The exclusive use of private finance is not a defining characteristic of a PPP-governments can also finance PPP projects, either in whole or in part. Reducing the amount of capital investment needed from the private party reduces the extent of risk transfer-weakening private sector incentives to create value for money, and making it easier for the private party to walk away if things go wrong. Nonetheless, there are several reasons why governments may choose to provide finance for PPP projects. These include:
• Avoiding excessive risk premiums-the government may consider the risk premium charged by the private sector for the project to be excessive, in relation to the actual project risks. This can be a difficult call to make, since financial markets are usually better at assessing risk than governments, but can apply particularly for new projects or markets, or during financial market disruptions
• Mitigating government risk-where project revenues depend on regular payments from government, this creates a risk for the private party, which will be reflected in the project cost. Where reliability of government payments may be in doubt, providing subsidies or payments upfront in the form of loan or grant finance, rather than on-going payments, could improve the bankability and lower the cost of the project
• Improving availability or reducing cost of finance-particularly when capital markets are under-developed, or disrupted, the availability of long-term finance may be limited, and so governments may choose to provide finance at terms that would otherwise be unavailable. Governments often have access to finance on concessional terms, which they may pass on to lower the cost of infrastructure projects. This may also be part of a broader policy of involving state financing institutions to provide long-term lending for developmental purposes.
There are also several different ways in which governments can contribute to the financing structure of a PPP. Governments may provide loan or grant finance directly to the project company, or provide a government guarantee on a commercial loan. Government-owned development banks or other finance institutions can also be involved-either providing finance to PPPs as part of a broader portfolio, or established specifically to support the PPP program. Finally, governments may simply not transfer the financing function to the PPP project to the private sector, instead retaining on-going responsibility for capital expenditures. These options are described in more detail below.
The rationale for government financial support to PPPs may be strengthened during periods of capital market disruption, and many governments introduce specific forms of financial support in response. Box 1.10: Pursuing PPP During the Global Financial Crisis describes how some governments have supported PPPs during the Global Financial Crisis of the late 2000s.
| Box 1.10: Pursuing PPP During the Global Financial Crisis The Global Financial Crisis of the late 2000s significantly reduced the availability of debt finance for PPP projects and similar investments. Fewer lenders were prepared to lend to PPP projects-in developed and developing markets alike-and terms became tougher. An IMF paper [#40] presents evidence on the impact of the financial crisis on PPPs. Several governments responded to this challenge by introducing specific measures to support PPP through the crisis. In the United Kingdom, the Treasury established an Infrastructure Finance Unit (TIFU), to lend at commercial rates to PPP projects that were unable to raise enough commercial bank finance. A World Bank note on the TIFU [#106] describes the United Kingdom's experience with PFI during the credit crisis. Foster's paper on the experience in Victoria, Australia [#105] describes how the government adapted on a project-by-project basis, by changing how certain financial risks were allocated, including by offering short-term guarantees. An EPEC paper on the financial crisis and the PPP Market [#79] provides further ideas for governments on how to support PPPs under these circumstances. These include changes to procurement approaches, providing State guarantees or co-lending, particularly as a short-term measure, and adapting PPP structures to attract different types of investor. |