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Introduction to PPP in the infrastructure sector 6
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Lecture1.1
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Lecture1.2
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Lecture1.3
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Lecture1.4
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Lecture1.5
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Lecture1.6
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Chapter 2: Structuring a PPP project 5
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Lecture2.1
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Lecture2.2
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Lecture2.3
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Lecture2.4
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Lecture2.5
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Chapter 3: Financing an infrastructure PPP project 6
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Lecture3.1
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Lecture3.2
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Lecture3.3
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Lecture3.4
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Lecture3.5
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Lecture3.6
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Chapter 4 :Documenting the transaction: anatomy of a PPP concession agreement and key risk allocation issues 11
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Lecture4.1
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Lecture4.2
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Lecture4.3
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Lecture4.4
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Lecture4.5
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Lecture4.6
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Lecture4.7
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Lecture4.8
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Lecture4.9
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Lecture4.10
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Lecture4.11
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Chapter 5: Documenting the transaction: finance documents 8
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Lecture5.1
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Lecture5.2
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Lecture5.3
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Lecture5.4
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Lecture5.5
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Lecture5.6
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Lecture5.7
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Lecture5.8
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Chapter 6:Documenting the transaction: other project documents 2
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Lecture6.1
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Lecture6.2
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Chapter 7:Procurement arrangements 2
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Lecture7.1
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Lecture7.2
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Chapter 8:Introduction to key sector issues 7
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Lecture8.1
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Lecture8.2
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Lecture8.3
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Lecture8.4
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Lecture8.5
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Lecture8.6
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Lecture8.7
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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
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