1. New ("greenfield") or existing assets - Greenfield developments, which involve huge capital expenditure to build new infrastructure or additions to existing infrastructure, have different requirements as compared to the rehabilitation or management of existing assets in brownfield developments. The role of private sector is broader in greenfield projects.

2. Ownership flexibility - There may be legal restrictions on public ownership (as is the case in India for highways or port frontages). Other practical issues need to be taken into account in deciding ownership, such as political acceptability (e.g. resistance to private ownership of certain facilities that are seen as providing strategic or 'vital' services, such as electricity). Restrictions on ownership rule out PPP modes that specifically contain ownership aspects, such as Build-Own-Operate (BOO) and its variants (e.g. BOOT). In this case, other options such as lease management contracts, BOT, BTL, could be considered.

3. Lifetime of the asset & capital costs - Infrastructure assets that involve large upfront capital costs or long timeframes for cost recovery, may be more amenable to long-term contracts (e.g. BOT, BLT etc). However, long timeframes also bring greater uncertainties increasing the risk profile of the project. The public entity may be required to take on some of these risks, by, say providing payment guarantee mechanisms, in order to attract private sector finances.

For example, in a road project where future traffic volumes are uncertain, the PPP might be structured with annuity payments rather than being toll-based, to reduce the revenue risk to the private operator. Alternatively, if long-tenure finance from the private sector is not available, public sector financing may need to step into the gap (e.g. India Infrastructure Finance Company Limited, is one such entity which provides long term finance for infrastructure projects). The willingness or ability of the public entity to meet these risks is a further factor to be considered in determining the length of contract. For example, if facilities to support long-tenor debt are not available, shorter term contracts with renewal clauses may be more appropriate.

4. Nature of the service provision and supporting assets - More broadly, the nature of the end-user service itself will tend to favour a particular type of contracting structure. This is related to the capital cost structure (scale and timing) and the nature of the assets (physically fixed to their location or transportable). Large capital intensive network infrastructure assets tend to be natural monopolies and require some form of institutional price and quality regulation, either within the terms of the contract or by a dedicated regulatory agency.

5. Services provided on the network - For instance, municipal buses, electric energy or solid waste collection, can be subject to market competition wherein different contracting structures can be explored. There could be a greater opportunity for shorter duration contracts looking at periodic competitive re-bidding, so as to maintain a healthy competition on costs.

6. Cost recovery options - Will the revenue in a PPP project come from a user-charge or an annuity paid by the public sector? This aspect has important implications for the nature of the risk sharing.

7. Stability of demand for the services - Long-term PPP contracts are best suited to the provision of infrastructure services which are not expected to change much through time. These projects have a lower risk of unforeseeable outcomes compared with projects whose services are subject to change (for example, sectors that are subject to rapid technological change). In some cases, it may be necessary to provide the project with some protection from competition in order to reduce volume and revenue risk.

For example, a roads project might have a guarantee from the public sector that an alternative route will not be allowed nearby within a set number of years or until traffic has reached a specified level.

Impact of SPVs in Structuring

The financing structure should be analysed within the context of the contractual structure for the PPP. When establishing a project consortium under a privately financed PPP project, the sponsor(s) generally set up (through a holding company) a Special Purpose Vehicle (SPV) or project company to contract with the Government as PPP contractor.

The SPV itself has no historical, financial or operating record that the Government can assess. So it has to rely on the historical performance of the consortium members to fulfil the project obligations.

• The SPV is supported by external equity contributions from shareholders - The SPV also raises debt or debt/equity (hybrid) finance. The debt providers are concerned with ensuring repayment of the debt plus interest and other returns as agreed. They provide term sheets offering finance subject to conditions precedent that must be fulfilled before the SPV can actually use (or draw down) the financing.

• Sponsor and financial risks stem from the complex structure of these arrangements - Upon contract execution, the SPV becomes the 'vital centre' of the project, coordinating and overseeing the work of the sub-contractors, providing the formal liaison with the Government over contractual issues, and ensuring that the financiers receive their revenue returns. Incompetence or a lack of probity in the SPV is therefore a key risk for all parties and one that all parties have an interest in managing. Both the project financiers and Government will scrutinise the SPV, lifting the corporate veil to ascertain which persons or companies have controlling interests in it.

Source: Knowledge Series, Training of Trainers Curriculum, PPP, Module II - Project Analysis and Structuring, Department of Economic Affairs, Ministry of Finance, Government of India

Functions

Parameters

Design & Scope

• Boundary conditions

• Design, engineering scope & standards

• Timelines

• Ancillary infrastructure provision

Performance Management

• Performance indicator

• Measurement & monitoring

Financial & Commercial Covenants

• Payments

• Guarantees & performance securities

• Variations

• Incentives & penalties

• Transaction costs

• Lender protection

• Insurances

Governance Mechanism

• Auditing

• Regulation

• Reporting

• Dispute resolution mechanism

Events of Default & Consequences

• Duration

• Either parties default of performance

• Termination payments

• Termination procedures