The higher contractual certainty of cost and time outcomes on PPPs is largely a result of the involvement of private sector investors and debt financiers.
The returns to investors will be reduced if the SPV incurs greater costs than forecast, or its revenues are delayed due to late completion. Similarly, the debt financiers that finance the project on a 'limited recourse' basis can only have recourse to the assets of the SPV to recover their debt. Accordingly, they need to be satisfied that the SPV can achieve the cost and time outcomes it is projecting, and has appropriate arrangements in place to manage the risks to these outcomes.
Debt financiers will have technical consultants review the project's cost and revenue projections, and the proposed risk management arrangements. They will also closely monitor the performance of the project during the construction and operation phases, which assists with the timely identification and resolution of problems. For example, during the construction phase, the debt financiers will:
• engage a certifier to assess the value of the work completed and what it will cost to complete the construction of the project; and
• only allow further drawdowns of the debt facilities if the forecast cost to complete does not exceed the SPV's available funding.
The draw-stop results in work ceasing until the cost overrun is resolved to the satisfaction of the debt financiers. The equity investors will get very interested in the situation, as they will need to cover the cost overrun if the contractor is entitled to extra money. Accordingly, claims by the contractor for extra money are investigated and promptly solved by those with 'skin in the game'.
The downside of involving investors and debt financiers is reduced flexibility. Government initiated changes to the project agreements that could adversely affect them will ordinarily require their consent. The equity investors will typically give consent if the potential rewards for them from the change are commensurate with the additional risks. Debt financiers, on the other hand, will usually not share in the financial benefits that flow to the SPV's investors from changes to the project that involve additional risk for the SPV. The debt financiers can therefore be an impediment to changes that the government and the SPV's investors would like to make to the project.
There is an open question as to whether the debt financiers' consent should be required for every change to the project agreements, or only those that could materially affect the SPV's ability to service and repay the debt.