Another popular method by which local governments might make use of the limited public resources available to them and raise capital for public-private partnerships is the project financing model. The project participants create a Special Purpose Vehicle (SPV) that acts a as subsidiary of the legal entity towards providing funding objectives while reducing the parent company’s risk exposure. This model can be funded through collected contributions from the municipalities, debt from lending institutions, and equity from private investors (De Marco et al. 2016) and has become fairly popular. This is due to its applications in large-scale energy efficiency initiatives in metropolitan settings, however, often without standardised approaches to implementation (Limaye and Limaye 2010). 

This model is linked to several different arrangements, and those arrangements may involve one or more private-sector investors. Some of the associated investors include asset operators, debt providers, manufacturers and equity investors. An SPV is responsible for managing, operating, installing and developing the infrastructure at their own expenditure for the duration of the project's execution. During its period of carrying out its responsibilities, the special purpose vehicle model partners bear the most risk as they are considered the direct owners of the project (De Marco et al. 2016). 

Contract terms are generally 20–25 years. The contract price is based on the required investment, cost of capital and operation and maintenance costs. The municipality pays private-sector partners monthly unitary charges, the amount of which is based on the contract price. These payments represent the key security for funders (Scottish Futures Trust 2013; WBG 2016b). 

Advantages:  The main merit of this type of financing is that it avails numerous opportunities for municipalities to leverage private capital and carry out projects using off-balance sheet funding. The off-balancing is supported by a structure that is crucial for operators, manufacturers and investors. Another benefit is that the SPV model helps to identify and separate project risks and enhances the attractiveness of the investment. For an SPV model, the long-term contracts avail sustainability for assets and operational maintenance (De Marco et al. 2016; Link 2012). An additional advantage for municipalities is that, if private sector partners fail to supply the services as agreed in the contract, the municipality is entitled to deduct or withhold a predetermined amount from payments and can even impose penalties. 

Disadvantages:  The high transaction costs involved in creating, developing and putting an SPV into action are the key obstacle that must be overcome in order to make use of this model. Also, it is not recommendable for small projects. It also associates with many additional costs incurred by the consortium's governance and structure. The project finance model may also allow a long time to elapse between the project start date and the beginning of actual development (De Marco et al. 2016; Bonetti, Caselli, and Gatti 2010; Makumbe et al. 2016).

Projects that can be financed with this model:  This strategy is appropriate for huge projects that require a significant capital investment (more than 20 million Euro). The project should possess the capability of attracting private investors and allow the application of long-term contracts with the involvement of private investors that oversee its infrastructure's operation and maintenance (Scottish Futures Trust 2013). Supporting public financing tools like grants, tax exemptions, tax-free bonds or credits can significantly improve project viability and facilitate private-sector involvement. According to this model, the fast-transparent bidding process, the clear legislative provision and the simple regulatory structure are all prerequisites for a successful completion of project implementation (Mendoza et al. 1999; Spillers 2000; De Marco et al. 2016). 

Further reading: