Under the current PFI model, a contracting authority can elect to contribute some of the capital funding requirement to the project, with the effect of reducing the amount of capital funding that is raised by the private sector and reducing the ongoing project financing costs that are included in facility charges to the public sector. The value of capital contributions to a project can vary, but are limited under current guidance to 30 per cent of the project capital value, generally contributed at the end of the construction phase and subject to maintaining appropriate risk transfer and private sector performance incentivisation. Under international public private partnership models, there are examples of a higher level of capital contributions being made and of options for the public sector to purchase the asset outright at the end of the construction phase of a project.
Alternative approaches to reducing the net public sector cost of projects adopted internationally include partial government underpinning of project risks, usually to increase the quantum of debt that can be raised for a project and/or to reduce its cost.
Question 8: What if any role should public sector capital play in the financing of the construction or operational phase of public assets and services? How and when might public sector capital be best used to improve investor/lender appetite and pricing without adversely affecting risk transfer and performance incentives? What constraints should apply to the quantum of public sector capital grants? Question 9: What if any role should public sector risk underpinning or guarantees play in partially de-risking the construction or operational phase of public assets and services? In which areas could underpinning or guarantees have a beneficial impact on investor and/or lender appetite and pricing? What are the constraints to this approach, with particular regard to risk transfer and performance incentives? Question 10: If public sector capital grants are made to part-finance the construction phase of projects, what constraints should apply and what impact would a level of capital contributions in excess of the current 30 per cent be expected to have on equity and debt investors' investment appraisal and pricing, and on risk transfer and performance incentives? Question 11: If public sector loans are made to part-finance the construction or operational phase of projects, what impact would this have on equity and debt investors' investment appraisal and pricing, assuming pari-passu ranking with senior debt? What approach should be taken to lender voting rights and what other constraints or procedures would be relevant? |