The government may seek to financially support a project when it is an economically viable user-pays project, but the projected revenue on the basis of use is not enough for the project to be commercially viable. Another reason is to keep the price of services provided by the assets at a level socially/politically acceptable for the population. This is referred to as Viability Gap Funding, and it has been explained in section 2.2.
However, regardless of the revenue regime and PPP type (user-pays or government-pays), the government may still decide to provide financial support to a PPP project for several reasons.
- There is a structural or temporary lack of available private lending.
- The project is too large or too risky, and commercial feasibility and bankability are threatened.
- The aim is to decrease the WACC of the project and make the scheme more affordable.
When availability of private finance is doubtful, even with financial support, the wisdom of pursuing the PPP route should be considered carefully (not least because there is the risk of lack of competition in the bidding process). But in any circumstances, direct or indirect financial participation or support (including the de-risking approaches explained in next heading) has to be assessed with care to avoid spoiling the Value for Money benefits of the PPP method.
This subsection will introduce the concept of co-financing as a common variation of PPPs (very common in mega-projects). This is where public financing (strictly speaking) and private financing are mixed together. The following heading will explain other financial means to participate in finance provisions and other approaches to increase commercial feasibility and bankability.
There may be a scarcity of long-term finance available in some local markets hosting the infrastructure project. The scarcity may be due to an overall lack of capacity in the local financial market, or it may be a temporary circumstance due to short-term market conditions. The scarcity may make it necessary, especially for larger projects and in the context of ambitious PPP programs, for governments to supplement the financing available in the market.
Governments may decide to supplement the financing required for the project, releasing the private partner from a part of capital needs. In these cases, the government will provide public finance for part of the project’s initial investment needs, creating a hybrid scheme (co-financed PPPs). These schemes will ideally retain all the typical features of a normal PPP with the difference that some level of compensation during construction should exist, which will then pay for a fixed portion of the cost of works.
Pure co-financing is represented by the provision of grant financing, that is, the provision of payments during construction that partially compensate for the work costs (monthly or quarterly as work is progressing, or on the basis of specific milestones during or at the end of the construction period).
A variation is for the grant payments to accrue, based on the achievement of specific milestones during or at the end of the construction period, but for the payments to be deferred. The government then makes the payments during the Operations Phase of the PPP; the payments are not subject to any reduction related to the operational performance of the project. These payments are usually unconditional and irrevocable (for example, Recognition Certificates of the Annual Payment for Work (CRPAO) structures in Perú or Pagos Diferidos (PDIFs) in Spain regarding High Speed Rail (HSR) PPPs). This may be also regarded as a de-risking technique as explained in section 7.4.1.
This latter case represents a solution when the public sector wants to co-finance a portion of the project but does not have sufficient liquidity. The SPV will raise the funds related to the grant, but the financial facility to “pre-finance” the public deferred committed funds will be much easier to negotiate.
In any case, grant amounts will normally be fixed at the PPP signing. They will accrue as a percentage of the work in progress completed (or by meeting the specific milestones) whether it is effectively paid during construction or on a deferred basis.
Value for Money (VfM) Considerations
The amount of co-financing within the PPP should not spoil the VfM by diminishing the alignment of interest associated with the PPP’s deferred performance-linked compensation scheme. Too much public financing will reduce the risks and motivations for the private partner to properly operate the project, which may be converted to a normal procurement in terms of risk allocation and incentives.
Co-financing may affect the accounting treatment of the project. It may even result in the private finance being reported as public debt (chapter 4.12 provides more information on PPP national accounting issues).
The decision to co-finance and the amount of co-financing is a structuring matter (financial structuring), and is explained in greater detail in chapter 5.5.2.
 The local financial market may have enough capacity to finance a large project or a number of smaller projects, but when a PPP program is in development and concentrating on many projects in a short period of time, problems of availability of finance may emerge. This should be duly planned in advance.
 PDIFs (Pagos Diferidos) represent an irrevocable and unconditional payment obligation which is accrued as long as construction progresses and is certified. This and other schemes are explained further in section 4.5.