PPP PROJECTS : HOW THEY ARE FINANCED
The complexity of PPP projects leads to the need for appropriate legal frameworks and institutions to support successful PPP programs. As a result in recent years, governments have considered various changes in the legal and regulatory environment, as well better administrative procedures, in order to reduce uncertainties for private investors. In particular, dedicated PPP Units have been created in some governments. What are the most important considerations in this respect?
Legal Basis Of PPPs
In most countries, provision of infrastructure services is the responsibility of the public sector. Depending on the political and administrative structure of the country, legislation may govern the infrastructure sectors at different levels of government (local, provincial, and national). Generally, some form of government authority is required to permit private involvement in infrastructure development. Legal provisions may also be required to process, promote and facilitate private involvement.
Administrative Mechanism and Coordination
The administrative mechanism of PPP project implementation depends on the system of government and the overall administrative structure, and the legal regime concerning PPPs. As these elements vary from one country to another, the administrative mechanism also varies from one country to another. Generally, the sectoral agencies at the national and provincial levels (in a federal structure) initiate and implement most of the PPP projects. However, in many countries, the Philippines for example, local level governments such as city governments are also allowed to undertake PPP projects.
Depending on the system in a country, the implementation of PPP projects may require the involvement of several public authorities at various levels of government. The authority to award PPP contracts and approve contract agreements is generally centralized in a separate public authority. This may be a special body for this purpose and is usually at the ministerial or council of ministers level.
The legal instruments and/or government rules and guidelines define how the sectoral agencies and local governments may initiate, develop, submit for approval of the national/provincial government, procure, negotiate and make deal with the private sector, and finally implement a project. These legal instruments may also define the authority and responsibilities concerning PPPs at different levels or tiers of government.
Steps in PPP Project Development and Implementation
The figure below shows the steps that are generally considered in a PPP project implementation process. Clear definitions and procedures of various tasks and administrative approval from competent authorities at different stages of project implementation process are necessary in running a successful PPP programme. Streamlined administrative procedures reduce uncertainties at different stages of project development and approval and help to reduce the transaction cost of a PPP project.
Risks in PPP Project Development
Risks can be hard to define, manage and mitigate. In infrastructure projects that cross regional or national borders and involve multiple parties from both the public and private sector, these risks may be amplified. Risks are evaluated on the magnitude and likelihood of their impact on project cash flows.
Lenders focus on certain risks more critically because they play a large role in the certainty of project cash flow. Investors often require certainty that market instruments and regulatory support are available to better align the risk profile of investment with their own risk tolerance before investing in a cross-border project.
Multiple currencies can further complicate a cross-border project, with multiple currency fluctuations to manage, as well as risks associated with currency convertibility and transferability. Some governments impose restrictions and/or limits on investors that receive their revenue in a local currency on converting that revenue to a foreign currency or transferring it abroad.
Even when a project receives revenue in a foreign currency, there may still be restrictions on transferring it abroad. Political risk insurance cover may be available to mitigate currency convertibility and/or transferability risk, although this can be expensive.
Currency fluctuation risks will depend on asset type, project costs and the project revenues available. As an example, if project revenues are available in foreign currencies and debt finance is available in that same foreign currency, this provides a natural hedge against the currency exchange rate and convertibility risks depending on the volatility of the foreign currency revenue. However, where project revenues are only available in a local currency and the only debt finance available is in a foreign currency, this currency mismatch creates an exchange rate risk.
Hedging instruments may be a solution to currency risk in these circumstances, but they rarely offer a cost-effective solution in many markets due to the costs involved and the lack of long term hedging options for many local currencies. In this case, lenders will have to settle for the maximum tenor the local market will offer and then renew the maturity of the hedge in due course.
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