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Public Private Partnerships in the Infrastructure Sector

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CoursesealsPublic Private Partnerships in the Infrastructure Sector
  • Introduction to PPP in the infrastructure sector 6

    • Lecture1.1
      What is PPP and how is the concept defined? 30 min
    • Lecture1.2
      The growth of PPP from an historical perspective 30 min
    • Lecture1.3
      The concept of privatisation in the context of PPPs 30 min
    • Lecture1.4
      Conventional procurement and PPP procurement 30 min
    • Lecture1.5
      Examples of PPP reform 30 min
    • Lecture1.6
      Summary of key characteristics and criteria of PPPs 30 min
  • Chapter 2: Structuring a PPP project 5

    • Lecture2.1
      Structuring a PPP project 30 min
    • Lecture2.2
      Project structuring: feasibility study 30 min
    • Lecture2.3
      PPP economics 30 min
    • Lecture2.4
      PPP economics 30 min
    • Lecture2.5
      Alternative PPP structure: rail project case study 30 min
  • Chapter 3: Financing an infrastructure PPP project 6

    • Lecture3.1
      Sources of financing for an infrastructure PPP project 30 min
    • Lecture3.2
      What is Project Finance? 30 min
    • Lecture3.3
      Drawbacks of using project finance in infrastructure PPP transactions 30 min
    • Lecture3.4
      Structure 30 min
    • Lecture3.5
      Key parties 30 min
    • Lecture3.6
      Timeline for financing an infrastructure PPP project 30 min
  • Chapter 4 :Documenting the transaction: anatomy of a PPP concession agreement and key risk allocation issues 11

    • Lecture4.1
      Scope and term of a PPP Concession Agreement 30 min
    • Lecture4.2
      Construction period obligations 30 min
    • Lecture4.3
      Operation period obligations 30 min
    • Lecture4.4
      Payment regimes 30 min
    • Lecture4.5
      Supervening events 30 min
    • Lecture4.6
      Termination and compensation 30 min
    • Lecture4.7
      Liability and insurance 30 min
    • Lecture4.8
      Dispute resolution 30 min
    • Lecture4.9
      Government controls 30 min
    • Lecture4.10
      Government support obligations 30 min
    • Lecture4.11
      Additional terms and conditions 30 min
  • Chapter 5: Documenting the transaction: finance documents 8

    • Lecture5.1
      Core finance documents 30 min
    • Lecture5.2
      Equity arrangements 30 min
    • Lecture5.3
      Impact on the concession agreement 30 min
    • Lecture5.4
      Direct Agreements 30 min
    • Lecture5.5
      Security 30 min
    • Lecture5.6
      Enforcement and insolvency 30 min
    • Lecture5.7
      Involvement of multilateral development banks (MDBs), development finance institutions (DFIs) and export credit agencies (ECAs) 30 min
    • Lecture5.8
      Government shareholder arrangements 30 min
  • Chapter 6:Documenting the transaction: other project documents 2

    • Lecture6.1
      Construction contract, O&M contract and interface issues 30 min
    • Lecture6.2
      Sub-contract risk pass-down 30 min
  • Chapter 7:Procurement arrangements 2

    • Lecture7.1
      A typical PPP timetable 30 min
    • Lecture7.2
      Unsolicited proposals 30 min
  • Chapter 8:Introduction to key sector issues 7

    • Lecture8.1
      Road projects 30 min
    • Lecture8.2
      Urban rail projects 30 min
    • Lecture8.3
      Freight rail projects 30 min
    • Lecture8.4
      Airport projects 30 min
    • Lecture8.5
      Port projects 30 min
    • Lecture8.6
      Accommodation projects 30 min
    • Lecture8.7
      Glossary 30 min

    Government controls

    (a)        Control over shareholdings

    The government has been assured at bid stage of the quality of the entities proposing to provide services, however the actual PPP contract is likely to be entered into with a special purpose vehicle. The entities which make up the bidding consortium (construction company, operation company, equity investors, etc) are the commercial glue holding it together and the government would wish to keep them locked into the project for a reasonable period of time.

    It would be common to see the initial equity investors locked into the equity of the project for at least 18 months, and in some cases substantially longer. For their part, the equity investors will usually want to retain the right to sell their equity stake freely after this period. Once the project is self-sustaining the government should not be too concerned provided that reasonable controls over the nature of any replacement equity investor are maintained. The government will always want to have the right to prevent “undesirable” investors from taking an interest in the project (e.g. for national security reasons).

    Even during the lock-in period, it may be justifiable for the equity investors to be able to transfer their stake within their own corporate group or within their own managed funds. The government should be comfortable with this in principle.

    (b)        Control over financing documents

    As previously discussed, the government is likely to have contingent liability for the senior debt in the project, which may be realised on an early termination.

    For this reason, the government has an interest in ensuring that the finance documents are not amended in a way which unfairly increases the government’s contingent risk. This could be achieved by requiring all changes to finance documents to be approved by the government prior to being implemented. However, in practice government consents can be time-consuming to obtain and so this is likely to be too restrictive for the concessionaire and lenders. A usual compromise is to provide that changes can be freely made to the financing documents, but no such changes will affect the government’s contingent liability for the debt unless express approval has been obtained.

    Some changes to the financing documents may be beneficial to the shareholders. If market conditions have changed or the project is perceived to have become less risky, a lower margin may be achievable on the debt. If the government had to bear the original cost of financing at the point the project started (e.g. through the calculation of the availability fee), it may be fair for the government to benefit from any subsequent reduction in finance costs. A starting position in many jurisdictions is that the benefit of such refinancing (called a refinancing gain) should be shared 50:50 between the parties.

    (c)        Control over project documents

    The government will expect to see and approve the final copies of the contracts entered into with the principal supply chain partners (EPC and O&M contractors) and any subsequent replacements. Not only does this give comfort that the concessionaire has put adequate arrangements in place to manage its obligations but the government has an interest in potentially stepping in to these contracts on an early termination of the concession agreement.

    This right of approval should however be subject to a test of reasonableness. The concessionaire will wish to retain the ability to terminate and replace the sub-contractors where this is justified in the best interests of the project in order for the concessionaire to manage its ongoing obligations under the concession agreement.

    (d)        Step-in rights

    The project assets are likely to comprise an essential piece of public infrastructure and, as such, the government should always expect to have the right to step in and take control of the asset at any time when this is reasonably necessary (e.g. if there is an emergency or a need to satisfy statutory obligations).

    The concessionaire will usually be accepting of this, provided that the government keeps the concessionaire in a “no better, no worse” position during the step-in period. If the reason for the step-in was brought about by a concessionaire breach then the concessionaire can expect to bear the additional costs incurred by the government to take the step-in action.

    However, the penalty should be moderate: once the project is taken out of the concessionaire’s control it is no longer able to rectify the original breach itself and so it would not be justified to continue to penalise the concessionaire indefinitely for this. Similarly, if the project is a revenue-generating project, one would expect the government to be under an ongoing obligation to continue to operate the project prudently and maximise revenues, which would need to be turned over to allow the debt to continue to be serviced.

    SUMMARY OF KEY POINTS
    Government controls

    • The government will usually require the initial equity investors (and shareholders of the concessionaire as a special purpose vehicle) to be locked in for a period of time because of their importance in holding the project together. Equity investors usually have the right to sell their equity stake freely after this period, but the government also often wants to be able to prevent “undesirable” investors from taking a share in the project (usually for national security reasons).
    • The government has contingent liability for the senior debt in the project and so it will want to restrict amendments to the finance documents. The usual position is that the government’s prior approval will be required if an amendment will affect the its contingent liability.
    • The EPC and O&M contracts provide the government with comfort that the concessionaire has adequate measures in place to manage its obligations under the concession agreement; these (and contracts with any subsequent replacement contractors) will therefore be reviewed and approved by the government. This right of approval is subject to a test of reasonableness, the concessionaire should be able to terminate and replace contractors freely when it is in the best interests of the project.
    • The government will always want the right to step in and take control of a public infrastructure asset where it is reasonably necessary to do so. The concessionaire will accept this provided it is kept in a “no better, no worse” position during the step-in period, particularly in terms of financial penalties and potential loss of revenues.
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