A.18 A variety of views were expressed on whether the public sector should provide financing for projects and at what stage the financing should be provided. Some respondents considered that the public sector should provide all of the finance during the construction period. Once operational, the project could be then transferred into private sector ownership. Other respondents considered that private finance should be used to deliver the public infrastructure. Once operational, the project could either be transferred into public sector ownership or remain in private sector ownership and refinanced.
A.19 There were also mixed views on whether Government should be a co-lender of debt to projects. Some respondents thought that this would reduce the cost of finance, or provide vital capacity for larger projects, while others were concerned about potential conflicts of interest. It was, however, noted that these concerns may be solved by using a centralised commercial entity and agreeing appropriate control and voting rights.
A.20 In general it was considered that Government guarantees were best used selectively to cover certain risks which could either not be borne by the private sector or where these risks were being priced at a premium. Respondents suggested that risks that could be guaranteed included volume (or demand), inflation, ground condition, contamination and aspects of construction for large complex construction projects. It was also suggested that Government could provide forms of credit enhancement to access new debt investors. These credit enhancements included mezzanine debt facilities and a guarantee of debt in termination scenarios. In some cases respondents put forward proposals for Government to guarantee some or all of the senior debt.
A.21 Many respondents highlighted that public sector capital contributions can help improve affordability and reduce the financing requirement, although it was noted that this has no impact on the relative attractiveness of the project to investors and is unlikely to influence the cost of debt or equity. In some cases respondents did, however, suggest that capital contributions could impact on the operational gearing of the project, creating additional risks, which could adversely affect pricing of the debt. It was commonly viewed that capital contributions should only be used where it improved the value for money of the project, and where risk transfer and private sector delivery incentives were not undermined. A number of respondents thought that capital contributions could be extended beyond the current cap of 30 per cent of capital costs.