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Body of Knowledge:
Structuring and Drafting the Tender and Contract
For the purpose of this chapter, the term financial structure is taken from the public perspective, that is, the financial structure of the contract as opposed to the financial structure of the project company (which is how the private partner would use the term). In this context, the financial...
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Body of Knowledge:
Structuring and Drafting the Tender and Contract
Privately financed infrastructure PPP contracts have long terms so that the government can obtain Value for Money (VfM) from life-cycle management and from effective risk transfer. There are other factors that can provide an incentive for the government to extend the term. However, at some point,...
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Body of Knowledge:
Structuring and Drafting the Tender and Contract
Pure co-financing refers to public financing that is included in the mix of finance that is non-revolving, that is, it is acting in a conventional, public-financed project by means of direct payments for a certain proportion of Capex expenditure that the private partner is not required to pay back...
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Body of Knowledge:
Structuring and Drafting the Tender and Contract
PPPs are generally (in developed countries and EMDEs with a certain degree of financial market development) financed in the local currency[13].
National agencies (national development banks [NDBs] and other national financial institutions) may play a significant role in lending to projects,...
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Body of Knowledge:
Structuring and Drafting the Tender and Contract
As explained in section 4.2, one reason for co-financing may be simply to fill the viability gap in a user-pays PPP, but there are other approaches.
A market-oriented or revenue maker project (based on user payments) may not be completely feasible on the basis of those commercial revenues (that is...
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Body of Knowledge:
Structuring and Drafting the Tender and Contract
The government may provide equity to the project company directly (participation from the procurement agency) or through a public infrastructure fund.
Sometimes the motivation is to increase day-to-day control and have direct access to accounts and daily management of the company. This should...
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Body of Knowledge:
Structuring and Drafting the Tender and Contract
Apart from providing public funds to partially compensate for construction, or through public debt or equity instruments, there are other indirect means by which the government can increase commercial feasibility and/or reduce the budgetary burden of the PPP. These can also be considered, in broad...
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Body of Knowledge:
Structuring and Drafting the Tender and Contract
Some PPP projects are funded wholly or primarily through user payments. This is most common in economic infrastructure sectors. Financial structuring matters that arise in user-pays PPPs are discussed in section 4.8.
Other PPP projects are funded wholly or primarily through government payments....
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Body of Knowledge:
Structuring and Drafting the Tender and Contract
As introduced in chapter 4, when the private partner’s revenue is based on user-payments, there are a number of structuring parameters that should be carefully considered and outlined during appraisal. These should then be refined (and in exceptional cases reconsidered) in the Structuring Phase....
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Body of Knowledge:
Structuring and Drafting the Tender and Contract
The basic form of the payment mechanism is defined during appraisal, whether the project is a user-pays PPP that relies on significant service payments to complement the revenue, or the project is a pure government-pays PPP where the operational revenue is entirely in the form of public payments....
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Body of Knowledge:
Structuring and Drafting the Tender and Contract
When the usage level of the asset is not relevant for the purpose of the public party (that is, it is not of itself a public objective), but it is still paramount that the asset be available for use by the final users, for instance health workers in a hospital, then payment should be based on the...
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Body of Knowledge:
Structuring and Drafting the Tender and Contract
BOX 5.14: Clarifications regarding the Scope of the Risk Concept assumed in this Chapter
Risk from a financial perspective
This chapter deals with risk matters from a financial perspective. As such, it is centred on risks affecting the infrastructure asset and the economic business related to...
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Body of Knowledge:
Structuring and Drafting the Tender and Contract
Risk allocation: definition and rationale
Risk allocation is the exercise to define which party will assume each risk, identifying which risks the private partner will be (or remain) responsible for and to what extent, and identifying which risks the public partner will be responsible for and to...
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Body of Knowledge:
Structuring and Drafting the Tender and Contract
An exact definition for risk is hard to find and its measurement is controversial as well. In literature, the word "risk" is used with many different meanings. The Oxford English Dictionary defines risk as "chance or possibility of danger, loss, injury, etc.”.
In the context of an infrastructure...
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Body of Knowledge:
Structuring and Drafting the Tender and Contract
The risk management process starts with the identification of risks. Identification of risks refers to defining a comprehensive list of risk events, usually grouped in consistent categories, and then describing them so as to understand clearly how those risks will impact the project outcome if they...
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Body of Knowledge:
Structuring and Drafting the Tender and Contract
5.4.1 Quantitative Assessment and Appraisal
As noted, a quantitative assessment (estimating or defining values of the possible outcomes or “expected values”) is usually applied during appraisal for financial analysis and VfM. This is also referred as “adjusting values to risk”, and it is also...
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Body of Knowledge:
Structuring and Drafting the Tender and Contract
Many risks can be mitigated through appropriate action by the procuring authority during the Screening, Appraisal, and Structuring Phases of the project. This can be done by optimizing the scope of the project, the planning process, and through robust investigations that provide information about...
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Body of Knowledge:
Structuring and Drafting the Tender and Contract
Default Situation and General Rules
When allocating risks, the government should be clear that risk transfer is defined by the contract scope and the PPP contract structure. Subject to the refinement of risk allocation, all risks inherent to the scope of the contract, and those appropriate to the...
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Body of Knowledge:
Structuring and Drafting the Tender and Contract
From the standpoint of contractual risk allocation (that is, the reflection of the risk allocation into the contract), there are different categories of risks.
Compensation events – this refers to risk events for which the private partner is entitled to receive financial compensation if the event...
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Body of Knowledge:
Structuring and Drafting the Tender and Contract
This subsection introduces a list of the most relevant risks as they are commonly identified in different guides and protocols (while acknowledging that there may be material differences in the classification of risks from some country practices to others).
Appendix A provides a deeper explanation...
