During the global financial crisis, larger government capital contributions such as Milestone Payments or Substantial Completion Payments were considered as one option to proceed with P3 projects in the context of challenging market conditions. Two recent reports examine the effects of larger capital contributions on project debt rating and project resiliency.

"Methodology Update Report: Public Sector Capital Contributions to Funding PFI/PPP/P3 Projects"

The first paper, published by Moody's in November 2009, examines the impact of capital contributions on senior debt credit risk. The report concludes that in most cases, a significant public sector capital contribution during the construction phase of a P3 project should be treated as having an adverse impact on the credit quality of senior debt, because it makes the senior debt credit proposition riskier than it would have been without the capital contribution. The report illustrates this by juxtaposing financing scenarios for an availability-based P3 with and without capital contributions and examining the respective effect on Probability of Default and Loss Given Default. It also mentions that the public sector might benefit in terms of overall costs from larger capital contributions, as long as risk transfer is not compromised, noting that "what is good for the public sector is generally bad for the private sector debt". View report.

"PPP Milestone and Completion Payments: Bigger is not Always Better"

The second paper is a commentary released by DBRS released in February 2010. While acknowledging positive effects of larger capital contributions, the paper argues that they can have an adverse effect on a project's resilience during the operations phase. Amongst other positive factors, the commentary notes that capital contributions can play an important role in bridging a gap in the financing of a project when debt and equity sources have been exhausted. On the negative side, the paper contends that larger amounts of capital contributions can reduce the robustness of a project, as they reduce the ability of a project to deal with financial shocks during the operating phase. In simplified terms, the debt requirement of a project diminishes, as capital contributions increase. Consequently, the amount of availability payments in the operating period and the cash flow required to maintain a given debt service coverage ratio is reduced. As a result, the cash flow cushion embedded in the debt service coverage ratio decreases relative to the operations and lifecycle expenses. While this reduced cushion could reduce the ability of a project to withstand financial shocks during operations, the commentary notes that is only one of many factors influencing a project's success. View report.