A.27 Throughout the dialogue period, Authorities should be well-informed about the state of the financing market to enable them to make independent judgements about the deliverability of financing terms submitted by bidders. However, this in no way diminishes the requirement for bidders to submit financeable bids and, where appropriate, demonstrate support from lenders.
A.28 It is important to recognise that bidders may need to engage with lenders to demonstrate confidence that their proposals are financeable. It is the responsibility of the Authority and its advisers to determine how much lender involvement is required prior to selecting a preferred bidder. This will have been considered as part of choosing the DFC strategy (see A.22). Once Authorities have determined the appropriate level of lender engagement, they should apply the chosen approach consistently for all bidders.
A.29 Where Authorities do plan to use a DFC at preferred bidder, they should ensure that they have sufficient understanding of financeability issues4 prior to selecting the preferred bidder given that resolving such issues may impact the commercial package(s).
A.30 Where Authorities seek funder involvement prior to the selection of the preferred bidder, lenders should be asked to identify any aspects of the project that they believe would adversely affect their ability to obtain credit approval.
A.31 In general, Authorities should be confident that the contractor support package and overall risk allocation will be acceptable to lenders. Resolution of any issues whilst still in competition is desirable for transparency, VfM and affordability reasons. Authorities should also be mindful of procurement issues which arise where matters are left for resolution once dialogue is closed.
A.32 Project risk factors that might concern lenders include:
• sites with known adverse ground conditions or restricted accessibility;
• high operational gearing5;
• substantial corporate support behind key subcontracts;
• significant refurbishment works;
• requirement for novel or unusual construction techniques;
• relatively long construction periods;
• construction materials or equipment with a unique supplier;
• fixed or unusually rigid construction programme delivery dates;
• assets that will be difficult to insure;
• demand or volume risk;
• unproven technology;
• training / educational outcome risk;
• unusual maintenance requirements;
• services requiring a unique supplier or very limited number of suppliers;
• funding solution that requires novel intercreditor arrangements;
• timing and conditions of Authority capital contributions; and
• multiple Authorities.
A.33 Authorities should understand which areas of the documents, financial modelling, contractual risk allocation (including subcontracts) and technical aspects of the project the funders have reviewed considered. Vague support letters stating that the project documents, preliminary technical report and financial model have been made available to funders should be discouraged in favour of disclosure of specific work undertaken by funders, listing any specific concerns and identifying work remaining.
A.34 Funders should explicitly acknowledge in any support letters i) the subcontract flow down inherent in the bid price and ii) whether any side letters or other conditions have been communicated to sponsors. Sponsors should have a parallel obligation to disclose such side letters or conditions as part of their bid. Where funders have supported the bid, these representations should be repeated in the preferred bidder appointment letter by the selected bidder and the funders.
A.35 The goal at this stage is not to have sponsors eliminate funders based upon their responses, but rather to allow the Authority to have early warning about difficult issues that would have arisen in any case later in dialogue or post preferred bidder.
A.36 One approach to managing the interface between competitive dialogue and a DFC is to appoint shadow lenders' advisers. The objective of this is to identify - prior to the closure of dialogue - issues likely to be raised by financiers. This approach can be effective, but factors to consider include:
• the difficulties advisers face in acting without a client;
• the cost and who pays it;
• terms and conditions of appointment, including duties of care and ultimate novation to financiers;
• confidentiality (particularly if one shadow technical adviser is appointed to review all the designs);
• managing the interfaces (i.e. between the shadow lenders' advisers as well as with the Authority's advisers) and incorporating the findings of the shadow lender advisers in the financial / commercial bid evaluation;
• ensuring acceptability of chosen shadow advisers to widest number of lenders; and
• managing the risk of lowest common denominator structuring and / or hidden sponsor points emerging through the due diligence process.
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4 Which might affect funder appetite for the project or give rise to higher financing costs, either directly through the credit margin or indirectly through performance bonding, reserve requirements and coverage ratios in excess of those required on standard PPP projects.
5 Operational gearing is the ratio of service costs to the total costs of the project company. As operational gearing increases, finance costs (which are a function of capital costs and financing terms) decrease relative to services costs (which are a function of operating assumptions).