Under the AFP model, the private sector is not paid by the public sector until the project is complete and thus in the interim, the private sector has to raise financing in the private markets to meet project expenditures. At the initial VFM stage, IO often engages independent, external financial advisors who provide assumptions on the financing costs and fees that a private party is likely to be charged (and will pass through to the public sector as a cost) by the private markets for undertaking the AFP project being analyzed. In addition IO studies the financing costs and fees observed in the bids received on earlier projects to develop private financing assumptions. Financing costs are modeled through the development of detailed financial models based on the construction (and lifecycle and operating cash flow schedules in a BFM or DBFM) as developed by the relevant external cost consultant. When VFM is reassessed (stage #2), the actual private financing cost in the preferred bid is used to replace the estimated private financing costs in the AFP model.
Total financing costs under AFP are typically higher than public sector financing costs because the private sector borrows at a higher rate than the Province. This is a common criticism of the AFP model, but it is important to consider the overall VFM analysis when evaluating which is the appropriate procurement model of choice. Higher financing costs are offset by the risk transfer to the private sector and mitigation of public sector risks under AFP.