A common belief about PPPs is that they should be entirely self-supporting with no recourse or guarantees from the government or private sponsor. In fact guarantees, from either party, are inconsistent with the concept of non-recourse PPP financing. Never the less, guarantees are sometimes necessary depending on the nature of the project and given the fact that the economic benefits of some projects are greater than the financial benefits and cannot be financially captured by the private sponsor.
Therefore, financiers may ask for sponsor guarantees to support debt servicing obligations until the project has achieved certified operational completion or to support the entire debt servicing period (depending on the outcome of the risk assessment). Private sponsors may also request government guarantees against such things as market or commercial risk if there is some concern about a projects financial viability. Furthermore, clear and unambiguous statements of government support for the type of investment being made are very useful, especially if linked to some form of guarantee. This will also provide an increased level of comfort to potential investors as the action will reaffirm that the project is compatible with national programs.
Guarantees need not add to the cost of a project and can be as simple as the assurance that no change in the environmental, tax, or other laws and regulatory framework will be applicable to the project if such change will have a material adverse effect on the rights of the project sponsors or the lenders.