3.57 Typically, third party credit providers are more risk-averse than equity providers and provide the majority of the funding. The PFI approach and process thus leads banks and other financial institutions who lend to PFI projects to play a important role in ensuring that proper due diligence is performed, all important risks are identified and properly addressed and allocated to the appropriate parties. They will seek to have robust and rigorous contractual undertakings from private sector participants in the PFI scheme and this is one of the reasons the PFI process delivers projects to time and to budget.
3.58 Private financiers usually provide a significant component of the project funding for a PFI project. It is recognised that the funders who provide this finance play an important role in developing the project scheme, and provide many of the benefits outlined in paragraphs 3.14 to 3.16 above. Typically, areas where funders perform key roles are:
• due diligence. When funders consider financing a project, they will carry out extensive due diligence work, aided by independent advisers, on all aspects of the project plan including its technical, insurance, legal and financial aspects. This due diligence is intended to ensure that the plan is robust based on the project assumptions and to eliminate any identifiable 'optimism bias' in the consortium's plans. Funders are incentivised to ensure as far as is possible that all potential project risks are taken into account;
• risk allocation. Funders ensure that all the risk identified in a project is allocated to the party best able to manage it. As funders are potentially exposed to all of the debt provided to the project, they ensure that the project's contractual structure properly incentivises and apportions risk to the appropriate parties to the contract. Ultimately funders remain exposed and will assess the residual risks of, for example, not achieving a watertight contract structure, or the inherent risk that a failing or failed project will not have sufficient funds to repay its debt;
• contract enforcement. Where a project has experienced problems, the private sector funders ensure that the contract structure they have created through the due diligence and risk allocation process is properly enforced, and that parties who have assumed risks are accountable. This enforcement role helps ensure that projects are nevertheless completed so that the public sector client can enjoy their benefit and the private sector receive whatever payments follow; and
• taking overall project risk. Although the credit providers ensure that the great majority of project risk rests with the consortium and its sub-contractors, they hold the overall risk that their debt is not repayed. To manage this risk, they hold step-in rights to take over failing projects and bring in new contractors who can meet public sector requirements.
3.59 The involvement of private finance in a project therefore brings with it many benefits, over and above taking on the risk of the project to the value of debt and equity provided. Annex C contains the results of a study conducted into the cost of private finance in PFI projects.