4.3. Financial structure

Why financial structures matter?

Careful analysis of alternative financial structures is required to establish the right financing structure for a project. As the expected return on equity is higher than the return on debt, the relative shares of debt and equity in the total financing package have important implications for the cash flow of the project. Their relative share is also important for taxation purposes. Generally, the higher the debt, the lower the tax on return. However, a higher proportion of debt, requires a larger cash flow for debt servicing, which can be problematic, especially in the early years of project operation when revenues are generally low. This is often the case in transport and water sector projects, which implies high risks of default.

Copyright © 2008 by Transport Policy and Development Section, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).