A revenue-based TEN-T PPP can be self-supporting if investment costs are funded entirely by private financing and project revenues derive solely from user charges. In many cases, however, full cost recovery through user charges may not be feasible - e.g. because of limited willingness to pay or affordability constraints. In these cases - where the government has to provide financial support to make the PPP financially feasible either at the start or on a recurrent basis - EU grants may be available for TEN-T projects to cover part of the funding gap.

Public authorities pursuing PPPs should be aware of the terms and conditions of EU grant funding to be able to benefit from them to the fullest extent. The European Commission is expected in the near future to issue guidance on the legal and methodological issues involved in combining EU funds with PPPs, in particular in the framework of the JASPERS initiative, in order to facilitate and increase the uptake of PPPs in Structural Fund projects <1> Some of the issues under review at present include the following:

A) Understanding EU grant eligibility requirements relating to PPPs and how to determine the maximum p ermitted amount of EU grant funding for a specific PPP <2>

□ The EU grant can cover up to 85% of eligible expenditures. Co-financing by the government (at least 15%) is always required.

□ If the PPP will generate some revenue from user charges, the "eligible expenditure" for purposes of determining the amount of the EU grant is reduced by the net contribution (i.e. after covering operating and maintenance costs) that such user-charge revenue makes to capital expenditures (determined on a discounted basis). This is the "funding gap" approach.

□ The direct beneficiary of the grant must be the public authority responsible for the PPP, generally the public authority contracting party. This makes the procedures somewhat more complicated than if the PPP project company could receive the grant funds directly, but it has been found to be workable.

B) Understanding the procedures (including timing) for the submission of documents and the approval of funding

□ Approval of funding before bidding for the PPP takes place. In many ways, this is the preferred solution. The grant arrangements can be thoroughly vetted, planned and specified in advance, and bidders will be asked to bid on that basis. This requires detailed structuring of the PPP project before going to the market, but (as noted elsewhere in this Guide) this is the best approach regardless of the presence of any grant funding.

□ Approval of funding after the preferred bidder has been selected. In this approach, although it is well understood at an earlier stage how an EU grant can be incorporated into the PPP and the contract and bidding are well structured to take this into consideration, the approval of the grant is not obtained until after the preferred bidder has been selected. This approach is advantageous where the results of the PPP bidding process need to be clarified in order to enable key elements of the grant application to be filled in (e.g. if there would be significant uncertainty about the size of grant required).

C) Structuring a PPP that includes EU grant funding in a way that does not weaken incentives and reduce Value for Money

□ For example, EU grants should not incentivise the private partner to allocate too much of the costs to capital expenditures rather than operation and maintenance expenditures - thus removing one of the benefits of PPPs, namely optimal whole-life costing. Good practice can be maintained by careful structuring of the PPP contract and the bidding process. This should not be difficult if competent advisers are engaged. It will also be less of a problem where the grant funding is modest and there remains a significant amount of private funding.

D) Determining the way (or ways) that EU grant funds can be applied to the PPP

□ Parallel co-financing of capex (capital grant). In this method, a distinct component of capex is financed by the private sector and another by the EU grant and government funds.

□ Blended co-financing of capex (capex subsidy capital grant). This is the most common model. The EU grant and state funds are used jointly with the financing mobilised by the private partner to make payments during the construction period under a single prime construction contract.

□ DBO (design build operate) contract. This is an extreme form of the approach above in which private financing has been entirely replaced with EU grant and state budgetary funds, but there is just one prime contract covering both the construction and operating phases.

□ Partial grant funding of service fee (payment subsidy). Grant funds could be used during the operating period as full or partial payment of availability payments, that is, time-based payments which would otherwise be made solely by the public authority, as opposed to user charges. (N.B. The feasibility of this model, in particular the application of EU funds to cover availability payments which would be incurred after the December 2015 deadline for EU funds expenditure in the current financial perspective, is not yet clear.)

In all cases, it is essential for the user of this Guide to seek proper advice and discuss the project with the relevant EC authority (e.g. national management authority, DG REGIO, TEN-T Executive Agency), maintaining a dialogue during project development and procurement, to ensure that the PPP is being designed and procured in a way that will give the greatest assurances that the applicable EU grant will be forthcoming and to avoid later procedural complications.

Finally, there are other considerations to be taken into account when incorporating EU grants into a PPP, for example: choice of the right tender evaluation criteria; ensuring that the grant will not be considered to be illegal state aid; or minimising the risk - through careful contract design - that a "significant modification" might result in a required repayment of the EU grant.