As described in Section C, PPP Contracts in Context, PPP Projects are typically funded through limited recourse project financing of an SPV owned by sponsor parties. This is both because of the need to bring together different sponsors to build and operate an asset (e.g. financial investors would not have the technical capability to build the required asset) and possibly because the amount of finance required is usually beyond the balance-sheet capacity of an individual sponsor. Project financing is usually classified as "off balance sheet" which may be useful from an accounting perspective for the parties involved and can often have a lower cost of capital than corporate financing because of the high gearing of cheaper third party debt to more expensive equity.
However, although not commonly used, corporate/on balance sheet financing can play a role in PPP-type projects and may be suitable in a number of circumstances. These include where a bidder is the sole sponsor, has a strong balance sheet and typically uses corporate finance for new projects as part of its normal business model or where it may be more cost-effective to use balance sheet financing to reduce transaction costs (e.g on smaller transactions). A bidder may wish to finance through equity rather than limited recourse financing for tax reasons or because it is willing to take more risk than third party lenders are prepared to take in a particular market (particularly if it has access to export credit or other support) or simply because it is an overall less expensive form of funding. From the Contracting Authority's perspective, if a project is to be financed on balance sheet, the key is to ensure that an appropriate risk allocation is maintained between the Contracting Authority and the Private Partner, following the same principles as in a project financing (and as outlined in this Guidance). Ideally the procurement process should accommodate bids using corporate and other types of financing, as well as a mix. It is important to ensure that, the tender and (if applicable) draft- contract documentation works for different financing scenarios. In some circumstances, it may also prove simpler, faster and more cost-effective - e.g. because of the fewer parties (and advisers) involved and simpler documentation and debt mechanics.
It is also possible that PPP Projects may be financed by a combination of project and corporate finance and the procurement process and documentation will need to be adapted appropriately. For the purposes of this Section 10, the assumption is that the PPP Project is to be wholly corporate financed.