Sponsor risk

In establishing a project consortium, the sponsor typically establishes the private party in the form of a special purpose vehicle ("SPV"), which contracts with government. The SPV is simply created to act as the legal entity of a project consortium. Because the arrangement is financed through non-recourse debt, creditors have access to the project's cash flows but limited recourse to the sponsors' balance sheets. Sponsor risk is the risk taken by government that the SPV, or its sub-contractors, will not fulfil their contractual obligations and that:

•  government will be unable to either enforce those obligations against the sponsors, or recover some form of compensation or remedy from the sponsors for any loss sustained by it as a result of the SPV's breach; or

•  the sponsor(s) will prove to be inappropriate or unsuitable for delivery of the project; or

•  the major equity partner is also a prime contractor to the SPV resulting in a possible reduction in the partner's incentive to enforce the owner's obligations under the contract.

The exposure of the Procuring Agency to sponsor risk can be mitigated both contractually and through the operation of the evaluation process.