Principles of Project Finance

company—for example, a road, bridge, or tunnel—and therefore ownership

remains with the public sector.

Build-transfer-operate (“BTO”) projects. These are similar to a BOT proj-

ect, except that the public sector does not take over the ownership of the proj-

ect until construction is completed.

Build-own-operate (“BOO”) projects. These are projects whose owner-

ship remains with the Project Company throughout its life—for example,

a power station in a privatized electricity industry or a mobile phone net-

work. The Project Company therefore gets the benefit of any residual value

in the project. (Project agreements with the private sector also normally fall

into this category.)

There are other variations on these acronyms for different project structures,

and the project finance market does not always use them consistently—for

example, “BOT” is often used to mean “Build-Own-Transfer,” i.e., the same

as “BOOT.”

Clearly a Project Company would always prefer to own the project assets, but

whether or not the ownership of the project is transferred to the public sector in

the short or the long term, or remains indefinitely with a private-sector company,

or is never held by the private-sector company, makes little difference from the

project finance point of view. This is because the real value in a project financed

in this way is not in the ownership of its assets, but in the right to receive cash flows

from the project. But although these different ownership structures are of limited

importance to lenders, any long-term residual value in the project (as there may be

in a BOO but not a BOOT/BOT/BTO project) may be of relevance to the in-

vestors in assessing their likely return.

§2.4 PROJECT FINANCE AND STRUCTURED FINANCE

Although there are general characteristics or features to be found in what the

market calls “project finance” transactions, as already mentioned, all of the

“building blocks” shown in Figure 2.1 are not found in every project financing, for

example:

• If the product of the project is a commodity for which there is a wide market

(e.g., oil), there is not necessarily a need for an Offtake Contract.

• A toll-road project has a Concession Agreement but no Offtake Contract.

• A project for a mobile phone network is usually built without a fixed price,

date-certain EPC Contract, and has no Offtake Contract.

• A mining or oil and gas extraction project is based on a concession or license

to extract the raw materials, but the Project Company may sell its products into

the market without an Offtake Contract.

§2.4 Project Finance and Structured Finance 11