The private party may suffer challenges to the robustness of its financial structure, as a result of intense competitive or other pressure. Under these circumstances the private party may be unable to satisfactorily discharge its contractual obligations and as such, government may not achieve the required outcomes from the project.
It is important that government undertakes, as far as possible, a reality check of the assumptions used in the bid, so that a significant under-bid is not automatically accepted. One of the danger signals may be where the sponsor is dependent on a refinancing at more favourable rates to make the contract commercially viable in the longer term. While this may be ordinarily possible when the project enters a lower risk phase, if a risk materialises and risk is assessed as remaining at comparatively high levels, the private party may find itself in an untenable commercial situation, prompting a desire to default and walk away. This outcome is not consistent with the philosophy of the public private partnership policy that sees value for government in private sector service delivery and in maintaining a sustainable, productive partnership.
The relationship between financiers and the private party puts incentives on the private party to deliver the contracted services. To mitigate their own risk, debt and equity providers typically need to ensure a robust and financially attractive structure with a clear pass-through of contractual obligations to contracted parties capable of complying with them. Debt financiers often take security by assignment of the special purpose vehicle's rights under the project contract, collateral warranties or guarantees from equity holders or sub-contractors.