What is the view of respondents to an approach which financed the construction period of projects separately from the operational phase? 

There could be enhanced value in separating construction from operational phase financing and SFT has considered this within the bounds of a "payment for available assets" structure. 

One approach to effectively separating the financing is through a mini-perm senior finance structure with either short term senior loan maturity requiring a refinancing before the end of the contract term (hard mini-perm) or strong incentives such as margin ratchets and cash sweeps for a refinancing (soft mini-perm). Under each of these structures the public sector pays a premium for the uncertainty in the future cost of finance.  Under a hard mini-perm structure equity has to be able to take the risk of increased cost of finance at refinancing and must be remunerated accordingly and the senior funders must be persuaded that the risk is very low that they would have to roll beyond the contracted maturity to avoid default if refinancing was not possible. Under a soft miniperm structure the public sector tends to pay the high cost of finance dictated by ratchets and only benefit from a proportion of the saving if that is reduced in a refinancing (due to refinancing gain sharing mechanisms).

An approach favoured by SFT is to take a 100% share for the public sector of any increase or decrease in the cost of finance at a refinancing post construction completion through an adjustment to the unitary charge. The cost of finance can be split into two elements - broadly the underlying interest rate and margin. It could be possible to maintain the hedge in long-term interest rates for the full contract term from the outset, but the issues associated with a long swap and short debt are likely to make the cost and complexity of this (if indeed it was available in the market) outweigh any benefit in cost certainty. Government (though perhaps not individual public sector bodies) is well used to accepting the risk that the underlying cost of long term finance varies through time from its own gilt issuance programme as well as having taken the risk at the time all PPP projects are first signed up to. The other element is the margin risk in debt pricing (either form banks, or more likely the capital markets) at a refinancing. Here there is a need to separate any effect of poor project performance from general market pricing. One way to do this would be through the pre-rating of the stable operational phase prior to signing the contract, it could then be re-rated in stable operations (a set period following construction completion) and any difference in rating would be to the cost of equity (and ultimately the incumbent senior financier), with the marginal cost of finance at the originally anticipated rating being to the account of the public sector.

An inability to refinance due to diminished rating would be a contractor default, and an inability to refinance due to market unavailability of originally anticipated tenor and rating of debt would be likely to represent a form of public sector default. SFT considers that such a structure could transfer availability risk to the private sector and retain the incentive to long-term diligence and cost management on behalf of both equity and the funder who would be reliant on a strong operational rating to be held whole at their exit.

It may additionally be possible to refinance a portfolio of assets at the same time in stable operation, potentially through an aggregation vehicle into a larger scale tap of the capital markets. 

SFT recognises that such a structure requires further development, not least in refining the separation of finance cost and operational risk, and in controlling creditor issues in the operational phase, however it is considered to have significant merit worthy of that further consideration given that it places two things: (1) short term risk and diligence with banks; and (2) long term stable cash flows with institutional investors; in what many would perceive to be their natural homes.