When projects are exposed to a financing shortfall at financial close, the State can fill the gap with public funds. The logic is for the public sector to provide a "top-up" facility, designed to fill the "syndication gap" on exactly the same terms as the commercial banks and, if possible, on a temporary basis. This will best support an existing pipeline of deals in a relatively advanced procurement stage.
In the UK, HM Treasury has set up a Treasury Infrastructure Funding Unit (TIFU) to act as a lender of last resort. TIFU issued its first loan to the Manchester Waste deal in April 2009.
PROS: This is one of the most practical and expedient ways to respond to the credit crisis, particularly if the crisis is assumed to be of a temporary nature. By "stepping into the private lenders' shoes", the public sector provides immediate but temporary relief to the financial markets. The expectation is that this approach will allow deals to close in the short-term, and that the market will take over in the longer term, when the State sells down its stakes on commercial terms.
CONS: There are a number of practical issues which need to be dealt with, not the least being the logistics of organising a fully fledged lending unit. Structural issues identified so far are the co-existence of public and private lenders and the timing of the public intervention:
■ How and when to decide on the size of the shortfall
■ Inter-creditor issues, e.g. voting rights and possible conflict of interest for the public side, which is both procurer and lender.
■ The risk of public intervention displacing the banks' market
■ The impact on pricing and risk of "game playing" by lenders
■ The practicality of the State eventually selling down its stakes
■ The practicality of using this approach for new projects.