Question

QUESTION 3 a) From a financial intermediation stand point, explain why developing countries finance. projects largely through government borrowing from international banking market, and multilateral institutions? [5 marks] b) Using examples of public infrastructure projects in Ghana, differentiate between offtake agreement and concession agreement. [5 marks] c) Explain why project finance is largely for public infrastructure projects but financed by the private sector in the 20th and 21st centuries? [5 marks] d) Why are pension funds more suitable sources of Project finance? [5 marks) [Total = 20 marks]

Answer 1

a) Due to the heavy investment required for setting up the infrastructure, developing countries go for financing projects through government borrowing. It also helps developing countries to get finance at low debt cost / at concessional interest rates for high investment projects which will not be possible through domestic financing.

b) Concession agreements are those agreements between the company and government or any other non-governmental owner with respect to a facility which gives the company the right to operate certain business within the jurisdiction of the government or within the facilities provided by non-governmental owners subject to certain terms and conditions for a prescribed period of time which is agreed in prior. Example: Telecom Operations

Offtake Agreements are those which are agreed between the producer and the buyer where the buyer agrees to take a certain percentage of the production that will take place in future. Example: Government Mining output is purchased by a certain company at the prescribed rate.

c) PPP is a model that we have experienced largely in 20th and 21st century. PPP means Public-Private Partnership model which is used for developing Public infrastructure projects by Private sector on behalf of the Government. This model enables the better availability of cashflows for building such high-cost infrastructure projects without the use of public funds. This helps in the monetization of the public project investments from Public which is not encouraged if it is built by the government.

d) pension funds are those funds which are generally meant for Long term savings by various persons. These funds are meant for future needs of the person contributing to the fund which is generally used at the time of retirement or old age. Hence these funds are available to use for financing long term projects like project finance instead of keeping them idle. Therefore, pensions funds are more suitable.

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