Gabriel Kofi Bentsi Bondzie’s thoughts … Project Finance And Financial Engineering For The Procurement Of Toll Roads



The procurement of public infrastructure by public finance has traditionally been the method of funding infrastructure projects in both developed and developing nations. Governments have used taxes to finance, build and operate infrastructure projects such as roads, bridges, schools and power stations. This has resulted in a large proportion of a country’s expenditure spent on the provision of infrastructure.


In recent years, the public sector has considered augmenting the needed finance by involving the private sector to help fund the needed infrastructure so as to provide the needed services for the increasing population.


The use of Project Finance and Financial Engineering tools have provided the needed finance to embark on projects that might not have been possible due to cash short-falls from the public sector.


This paper focuses on the use of Project Finance and Financial Engineering tools in the procurement of toll roads.


Project Financing which is the financing of infrastructure projects by the private sector through limited or non-recourse financing has been introduced to relieve governments from the burden of providing infrastructure. This makes it a useful financing system for sponsors who do not want the project’s debt to reflect on their balance sheet.


Usually, the constraint on government for the provision of infrastructure projects, has occasioned the invitation of the private sector to support Government with such infrastructural projects.


In Ghana, Project Finance can be implemented for the procurement of numerous infrastructure projects including roads. According to the Ghana Investment Promotion Centre, road transport in Ghana is the predominant force in the transportation industry. It is estimated that about 96% of passenger and freight traffic in Ghana is by road transport.

With the use of Project Finance, roads can be procured under concession arrangements where a concession agreement is signed between the government (Principal) and the private sector party (Promoter or Special Project Vehicle, SPV). The SPV will be involved in the planning, design, construction and arrangement of finance. During the concession, the SPV recoups their investment through the collection of tolls within a specified period as agreed between the Principal and the Promoter.

It is worthy to note that, even though various governments have contributed to the development of the country’s road infrastructure, there still lies an increasing infrastructure deficit. With the advent of Project Financing, the Government of Ghana should consider augmenting the needed finance by involving the private sector to help fund the needed road projects so as to provide the needed services for the increasing population.


The main features of project finance are:

  • The SPV is responsible for the financing, building, operating and the transferring of the facility (road) to the principal. The SPV has no asset value so project finance is non-recourse in nature. The SPV is usually a joint venture of constructors, operators, lenders, shareholders and suppliers.
  • Loans from banks and equity from project participants are usually the main source of finance for project financing. Other forms of financing such as mezzanine finance and insurance are also used. Equity is usually committed into the project before debt and there is a high debt to equity ratio. The lenders use the project cash flow to determine the amount of debt that can be provided.
  • Project Finance is non-recourse so project sponsors tend to ensure that liabilities from the project are not shown on the balance sheet of the parent company. This helps project participants to emphasize higher leverage so as to reduce the gearing impact on the parent company’s balance sheet. The non-recourse nature of Project Finance enables the sponsors to fund the project off-balance sheet.
  • There are numerous parties to Project Finance. There are private sector participants and the government. There are even foreign participants in Project Financing.


Benefits of Project Finance

Project Financing is being regarded as the best option for most complex and risky projects in which governments are finding problems in financing. Project financing has resulted due to high demand in infrastructure, the tight budgets of government and the private sector being involved in the procuring of infrastructure. The benefits of using Project Finance to other forms of financing are:

  • With Project Financing, the risks can be managed and contained effectively. An investor at risk trying to raise finance using project finance does not face a termination of business because the project’s risks does not permeate the investor’s business.
  • Project Finance provides long term investment for projects. This is necessary especially when the infrastructure has a high CAPEX (capital expenditure) which cannot be recouped during the shortest possible term without increasing the cost that must be charged for the project’s end-product.
  • Project Finance provides off-sheet balancing from the view of the project sponsor. Project finance could allow the project sponsor to keep the debt off balance sheet as experienced in some countries. In these scenarios, equity is used when the Special Project Vehicle’s subsidiary is portrayed as a one-line entry in the project’s balance sheet.
  • High leverage is an option to developers because the higher the leverage, the higher the return on equity making use of the fact that debt is cheaper than equity. In Project Financing, the higher the leverage does not mean the higher the risks for lenders.

The Financial Engineering Approach

In Project Fianance, Financial Engineering is the arrangement of the finance terms of the projects in the most well-organized and viable way while maintaining the heftiness of the undertaking. It focuses on the source of funds, the repayment and debt service arrangements, the revenue and the commercial viability of the project.

The benefit of Financial Engineering is it solves the problem of raising funds for each project individually hence, reducing the overall project cost. This will help to augment the credit of weaker projects and help to group the risk spread.

The process of Financial Engineering has two procedures:

  • Credit enhancement
  • Financial instruments

Credit Enhancement

Even though Project Finance is non-recourse in nature, in the event of default, the lender may be exposed to equity risks or might be unable to recoup the borrowed principal. It is for this reason that credit enhancement is required in Project Finance to protect the lenders from risks.

There are different forms of credit enhancement such as:

  • Direct guarantees by the project participants or project sponsors.
  • Guarantees by third parties who are not directly participating in the project.


Financial Instruments

 These are the tools needed by the promoter to raise money to finance the project. Financial instruments are traditionally in the form of debt and equity. Due to recent developments, there are new forms of financial instruments known as mezzanine finance, sharing characteristics of both debt and equity. The debt and equity vary depending on how risky the project is to the lender.



Equity is provided by investors who receive dividends in proportion to the amount of equity invested. The profit given to the shareholders are junior to all forms of debt and financial responsibilities. This therefore means that dividends are given only when all debts and other financial obligations have been paid for and if there are any losses or liquidation hence, equity is the last to be paid for. This is the reason why the cost of equity is higher than debt. The proportion of debt to equity lies with the lender’s assessment of the risks available to the project.

The lenders will also want all equity to be used before debt can partake in the project.The equity provided by the sponsors of the project is usually for the pre-construction stage or the development cost of the project. It is during this stage that the risks to the project are high and the sponsors to the project will want to yield high returns on their investment.

Equity can be raised through capital markets. The markets for these equities are long-term finance. Capital markets are of two types:

  • Domestic capital markets and
  • International capital market

[a]          Domestic Capital Markets

These capital markets provide the possibility by which funds could be raised for infrastructure projects through the sale of equity interest in the stock market by giving them to institutions and personal investors.


[b]          International Capital Markets

This is the market comprising all stocks bought and issued outside the issuer’s home country. The most predominant international equity transaction is the transaction of a foreign borrower in a domestic market in local currency.


This is the main source and most widespread source of funds for Project Financing. The amount of debt injected into a project depends on the lender’s preference and confidence in the project’s repayment ability. There are numerous kinds of debt such as: subordinated loans, senior loans and soft loans which are all available to the SPV. Historically, debt financing is said to be less risky and it has a lower return of investment capital due to the reason of debt having a restricted term (Scheinkestel, 1997).

Most Project Finance projects are highly leveraged with debt financing ranging between 50 to 100 % (Fishbein et al., 1996).

[a]          Secured Debt

This is debt which is secured by guarantee to reduce the risk associated with lending an example being a mortgage. Secured debt is offered only to projects where the assets have value as collateral and these assets must be profit-making and easy to change into cash. Secured debt is very attractive because the rate of interest is often lower than non-secured loans.

[b]          Unsecured Loans

These loans are sometimes called signature loans. They are not backed by security so no collateral is needed.

[c]          Syndicated Loans

This applies to a type of loan where several banks structurally, organize and provide loans to a borrower because one bank cannot provide the funding requirements needed to execute a project. These banks come together to provide the loan with one of these banks acting as the lead arranger. By doing this, it helps the banks to avoid over exposure to external risks such as default of the borrower, which consecutively and eventually reduces the cost of finance.


Bonds are means by which the promoter can raise long-term finance for the project. A bond is a loan in which an investor/ bondholder lends to an entity/issuer for a period of time at certain interest rates.

Bonds could be issued by government, agencies or companies and some bonds are issued by the SPV.

Bond financing is regarded as the best means of financing infrastructure projects because of their long maturities.


In financing a project using Project Finance; the private sector should be willing to participate and contribute to the procurement of infrastructure projects, the banks should be capable of providing loans to private firms, the public and private sectors should manage and share the risks affecting the project and there should be some collaboration between the private and public sector.

Project Finance is not a panacea for all types of projects due to the numerous challenges and risks associated with the financing of infrastructure projects. The project should be bankable and viable to attract private sector investment. Lenders will rely on the cashflow forecast of the road project to make a determination or their investment choice.

Due to the huge size of debt needed to finance road projects, syndicated loans are usually the preferred source of financing road projects.

In recent times, bond financing is regarded as the best means of financing infrastructure projects because of their long term maturities. Additionally, due to the evolving financial markets and its demand, project sponsors are now relying on bonds as a way of providing the funds in financing Infrastructure projects. Depending on the bond, you could have maturities ranging from ten to thirty years.


  • With the numerous road projects under consideration, government can look to Project Finance and Financial Engineering tools as a more sustainable way of providing the needed finance to implement various road and infrastructure projects.

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