A primary part of any partnership solution will concern financial arrangements that are incorporated to meet financial (and other identified) objectives (see discussion in Chapters 3 and 7). In order to ensure that basic objectives are met and goals are viable and sustainable, a moderate level of knowledge is necessary among those municipal individuals leading partnership development and negotiations. It is necessary for a municipal decision-making team to have some grasp of why the private sector acts in the way it does. Knowledge of rates of return, financial viability (especially in relation to tariffs and subsidies), debt servicing and the financial conditions needed for investment will be important in understanding basic incentives, and understanding the financial, political, social and environmental implications of tariffs is essential to achieving objectives. While many of the skills needed to analyse the existing conditions (to prepare a PPP) may be bought from specialist advisors, it is essential that advisors are given a full picture of the operating context, and thus it is necessary to have sufficient in-house skills to brief advisors and understand the advice being given.
The set of issues that need to be addressed in relation to financing include:4
• benchmarking (in relation to assets, efficiency, cost effectiveness of service delivery);
• project finance (principles of net present value, rates of return);
• local and international finance markets (how local financial markets affect international investors and the implications of international financing on the service being delivered);
• guarantees and lenders' rights (security etc.);
• currency exchange and interest rate risk (what do exchange rates imply for rates of return);
• credit enhancement (additional investment by government if necessary);
• risk (how risks affect financial viability and how they are factored into cost recovery);
• tariff structuring and subsidy design (their implications on equity, affordability and revenue flows) as well as tariff adjustment mechanisms; and
• credit control (risks of bad debt, assurance of government revenue, insurance and guarantees).