Project finance and PFI

Here you can find a list of definitions for terms associated with Project Finance and PFI. These terms are listed alphabetically, alternatively you can use the find facility within your internet browser (by pressing control + F simultaneously) to search for terms within this page.

Abandonment

Ceasing to operate a project.

Affordability

The budget envelope within which a public authority has the ability to make payments under a PFI contract; if a project is not affordable, it must be reduced in scope.

All Risks Insurance

Insurance of the physical damage to a project.

ALOP (Advance Loss of Profits) Insurance

The insurance of revenue from projects under construction. Also known as DSU (delay in start-up) insurance.

Annual Debt Service Cover Ratio (ADSCR)

Each year's operating cash flow compared to the debt service obligations in the relevant year.

Assignment

Transfer of rights over project contracts as security for lenders.

Availability

The ability of a project to provide its service (e.g. power generation, or accommodation in a PFI project); deductions are normally made from contractual payments to a project if availability requirements are not met.

Base Case

The expected cash flow forecast with each variable set at their expected value.

Benchmarking

Process of comparing the cost of the undertaking with similar activities in other areas.

Best and Final Offer (BAFO)

In a negotiated procurement process, the bid containing final pricing and deliverables submitted by bidding contractors based on the outcome of the negotiations conducted during the initial bid stage.

BLT (Build-Lease-Transfer)

Similar to a BOT or BRT project except that a lease of the project site, buildings and equipment is granted to the private sector during the term of the project.

BOO (Build-Own-Operate)

A method of financing projects and developing infrastructure, where a private company is required to finance and administer a project in its entirety and at its own risk. The government may provide some form of payment guarantee via long-term contracts, but any residual value of the project accrues to the private sector.

BOOT (Build-Own-Operate-Transfer)

A method of financing projects and developing infrastructure, where private investors construct the project and own and operate it for a set period of time (earning the revenues from the project in this period), at the end of which ownership is transferred back to the public sector. The government may provide some form of revenue guarantee via long-term contracts.

BOT (Build-Operate-Transfer)

Similar to a BOOT project, but the private investors never own the assets used to provide the project services; however they construct the project and have the right to earn revenues from its operation for a period of time. This structure is used where the public nature of the project - for example, a road, bridge or tunnel - makes it inappropriate for it to be owned by a private-sector company and therefore ownership remains with the public sector.

BRT (Build-Rent-Transfer)

Similar to a BOT or BLT project except that the project site, buildings and equipment are rented to the private sector during the term of the project.

Bundling

The grouping together of associated services/projects in order to acquire (more advantageous) financing as a single service/project.

Capacity Charge

Payment under a power purchase agreement for generation capacity provision, regardless of whether or not that capacity is actually used; similar payments may be made (e.g. for capacity in a pipeline).

Cash Flow Cascade (or Waterfall)

The agreed order of priorities in which the project's cash flow will be applied.

Cash Sweep

The use of surplus cash to prepay debt or provide extra security for lenders, instead of paying it out to investors.

Collateral Warranties

Agreements under which parties with contractual obligations, in connection with construction or operation of a project, accept liability to the lenders for their performance.

Commercial Operation Date (COD)

Date when the technical adviser certifies that the facility is operational or built to the contracted specifications.

Common Terms Agreement

Agreement between different lenders to a project on common loan terms such as events of default.

Completion Guarantee

An undertaking to provide compensation if construction of the project is not completed by a specific time.

Compulsory Competitive Tendering (CCT)

Governmental institutions/authorities have to ascertain that goods and services are procured at the best possible conditions. This is achieved by selecting providers via competitive tenders that are based on pre-defined criteria.

Concession

The length of time that a private company administers a project/service before transferring full ownership back to the government.

Concession Agreement

An agreement between a government and a private company about the provision of what is generally considered to be public services by the company. The agreement establishes the rules with which the company must comply with regard to its operations.

Conforming Bid

A bid that meets the procuring authority's necessary criteria. Bids which do not comply with these criteria may be rejected by the authority before assessment.

Consortium Project

A project co-ordinated by at least two parties, e.g. a partnership or joint-venture.

Contract for Differences

An arrangement in which the producer or service provider receives a fixed price plus an adjustment to cover any differences between the agreed fixed price and the actual market price.

Cure Period

The time that a borrower is allowed to remedy a contractual default.

DBFO (Design, Build, Finance and Operation)

Has the same meaning as Build-Operate-Transfer (BOT).

Default Interest

The higher rate of interest applied to a borrower who fails to effect a repayment when due.

Deficiency Agreement

An undertaking to fill the shortfall if funds available are insufficient to fulfil a debt obligation.

Delay LDs/Liquidated Damages

Compensation paid by the contractor in the event of a failure to meet its obligations. These liquidated damages are often assigned to the project's lenders as part of their security.

Development Agreement

Agreement between the developers/investors in a prospective project as to how development costs are to be allocated, and decisions to be taken on the project.

Direct Agreement

Agreement between the lenders and a third party contracting with the project company (e.g. construction contractor, off-taker), protecting the lenders' interests under this contract.

Dividend Stop Ratio

A level of annual debt service cover ratio (ADSCR) below which distributions cannot be made.

Drawstop

An event during the construction of a project giving the lenders the right to refuse to make further loan advances.

DSU (Delay in Start-up) Insurance

See ALOP insurance.

EPC Contract

Engineering, procurement and construction contract.

EPC Contractor

Engineering, procurement and construction contractor.

Equity Bridge Loan

A loan provided during the construction period of a project for the amount of the equity investment (which improves the equity internal rate of return).

Equity Kicker

The right (or option) to acquire an ownership equity in a project where a loan is involved.

Escrow (Escrow Account)

Money, securities, documents or real estate held by a third party to be returned once specific predetermined criteria are met. It also refers to borrowers' accounts established as security for debt service or maintenance of the project.

EU Procurement Regime

EU regulations on public sector procurement of goods or services within EU Member States. The EU procurement regime means that public procurement in the European Union is conducted in a transparent manner and with the view of obtaining best value for money. It also ensures that all local, regional and national public sector contracts are open to providers from other Member States.

Expropriation

The forced surrender of property, usually to the government.

Facilities Management

The management of facilities provided in a PFI project, e.g. cleaning, maintenance, security, catering.

Financial Close

When all of a project's contracts and financing are complete and conditions precedent are met.

Force Majeure

A clause in a contract that covers potential failures to fulfil contractual obligations due to unforeseen and unavoidable circumstances, such as natural disasters (acts of God) or political events such as wars. In such cases, penalties for non-performance under the contract may be excused.

Full Business Case (FBC)

The case put forward by the procuring authority validating their selection of bidder.

Guaranteed Investment Contract

An agreement from a bank in which security deposits (usually the proceeds of a bond issue before these are expended on the project) are paid at a fixed rate of interest on this deposit.

Hell-or-High-Water Clause

A clause in a project finance contract that obliges the purchaser of services or goods produced by the project to pay, regardless of whether or not the goods or service are actually delivered.

Inter-creditor Agreement

An agreement between the creditors of a project/company on joint procedures on an Event of Default, and on their entitlements in case of default.

Invitation to Negotiate (ITN)

A formal invitation, from a procuring public body to prospective contractors, to present bids (including pricing) for a contract See request for proposals (RFP).

Invitation to Tender (ITT)

See invitation to negotiate (ITN).

Joint Liability

Refers to when at least two persons or entities are bound to fulfill certain obligations.

Lenders' Engineer

See technical advisor.

Limited Partnership

A company run by at least one general partner (responsible for managing the company) and at least one limited partner (only liable for the funds they have invested).

Limited Recourse

A lending arrangement where the lender is permitted to request repayment from the sponsor if the borrower fails to meet their payment obligation, provided certain conditions are met. Generally, limited recourse only applies to a specific and limited amount.

Limited Recourse Finance

See project finance.

Liquidated Damages (LDs)

Specified amount that a contractor has to pay if an agreed performance is not met.

Loan Life Cover Ratio (LLCR)

The project's net present value of available cash for debt service to the maturity of the credit facilities divided by the principal outstanding.

Maintenance Bond

A bond supplying funds for the maintenance of equipment/property.

Maintenance Reserve Account

The reserve account of cash balances set aside to cover a project's maintenance and repair expenses.

Merchant

Refers to projects in a liberalised market (e.g. electricity generation) where the private contractor builds a new facility without the government providing any revenue guarantee. In other words, the private contractor takes on the construction, operation, and market risk of the project.

Monoline Insurance

Credit insurance provided to lenders or bondholders for a project company's debt.

Negotiated Procedure

A tendering procedure permitting the procuring authority to negotiate detailed pricing and other terms with prospective contractors.

Non-recourse

A lending arrangement where the lender is not permitted to request repayment from the parent company if the borrower (its subsidiary) fails to meet their payment obligation, or in which repayment is limited to a specific source of funds.

Non-vitiation Clause

A clause in insurance policies which prevents the insurer from refusing to pay the funders if the project company made a mistake or misrepresentation of a material fact.

O&M (Operations and Maintenance) Agreement

The contract for operating and maintaining a project.

Off-take

The end-product of a project.

Off-taker

The recipient of the end-product of a project.

Outline Business Case (OBC)

Refers to the case put forward by the procuring public agency assessing the importance of the project and its scope, before it is offered to prospective contractors.

Output Specification

Refers to the requirements, specified by the procuring authority, on what they want the project to accomplish. The prospective contractors must then resolve how the requirements will be best met.

Payment Mechanism

The mechanism used to calculate the unitary charge of the provider's services.

Performance Bond

A bond issued by an insurance company to cover a specified loss if the EPC contractor fails to complete the construction of the project.

Performance Guarantee

An undertaking that a project will be completed adequately by the contractor, and cover against loss if the contractor fails to do so.

PFI (Private Finance Initiative)

A government or public authority initiative to acquire private financing for public sector infrastructure.

PFU (Private Finance Unit)

A governmental department unit dedicated to PFI promotion.

Power Purchase Agreement (PPA)

The off-take contract from a large customer to buy the electricity generated by a power plant.

PPP (Public Private Partnership)

An agreement between public and private sector parties on the provision of public infrastructure (also known as PFI in the UK).

Processing Agreement

An agreement to process certain amounts of a specific product at specific intervals and at a predetermined price.

Production Payment

A payment securing the right to a specific percentage of a product or service.

Production Payment Loan

A loan acquired via a production payment.

Project Finance

A form of financing projects, primarily based on claims against the financed asset or project rather than on the sponsor of the project. However, there are varying degrees of recourse possible. Repayment is based on the future cash flows of the project.

Project IRR

The internal rate of return (IRR) of a project before taking its funding structure into account (i.e. the IRR based on cash flow before debt service and distributions).

Project Life Cover Ratio (PLCR)

The value of a project's cash flow available for debt service until the end of the project divided by the principal outstanding.

Public Sector Comparator (PSC)

A comparison of the relative cost for the public sector of undertaking a project through conventional public procurement or a PFI/PPP route.

Request for Expression of Interest (RFEI)

Part of the preliminary stage of a procurement process, RFEIs allow the procuring entity to establish the degree of interest in the marketplace to deliver a given service or product.

Request for Qualification

Request by the procuring entity to providers that have expressed an interest in delivering a certain service or product to meet certain technical criteria. Those that meet the qualification requirements will then be invited to bid under a request for proposals (RFP).

Request for Proposals (RFP)

Request by the procuring entity for detailed proposals for the delivery of a given product or service. See invitation to negotiate (ITN).

Reserve Cover Ratio

The equivalent of LLCR (loan life cover ratio) for a natural resources project.

Reserve Tail

Proven reserves available after all the project's funding is repaid.

Risk Matrix

A schedule of all the risks inherent in a project, who assumes these risks, and how they are mitigated (e.g. by insurance).

Royalty

A duty paid to the owner of a copyright, patent, franchise or natural resource in exchange for the owner's permission to use, under certain conditions, the owner's property.

Service Agreement

A contract specifying the service to be provided.

Shadow Tolls

Tolls paid by the project's sponsor (often a government) rather than the general public when they use the project.

Sinking Fund

A fund that is built up by periodic payments from an entity with the purpose of paying future liabilities.

Special Purpose Vehicle (SPV)

A private company that has been set up with the specific and sole objective of carrying out a given project. Upon completion of the project, it may also be contracted to provide a service associated with the project to the procuring entity.

Sponsor

The developer of a project, who normally supplies part or all of the equity financing.

Step-in Rights

Right under a direct agreement for the funders to take control of the operation of a project contract.

Substitution

Right under a direct agreement for the funders to change the obligor under a project contract.

Supply-or-Pay Contract

An agreement by a supplier to provide a product/service at specific intervals at a predetermined price or, if this is impossible, to pay for alternative provisions.

Tail

Period during which project revenues are still received after full repayment of debt.

Take-and-Pay Contract

An agreement between a buyer and seller where the buyer is only obliged to pay for the product used.

Take-or-Pay Contract

An agreement between a buyer and seller where the buyer is contracted to pay a specific amount over specific period, even if the buyer does not require the product.

Tariffs

Payments under a project agreement; generally divided into payments for availability or capacity and a variable amount reflecting actual usage of the project.

Technical Advisor (or Lenders' Engineer)

The engineering or consulting firm that advises the lenders on the technical matters of the project.

Through-put Contract

A contract where the obligors must pay for the shipment of specific quantities of products, such as oil or gas, over specific periods via a pipeline.

Tolling Contract

A contract in which raw materials or other input supplies are provided at no cost to a project that is paid for processing them.

Turnkey Contract

An agreement where a company is contracted to ensuring the completion of a project for an amount which, in accordance with standards, is specified at the time of the contract's signing.

Unitary Charge

The tariff under a PFI contract.

Value for Money (VfM)

Review by a public sector authority of whether a PFI contract offers the best pricing available in the market.

Variant Bid

An alternative bid which the prospective contractor believes provides more value for money than a standard bid.

Wrapped Bonds

Public or private debt issues guaranteed by monoline insurance.

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