The second key characteristic of a PPP project is the allocation of a major construction obligation, focused on either Build (obligation to construct capital assets - also known as a greenfield project) or Refurbish (a significant obligation to refurbish or expand existing assets - also known as a brownfield project). So a greenfield power plant would be a Build PPP while the refurbishment of an existing hospital would be a Refurbish PPP.
These construction obligations are limited to significant undertakings occurring early in the project, such that prospective investors will plan and possibly prepare preliminary designs for such works in advance and will consider carefully such works as a part of project assessment. Such construction obligations would therefore have a more considerable impact on the risk allocation set out in project agreements and risk perceptions of potential investors. The more a capital expenditure obligation is delayed in time after commencement of project, the more uncertain will be the nature of that obligation, and the less specific will be its implications to an investor evaluating the potential of a project. Where the obligation does not arise until some time after commencement, it may not be feasible to enter into a fixed price / fixed time construction contract. The model therefore highlights the difference in risk profile of projects that involve a significant construction obligation in the early part of the project.
The financing for the project will assume a date for completion of the works. Any failure to complete the works by this date will have a direct impact on the sufficiency of revenues to repay debt and accumulate return on equity. Given the generally fixed duration of a PPP project, every day of delay reduces total revenues for the project. Similarly any increase in cost of the works will have a direct impact on the extent to which revenues are sufficient to satisfy debt repayment and to earn a profit for the equity holders. Therefore a project company undertaking a significant capital expenditure obligation will be subject to market risk implications, such as the market cost of labor, materials, and technology. Underperforming works reduce revenues (which are generally output based) and therefore undermine financial viability of the project.
But undertaking major construction works also represents a significant commercial opportunity from the construction and associated contracts. The profit margins on turnkey, also known as engineer -- procure -- construct (EPC), contracts are usually significantly higher than the profit margin items earned by contractors on traditional construction contracts. Bidding consortia for a project involving a significant construction obligation are often led by construction contractors interested primarily in winning the construction contract. This raises conflict of interest and control issues for the grantor, shareholders and the lenders.