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Often, the implementation of a project through this type of financing particularly attracts private partners. Here, the public partner provides partial funding for some costs in Public Private Partnership (the "PPP") projects through subsidies or budgetary investments.
In public financing, the government raises borrowed funds and provides them to the project through lending to the final borrower, grants, subsidies, or debt guarantees. Usually, public authorities can obtain loans at a lower interest rate, but they are limited by the financial possibilities of the budget (maximum possible borrowing is regulated), as well as by the fact that there are always several programs, competing for scarce financial resources. Additionally, the government is less effective in managing commercial risks [1].
The legislative aspect of public financing.
Within the meaning of Article 38 of the Law of the Republic of Uzbekistan “On Public-Private Partnership” dated 10 May 2019, No. 537 (hereinafter referred to as the “Law”) the state to protect the interests of the private partner, creditors, and/or shareholders in the framework of the PPP agreement grants, deposits in the form of assets and property, funds from the state budgets, loans, credit lines, additional guarantees on investors' obligations, tax incentives and preferences, compensation, etc. At the same time, according to the Regulation “On the Procedure for Financing Public-Private Partnership Projects” (Annex to the Decree of the Cabinet of Ministers of the Republic of Uzbekistan dated 11 August 2021 No.509), the following expenditures of PPP projects are financed from the budget funds, subsidies, budget loans and credit lines of the budget system of the Republic of Uzbekistan:
The procedure for such financing is defined as the PPP agreement between the partners and the Regulation “On the Procedure for Financing Public-Private Partnership Projects” dated 11 August 2021, No. 509.
The practical aspect of public financing.
Public financing does not imply one-way funding by a public partner. The private partner under the PPP agreement undertakes to donate its assets to the implementation of the project - it can be own funds and assets of shareholders (investors) in the form of contributions to the charter capital. The second option requires collateral of the property as well as interest. Both are considered when calculating compensation in case of termination of the PPP agreement. As a rule, public financing takes place during the construction of infrastructure facilities and the commissioning of social facilities, that is, in those projects where the government has some degree of interest. This financing option includes financing by the partners' agreement about the provision for returning the investments, allocation of the partner's share, transfer of ownership rights to the object, etc.
As noted, corporate financing - is a type of financing when the company attracts funds using its credit history and active business (regardless of whether the credit is provided by assets or revenues of the company) and uses them to invest in the project. Utilities and public enterprises do not have sufficient leverage and may have several competing investment needs. Such opportunities may be available to external investors, however, the amount of investment required and the returns that such investors normally want to earn from investments may result in an unduly high cost of financing and, therefore, this path may be closed to the concentrator [2].
Corporate financing is available to a limited number of large companies that can finance the creation and subsequent maintenance of a capital-intensive and technologically sophisticated infrastructure asset without jeopardizing their financial sustainability. Indeed, with such financing, the bulk of the burden lies with investors (individuals and legal entities), and therefore the private partner assumes most of the risks of such a project.
The legislative aspect of corporate financing.
The process of corporate financing is not explicitly regulated and is specified in the negotiation process or by the PPP agreement itself. However, corporate finance occurs when a PPP project is initiated by a private partner. Thus, per paragraph 1 of Article 17 of the Law, a private initiator has the right to develop and present the concept of a public-private partnership project to a potential public partner. The public-private partnership project concept should provide an innovative approach to solving existing problems and ensure a balanced benefit for the parties.
The Regulation "On the Procedure for the Implementation of Public-Private Partnership Projects" April 27, 2020, No. 259 establishes the need to develop a project appraisal document, which is a project document defining the cost of the project and the amount of funds required for financing, as well as justifying the most suitable technological and organizational decision on the implementation of the project.
To attract the attention of the public partner and win in the tender, applicants offer corporate financing, thereby showing their solvency, and reliability as a private partner.
The practical aspect of corporate financing.
A shareholder or investor attracts financing on its own. That is, it enters into credit obligations with a bank or other credit institution. The difference between corporate financing and project finance is that in the latter case, the raising of funds, in particular loans and credits, goes to the project company, rather than corporate risks assumed by the shareholders or investors themselves. Typically, security for loan obligations is provided by the shareholders themselves or by investors in the form of a suretyship, collateral of their property, bank guarantee, or, where there is an agreement under the PPP agreement, a guarantee from the public partner. Another difference is the lack of funding from the state budget, unless, of course, otherwise agreed by the PPP agreement.
However, the private partner may expect to receive many guarantees and preferences in return for this type of financing, additional funds during the implementation and use of the PPP facility, and a minimum guaranteed income from PPPs.
Also, a PPP agreement, in the case of a private (concessional) initiative, may provide a private partner with a guarantee to obtain land or other objects of public ownership without conducting tenders. Parties to a PPP agreement with ownership rights may grant each other the right to lease, hold, and use land or another real estate or movable property or intangible assets. The private partner may, subject to the terms PPP agreement, acquire the right of ownership of the object of public property or other state property.
Legal doctrine determines that PPP project finance can be broadly described as financing of investment projects, in which loans are provided to a particular project company, wherein the securities of the investments are limited to the project's current assets and future revenues.
In this type of financing, direct loans without recourse or with limited recourse (these terms may be used as synonyms) are provided to the project company. In this case, creditors rely on the project's cash flows to repay the debt, wherein, again, the securities of financing are limited to the project's current assets and future revenues. Thus, the debt of the project company is not reflected in the balance sheet of the shareholders or in the balance sheet of the concentrator[3].
The practical aspect of project financing.
Funding organizations, including banks, play a crucial role in project finance. By entering into a PPP agreement or a concession agreement, a bank or other funding organization, as a third party, has the right to demand collateral and repayment of debt financing, and also provides repayment of debt financing in case of termination of the PPP agreement at the expense of the remaining unfinished project. Banks and other funding organizations are not interested in providing funds "for free". When investors enter the project as financiers, they change and amend the PPP agreement or enter a new agreement that protects their rights and interests. These could be prohibitions on changing the terms of the agreement unilaterally, without their notification/negotiation, or requirements for the pledge of shares.
Project finance for banks is not an ordinary loaning procedure, but a whole process of risk analysis and evaluation of the entire project, paying attention to the payback and profitability of the project.
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[1] See Delmon, J. (2011). Public-Private Partnership Projects in Infrastructure: An Essential Guide for Policy Makers.
[2] Ibid.
[3] Ibid.
