Underpinning

This is when a portion of the financing is back-stopped by specific government undertakings, for example, favourable repayment provisions such as compensation on termination, or direct irrevocable payment by the authority post completion.

Examples are the French "Cession de créances", or the German "Forfeiting" structures which have been extensively used over the last few years.

The underpinned tranches are likely to be cheaper and to attract a different sub-set of lenders, seeking low risk, quasi-government paper, and thereby increasing bankability. On the French market, the overall financial benefit appears to have been significant.

However, the irrevocable portions cannot attract performance penalties, which goes against one of the main tenets of PPPs. In practice it may prove difficult to peg the irrevocable portion at the right level, which will provide both a cost benefit and maintain the right performance incentives.