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Appraising PPP Projects

46.3 Inputting the Operating Costs and Reinvestments

The operating costs or operating expenditures (Opex) and reinvestments (infrastructure renewals or life-cycle costs) are commonly distributed throughout the entire duration of the contract. Most of those costs are outputs of the technical requirements, but they must be organized in terms of yearly sums[13], and their eventual variations through time should be incorporated.

Some typical items that should be included in the operational expenditure estimates are as follows.

  • Direct project company costs: The costs of the project company, once the project enters into the Operations Phase, should be estimated and included in the Opex estimates;
  • Ordinary maintenance costs: This refers to regular maintenance costs such as cleaning and routine interventions for the asset such as hydraulic and electric check-ups, and so on;
  • Major or extraordinary maintenance (reinvestments and renewals): The Capex investments related to maintaining the asset in similar conditions throughout its lifetime (or the period of the contract), including life-cycle renewals such as comprehensive reinvestments to update the asset or re-establish its prior condition, or renovation of equipment due to technology obsolescence, and so on. It is common that a relevant part of these costs is pre-funded by means of the creation of reserve funds as a requirement of lenders or of the PPP contract;
  • Operation costs: In addition to maintenance, in many (but not all) PPPs, the SPV will have some type of operational responsibility over the asset. This can be as small as watching to prevent unauthorized intervention on a water pipe region, and as large as the full operation of prisons. Often this function is subcontracted to another party (which may be a shareholder of the SPV), in which case the relevant cost is the price that would be payable under the subcontract. In some cases, there is also the need to meet monitoring standards required by the PPP contract such as hiring independent certifiers or incurring other oversight expenses. These activities all have costs that need to be fully recognized throughout the life of the contract;
  • Insurances and guarantees: Once the asset is operational, several other types of insurances must be held to mitigate the risks involved in the project. There are also costs for taking out and maintaining contract guarantees, such as performance bonds. These costs are generally included in the Opex;
  • Communication costs: These can be a relevant component, depending on the nature of project. They represent all the communications efforts, media campaigning, and other awareness raising initiatives to be conducted by the project company; and
  • Taxes: Taxes are an outflow of resources from the project company. In many countries, PPPs, or infrastructure in general, are subject to specific tax regimes, including corporate tax and sometimes indirect taxes such as Value Added Tax or similar taxes that may affect both inputs and revenues. These should be recognized and an accurate estimate of taxes should be input into the financial model.

 

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