Methodology Update Report: Public Sector Capital Contributions to Funding PFI/PPP/P3 Projects (200911XX)

Methodology Update Report: Public Sector Capital Contributions to Funding PFI/PPP/P3 Projects

This report is an update to the rating methodology Construction Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects published in December 2007 (the "Construction Risk Methodology")

In December 2008 we published a Request for Comment ("RFC") on The Impact of Grant Funding on Senior Debt Ratings in Construction Phase PFI/PPP/P3 Projects We received feedback from a number of market participants with dialogue continuing beyond the initial response deadline of 31 March 2009.

While some respondents found the RFC surprising, suggesting as it did that grants from the public sector might negatively impact the credit quality of senior debt, none challenged the logic of the underlying analysis. The strongest feedback was that even labelling capital contributions as "grants" wrongly implied a lack of conditionality or financial control; many public sector procurers have asserted to us that their capital contributions are now subject to strict conditionality, and that they take all possible steps to ensure that value for money and risk transfer would be preserved for the public sector in any termination scenario. We are happy to note and accept this comment since it is consistent with our previous observation that public sector procurers are becoming increasingly sophisticated and adept at ensuring reliable risk transfer, to the benefit of the public sector but with a corresponding negative credit impact for private sector debt funders.

This report therefore refers to Capital Contributions ("CCs") instead of grants and confirms that in most cases, a material public sector CC to part-fund the construction phase of a PFI/PPP/P3 Project should be treated as having an "Adverse" impact on the credit quality of senior debt, because it makes the senior debt credit proposition riskier than it would have been without the CC.