In developing the PSC cost estimate, it is assumed that the traditional public procurement is not financed, even though a comparison is made to a fully financed Shadow Bid. The rational for this assumption is presented in Appendix 1.
Financing costs are the costs associated with arranging financing for a PPP with debt and equity, and can include items such as arrangement fees, commitment fees, and swap credit premiums. These costs need to be incorporated into the Shadow Bid as cash flows.
Partnerships BC assumes that debt financing is obtained either through bank debt or bonds in a typical PPP. When bank debt financing is used, a lender approves the maximum amount of debt for a project, and draw-downs occur through the construction period until this maximum is reached. Interest is accrued periodically on the outstanding balance as the debt is drawn down through the construction period, with a commitment fee applied to the unused portion. When construction is complete and the ASP to the private partner is started, the debt is repaid via fixed payments of principal and interest.
Alternatively, when bond financing is used, the full amount of the required funds is raised up front and interest starts accruing right away. To lower overall carrying costs of bonds, the private sector may borrow several tranches of debt over the construction period. The repayment of bonds is similar to bank debt financing, as fixed payments of principal and interest are paid after project construction is complete.
Equity providers structure their investments to be as efficient as possible. In addition to conventional equity investment, an efficient structure may also include a letter of credit or an equity bridge loan as a means of financing construction. Payments to equity holders are not constant, with the Shadow Bid allowing for a minimum equity return to be specified. This required equity return becomes the cost of equity to the project and is the internal rate of return (IRR) to the equity investor.