4.5.1. In the past, the use of subordinated debt has been largely limited to quasi-equity subordinated debt lent by project sponsors as a tax efficient way of creating what is, in effect, an equity interest in the project. There have been isolated cases of mezzanine being incorporated into the capital structure, but these have been exceptional. The more routine inclusion of a layer of debt between the sponsors' subordinated debt and the senior debt should be explored as a means of enhancing the rating of the senior debt. The size of the junior debt would likely range from 10% to 30% of the capital structure depending on the risk in the project. Simple accommodation or road projects without demand risk and low technology requirements would be at the lower end of the range while real toll roads and other projects with demand risk or involving new technology would be at the higher end. There is potentially a substantial pool of capital available for mezzanine debt, some of which might be redeployed from the large amount of equity capital that was raised immediately before the financial crisis hit and which fund managers are finding difficult to invest in the absence of suf-ficient senior debt.
4.5.2. An interesting extension of the above concept is being discussed in the market in relation to junior debt which could address the project control problem. By inverting the customary intercreditor provisions to the effect that junior, rather than senior, debt providers control most lender decisions as long as losses have not eroded their economic interest in the project, decision-making could be vested in a single investor (or at least much smaller group of investors) with expertise in PPP projects. One could envision the junior creditor controlling day-to-day project decisions concerning minor variations to base case assumptions, which form the majority of lender discretions, while senior creditors would be consulted or take voting control for deci-sions with a financial impact above a certain threshold or in cases in which the project is distressed. Such an approach would mitigate considerably the project management burden on senior lenders and make senior lender participation necessary only for more important decisions to be agreed among the parties. This idea emerged in relation to the revival of the monoline model, but it could be explored for any provider of junior debt with sufficient expertise.