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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

    PPP economics

    The economics of PPPs must also be considered; one example for a hypothetical rail project is depicted in the diagram below.

    Governments are often keen on PPPs because they believe that the private sector can take all of the risk and can deliver a project that the government has been unable to deliver to date. However, PPPs are a funding mechanism, not a mechanism for creating affordability. There is a distinction between whether a project can finance itself and how you finance it. Some projects are simply unviable from the start.

    Governments need to acknowledge that there are limited sources of revenue for financing a PPP project. There is only so much the public will be willing to pay for an asset through tolls or taxes. In most cases, these are the only two realistic sources of revenue. In an emerging market context, it is more likely that the project will need to be self-financing through tolls or other user charges rather than government budgets funded by taxation.

    Another funding option outside of user charges or taxation is property development. For example, the land alongside a new PPP road could be acquired by the government and sold for development, which in turn generates more growth by promoting business along that road. Similarly, a rail project could give opportunities for transit-oriented development such as offices, shops or housing above or near stations.

    However, property development is not a common source of revenue for PPP project concessionaires because lenders tend to view the risk profile on property developments differently to project finance, so it is not straightforward to combine these in a single project. The upsides may also be longer-term and not available in time to defray the high capital and financing cost of the road or railway. Nevertheless the government party may be able to take a long-term view where the concessionaire cannot.

    The government also needs to consider the private sector’s ability to assume demand risk. There have been a number of projects in the road and rail sectors where the private sector has grossly overestimated the demand and the projects have essentially failed. If demand cannot be predicted – which is particularly difficult for greenfield projects that have no existing demand history – then this may suggest that the government needs to find another solution to procure the project, which may involve taking back or sharing in the demand risk to a level that is comfortable for the private sector.

    SUMMARY OF KEY POINTS
    PPP economics

    • PPPs are a common way of funding public projects on the basis that the private sector is perceived to take all of the risk and deliver the project successfully. However, certain projects are often unviable and the public will not always want to pay excessive amounts for an asset through tolls or taxes.
    • An alternative option to fund projects is property development, capitalizing on land surrounding the location of the project to construct additional attractions such as offices, shops or housing to, in turn, generate more growth and promote business at the site. However, it is difficult to combine property development and project finance into one single project because lenders view the two risk profiles very differently.
    • Demand risk is often assumed by the private sector and gross overestimation of the use of projects can be problematic and lead to failure of the project.
    Prev PPP economics
    Next Alternative PPP structure: rail project case study

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