In determining the creditworthiness of a PPP project during operations, DBRS takes into consideration a wide range of factors as highlighted in its methodology, "Rating Canadian Public-Private Partnerships." For an availability-based PPP project, DBRS will analyze factors such as the degree of risk allocation, the complexity of the services provided and performance standards, and the operating expenditure and life cycle maintenance profiles. DBRS also assesses the resilience of a project's financial metrics to increases in operating and maintenance costs as a result of a need to replace a service provider (the O&M Breakeven), increases in lifecycle maintenance costs due to replacement of a provider or unexpected increases in lifecycle costs retained by the Project Company (the LCM Breakeven), as well as the project's ability to withstand additional indebtedness attributable to a construction cost overrun (the Additional Indebtedness Breakeven). In each case, DBRS will look at the maximum by which these costs can be inflated for the full term of the project while still maintaining a minimum Debt Service Coverage Ratio (DSCR) of 1.0 time.
DBRS recognizes that GFuDC serves a number of important purposes in the context of PPP procurement. GFuDC demonstrates a commitment to PPP as a means of delivery of infrastructure, and solidifies the province's financial ties to the project. In large projects, the payments play an important role in bridging a gap in the financing of a project in situations where readily-available sources of debt and equity have been exhausted. These are positive attributes.
However, the trend towards larger amounts of GFuDC in certain jurisdictions points to the possibility of reduced robustness during operations as it reduces the ability of a project to deal with financial shocks during the operating phase. To understand this inverse relationship between the extent of government funding during the construction phase of a project and the resilience of the project during its operating phase, it is necessary to examine the impact such funding has on the operating cash flows of the project. As expected, increased GFuDC will lead to lower debt needs, resulting in lower capital payments from the government and lower cash flows required to maintain a given DSCR. In other words, each basis point of DSCR will require a lower amount of cash flow available for debt servicing. With stable O&M and lifecycle budgets, the cash flow cushion embedded in a given DSCR will shrink relative to O&M and lifecycle expenses; as GFuDC goes up, set percentage changes in those budgets will lead to faster erosion in the DSCR.
DBRS notes that GFuDC can have consequences for recovery upon default during a project's construction phase. However, the focus of DBRS's analysis is on the project's probability of default, with emphasis on the creditworthiness of the project on a going concern basis.