Prior to the 2008 global financial crisis, most PPP Projects were successfully financed through long term commercial bank debt borrowed by the Private Partner. More recently, as a result of the financial crisis and ensuing banking regulation67, the volume of bank debt available for large infrastructure projects has reduced and loan tenor has shortened with a corresponding effect on pricing and the introduction of refinancing risk if debt cannot be obtained for the whole project period. In addition, comparing bids with different tenors has proved challenging, with questions around the non-compliance and comparability of bids without full term committed pricing.
This has meant that in some PPP markets (e.g. particularly Europe and Australia), both bidders and Contracting Authorities have had to consider alternative forms of finance - on the bidders' side to ensure that their bids can be financed and remain competitive, and on the Contracting Authorities' side to ensure that value for money is obtained from the range of financing options procured by bidders (e.g. by requiring non-bank financing solutions to be submitted as part of bids.
Even in markets where liquidity is not such a concern, there are also other reasons to consider bond financing as an alternative financing method. In some circumstances, bond finance - private or public - can offer long term finance for PPP Projects at a more affordable price than bank debt. Recent examples of this in developed markets include the projects funded under the EIB's Project Bond Credit Enhancement programme. Due to the longer term repayment profile of bonds, scheduled repayments may be lower than bank loan repayments and, in such cases, this should feed through to a lower priced PPP Contract for the Contracting Authority (or end user). From the Private Partner's perspective, it may also result in more cash being available for distribution to its equity investors during the repayment term than would be the case in a bank financing. The long term (and generally fixed rate) nature of bond financing also enables the Private Partner to fix its financing costs for the life of the PPP Project (or the remaining life if after a refinancing) without the need for separate interest rate hedging arrangements, giving it certainty and reducing the likelihood of a subsequent refinancing. However, as discussed in Section 9.3.2, bond financing is unlikely to be suitable for all PPP Projects, particularly those of smaller value due to the relative size of transaction costs.
Investor appetite is another reason to consider bond financing. Non-bank financial institutions (such as insurance companies and pension funds) are becoming increasingly interested in investing in PPP Projects because they recognize that the long term predictable returns in PPP Projects can provide a hedge to the profile of their long term liabilities. Facilitating the entry of such institutions to the PPP debt market widens the lender base and increases liquidity. With more private finance available, Contracting Authorities should in turn be able to procure more PPP Projects and at more competitive pricing.68
Bond financing of PPP Projects does have its own challenges, however, which are described further in this Section 9. One key factor is that, particularly for a public bond, the pricing of the bond may not be finally committed until shortly (e.g. five business days) before financial close. This may cause difficulties for the Contracting Authority in the evaluation of bids, given that the choice may be between a bid with committed financing and one where the financing may be notionally more competitively priced, but on an uncommitted basis.69 A bond financing process also has certain timing implications which need to be factored into the procurement process. Some PPP Projects may also require credit enhancement in order to achieve a successful bond financing - this is discussed further in this Section 9 and is particularly relevant in projects with specific risks (whether political, technological or developmental). In such cases, Contracting Authorities should consider engaging with potential credit enhancement providers early on in the procurement process if there are likely to be benefits in widening the field of possible financing options. See Section 9.5.
In some cases (e.g. due to the type of risks mentioned above or constraints such as timing), PPP Projects may be financed by other means (e.g. bank debt) at financial close but refinanced by bond financing at a later stage (usually after construction completion). This Section 9 focuses primarily on bond financing at financial close but also touches on the refinancing approach.
The guidance in this Section 9 gives an overview of the bond financing process in a PPP Project, highlights the factors a Contracting Authority will want to take into account in assessing whether bond financing could be a suitable option for its PPP Project and (if it decides that it is) what considerations are then relevant both during the bid phase and ultimately in reaching successful close with a bond financed bid. The key point for the Contracting Authority is that it would need to be prepared to adapt its approach to facilitate bond financing where appropriate - this should not require the Contracting Authority to take on more risk or responsibility than under a bank financing.
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67 For example, the Basel III capital adequacy requirements imposed on banks.
68 A number of institutions have produced resources on bond financing as an alternative to bank financing of infrastructure projects. Please see links in Appendix, Additional PPP Resources - these have been drawn on where appropriate in compiling this Guidance.
69 It should be borne in mind, however, that even in a bank financing, certain elements of pricing are only fixed at financial close - see Section 9.3.4.