Although private entities can be beneficiaries under the rules of the Structural Funds, beneficiaries must also be "initiators" of a project. In practice this means that "private-private" projects can work with private beneficiaries, but under a PPP it is only the public sector that can be the initiator, and therefore beneficiary. It is the public entity that has to sign the grant application and that will ultimately receive the money against proof of expenditure.
There are four main ways in which the Structural Funds can be combined with private finance in PPP projects. In practice, some of these models have proved more deliverable than others. However, all are in principle applicable and have been used by countries, which have combined grant funding from their own national resources with PPP structures.
• Grants as public capital expenditure contribution: In this model, grant is used to part finance directly the capital costs of an asset. Availability or user charges are reduced as a consequence. In many respects this model is well adapted to the Structural Funds regulations as grants are used to finance directly capital expenditures. The model is, however, less well suited to the philosophy of PPP where remuneration of the private partner should be related to services delivered rather than costs incurred.
• Parallel co-financing: This involves the 'splitting' of an infrastructure asset or programme into (at least) two discrete parts, one of which is financed from public sources (incl. the EU grant) as a conventional procurement, the other as a PPP. The two elements of the project may subsequently be operated as a single concession, with availability or user charges below the level that would have applied to a full PPP procurement.
• Grants as means of part funding availability or user related (e.g. shadow toll) payments: This is arguably the 'classic' model for blending grants with private finance, in the sense that it matches most closely the fundamental principle of PPP that payments to the private sector should be related not to costs but to service delivery. However, it is also the model which has, in practice, been the most problematic to deliver with Structural Funds grants mainly due to the n+2 rule.
In practice this means that unlike PPPs, EU Structural Funds grants do not have a whole-life approach per se, but focus exclusively on the provision of assets. They are therefore oriented to co-financing a portion of construction costs, and not paying for an infrastructure-based service as under most PPPs. There is a cut-off date of 31/12/2015 beyond which no payments are possible under the 2007-2013 funding programme. For example, in an availability-based PPP, the private sector would construct and asset and then "lease" it out to the public sector, i.e. the public sector would only start paying for the service after project completion, typically over a long period of 20-30 years. EU grants have been designed as upfront payments towards the construction costs, and therefore although they could co-finance availability payments up to 2015, they could not support the main period of availability payments which would stretch beyond. This makes EU funding difficult to use for non-revenue projects like social infrastructure. Up-front capital contributions can be made, but if large, these can distort the risk profile and violate the "no service no payment" principle.
The timing incompatibilities would also apply to the EU grants to promote investments in TEN-T. The TEN Regulations require the project to begin within two years of the start date of the project and the first partial payment to be made within three years of the funding decision. If the grant is awarded before construction starts, in order to provide leverage to the financing of the PPP, then it must be well-timed to meet these constraints and the grant will almost certainly need to be awarded to the consortium in order to meet the three year limit. This is not unreasonable if the grant is to be awarded against construction costs because they are initially borne by the private sector. The cycle of funding linked to the 7 year EU budget cycle is not compatible with the schedule of availability payments, which typically extend to 30 years or more. This is inconsistent with the principle of whole life costing, particularly when the grant is only available to offset construction costs, which is currently the case.
One solution to the issues raised in this section is the investment fund model. Under this model, Structural Funds would be combined with public and private financing in an investment fund which invests in a portfolio of PPP (or other) projects via repayable instruments. This has the further advantage that the Structural Funds invested are 'recycled' and the capital and returns can be re-invested. The JESSICA model (in which Structural Funds are disbursed to Urban Development Funds, UDF, in some cases via a Holding Fund) works on this basis.