10.1 This chapter provides a basic introduction to the key methods of financing PPP schemes. It is intended to give managers involved in PPP procurements in the NHS an understanding of the differences between alternative methods of financing schemes. This should assist NHS bodies in understanding the financing packages that will be put forward by participants. This section is not intended to replace the professional advice that NHS bodies will require from their financial advisers. Financing costs (like other costs) and any risks related to financing are to be managed by the private sector.
10.2 This chapter addresses three aspects of the financing of schemes:
• bank financing
• bond financing
• the role of equity.
At the end of this section, a paper highlighting issues to consider when selecting bank and bond funded senior debt solutions is included. Reference can also be made to the Scottish Government Infrastructure Investments Unit Publications which includes advice on the financing of PPP deals.
10.3 To date, larger PPP schemes in the NHS have been funded either using bank financing (also known as project financing) or bond financing (also known as capital markets financing). Both types of financing are likely to involve alongside them the provision of equity. The two types of financing are not exclusive - it would be possible for a larger deal to be partly financed using both types of financing. Furthermore, schemes may be refinanced (mainly bank, not bond) during the contract period which may involve the same or a different type of financing. A scheme may sometimes be refinanced once the new facilities are built and commissioned and hence when the risk profile of the project changes (as there will no longer be any construction risk). Smaller projects may also be financed internally, at least initially, by companies (i.e. on their own balance sheets) rather than using bank or bond financing.
10.4 There is no preference on the part of the public sector for any particular type of financing. There are both advantages and disadvantages to using bond or bank financing. It is necessary for the project company to look at the requirements of each individual project and to assess whether these can best be addressed through a bond or bank finance route. Furthermore, the financing markets will develop over time. For example, longer maturities are now achievable for bank financing for PPP schemes than were available earlier in the development of PPP. The key for the public sector is to ensure that the overall deal, of which the method of financing is one part, is best value for money.