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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

    Involvement of multilateral development banks (MDBs), development finance institutions (DFIs) and export credit agencies (ECAs)

    (a)        Introduction

    MDBs are institutions such as the World Bank, African Development Bank and the European Bank for Reconstruction and Development or other of the international agencies established to assist in the development of economies. MDBs will support governments in the development of projects through risk mitigation products such as political risk cover, or in other ways (e.g. direct lending, providing funds for government support).

    DFIs are bilateral, regional or multilateral institutions that are supported by developed countries with a mandate to provide finance to private sector participants to promote economic growth and support social development. These are institutions such as the International Finance Corporation and European Investment Bank.

    ECAs are institutions (often public or quasi-public) that provide government backed support (loans, guarantees and insurance) to encourage the export of goods from their home country. For example, JBIC (the Japanese ECA) may lend to a PPP project for the supply of Japanese built trains.

    These institutions play a vital role in securing the required funding for infrastructure projects in emerging markets. They are catalytic, attracting further private investment from commercial banks.

    The involvement of these types of entity is advantageous in project finance transactions for a number of reasons:

    (i)         their interest rates are generally lower than those of commercial banks and the tenor of the loan may be longer;

    (ii)        they may be able to lend to projects which commercial banks cannot;

    (iii)       the presence of one of these institutions may attract further private finance from commercial banks because of:

    (A)       the nature of the support e.g. guarantees given to commercial banks covering all or part of their loan; and/or
    (B)       indirectly, because their involvement engenders confidence in other potential lenders due to the expertise of these institutions in the project finance market; the political pressure that can be brought to bear on the government if any issues arise; or, in some cases, because of the preferential status that may be afforded to certain lenders by virtue of the involvement of these institutions (e.g. mitigating transfer and convertibility risk in the event of a foreign exchange crisis).

    A full examination of these institutions and the support they provide is outside the scope of this guide but we will briefly look at political risk mitigation products below, which feature in African infrastructure PPP projects.

    (b)        Political risk

    Commercial risk is the inability of a borrower to meet its payment obligations due to performance issues with the project or if an offtaker has become insolvent.

    Political risk is the failure of a borrower to meet its payment obligations because of the actions of the government or because of war or civil unrest in the jurisdiction of the project. Political risks typically include:

    (i)         damage or destruction of assets, business interruption or forced abandonment of a project resulting from events such as war, revolution, insurrection, civil unrest, terrorism and sabotage;

    (ii)        confiscation, expropriation, nationalisation (CEN) and other acts by a government that deprive the project company of its fundamental rights to the concession, equipment or other assets. “Creeping expropriation” – a series of acts that ultimately have an expropriatory effect. Selective discrimination, forced divestiture, and losses arising from breach of contract by the government or the non-honouring of a government payment obligation under an off-take agreement or other commercial arrangement;

    (iii)       currency inconvertibility and non-transferability – the inability to convert local proceeds to hard currency and repatriate the currency.

    There is an element of political risk in any project financing, even projects in the UK, but the risk is likely to be greater in emerging markets jurisdictions. Political risk is an issue in project finance transactions because:

    (i)         the project may be the first project of its kind in the country in a sector which was previously government controlled;

    (ii)        the project is likely to require some form of governmental concession whether to transfer hard currency outside the host country or merely just to operate and, if this is revoked, the project will fail; and

    (iii)       the project will be very important to a country’s infrastructure (roads, hospitals) or for security reasons (airport, port).

    (c)        Mitigation

    The lenders to the project will seek to mitigate the political risk inherent in a project. They can do this in a number of ways:

    (i)         by including “stabilisation” provisions in the concession agreement (promises not to adversely change legislation or to indemnity the project company if adverse legislation is implemented);

    (ii)        an undertaking from the central bank to ensure the availability of foreign exchange;

    (iii)       political risk insurance provided by commercial insurers or from ECAs or MDBs (see further below), although this can be very expensive or not available to cover the relevant risk;

    (iv)       rely on the involvement of MDBs, DFIs and ECAs as part of the lending group to exert political pressure if political risks materialise; and

    (v)        include the government as a shareholder in the project company.

    (d)        Political risk insurance

    Political risk insurance (PRI) policies are insurance contracts that offer coverage for the “political risks” excluded under typical commercial insurance contracts. PRI provides coverage for investors making direct equity investments in projects and to those lending to emerging markets borrowers.

    As with other insurance contracts the coverage trigger hinges on a loss occurrence connected with a specified insurance peril. Particularly in relation to political violence and CEN cover, it can be difficult to determine the trigger for a claim. How can the insured prove that a loss was directly caused by political violence?

    PRI policies are bespoke and the definition of each peril will be different for each insurer. Likewise, the exclusions, deductions etc. will all depend on the nature of the project, the country, and other factors to be considered at the time of policy inception.

    SUMMARY OF KEY POINTS
    Involvement of multilateral development banks (MDBs), development finance institutions (DFIs) and export credit agencies (ECAs)

    • MDBs, DFIs and ECAs play a vital role in securing funding for infrastructure projects in emerging markets. MDBs and DFIs have a common aim of promoting economic growth and development. These entities provide support by way of direct finance, equity investment, specific products or governmental support.
    • The involvement of these entities is beneficial for the project company as interest rates on the loan may be lower, or tenors might be longer. It also often attracts further investment from commercial banks due to the nature of the support these institutions and their perceived political influence.

    Political risk

    • This relates to the project company’s failure to meet its repayment obligations due to the actions of the government (such as confiscation, expropriation, nationalisation), the inability to convert local proceeds to hard currency and repatriate the currency, or because of war, civil unrest, terrorism, insurrection in the jurisdiction of the project which damages assets or causes interruption to the project.
    • Such risks are greater in emerging markets jurisdictions than developed markets but the risks can be mitigated through the use of stabilisation clauses, the involvement of MDBs, DFIs and ECAs that can exert political pressure if necessary, and political risk insurance policies that can cover such events.
    Prev Enforcement and insolvency
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