7.1 For JVs classified to the public sector (i.e. public corporations and self-financing public corporations), it would normally be expected that the required finance would be provided by the private sector. Careful consideration is needed in these circumstances (see also Chapter 5 on the implications of public/private classification). Because Government is able to borrow more cheaply than the private sector, the prima facie argument is that any private sector borrowing can only offer VfM if the private sector debt provider is bearing genuine risk.
7.2 Depending on the purposes of the JV, it may be necessary to ensure that a public sector classified JV does not obtain a commercial advantage through public sector financing at below the commercial market rate for risks involved; this could constitute State Aid (see Chapter 3 and Annex C). This risk may be mitigated where Government lending is structured so that it is effectively provided to the JV at a prevailing market rate.
7.3 As set out in Chapter 3, public sector bodies should first ensure they have the necessary statutory powers, authority and if required budgetary cover to participate in a JV or become exposed to future potential liabilities, for instance, through indemnities. The VfM aspect is key and can be considered in terms of providing a reasonable return for a given investment, taking into account the risks associated with a given capitalisation structure.
7.4 This is an area where professional advice should be sought. This Chapter 7 only provides a brief overview.
7.5 Funds for the JV can be raised in a number of ways, at both initial funding stage and subsequent rounds of funding. These include:
● issue of shares (equity) or partnership interests;
● debt raising; and
● grants.
7.6 The JV can raise funding by any combination of these three means, both when it is formed and in subsequent fund raising. At formation the risks are inherently greater as the JV has no track record, and so funding at this stage will typically come from the JV's founders unless debt can be secured against the JVs assets, e.g. in the case of a property JV.
7.7 The introduction of the Prudential Framework for Capital Investment by Part I of the Local Government Act 2003 provides a further source of finance to local authorities62.
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62 See also guidance issued by the Chartered Institute of Public Finance and Accountancy (CIPFA).