If the Contracting Authority wishes bidders to be able to submit the best value financing available, the bid process should, where appropriate, allow for financing approaches other than bank debt. At project preparation stage, the Contracting Authority should therefore assess the suitability of the key features of its proposed PPP Project for bond financing and, if it is considered suitable, publicise this to bidders when the PPP Project is first launched. In such circumstances, bid documentation and procurement rules should be drafted accordingly.
While the Private Partner will ultimately decide on its financing approach, the Contracting Authority's role is to be neutral as to the financing method to the extent appropriate for its PPP Project, but to facilitate, where appropriate, different financing methods. Selecting the right type of financing will depend on a PPP Project's particular characteristics. Both Sponsors and Contracting Authorities will need to take into account a range of factors and assess how these compare under different financing approaches (e.g. bank or bond financing - whether public or private placement). These include the flexibility to accommodate changes to circumstances over the life of the PPP Project, the degree to which the tenors and interest rate structures offered by finance parties lending through each type of financing best suit the requirements of the PPP Project's revenues and debt profile, the nature of the transaction risk and the risk appetite of the target investors, the importance of confidentiality (in the context of the level of disclosure which may be required), the all-in cost effectiveness and economics of the method chosen and the consequent value for money.
Contracting Authorities should bear in mind that bond financings involve significant preparatory costs (e.g. obtaining a credit rating, preparing the bond documentation and marketing). Legal costs can be significant especially in the case of publicly listed issues. Because of their costs, complexity and investor appetite, bond financings are typically best suited to PPP transactions of a significant size (e.g. involving bond financing in excess of USD200 million). Whilst public offerings may suit larger transactions, private placements, given the more flexible information flow and the less rigorous disclosure requirements, are potentially more suited to the PPP market. In addition, the universe of private placement investors is growing and therefore liquidity is enhanced.
If public authority bidding procedure rules require certainty of financing this may limit the choice to a degree. As explained above, in a public bond solution, the pricing and availability of the financing will as a rule only be committed very shortly prior to closing, although, as noted, elements of a bank-funded solution are similarly uncommitted until closing. In certain jurisdictions, the choice of financing for public authorities may also be shaped by practice rather than by law. See Section 9.3.6.