Under this approach, the private sector guarantees funding provided by the public sector to projects. This is arguably the most directly relevant response to the current crisis, as:
■ the credit crisis is largely caused by a liquidity shortage, and
■ it remains fully consistent with the PPP model, as it attempts to facilitate the involvement of the private lenders, who are still expected to bear the project risks.
The UK Treasury tested a similar concept a few years ago through the Credit Guarantee Facility (CGF), but did not develop it further.
A number of public or semi-public institutions such as KFW in Germany, CdC in France or CDP in Italy are now considering similar approaches.
PROS: By providing such funding, the public sector will respond to an immediate shortage and will do it at a significantly lower cost than a private lender could do (see 2.2 above).
CONS: Funding facilities solve only part of the problem as the appetite of commercial banks for project risk is currently not sufficient to meet the overall demand for senior debt.
Banks also have diverging views on this structure. Some, mostly banks with acute liquidity shortages, welcome it. Others consider that providing a guarantee to long term funders is actually more onerous than a straight loan. This is because long term guarantees are almost impossible to "refinance" and raise documentation and inter-creditor issues between the guarantors and the lender.