in most countries of the world.

If you are looking for a reliable private partner who has been investing in road infrastructure for many years, contact our specialists. With us you will find advanced solutions to the most ambitious technical and financial challenges.