Contractors
When governments or public entities act as public sponsors in a project finance (PF) initiative, the process naturally becomes more structured and subject to strict regulation. Public entities operate under rigorous frameworks designed to ensure transparency, fairness, and competitiveness in project allocation. Additionally, these entities must adhere to target budgets, where exceeding allocations often requires approval from higher governing bodies—a process that can be both time-consuming and resource-intensive.
In contrast, when PF projects are primarily financed by private sponsors connected to the infrastructure or asset being developed, decision-making tends to be more flexible and aligned with the sponsor’s existing business operations. This allows for quicker, discretionary decisions without the bureaucratic constraints faced by public entities.
Governments, and the institutions they oversee, are subject to intense public scrutiny because a significant portion of their revenue comes from taxes. To put this into perspective, in several EU countries like France, Denmark, and Belgium, the tax-to-GDP ratio exceeds 44%. Think about that: nearly half of government income is derived from taxes and social contributions. These funds are collected in various forms, though personal and corporate income taxes remain among the most common methods of generating government revenue.
In private project finance (PF) initiatives, contractors can also act as shareholders in the special purpose vehicle (SPV), aligning their interests with the project’s long-term success. Under this model, the contractor contributes equity to the SPV and often establishes an ongoing contractual relationship after the asset is developed and fully operational. This relationship generates stable cash flows for the contractor while also allowing them to earn dividends as an SPV shareholder.
In the previous lesson, we examined a clear example of this structure: a Polish utility company formed a 50% joint venture with a Danish wind energy company to supply energy across various Polish regions. For the Polish shareholder, the partnership served a specific strategic purpose—creating a new energy source to support its customer base. What’s particularly noteworthy is the alignment of interests between the SPV and the Polish utility company. Both parties are motivated to ensure the project is completed on time and meets the agreed-upon performance standards, highlighting the effectiveness of such collaborative frameworks.
Revenues can extend beyond initial investments. Operational and Maintenance (O&M) contracts offer a reliable avenue for generating long-term income. By providing O&M services to the offshore wind farm, the Polish sponsor can secure recurring cash flows over time (Gatti et al, 2010).
Financial Investors
Financial investors, unlike contractors or public entities, typically play a minimal role in shaping the industrial and operational strategies of an SPV company. Their primary focus is on generating returns for their clients or beneficiaries. These investors take various forms, including institutional investors such as pension funds and large insurance companies, which seek to protect and grow their assets to keep pace with inflation and operational costs. Sovereign wealth funds, owned by governments or related institutions, aim to address societal needs such as infrastructure development, social welfare, economic growth, or other financial goals. Additionally, there are fund-of-funds, which invest in other funds with exposure to PF projects through equity or debt holdings.
Some countries benefit from enormous sovereign wealth funds, primarily fueled by revenues from their natural resources. Take Cepsa as an example. This Spanish company, with over 90 years of experience in the oil, gas, and chemical sectors, has long been a household name in Spain, recognized for its widespread network of gas stations.
However, as times evolved, so did Cepsa. The company expanded internationally and recently underwent a major transformation, rebranding itself as “Moeve.” The name, inspired by the Spanish word “Mueve” (meaning “movement”), reflects its strategic pivot towards the energy transition.
Under this new identity, Cepsa is repositioning itself by shedding traditional assets. For instance, it divested its gas exploration and production (E&P) operations in the UAE, including its stakes in the SARB, Umm Lulu, and Mubarraz concessions, which were sold to TotalEnergies. This marks a decisive shift in strategy, as Cepsa moves away from hydrocarbons to align with the future of sustainable energy.
The key question is: who are Moeve’s shareholders, and what are their goals? Moeve (formerly Cepsa) is jointly owned by two global financial powerhouses—Mubadala Investment Company and The Carlyle Group. These are large scale asset managers with abundant resources to shape the global energy sector.
Mubadala Investment Company, based in Abu Dhabi, is one of the world’s largest sovereign wealth funds, managing an impressive portfolio valued at $302 billion (AED 1,111 billion) across six continents. Established under the vision of Sheikh Zayed bin Sultan Al Nahyan to promote sustainable prosperity, Mubadala has grown from a regional investment entity into a global leader. With offices in major financial hubs like London, Moscow, New York, and Beijing, Mubadala invests in transformative businesses, balancing innovation with steady, long-term returns.
Joining Mubadala in this venture is The Carlyle Group, a renowned global investment firm managing $447 billion in assets. As one of the leading private equity firms in the United States, Carlyle brings deep expertise in driving corporate transformations and strategic repositioning.
In 2020, Masdar—a subsidiary fully owned by Mubadala Investment Company—announced a 50-50 joint venture with Cepsa to develop strategic renewable energy projects across Spain and Portugal.
This collaboration illustrates how sovereign wealth funds, like Abu Dhabi’s Mubadala, create subsidiaries to execute investment strategies that serve broader governmental objectives. By diversifying its portfolio into non-oil, revenue-generating assets, Abu Dhabi is leveraging Masdar to form strategic partnerships, such as with Cepsa. These partnerships bring mutual benefits: larger funding pools for projects, a higher risk tolerance, and valuable regional expertise.
The Masdar-Cepsa joint venture aims to develop wind and solar projects with an initial capacity of 500-600MW, a significant contribution to Spain and Portugal’s ambitious renewable energy goals. Portugal plans to generate 80% of its electricity from renewables by 2030, while Spain targets 74% within the same timeframe. The Iberian Peninsula is particularly attractive for renewable energy investment due to abundant natural resources for wind and solar power, coupled with strong government support.
Financial investors also place value in historical relationships. Since 2008, Masdar has operated successful projects in Spain, including the Gemasolar plant in Seville—the world’s first 24-hour solar thermal power plant.
Abu Dhabi’s broader economic diversification strategy is clearly led by Mubadala. The emirate is shifting its focus from traditional oil and gas investments to future-oriented sectors such as renewable energy, sustainable transportation, and financial technology. For instance, Mubadala’s investment in Moove, an electric vehicle financing platform, highlights its interest in innovative mobility solutions, while the Masdar-Cepsa joint venture underscores its commitment to renewable energy infrastructure.
Types of Funds
The higher the risk of an investment, the greater the return investors expect. One way to measure this return is through the internal rate of return (IRR) Don’t worry—I won’t dive into the complex math behind it. Instead, let’s focus on understanding the concept of the cost of capital..
Every company has an inherent cost of capital, often referred to as the Weighted Average Cost of Capital (WACC). This reflects the cost of both borrowing and equity. Essentially, it’s the rate of return required by lenders and shareholders who invest in your company. These expectations are quantified as borrowing costs and equity costs.
When evaluating investment opportunities, decision-makers often rely on metrics like IRR. The IRR represents the discount rate at which the net present value (NPV) of a project equals zero. Simply put, it’s the annualized return a project generates. If the IRR exceeds the hurdle rate—a minimum acceptable rate set by management, closely tied to the firm’s cost of capital—the project is more likely to be approved.
However, it’s important to note that IRR is expressed as a percentage and doesn’t provide information about the monetary value of the investment. This makes IRR insufficient as a standalone metric for decision-making. Comparing two projects solely on their IRRs without considering the size of the investments can lead to flawed conclusions.
In project finance, excluding fund-of-funds, there are two primary types of investment funds: greenfield funds and brownfield funds.
Greenfield funds focus on project development and construction, assuming all associated risks, including technological and operational challenges. In contrast, brownfield funds invest in projects that are already operational. These funds are particularly useful in scenarios where an original shareholder involved in the construction phase needs to exit due to investment policies. They also play a key role during privatizations, allowing financial investors to step in, reorganize operations, or restructure project finance (PF) to enhance efficiency and streamline processes.
According to Gatti (2013), greenfield funds typically target an internal rate of return (IRR) of around 15%, while brownfield funds generally aim for an IRR of 10-12%.
It’s important to note that disclosure in PF deals is often limited, especially when development banks or public lenders are not involved. Unlike the transparency of annual reports from listed companies, many PF transactions remain undisclosed, even years after their execution. Additionally, technical documentation can pose a significant barrier for non-experts, making it challenging to analyze and evaluate such projects effectively.
