Plain vanilla options and sovereign project financing

The article proposes a plain vanilla options framework for the sovereign financing of economically viable projects. The framework's two main objectives are to crowd in the private sector and to reduce the likelihood of sovereign default. Project commitments are ring-fenced through special purpose companies (SPCs), which are public-private partnerships (PPPs). SPCs must prove the viability of their business models and be listed on a stock exchange by a pre-agreed date. SPCs issue debt only after becoming publicly traded, and debt is issued solely to private-sector institutions. Sovereigns have no roles in the management of the SPCs. They provide pre-launch technical assistance, but they offer no guarantees. Sovereigns' exposures to SPCs are limited through zero-cost collar strategies that trade upside performance for downside protection. As a consequence, sovereign default is extremely unlikely. The proposed framework assumes the existence of debt, equity, and equity derivatives markets. Thus, the importance of capital markets infrastructure is highlighted.