International Construction Law Review
REALISATION OF PRIVATELY FINANCED INFRASTRUCTURE PROJECTS—ECONOMIC VIABILITY, CONTRACT STRUCTURE, RISK MANAGEMENT
PROF DR FRITZ NICKLISCH
University of Heidelberg *
1. ECONOMIC VIABILITY OF THE PROJECT AS A PRECONDITION
Privately financed infrastructure projects, and BOT projects in particular, make it possible for the government of a country to instal infrastructural facilities (railway lines, tunnels, airports, motorways, water treatment plants etc.) without having to draw upon public funds for the purpose. This method of financing infrastructure projects is not new. In Europe, railway lines and tunnels through the Alps were constructed in this way as early as the nineteenth century. The last two decades have, however, seen a major upswing in the use made of private sources of finance for infrastructure projects, and it looks as if this upward trend will continue in the future across all of Europe and in other parts of the world.
The principle behind private project financing is that the costs required for constructing and operating an infrastructure facility are covered by the revenues from the project over a period of 20 or 25 years and paid to the investors. Accordingly, the revenues generated by the project have to be sufficient to cover the debt service and produce the return expected by the investors. For this to be the case, the project has to display the necessary economic viability; there has to be sufficient demand for the product of the project, thus guaranteeing that its earning capacity is adequate. Economic viability thus defined is the precondition motivating investors to commit themselves to the project in the first place. Equally, in the framework of its Trans-European Networks (TEN) the European Union requires proof of such economic viability as a basis for decisions on eligibility for economic support.
Forecasts on the economic viability of a project are undertaken notably in the framework of a feasibility study. However, both during the construction phase and the later operation phase deviations from the assumptions underlying the feasibility study may occur. In most cases these will only have a
[2003
The International Construction Law Review
82