Though the working relationships between the public and private sectors are not new, the use of PPP structures is becoming increasingly popular. PPPs enable the participants to transfer the various risks inherent in a project to those who are best equipped to manage it. If a PPP is well structured it should enable all parties to better utilize resources by promoting efficiency and transparency, as well as provide a number of benefits including:
i. Risk Diversification - The creation of an SPV enables the coming together of many different parties and facilitates the allocation and diversification of risk and financing requirements to more than one party. This diversification enables the undertaking of projects where the financial requirements or risks might be too great for any one party by itself.
ii. Risk Mitigation - The SPV facilitates the use of project financing which is intended to keep the specific risks of that project separate from the existing business of the private sponsors. This is beneficial in that the financial integrity of the project sponsor's business will not be jeopardized should the project fail.
iii. Project financing - unlike traditional lending, is based on the financial strength of a project with little or no recourse back to the sponsor. The SPV borrows the funds and the debt is paid back using the cash flow generated from the project. Since it is the SPV that is borrowing the funds, this will not affect the sponsor's credit rating and therefore not affect future borrowing by the project sponsor.
iv. Leverage - Leverage is the amount of debt in relation to the amount of equity used to finance a project. Projects financed using project-financing methods are usually highly leveraged in order to increase the equity return. The use of leverage can make projects more financially viable.
v. Credit Ratings - Traditional corporate lending is based on the sponsor's credit rating. Project financing facilitates the borrowing for a profitable project and is not restrained by the project sponsor's borrowing limitations.
vi. Tax Benefits - Depending on the country, tax benefits and holidays sometime exist for new enterprises. The establishment of an SPV to undertake a PPP can help sponsors take advantage of these tax saving mechanisms.