A.20 The appropriate size of capital contributions appropriate will depend, inter alia, on the risk characteristics of the project. The overriding principle should be that sponsor equity and private sector debt should absorb all of the expected losses in the project as determined through stress testing of cash flows and construction period delay and all default scenarios.
A.21 It is unlikely that capital contributions in excess of 30% of the capital works value of a project will be appropriate.
| Box 2.A: Issues related to capital contributions Payment mechanism The inclusion of a capital contribution will lower the total unitary charge by reducing the amount required to service finance; however, the unitary charge attributable to service providers will remain the same. The effect of this is to change the relative amount of unitary charge at risk to project sponsors once the capital contribution is paid. Where a capital contribution is introduced into a project, the Authority will need to review the payment mechanism / deduction regime to ensure it remains appropriately calibrated and appropriate incentives exist to ensure delivery of the contracted services. Operational gearing As noted above, the reduction in finance costs relative to service costs increases the operational gearing of the project. Authorities should therefore consider any related financial impacts (such as the sensitivity requirements of financiers) when analysing capital contributions. Land Authorities considering effecting a capital contribution through a transfer of land should incorporate provisions in the project agreement to protect their interest in the land until construction is completed. Set Off There must be no prohibition on the Authority's right to set off amounts owing to it against any capital contributions. |