2.1.20 The private provider will raise project finance through equity and debt finance. The SPV is usually owned by one or more equity investors. Some of these shareholders may be contractors to the consortium who undertake to carry out construction, design or facilities management work in the project. Others may be financial investors. Debt finance, in the form of bank loans or bonds, is also raised to pay for the construction and operation of the project. Both providers of equity and debt play important roles in the overall success of the DBFO project.
2.1.21 Equity Providers own the consortium company (i.e. the SPV). An equity investor only benefits from its investment in a DBFO project after it is completed and successfully in operation as the public agency concerned only starts paying when the asset becomes available. In addition, the value of the project to the equity investor is determined by the expected performance of the project over its whole life. Hence, the equity investor will ensure that the SPV performs up to the specified standards so that there are positive returns on investment for the company.
2.1.22 Debt providers provide the majority of the funding (in the UK, about 80% to 90% of financing for a DBFO project comes from debt providers). The banks and other financial institutions that lend to DBFO projects play the following key roles:
a) Due diligence - When private sector financiers consider financing a project, they will carry out extensive due diligence work, aided by independent advisors in technical, insurance, legal and financial aspects of the DBFO deal. This due diligence is intended to ensure that the SPV's business plan is robust; and
b) Taking overall project risk - Debt providers hold the overall risk that their debt is not repaid. To manage this risk, they hold step-in rights to take over failing projects and bring in new contractors who can meet public sector requirements, subject to the public agency's agreement.