The State may elect to make a State Contribution to the Project for a variety of reasons, including where there are liquidity constraints or where Project costs could be reduced by reducing the level of private capital at risk during the Operational Phase. It is important to maintain sufficient private sector capital at risk to absorb the remaining risks the private sector is taking and to incentivise performance.
Where the State elects to make a State Contribution, the preference is to do so in a single lump sum shortly after Commercial Acceptance is achieved. This ensures that the State Contribution is only made after the Development Phase has been completed in accordance with the Project Deed so that the State is not accepting any construction or delivery risk.
The State's usual requirement, mandated in the Finance Direct Deed, is that the full amount of any lump sum State Contribution must be applied to repay debt funding immediately upon receipt. Depending on the size of the State Contribution, the debt to equity gearing ratio may be significantly changed by this. Thereafter, the State may permit the debt to equity ratio to be regeared, provided that this is strictly in accordance with the Financial Close Financial Model agreed by the State.
In some cases, the capital requirement for a Project may be so large (for example, major tunnelling or road network projects) that the State considers it appropriate and cost effective to make State Contributions during the Development Phase in the form of either an additional one or two material contributions or regular smaller payments throughout the Development Phase. To mitigate the construction risk that the State thereby becomes exposed to, the State will impose project specific conditions on the amount of debt funding and equity funding that must be contributed before any such State Contributions are required to be made, and will require all such State Contributions to be contributed pro rata with additional debt and/or equity funding. In addition, State Contributions during the Development Phase will be dependent upon Project Co achieving specified delivery milestones (which are certified by the Financiers' independent verifier prior to payment of the contributions).
As a consequence of the State mandating that any lump sum State Contribution must be applied to repay debt funding (and the debt funding structure reflects this lump sum payment), the State typically accepts that the State's rights of set-off do not apply to a State Contribution.