Mini-perm Structures in PPP Contracts: Risks and Opportunities

Prior to the 2008 financial crisis, the economic model of PPPs benefited from a very favorable environment in terms of credit availability and cost. The high level of liquidity in financial markets allowed rising abundant and not expensive external resources, because of both the low level of interest rates and the search by investors for financial assets characterize by these kinds of risk and revenue profiles. Such context was essential to help PPP deals to achieve their value for money requirement as it allowed minimizing the additional cost of private funds, compared to public ones. Indeed, the sovereign debt is considered as immunized from default risk. As a consequence, no risk premium is charged on public debt. So, it would be automatically more expansive to finance procurement through private funds than public ones. The financial attractiveness of PPPs, despite this handicap, could be both explained by intrinsic qualities of such deals in terms of incentive capacities and by this initial financial context, which conduce to such a private funding structure to present a very limited additional cost compared to sovereign bonds. The credit crunch compromised the viability of deals, which are funded through project finance structures with high levels of debt. Funds are more and more difficult to rise and are more and more costly, even for deals for which the counterpart is a public body . Additionally, the disappearance of monoline insurers, which guaranteed to the investors the repayment of the project entity debt through their AAA financial rating, contribute to limit the capacity of project managers not only to fund them with a limited risk premium but also to obtain a debt maturity, which match with the project one. Consequently, mini-perm structures, which are not a novelty in long-term contracts, tend to be more and more frequent after the financial crisis. Our purpose, in the framework of this communication, is to assess the possible consequences of such financial structures on the opportunity of PPPs for the public contractor. After presenting in a first part the increasing use of mini-perm structures after the 2008 crisis as a consequence of the major disruption in the contract financing model, we describe, in a second one, its potential repercussions, both in favorable and unfavorable situations. Our conclusion will put the accent on the analysis of financial and budgetary consequences of the additional risk induced by such structures for the public contractor. These consequences could be put in perspective with other devices used for preserving PPP financial structure as government guarantees.