A PPP contract is sometimes awarded and signed before the project reaches financial close-that is, before the finance for the project is fully secured. In the interim period, lenders complete their due diligence process, including detailed review of the PPP agreements. Loan agreements set 'conditions precedent' that must be in place before the project company can access funds from the loan.
This process creates a risk that the project could be delayed or even fall through, if the winning bidders are unable to raise finance on the expected terms. As described by Farquharson et al [#95, page 125] the government may be under pressure to change the contract terms to meet lenders' requirements, since re-opening the procurement process at this stage would cause delays and additional transaction costs for the government.
Governments have a few options available to mitigate this risk. As Farquharson et al also explains, bidders can be required to provide a bond, which may be called if the preferred bidder fails to achieve financial close within a certain period. This may encourage bidders to develop more concrete financing plans before submitting bids. Another option to avoid the risk altogether, as described by Delmon [#58, pages 445-446], is for governments to require bids with financing commitments already in place (called an 'underwritten' bid). In this case, lenders must complete due diligence before the tender process is complete. However, both these options increase the cost of bidding, which may deter bidders and undermine competition.
Another approach is to introduce stapled financing. Stapled financing is a pre-arranged financing package for the project, developed by the government and provided to bidders during the tender process. The winning bidder has the option, but not the obligation, to use the financial package for the project. Stapled financing is common in Mergers and Acquisition deals, and has been explored by some governments for infrastructure projects-for example, in Egypt [#116].