Any developments in the UK PPP model should, above all, endeavour to maintain the main benefits of the current model, namely:
- improvements to the way public projects are procured. PPP has acted to impose new disciplines on public procurement teams and encouraged a focus on investment objectives rather than the means by which they can be achieved;
- a "life-cycle" approach to capital investment, where an investment is considered on its complete cost over time, including long term maintenance and performance, rather than on the original capital expenditure only;
- efficient incentives and the alignment of the interests of the public and the private sectors through risk sharing and appropriate contractual arrangements; and
- the engagement of third party funders. This brings robust external scrutiny to projects. Equally important, funders are incentivised to ensure the long term performance meets the public sector's specification.
Given the significance of long term, third party finance for PPP transactions, the current difficulties in securing long term debt on affordable terms represents a considerable challenge for the PPP model and a number of Member states have introduced measures aimed at increasing the available funding. Some of the following options are currently in place or being considered elsewhere in Europe are:
- Direct guarantees to the private sector. Direct guarantees are state guarantees offered to lenders outside the provisions of project agreements. These are being used in France and Portugal, and are under consideration in Slovakia, principally in the case of large projects where banks need to limit their exposure. Typically, these are structured to leave a residual risk to lenders.
- Indirect guarantees to the private sector. Indirect guarantees are typically applied through specific provisions of project agreements. These may range from favourable compensation on termination provisions which have applied, for example, in Spain to direct irrevocable payments from the public sector to lenders after project completion-examples are the German Forfeiting model or the French Cession de Créances.
- Refinancing guarantees. Some European authorities have proposed forms of refinancing guarantee to address the uncertainties related to short term debt tenors (so called "mini-perm" structures).
- Public sector co-lending facilities for PPPs. The UK, of course, already has experience of the Treasury Infrastructure Funding Unit (TIFU).
- Public sector liquidity guaranteed by the private sector. In practice, this usually involves commercial guarantees for debt provided public sector promotional banks.
A key attraction for the public sector of these each models is that they should reduce the cost of finance for PPP projects. On the other hand, and to put the issue quite starkly, each of these models result in, to a greater or lesser degree, lower risk for private sector lenders. In assessing these models, it is important to recognise the key risk management role performed by equity and third party debt in PPP transactions. Indeed, it is arguable that the role of third party equity and debt finance in scrutinising the economic and financial performance of projects is the principal reason for the superior 'time and cost' performance of PPP vis a vis conventional procurement.
To state the issue clearly, the more debt is de-risked, the greater the probability that the public sector will, eventually, be called upon to pay out on its guarantees. This underlines the importance of a clear analysis on the part of the public sector of reasons for de-risking debt. There is a significant difference between guarantees on the one hand for poorly structured projects with weak economics which could not otherwise be bankable and, on the other, guarantees which address reasonable lender risk aversion on the very largest deals.