When created and used in conjunction with a public-private partnership (PPP), a special purpose vehicle (SPV) -- sometimes referred to instead as a special purpose entity (SPE) -- allows for improved financing and a greater degree of operational control for the private agent. Since every SPV can vary based on its founding legal and financial agreements, its specific role is often unique to the partnership.
What Is a Public-Private Partnership?
Public-private partnerships are contractual arrangements between a public agency and a privately owned service provider. They are used to finance and operate projects that are considered important or desirable to the general public. Private agencies are incorporated because it has become increasingly apparent to both governments and donors that private enterprises are more cost-efficient and effective at delivering valuable products and services.
What Is a Special Purpose Vehicle?
Special purpose vehicles function as subsidiary entities for larger parent organizations and are typically used to finance new operations at favorable terms. The SPV can raise capital without carrying the debt or other liabilities of the parent organization even though the subsidiary is often operated by the same individuals and serves purposes that benefit the parent organization.
Though they sometimes do have actual employees and carry out tangible business operations, SPVs are first and foremost an off-balance-sheet capital tool. This means that companies can change their overall asset/liabilities framework without having it show up in their primary financial statements.
SPV in a PPP
Many private partners in a PPP demand an SPV as part of the arrangement. This is especially true for very capital-intensive endeavors, such as an infrastructure project. The private company doesn't want to limit its exposure to liabilities, so an SPV is created to absorb some of the risks.
There isn't a uniform operational role or legal design for the use of SPVs in a PPP; the particulars vary depending on the agreements of the actors and stakeholders in the project. However, every SPV needs to be created in accordance with the proper legal and accountancy rules in the jurisdiction.
Most public projects rely on support from commercial banks or other financial institutions. Almost always, the SPV represents the financing wing and is used to attract funds from other lenders and investors. This protects the parent company and all financing parties from immediate counterparty risk. In the case of non-recourse financing, the lender's only valid claims are limited to project assets in the case of default or non-completion. In turn, the SPV is not directly exposed to balance sheet issues with the parent or government agency.
The government agency is often able to keep project debt and liabilities off its own balance sheet. This leaves more fiscal space for other public obligations. This can be especially important for governments that issue bonds because more fiscal space equates to higher bond credit ratings.