An alternative form of state support for PPP projects not widely used in Australia is the use of state guarantees to support privately sourced project finance in adverse capital market conditions. Debt guarantees, unlike the CGF and SDM approaches, are a contingent liability of government for borrowing limit purposes and do not attract the “crowding out” and deadweight cost disadvantages of direct state capital contributions. They can also reduce the overall debt funding costs and improve the value for money outcomes for PPP transactions. Other advantages include:
1. The preservation of traditional incentive frameworks which are important to the effectiveness of the PPP procurement method
2. Flexibility -guarantees may be full or partial and may be withdrawn over time
3. The refinancing option remains available to private investors
4. The cost of a state guarantee is small
5. Transactional and agency costs are less than under the CGF or SDM
6. This method of support does not require the state to assume a loan administration role.
Research in developing countries points to the relatively low risk of state guarantee support for project senior debt compared to other forms of assistance for PPP projects. A review of state support for Indonesian BOT toll roads measured the contingent liability of five forms of support - revenue guarantees, interest subsidies, tariff guarantees, minimum traffic guarantees and guarantees of debt. The study found that the probability of a guarantee being called in projects with an average
80:20 debt to equity ratio was 5% compared with 89% for tariff guarantees, 54% for interest guarantees and 39% for traffic guarantees. On a risk payoff basis, project debt guarantees were found to be the least risky form of guarantee for government (Wibowo 2004). The findings of this study are supported by recent research by the World Bank (Irwin 2003).