12.1.1 World Bank and IMF

The World Bank and the IMF were created by the Bretton Woods Agreement to, among other major issues, promote economic development and support international monetary cooperation. Their role and participation in financings is changing in order to meet new economic challenges and development needs.

12.1.2 New Development Bank and Contingent Reserve Account

The New Development Bank, also known as the BRICS Development Bank, and its Contingent Reserve Arrangement were established in 2016 by the five BRICS countries: Brazil, Russia, India, China, and South Africa to provide an alternative to the World Bank and the IMF. Led by China, it was created to counterbalance western financial institutions based in Washington, DC. However, the World Bank and other multilateral development institutions intend to collaborate with NDB in infrastructure projects.

12.1.3 Regional Development Banks

Regional development banks (RDBs) are owned by member countries, have developed skills that are specialized to their respective region's needs, and they serve as trusted advisors and partners of member‐country governments. They are well funded to finance economic development and social need projects through low‐interest loans, and foster innovation and support for large infrastructure project needs.

1. European Bank for Reconstruction and Development (EBRD). It was created to introduce private initiatives and stimulate market based economic systems in central and eastern Europe. Now, it also has presence in southeastern Europe, the south and eastern Mediterranean, and Russia. EBRD provides assistance to projects that have substantial amounts of sponsor equity, pass stringent criteria, and benefit the host country's economic development. Its investments in project sector projects include fixed rate senior, subordinated, and mezzanine loans with project company insurance against insurable risks. EBRD also makes minority equity investments in profitable projects, provides guarantees to secure payments of letters of credit, bid and performance bonds, and other instruments.
2. European Investment Bank (EIB). It is a European Union (EU) member country owned bank which provides expertise and financing for sustainable projects that are in line with EU objectives. It provides up to 20% first loss support, mezzanine debt, standby financing, loan guarantee instruments, and capital grants for availability projects. EIB acts as a catalyst for financial institutions to fund projects by developing EU country capital markets.
3. Asian Infrastructure Investment Bank (AIIB). It is a China sponsored and based infrastructure development bank created to influence the global financial architecture with focus on fostering economic development of Asian countries. It provides private and sovereign financing for sustainable infrastructure and economic development projects with programs similar to those of other RDBs.
4. China Development Bank (CDB). It is a state‐owned investment institution created to raise funds for large infrastructure projects and support Chinese companies going abroad. It provides medium and long term financing for foreign investment in cooperation with the China EXIM Bank. Its products include loans and bond issues and interest rate, commodity, and foreign exchange risk management.
5. China Africa Development Fund. It is a Chinese private equity fund sponsored by the China Development Bank to facilitate investment in Africa by Chinese companies in natural resources, manufacturing, power generation, and transportation. It makes direct investments in companies and projects and quasi‐equity facilities; the likes of preferred shares and convertible bonds.
6. Silk Road Fund. It is a Chinese, state‐owned holding company designed to promote China development and prosperity for countries along the Silk Road Economic Belt. It is the land‐based component that together with the oceanic Maritime Silk Road forms One Belt, One Road. The Chinese government created this economic development framework to integrate trade and investment in Eurasia. Its focus is on building ports, roads, and rail links, urban transportation, forestry, and energy efficiency projects along the Silk Road Economic Belt.
7. Asian Development Bank (ADB). This is an Asia‐focused institution promoting development and cooperation in the poorest countries in the world. It works with governments and financial institutions to provide technical and financial assistance to infrastructure projects, financial market development, and education. ADB offers project development grants and loans in hard or local currency at LIBOR rates and co‐financing with ECA and commercial credit sources. Its Asian Development Fund (ADF) provides grants at concessionary terms to financial intermediaries to fund development projects and credit enhancement products.
8. African Development Bank (AfDB). This is focused on improving economic conditions and provides technical assistance and policy advice to regional member countries. AfDB mobilizes resources to fund development projects and eliminate poverty through funding of both public and private sector projects. It offers flexible multi‐currency enhanced variable spread loans to customize debt repayment and several risk management products such as indexed loans, commodity hedges, and interest rate swaps. It also offers loan guarantees for borrowers to access commercial funding.
9. Inter‐American Development Bank (IDB). This is focused on financing economic and social development projects in Latin America and the Caribbean and offers a number of financing products including flexible financing facility loans, local currency financing, and guarantees in local currency. IDB offers guarantees to public and private sector borrowers for political risk and partial credit risk guarantees. It also offers concessional financing through blended loans from its Fund for Special Operations and ordinary capital at 0.25% and LIBOR‐based rates.
10. Islamic Development Bank (IsDB). This is an international Islamic financial institution fostering economic development and social progress of member Muslim countries. IsDB provides financing for infrastructure projects consistent with sharia law, which prohibits interest or fees on loans. Its debt‐like instruments include Morabaha, a short‐term working capital financing; Salam, a purchase of assets to be delivered in the future; and Sukuk, an ownership instrument with properties similar to ownership of a bond. The equity‐like instruments of IsDB include Modaraba and Mosharaka, which are both very much like western general partnership arrangements.

12.1.4 Export Credit Agencies

Export credit agencies (ECAs) are mostly government institutions created to support exports of domestic producers of goods and services used in infrastructure projects whose participation in 2009–2010 amounted to 5% of total project finance loans. During the 2011 to 2014 period, US Exim Bank new export support was $79.3 billion. In comparison, 2011 project‐finance loans from OECD country ECAs were $213.5 billion. All developed countries have their own ECAs and their mandates vary widely between countries, but OECD member ECAs operate under the OECD Consensus Agreement. That agreement provides for a level playing field where competition is based on the price and quality of exported goods and services and not on the financial terms provided.

The US Export–Import Bank (US EXIM) is a major player in export financing of goods and services used in infrastructure projects and offers a number of support products typical of other ECAs' offerings. It offers several different programs to support project finance deals, which include the following:

1. Competitive, direct fixed‐rate loans up to 12 and 18 years to foreign buyers of at least 50% US export contents, covering up to 85% of project value (which includes principal and interest)
2. Medium and long‐term loan guarantees of 85% of exports plus 30% of local costs with a 15% buyer down payment
3. Working capital loan guarantees that are 90% loan‐backing guarantees to banks issuing standby letters of credit or bid and performance bonds
4. Export credit insurance policies for foreign accounts receivable protection against buyer nonpayment risk
5. Protection against political risk at 100% and commercial default at 95%

In the project finance area, US EXIM provides loans and guarantees for new projects above $50 million in structures of 25% equity and 75% debt with the option of financing loans of 85% of export value to private borrowers with the following options:

1. Political risk coverage only in the pre‐completion period
2. Political risk coverage only in pre‐completion and comprehensive coverage post‐completion
3. Political risk guarantee in pre‐completion or no pre‐completion coverage but only post‐completion political risk coverage

One of the other US EXIM programs is the Engineering Multiplier Program, which involves support for architectural, industrial design, and engineering services in international projects. Also, the medical initiative program is helping the export of medical equipment from US‐based companies to borrowers who are unable to obtain financing without US EXIM support. Another program is tied‐aid financing, a government to government‐based program, which is a mix of a large grant with a standard export credit of up to 10 years, or a credit with a repayment term of 20 to 30 years and interest rates lower than market rates.

12.1.5 Other US and State Government Agencies

There are several private and US government agencies created to provide long‐term funding for projects within the United States and overseas. The funding and support of these agencies is of a relatively small scale with the exception of the US Agency for International Development (USAID) and the Overseas Private Investment Corporation (OPIC).

1. US Agency for International Development (USAID). Its focus is on eliminating poverty and promoting the development of democratic societies abroad. The USAID's Development Credit Authority made $4.0 billion in private finance available in the 1999 to 2016 period using risk‐sharing agreements to mobilize local private capital to fill financing needs. First, it offers a 50% guarantee on loan principal backed by the US Treasury and guarantees on private‐sector debt capital for up to 20 years. Additionally, the USAID provides grants to identify project requirements and for market research, business forecasts, bid solicitations and evaluations, and negotiation; that is, for project development.
2. Overseas Private Investment Corporation (OPIC). This US government agency works with financial institutions and mobilizes private capital to support development projects. OPIC provides long‐term financing and guarantees to investments in developing and emerging market countries and cooperates with private funding sources to increase their lending capacity with commitments from one third for equity or debt to two thirds of total fund capitalizations. OPIC is also known for offering several types of political risk insurance; namely, currency inconvertibility, expropriation, political violence, regulatory risks, and other host government interference.
3. Private Export Funding Corporation (PEFCO). This is a US, privately owned institution; owned by commercial banks, industrial companies, and financial services companies. It makes medium and long‐term fixed rate loans to foreign borrowers when such loans are not available from private‐sector lenders; these loans have long disbursement and repayment periods. It is included with government funding entities because it supports commercial bank securitizations of US EXIM guarantee obligations
4. Maritime Administration (MARAD). This US government agency is an arm of the US Department of Transportation that is responsible for ensuring the adequacy of the merchant marines to handle domestic and foreign waterborne commerce. MARAD and US EXIM bank have an arrangement to provide EXIM‐guaranteed working capital loans for shipping, logistics, and other companies involved in the ocean transportation of US exports to foreign countries. Under this agreement, US EXIM increases its working capital guarantee to 95% of exported goods that ship on US flagged vessels.
5. Energy Research and Development Administration (ERDA). This is an agency of the US Department of Energy (DOE) that supports energy commercialization projects of DOE technologies and project management to deliver projects on schedule, within budget, and required performance. ERDA support to projects also requires compliance with environmental and health and safety standards. It performs independent reviews and cost estimates of projects and helps in the acquisition of capital assets for energy related projects. Furthermore, ERDA provides guarantees, assists investors in demonstrating the commercial viability of energy projects, and promotes the development of such projects.
6. Transportation Infrastructure Finance and Innovation Act (TIFIA). The programs of this agency of the US Department of Transportation support only large domestic transportation infrastructure projects including highway, passenger rail, ports and airports, intelligent transportation systems, and other related projects. TIFIA invests in PPPs along with private investors in terms of direct loans, loan guarantees, and standby letters of credit to projects of national and regional importance. Credit assistance is usually capped at 33% of reasonably estimated project costs and senior debt and TIFIA loans must have investment grade ratings.
7. State Infrastructure Banks (SIBs). Established by the US Department of Transportation, these are revolving infrastructure investment funds for surface‐transportation projects that are created and managed by individual states. A SIB, much like a private bank, can offer a range of loans and credit assistance enhancement products to public and private sponsors of highway construction projects, transit capital projects, and railroad projects. SIBs offer loans for all or part of the cost of a project with flexible terms and at market or below market rates and short term construction funding or long term financing. They also provide letters of credit, bond insurance and loan guarantees, and security for bond or debt financing instruments.

12.2.1 Project Equity

Equity in the form of ordinary share capital in project finance deals comes primarily from project sponsors or developers but, also, from construction and operation contractors, equipment providers, and financial institutions. Usually, project sponsor equity ranges between 20% and 30% of project value, but the higher the project risk, the larger the share of the sponsor or developer equity required to get lenders willing to lend to the project.

1. Sponsor equity. By their nature, project finance deals require some sponsor equity contribution for ownership of project company shares. Sponsor project equity takes the form of ordinary capital, which is long‐term capital, and debt that is temporary equity or quasi‐equity, which is a shareholder subordinated debt. Sometimes, equity is provided by the host government and, in some PPP projects, may take the form of in‐kind contributions. In other cases, project construction contractors or O&M contractors make equity investments in the project company. Shareholder subordinated debt or junior debt ranks below commercial bank debt that is senior debt.
2. Other investor equity. The broadening of the project finance market has increased equity investments by other investors who have long‐term horizons and are interested in stable cash flows. This group of equity investors is made up of participants who have the skills and experience to evaluate the potential of infrastructure project investments and includes the following funding channels:
   1. Listed infrastructure funds. These are funds that invest in companies that generate stable cash flows from infrastructure assets usually diversified by infrastructure sector and geographic region.
   2. Master Limited Partnerships (MLPs). These are entities structured as partnerships whose shares are traded in equity markets and yield income taxed only at the shareholder level. They invest in infrastructure projects and give investors dividends and liquidity similar to those of corporations.
   3. Real Estate Investment Trusts (REITs). Infrastructure REITs are companies that own mostly, but not exclusively, the real estate assets of projects and distribute at least 90% of their income to their equity holders.
   4. Infrastructure Investment Trusts (IITs). IITs are similar to mutual funds that invest in infrastructure projects to earn stable income and in some cases they are a modified version of REITs.
   5. Index Funds. They are a type of mutual fund whose portfolio consists of stocks of companies owning or investing in infrastructure assets weighted by their capitalizations and are designed to track the performance of the project infrastructure market.
   6. Exchange‐Traded Funds (ETFs). ETFs are passive management funds that trade in stock exchanges like ordinary shares and they are similar to index funds in that they track a group of infrastructure companies' assets they own.
   7. Unlisted direct equity. These are investments in shares of new infrastructure projects not traded in open public markets and because of the nature of their structures they are considered risky investments. For that reason, they are the purview of large, sophisticated investors who avoid the costs of funds and fund managers.
   8. Life insurance companies. Life insurance companies are subject to some strict equity investment restrictions and corporate bond investments and limits. However, life insurance companies with large reserves that have long payout horizons, as do some property and casualty insurance companies, are looking for higher than Treasury bond returns and invest in sound infrastructure projects. In general, insurance companies hold a significant part of all outstanding credit market instruments in the United States and invest the majority of their assets in stable and liquid instruments.
   9. Sovereign funds. There are several types of sovereign wealth funds which are national government funds coming from taxation and trade surpluses and which due to differences in their objectives they invest in different proportions and asset classes. Because of currently low interest rates globally, they have begun investing in promising infrastructure projects that have predictable cash flows and instruments and consistently pay dividends.
   10. Pension funds. These are government and private company funded, benefit defined, retirement plans for employees that make payments out of the returns on invested pools of funds. Much like sovereign wealth funds, most pension funds make conservative investments although their asset allocations and appetite in infrastructure projects vary widely across countries.

12.2.2 Project Debt

Project debt is a crucial component of project finance and it takes the form of loans, bonds, and subordinated shareholder debt. Project debt is the largest share of funding, usually in the neighborhood of 70–80% of the project's value, with a good part of it coming from commercial banks.

1. Commercial bank debt. Commercial bank loans for project finance deals are facilities that take the form of revolving credit for construction financing, term loans drawn during construction, standby letters of credit to support issue of commercial paper, and bridge loans up to four years. They also provide comprehensive credit facilities covering a project's entire loan requirements and, for large projects, they involve different lenders providing different portions of a loan. Syndicated loans and senior debt instruments are secured by project company asset collateral and cash flow.
2. Mezzanine debt. This is a subordinated debt or preferred equity instrument that is often a desired channel to raise project funding that is senior only to common shares. These loans are unsecured bank loans that, in the event of project company asset liquidation, can only be repaid after all claims of secured creditors have been met. Mezzanine debt is a hybrid instrument that gives a lender the right to convert debt into equity in the event of a default and because of higher risk, mezzanine debt carries higher interest rates than commercial bank loans. The most important lender requirement for mezzanine financing is the project company's ability to generate sufficient cash flow.
3. Equity bridge loans. These are short‐term loans—also known as capital call facilities—that are often offered as revolving credit while permanent financing is secured, at which point bridge loans are repaid. This type of loan is backed by project company asset collateral and carries higher interest rates and origination fees.
4. Project bonds. These are privately placed or issued in public markets and are used to finance specific infrastructure projects. They are a source of long‐term funding, particularly for brownfield projects. Institutional investors are the majority buyers of project bonds, which carry superior risk‐adjusted returns. A specific type of tax‐exempt bond, called green bonds, are issued by government agencies and are used to develop brownfield sites that are abandoned or underdeveloped.

12.2.3 Other Funding Sources and Instruments

There are private and public channels and facilities available to finance profitable projects in addition to the sources of funding and instruments mentioned earlier. The most important channels are the Rule 144A market, asset‐backed securities, and Islamic financing. The latter is a large player in project financings in Moslem countries.

1. Asset‐backed securities. These project finance instruments are bonds sold to investors in public markets and are backed by infrastructure loans pooled together and issued in tranches.
2. Rule 144A market. This is a Securities and Exchange Commission regulated market that specifies the rules for privately placed securities and was planned to facilitate trading among institutional investors. Internal Revenue Service Rule 144A is the basis on which project finance bonds are issued. These are restricted securities in private sales from an issuing infrastructure project company and may not be sold to the public.
3. Supplier credit. It is also known as supplier financing and it is an extension of credit, with repayment over a 7 to 10 years, to project companies buying equipment, goods, and technology and other services. It is credit extended from a bank in the supplier's country that takes the form of letter of credit. Supplier credit is usually supplemented with export credit for equipment, goods, and services produced in the supplier's country.
4. Public sector assistance. A significant part of public sector assistance comes from local currency loans to infrastructure projects for purchase of local resources and to fill gaps in the financing of a project. Often, public sector assistance comes in the form of in‐kind contributions, tax incentives, export support, subsidies, and other assistance programs.
5. Capital grants. These are contributions from public sector entities or from bilateral and multilateral institutions supporting economic development, often with concessionary terms or not repayable. They are used to fund development for badly needed infrastructure projects or to establish the viability of commercializing new technologies. Capital grants, however, require strict compliance to requirements of grading agencies assigned to rate the project.
6. Islamic financing. Project finance facilities from Islamic institutions are instruments compliant with Sharia law that are structured instruments for infrastructure project investors to obtain income. One of the most common debt‐finance instruments is the sukuk, whose structure resembles a conventional bond, and the other being the equity‐like instrument modaraba, which is very similar to a western limited partnership arrangement.