The borrowing costs of a private sector owned SPV will always be higher than the borrowing costs of government, because lenders assume more risk when lending to a SPV than to government.
Most Australian governments have a AAA or AA+ credit rating, whereas most Australian PPP SPVs have an A- or BBB+ credit rating (or equivalent bank internal rating) at the time they raise debt. Lenders will charge a higher interest rate when lending to SPVs, on account of the higher credit risk.
The key difference, however, is the basis on which governments borrow.
Australian PPPs are typically financed by the SPV on a 'limited recourse' basis (i.e. the debt financiers can only have recourse to the assets of the SPV, and not to other assets of the investors in the SPV). When a government borrows money for traditional government-funded project, it generally doesn't do so on a limited recourse basis; rather, it agrees to repay the loan from revenues and assets unrelated to the project, if necessary.
The lower cost of borrowing is therefore available to government because government borrows on a full recourse basis. In effect, government takes more risk and the lenders take less. If a government-owned SPV raised finance for a project on a limited recourse basis, it would incur the same borrowing costs as a private sector owned SPV. The project finance raised by the NSW government owned Sydney Motorway Company for the WestConnex project is an example of this.
While the high cost of private sector finance will ultimately be passed on to government, the government is paying for the ability to transfer contractor default or insolvency risk and, in some cases, demand risk. Private financiers price this risk, and a PPP's goal is that this price would be better value for money than if government accepted the risk by using a more traditional procurement approach. We look at some methods to minimise the higher financing costs later. |
| "Government borrowing costs less because it borrows on a full, not limited, recourse basis." |