INTRODUCTION and OVERVIEW 

AN INTRODUCTION TO DEBT AND EQUITY FINANCE FOR PFI AND PPP

The introductory Chapter deals with the development of PFI/PPP in the UK over the last ten years. Particular attention is concentrated upon the objective that the governments have sought to achieve with this financial vehicle.

Attention will be focused on:

• allocation of risk

• access to funding

• introduction of management techniques

• value for money considerations

• utilisation of off-balance sheet funding

• length of contracts

• whole life cycle costing

PROCEDURES

This Chapter is focused upon the standardised procedures which have been developed for dealing with PFI projects.

Attention will be focused on:

• initial approval process ( Outline Business Case, PRG)

• OJEC publication

• Formation of bidding consortia

FINANCIAL REQUIREMENTS

Here attention is directed towards the differing characteristics of the various phases of a project:

• construction

• commissioning

• operation - ongoing and discrete additions

The time continuum is identified and the key risks at each stage are highlighted with the intention of indicating the trade offs between risk and profitability which can be achieved.

TYPICAL FINANCIAL INSTRUMENTS

The major means of financing projects are briefly considered. Attention will focus on:

• bank debt

• bonds

• subordinated debt

• mezzanine financing

• equity

The differing characteristics of each type of instrument are described with particular reference to term, interest rate/ROR and restrictions. The major players in each segment are briefly identified. In addition the importance of size in determining the appropriateness of instruments, e.g. syndicated loans, are underlined.  The relative contributions of key instruments to the overall development of PFI/PPP are also assessed.

KEY VARIABLES

Here attention is focused upon key variables in PFI/PPP projects which can alter the perceptions of the suitability of different forms of finance for the various players.

The chief factors to be examined will be:

• term

• ROR over the life of the project life

• performance risk

• demand risk

• possibility of renegotiation

• payment mechanisms

• alteration in government policy and the law

ADDITIONAL FACTORS

A number of additional factors, with their individually associated risks, may also impact upon a PFI/PPP project.

The major additional factors to be considered relate to constraints imposed by:

• staff and management resource constraints

• land and property availability

• finance generated from the disposal of property

• planning permission

• mixed use of property by the beneficiary and the general public

• commercial revenues and their appropriation.

FUTURE PROSPECTS

The future prospects for the PFI/PPP market will be examined in terms of government pronouncements and budget estimates. These prospects will then be assessed against the various limitation imposed by public and private sector constraints and competitive pressures. The major factors influencing the development of PFI/PPP financing will be identified and their future importance assessed.

SUMMARY AND CONCLUSION

The concluding Chapter will summarise the major trends that are evident in the evolution of the roles of debt and equity financing in the PFI/PPP market. The differentiation of products and instruments in expanding markets and their reduction and concentration in tighter market conditions will also be underlined. Nonetheless, whatever happens, the PFI/PPP looks set to remain a central plank of government policy.

Key issues also addressed.

• Small Projects - bundling, schools, prisons etc.

• Syndicated Debt - secondary market

• Asset financing and leasing

• Debt and inter creditor issues.

• Special Purpose Vehicles - SPVs

• Ratings and Ratings companies - Fitch, S&P and Moodys - SPVs can often have higher credit ratings than their holding companies.

The report contains around 95 pages of original research and comment offering incisive and thought-provoking views on this issue.