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Appraising PPP Projects

46.7 Defining the Contract Term

An important parameter of the financial model is the contract term, since it directly affects several of its conclusions. This is typically a variable preliminarily defined during the design of the financial model and is confirmed or adjusted during the structuring of the project. Some of the issues that should be considered in setting the contract term, which are further developed in chapter 5, are as follows;

  • Life-cycle management and effective risk transfer;
  • Private financial structure optimization;
  • Affordability;
  • Commercial feasibility (especially in user-pays);
  • Political pressure;
  • Budget management;
  • Rigidity;
  • Flexibility to accommodate risk and uncertainty; and
  • Relationships with other projects and other contracts.

Taking all these aspects under consideration should lead to a preliminary definition of contract duration. As with many aspects of the financial model, the duration of the contract can be continuously revisited during the Appraisal Phase as well as later on in the PPP cycle.

 

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