2.3.8 It can be argued that private sector financing under some PPP models, e.g. the Design-Build-Finance-Operate (DBFO) model, will result in higher financing cost for the project, since the borrowing rate for the private sector is generally higher than the borrowing rate for Government. The financing cost for the private sector might be higher because lending to the private sector could inherently be riskier than lending to Government. Private borrowing rates also include profits that private financiers have to make.
2.3.9 However, private financing is an important element of PPP projects as it helps to instil discipline in the use of capital. As the private sector is required to raise financing, there is an incentive to optimise capital investment in Government projects. Private financing also allows Government to tap into the expertise of private financiers in evaluating business proposals. The due diligence by private financiers will ensure that business proposals are robust and sustainable over the contract length.
2.3.10 In addition, the cost of private financing for the project can be controlled by managing the risks of the project. Appropriate risk mitigation measures should be put in place to ensure the private financiers of the viability and bankability of the PPP deal. Private financiers could then provide lower borrowing rates to a PPP provider.
2.3.11 With appropriate risk management measures under a win-win PPP deal structure, the higher private financing costs could be offset by the efficiency gains that private financing can provide, e.g. through better capital investment decisions.