In a PPP procurement involving private finance the cost of senior debt facilities in PPP is incurred by Procuring Authorities (PAs) through the Unitary Charge over the life of the contract. Senior debt comprises the bulk (some 90%) of most PPP deals - this note is not concerned with the remaining funding which comes from junior debt or equity sources. Because of the significance of senior debt, PAs should review carefully the robustness and deliverability of senior debt funding solutions.
These would typically include (but may not be limited to) the following:
i. review of the level of overall senior debt funding ("gearing")
ii. reviewing terms and conditions offered
iii. agreement of terms and conditions offered to the relevant financial model(s)
iv. acceptance by funders of Standard Form Project Agreements, in particular the Payment Mechanism and related calibration
v. interaction with equity and other funding sources
vi. timetable and due diligence requirements
Subject to project size, it is now common for alternative senior debt solutions (i.e. bank and bond funding) to be offered by consortia on PPPs for evaluation by PAs. Typically this would demonstrate the benefit of competition and enhance VfM / affordability.
The different senior debt funding sources offered will normally be a Bank solution and one of or a combination of:-
- public bond (index-linked, fixed rate or Limited Price Index)
- private placement (index linked or fixed)
- conduit structure
Variations can also arise if EIB funding is part of the project. Other senior debt funding structures and alternatives may emerge over time, for example wrapped bank debt.
This note provides PAs with guidance in the following areas:-
i. the consistent evaluation of alternative senior debt funding sources
ii. quantitative and qualitative issues to consider when evaluating different funding routes
iii. methodology and timing of final funding route selection
This note does not provide advice on or a process for formal funding competitions. If required, the SE Financial Partnerships Unit would give advice in particular circumstances if a formal funding competition process was envisaged.
In all circumstances, PAs should utilise specialist financial advice in reviewing funding offers and discuss with advisers the different types of senior debt funding available and their impact on long term flexibility / delivery vs. improved affordability etc. SE funding is available only for projects where appropriate professional advice is sought and taken.
Technical terminology is used throughout this note and where applicable PAs should discuss this with financial advisors. This note should be seen by all Members and officials with responsibilities for PPP projects. It has been made available to all financial advisors and funders currently operating in the Scottish PPP market.