| Chapter 2 set out a range of possible delivery models for investments in public infrastructure. This chapter analyses the role of private finance in this context. The most common form of Public Private Partnership (PPP) finance is the structure employed in Private Finance Initiative (PFI) transactions, where the capital and other initial costs are funded through the use of private finance, in the form of private sector equity and debt, and a performance related service charge is paid by the public sector over the project life. Private finance is however also used in a range of other approaches and the sources of this finance are evolving. This chapter: • outlines the benefits private finance can bring in helping to incentivise effective risk transfer and manage performance; • describes the challenge of harnessing emerging sources of finance, particularly global infrastructure funds; • shows how the lessons learned in PFI can be applied to other forms of PPP; and • provides an update on a number of key issues in private finance. |
3.1 All public projects, irrespective of delivery model, need to obtain finance from somewhere, whether from government or the private sector. The contractual structure not only determines risk sharing but also the timing and conditions of payments made by the public sector to the private sector contractor. Risk allocation and payment are closely linked. Depending on the contractual payment mechanism, requirements for private sector funding can be either very limited and short term, or extensive and long term. For example, under some forms of construction contracts the public sector makes milestone payments and the contractor has, as a result, limited need to support the works with its own funding. Under a concession or PFI arrangement, the concessionaire or contractor only receives compensation for its initial capital outlays over the life of the concession or PFI contract, and as such must raise finance to cover a prolonged period.