The Private Partner in most PPP Contracts is a project company specifically formed for that purpose - often called a "special purpose company" or "special purpose vehicle" (abbreviated to "SPV"). The SPV commonly finances the cost of a PPP Project through a combination of equity - provided by its Shareholders - and third party debt provided by its Lenders (who may be commercial banks, bond investors or other finance providers). The choice of third party funder and the cost of such funds will be carefully considered by the Private Partner in its bid preparation.
Any PPP Project losses suffered by the Private Partner are borne first by its Shareholders, and Lenders are adversely affected only if the equity investment is lost. This means Equity Investors accept a higher risk than debt providers and require a higher return on their investment. As s equity is typically more expensive than debt, the aim in reducing the overall weighted average cost of capital of a PPP Project is to use as high a proportion of debt as possible to finance the PPP Project (typically 70 to 95 per cent of total project cost), which in turn should result in a lower priced facility and service for the Contracting Authority. The level of expected equity return will depend on the particular PPP Project's circumstances, but one of the advantages of a competitive bidding process is that bidders will be aiming to find a funding solution which delivers the best value for money for the Contracting Authority.
From the Equity Investors' perspective, limiting their exposure to a single PPP Project in this way makes it possible to undertake much larger (and potentially more) projects than would otherwise be the case.
PPP Project financings are typically structured as "non recourse" or "limited recourse" financings. In non recourse PPP Projects6, Lenders can be paid only from the Private Partner's revenues, without recourse to the Equity Investors. In the context of limited recourse PPP Projects, Lenders rely primarily on the Private Partner's revenues to repay their loans but have certain additional limited recourse to the Equity Investors.
There have been examples of state/procuring entities taking equity stakes in project vehicles, for example, the Building Schools for the Future programme in the UK, the Non-Profit Distributing programme in Scotland and certain Belgian PPPs. Equity interests held by public and private sectors can serve to align incentives and promote co-operation at an operational level, while also giving the public sector a direct stake in the financial success of the PPP Project. However, it is important to design the framework to avoid conflicts of interest and to ensure that decisions necessary for the implementation of the PPP Project can be taken effectively and quickly and free from political influence. A public-private equity structure is therefore likely to be less suitable for PPP Projects in emerging PPP markets, particularly where there is a less stable legal and political environment, as Equity Investors may feel the structure holds too much uncertainty for them.
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6 See Sections 9 and 10 for alternative modes of financing for a PPP Project by means of bond or corporate financing and their implications for the considerations for Contracting Authorities as detailed in Sections 1 to 8 of this Guidance.