cumbersome and drawn-out issue procedures organized by a syndicate of participating banks (Lewis and Davis, 1987, pp. 327–8). The bought deal gave greater certainty of process, faster placement and keener pricing, and much the same reasons underpin the financier-led model.
In the case of PPPs, of course, we are dealing not with a process over a matter of weeks but with procedures governing contractual arrangements last- ing 25–30 years. Concerns have been raised about the nature of the partner- ship created, and who bears the service performance risk, when the components are ‘unbundled’ by the financier into subcontracts after the bid is successful. Equity participation in the SPV is one way of aligning the interests of those involved in delivering the project with policy objectives and the long- term partnership with the government. Certainly, in the traditional approach, connectivity exists between service delivery outcomes, those providing the services (and taking the risks), and the extent and proportion of equity invest- ment from the contractors and service providers in a way that is not so readily apparent in the financier-led model.
Against this, there are clear pricing benefits when the whole process is an integrated one under the direction of the bank, one aim of which is to reduce transactions costs and generate a competitive bid. It also enables the bank to control the various elements that underpin the financing deal. This is a reflec- tion that financing in the PPP market is changing from traditional project finance to corporate financing methods, with the end process being the issue and underwriting of bonds that are placed directly with institutional investors.
In addition, some leading banks have created special ‘social infrastructure’
pooled investment funds and it remains to be seen to what extent they will look to direct the cash flows from the projects to those funds, tapping a wider investment market for infrastructure financing.
These two issues are taken up later when case studies of the two alternative approaches are presented in the final section of this chapter. One case study relates to the ‘traditional’ PPP project approach and involves privately built and operated prisons in Bridgend, Wales and Fazerkerley, Merseyside. The other case study is of a ‘financier-led’ PPP for the construction of a public hospital in Berwick, Victoria. In the meantime, bearing the distinction between the two models in mind, we now outline the role of the various participants.5
different ‘hats’. In a PPP, unlike with privatization, the government retains a permanent interest in the delivery of an asset or service. It is ultimately responsible for determining the objectives, seeing that the outcomes are deliv- ered to the required standards, and ensuring that the public interest is safe- guarded. Consequently, while the execution of many elements of service delivery may transfer to the private sector, the public sector procurer remains accountable for many aspects. These include:
• defining the business and the services required, and the public sector resources available to pay for them;
• specifying the priorities, targets and outputs;
• executing a carefully planned procurement process;
• determining the performance regime by setting and monitoring safety, quality and performance standards for those services;
• governing the contract by enforcing those standards, taking action if they are not delivered;
• managing community expectations;
• providing the enabling environment; and
• reacting, in cooperation with the private sector, to changes in the project environment while remaining focused on pre-defined objectives.
Public sector regulatory bodies and other public sector entities play an impor- tant contributing role in that they issue permits, licences, authorizations and concessions and they design the regulatory framework to which the PPP struc- ture must be allied.
Project Vehicle Company
The sponsors and other equity holders in the SPV are responsible for meeting their contractual obligations, which include:
• producing and delivering the defined services to the required standard;
• designing and building or upgrading the infrastructure asset;
• raising funds for the capital needs of the project;
• focusing on government’s objectives, while responding in cooperation with the public procurer to variations in the project environment;
• returning the assets in the specified condition at the end of the contract.
Financiers
Under either of the two structures outlined earlier, an SPV is formed in which one or more of the bank, constructor, and operator may have a share.
Arrangements for financing the SPV will usually be entered into at the same time as the contract and subcontracts are concluded. A precondition for this to happen is a revenue stream that will provide security for the financing institu- tions and encourage equity participation. In short, a corporate entity must be created that can represent itself as an acceptable credit risk. A benchmark figure for the finance would be, say, 90 per cent debt, comprising either senior bank debt or bonds, plus 10 per cent equity provided by the investors in the SPV. Subordinated debt is also used, which is akin to equity in that the rights of holders of this debt are subordinated to other creditors (except sharehold- ers). All financial obligations must be serviced within the life of the contract.
Because the major costs of constructing the facility are funded by non- recourse debt, the private debt markets must commit to significant sums of debt up front. PPP structures are useful for facilitating capital intensive infra- structure transactions because the spreading of project risk among a number of participants creates a sense of mutual interest – everyone stands to lose if the project fails. As a result, financiers are assured that the participants are likely to work together to resolve issues that may otherwise stall the project.
Subcontractors
The project company’s obligations and responsibilities to the public procurer are delivered through specialized subcontractors, who in the traditional model are often equity investors in the SPV. Functions that are usually subcontracted out by the SPV are construction, equipment supply, and operation and main- tenance, with a separate agreement for each.
Advisers
The advisers provide financial, legal, technical and other advice to both the public and private sectors in structuring PPPs. Governments rely on their advisers to implement and provide an independent check on each PPP-type transaction, and add value to the public procurement. The sponsors use outside advisers or their in-house team to bid for projects. Usually the financiers rely on their own advisory group or occasionally outside advisers to assess the financial viability of a project and the risks attached to the revenue stream providing security for the finance.
Rating Agencies
When projects are financed through the public issue of bonds, rating agencies are consulted to provide credit ratings for the underlying debt. These agencies are typically involved at very early stages of project formulation so that credit
concerns can be addressed and a new structure developed (e.g. altering the extent of equity in the SPV). Insurers may also be used to provide credit enhancement.
Insurers
Insurers provide risk enhancement in project financing irrespective of whether the risks are commercial or political. Typically, they work closely with project sponsors and lenders, so as to produce an insurance package that limits risk at an achievable price. There is a relatively new sub-sector of insurers that cover credit risk of debt issues (normally bonds). These ‘monoline’ insurers are involved in credit risk arbitrage that often creates value for project financing in circumstances where the market generally would tend to overestimate the risks.