USER OR OFFTAKER REVENUE STREAM?
The private sector will seek a secure revenue stream to ensure repayment of debt (and hence lower interest rates) and profitability over time. Given the limited sources of revenues, and structure of financing, any reduction in revenues has a direct and significant impact on the ability of the project company to repay debt and on the return the shareholders will earn on their investment. Therefore, when structuring a project, the private sector will want to see a clearly defined revenue stream, limiting as much as possible the risk that calculations of revenues or tariffs will not achieve the levels anticipated.
We can categorize the source of revenue as follows :
- Offtaker revenue stream.
The revenue stream originates from one offtaker/host government. An offtaker is a single buyer who commits to buying all the project company’s output, based on long-term purchase contracts often signed on a take-or-pay basis (the offtaker commits to buying a good or service produced by the SPV and is obligated to pay even if it does not actually take a good or service). This structure provides the project company with simplified billing and collection, and assessment of credit risk.
In the power industry, for example, the output of a given plant is sold on a long-term basis to one buyer or a few buyers. It is usually a Power Purchase Agreement (PPA) that is signed between the SPV and the offtaker. This contract structure is based on long-term agreements between private investors and a public counterparty or an entity linked to the public administration that essentially poses no credit risk. The following figure shows a typical project finance structure, with a PPA agreement :
In the health field, for example, users do not pay for hospital services; instead, relative costs are covered directly by a branch of the public administration. The project company enters a ‘Soft’ Facilities Maintenance (‘FM’) Contract, under which a Service Company provides services such as security, cleaning and catering for the hospital. There is also a ‘Hard’ FM Contract, under which a maintenance company (or the original D&B contractor) provides building-maintenance services. See the figure below for project structure :
- Users revenue stream.
This relates to a revenue stream sourced from consumers. A project company with a users revenue profile will face more complex billing, collection and credit risk due to the interfaces with consumers and the large number of offtakers. This complexity will complicate the due diligence process, requiring to assess demand profiles, collection rates, opportunities to improve billing and collection and assessment of late payments and the ability to sanction nonpayment and non-performing debts.
In the highways industry, users of the newly constructed road will pay tolls to repay the debt. The following figure shows the main contractual and financing building blocks for a road Concession :
Let's take a closer look now at the different types of PPP.
Follow this link : Types of PPP.
Follow this link to Summary.
Follow this link : Types of PPP.
Follow this link to Summary.
In case you need more information, or are eager to get into the details of Project Finance, I recommend the following reads , that I personally bought as to create the summarized information of this Project Finance website (Amazon links) :
|