3.2.3 Prepare detailed design of the PPP arrangement 
(1)(2)
All aspects of the PPP arrangement - responsibilities, risk allocation, payment mechanism, etc. - need to be developed in further detail, with the ultimate goal of producing the draft PPP contract. It is advisable to deal with this in smaller sub-steps rather than to try to draft a full PPP contract right away. This simplifies the internal review process: it is better to focus the initial internal discussion and approval on the broad commercial aspects of project design rather than on detailed legal terms.
□ The first sub-step might be to prepare a document outlining the principal commercial terms ("heads of terms"), and once the heads of terms have been internally approved, to progressively develop and refine the different topics<3> Certain aspects (e.g. payment mechanism) might first require the preparation by the advisers of discussion notes presenting and assessing various alternatives.
□ The risk allocation of the PPP arrangement will be further developed with the help of advisers and the results checked against prevailing market conditions. Preliminary risk matrices or registers will have been used in the feasibility phase, and they will be further refined in this phase<4>
□ The assessment of traffic volumes and traffic risks is essential in TEN-T projects as in any other large transport infrastructure projects. Experience shows that in many cases the appraisal of transport projects tends to overestimate traffic volumes. The public authority should be aware of this risk. The allocation of traffic risk in a TEN-T project is given effect through the payment mechanism in the PPP contract, which may seek to transfer some, all or none of the traffic risk to the private sector (see Box 3 Traffic revenue risk allocation and Box 4 Payment Mechanism).
□ The financial model of the expected PPP (sometimes called a "shadow bid" model) - prepared initially by the public contracting authority and its advisers for use in the feasibility analysis - should be further developed and refined and should be used to examine alternative risk allocations and payment mechanisms. (Note that this is not the same financial model that a bidder will prepare and submit with its proposal).
| The problematic issues concerning risks to be transferred in a TEN-T PPP are usually more related to the underlying transport technology than the status of the project as a TEN per se. Many TENs are based around transport modalities with particularly challenging risks. Examples include the interface issues inherent in rail projects (in addition to the interface between track infrastructure and train operation, there are issues relating to communications technology, signalling, cross border issues), or information technology issues in airport developments and so on. Rail TEN-T projects are typically high cost and they are usually much more complex and difficult to complete. In addition, the choice of a particular technical solution, for example, for rolling stock may limit the scope for the future replacement of a non-performing supplier or sub contractor. This will generally lead lenders to increase their assessment of the risk of the project. Sources of guidance in this field are scarce and that is why advisors with previous TEN-T rail experience will be extremely important to the progress of the project. The TEN-T Executive Agency, DG MOVE and EPEC may consider developing specific rail-related guidance in the future. A more general issue in traffic risk projects is that of network effects. Because projects form part of a wider network, the traffic performance (irrespective of the traffic mode) will be, in part, determined by performance of other parts of the network. This will typically be outside the control of both the private sector partner and the public authorities. This may result in risks which lenders, in particular, find difficult to accept. TEN-T specific instruments, such as those available from the EIB or the EU Commission, might help in addressing this issue. |