Public private partnership contracts financing by covered bonds

Abstract

The provision of public properties that generate income for the public sector, used as securitization in government bonds, is under consideration both from public and private sector during the last few years. The efficient exploitation of the long term contracts under Public Private Partnership schemes (either infrastructures or other real assets) that produce steady cash inflows can result to a lower cost of borrowing-funding for the State, by linking the efficiently priced future expected cash flows of PPP’s, with a special form of sovereign covered bonds issued by the Government. This paper, after a review of covered bonds advantages and recent market developments, examines the major parameters that governmental authorities should review and assess in order to achieve optimal pricing from a market point of view of PPP contracts. Such parameters include Primary Objectives of the public sector, expectations about future developments in inflation, growth and interest rates, availability of government funding and key objectives about management of Public deficit and Public debt, as well as the pricing sensitivities of PPP contracts expected cash flows on some of these factors. Also the paper develops and assesses the possible uses of PPP contracts for the purposes of enhancing the credit quality of new Sovereign Covered Bonds (Linked with PPP contracts), together with the broader objective of efficiently mobilizing the Public assets portfolio in delivering to the State, efficiently priced and optimal Public services and under specific conditions, lower cost of funding or refinancing for the State, compared to the unsecured senior debt obligations of the Government. The standard market model of the public sector in pricing PPP’s projects is extended and connected to optimization of quantitative objectives of the Public Sector in order to achieve specific targets under different assumptions about the underlying variables. Issues of legislation, marketability and liquidity of the proposed schemes as well as mutual benefits for the market participants are highlighted as well as market practices from the private sector covered bond market.