21.1.1 Capital contributions typically result in reduction of the annual unitary charge paid by the Authority. Additionally, phased payment of capital contributions in advance of actual construction completion can further reduce the unitary charge as this reduces the need for external financing to bridge the time timing between subcontractor payments and receipt of the capital contribution. Consequently the quantum and timing of any capital contribution can be important considerations in addressing Authority affordability constraints. However, risk transfer is a cornerstone of PF2 and the quantum and timing of capital contributions should not undermine this.
21.1.2 Where an Authority is considering making a capital contribution to a project, this should be considered as part of the Outline Business Case in both the affordability and VfM assessments. Capital contributions should be considered sufficiently early in the procurement to allow any issues to be dealt with under competitive tension. Authorities should always discuss any such proposal at an early stage with HMT.
21.1.3 Authorities should more generally consider the balance of incentives on the sponsors and lenders, in particular once the capital contribution(s) have been paid (see comments related to payment mechanism in Section 19 (Price and Payment Mechanism)). Any capital contributions, if approved, should be kept to a modest size and payments linked to the achievement of important milestones in the construction schedule and should be directly attributable to the construction cost (i.e. capital contributions should not be funding working capital requirements or lender / adviser fees). Capital contributions should not be so large as to affect the likely behaviour of Senior Lenders to remedy any default in the construction phase. It is recognised however that any capital contribution is taken into account in the financial model from the outset, reducing the Unitary Charge payable by the Authority, and the Authority therefore will only lose its investment of capital contribution if a default occurs which is so serious that no-one is willing to bid to take over the contract on a default termination.
21.1.4 It is possible that the risk characteristics of some complex projects, in particular those with challenging construction techniques, technological / commissioning risk, high operational gearing or volatile cash flows associated with demand risk, will make them unsuitable for any capital contributions.