Table Of Content

Prelims-H8054 2/15/07 7:51 PM Page i Public–Private Partnerships This page intentionally left blank Prelims-H8054 2/15/07 7:51 PM Page iii Public–Private Partnerships Principles of Policy and Finance E. R. Yescombe Yescombe Consulting Ltd London, UK www.yescombe.com AMSTERDAM • BOSTON • HEIDELBERG • LONDON • NEW YORK • OXFORD PARIS • SAN DIEGO • SAN FRANCISCO • SINGAPORE • SYDNEY • TOKYO Butterworth-Heinemann is an imprint of Elsevier Prelims-H8054 2/15/07 7:51 PM Page iv Butterworth-Heinemann is an imprint of Elsevier 30 Corporate Drive, Suite 400, Burlington, MA 01803, USA Linacre House, Jordan Hill, Oxford, OX2 8DP, UK First edition 2007 Copyright © 2007, Yescombe Consulting Ltd. Published by Elsevier Ltd. All rights reserved The right ofYescombe Consulting Ltd to be identified as the author of this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988 No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the publisher Permissions may be sought directly from Elsevier’s Science & Technology Rights Department in Oxford, UK: phone ((cid:1)44) (0) 1865 843830; fax ((cid:1)44) (0) 1865 853333; email: [email protected]. Alternatively you can submit your request online by visiting the Elsevier web site at http://elsevier.com/locate/permissions, and selecting Obtaining permission to use Elsevier material Notice No responsibility is assumed by the publisher for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use or operation of any methods, products, instructions or ideas contained in the material herein. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication Data A catalog record for this book is available from the Library of Congress ISBN: 978-0-7506-8054-7 For information on all Butterworth-Heinemann publications visit our web site at http://books.elsevier.com Typeset by Charon Tec Ltd (A Macmillan Company), Chennai, India www.charontec.com Printed and bound in Great Britain 07 08 09 10 11 10 9 8 7 6 5 4 3 2 1 Prelims-H8054 2/15/07 7:51 PM Page v Contents List of Figures xi List of Tables xiii Introduction xv Chapter 1 What are Public–Private Partnerships? 1 §1.1 Introduction 1 §1.2 Public Infrastructure and the Private Sector 1 §1.3 Public–Private Partnerships 2 §1.4 Development and Structures 4 §1.5 PPPs and Public Infrastructure 11 §1.6 Types of PPP 13 Chapter 2 PPPs—For and Against 15 §2.1 Introduction 15 §2.2 New Public Management,Privatisation and PPPs 16 §2.3 Budgetary Benefit 17 §2.4 Additionality 17 §2.5 Financing Cost and Risk Transfer 18 §2.6 Risk Transfer and Value for Money 18 §2.7 Economies of Scale 20 §2.8 Whole-Life Costing and Maintenance 21 §2.9 Private-Sector Skills 21 §2.10 Public-Sector Reform 24 §2.11 Complexity 26 §2.12 Flexibility 26 §2.13 PPPs and Politics 27 v Prelims-H8054 2/15/07 7:51 PM Page vi vi Contents Chapter 3 PPPs Worldwide 29 §3.1 Introduction 29 §3.2 Developing PPP Programmes 29 §3.3 Legal Framework 31 §3.4 United Kingdom 33 §3.5 United States 39 §3.6 Australia 41 §3.7 France 43 §3.8 Korea 44 §3.9 Spain 46 §3.10 South Africa 47 Chapter 4 Cash Flow and Investment Analysis 49 §4.1 Introduction 49 §4.2 Net Present Value/Discounted Cash Flow 49 §4.3 Internal Rate of Return 51 §4.4 Problems with DCF and IRR Calculations 52 §4.5 Uses in PPPs 56 Chapter 5 The Public-Sector Investment Decision 58 §5.1 Introduction 58 §5.2 Economic Justification 58 §5.3 Value for Money and the Public-Sector Comparator 62 §5.4 Affordability 67 §5.5 Balance-Sheet Treatment 68 Chapter 6 Public-Sector Procurement and Contract Management 74 §6.1 Introduction 74 §6.2 Project Management 75 §6.3 Procurement Procedures 77 §6.4 Other Procurement Issues 84 §6.5 Due Diligence 86 §6.6 Contract Management 88 §6.7 External Advisers 91 Prelims-H8054 2/15/07 7:51 PM Page vii Contents vii Chapter 7 The Private-Sector Investor’s Perspective 96 §7.1 Introduction 96 §7.2 The Investment Pool 96 §7.3 The Investment Decision 101 §7.4 Bidding and Project Development 107 §7.5 Joint-Venture Issues 108 §7.6 The Project Company 108 §7.7 External Advisers 111 Chapter 8 Project Finance and PPPs 113 §8.1 Introduction 113 §8.2 Development of Project Finance 114 §8.3 Features of Project Finance 115 §8.4 The Project-Finance Market 116 §8.5 Why Use Project Finance for PPPs? 120 Chapter 9 Private-Sector Financing—Sources and Procedures 124 §9.1 Introduction 124 §9.2 The Rôle of the Financial Adviser 124 §9.3 Commercial Banks 126 §9.4 Bond Issues 135 §9.5 Bank Loans v.Bonds 140 §9.6 Mezzanine Debt 142 Chapter 10 Financial Structuring 143 §10.1 Introduction 143 §10.2 The Financial Model 143 §10.3 Model Inputs and Outputs 145 §10.4 Financing Costs 150 §10.5 Debt Profile 153 §10.6 Cover Ratios 159 §10.7 Relationship between Cover Ratio,Leverage and Equity Return 166 §10.8 Accounting and Taxation Issues 167 §10.9 Recourse to the Sponsors 169 Prelims-H8054 2/15/07 7:51 PM Page viii viii Contents Chapter 11 Financial Hedging 171 §11.1 Introduction 171 §11.2 Interest-Rate Risk 171 §11.3 Inflation Issues 187 Chapter 12 Lenders’ Cash-Flow Controls, Security and Enforcement 202 §12.1 Introduction 202 §12.2 Control of Cash Flow 202 §12.3 Security 208 §12.4 The Rôle of Insurance 211 §12.5 Events of Default 218 §12.6 Intercreditor issues 219 Chapter 13 Service-Fee Mechanism 223 §13.1 Introduction 223 §13.2 Contract Scope 223 §13.3 Payment Structure 225 §13.4 Usage-Based Payments 229 §13.5 Availability-Based Payments 236 §13.6 Mixed Usage and Availability Payments 241 §13.7 Third-Party and Secondary Revenues 241 Chapter 14 Risk Evaluation and Transfer 242 §14.1 Introduction 242 §14.2 Principles of Risk Transfer 242 §14.3 The Risk Matrix 245 §14.4 Political Risks 247 §14.5 Site Risks 248 §14.6 Construction Risks 253 §14.7 Completion Risks 259 §14.8 Operation-Phase Risks 263 Chapter 15 Changes in Circumstances and Termination 270 §15.1 Introduction 270 §15.2 Compensation Events 271 Prelims-H8054 2/15/07 7:51 PM Page ix Contents ix §15.3 Relief Events 276 §15.4 Step-In and Substitution 277 §15.5 Early Termination:Default by the Project Company 279 §15.6 Optional Termination or Default by the Public Authority 285 §15.7 Early Termination:Force Majeure 287 §15.8 Early Termination:Corruption 288 §15.9 Termination and Subcontractors 289 §15.10 Tax Implications of a Termination-Sum Payment 289 §15.11 Final Maturity,Residual-Value Risk and Hand-Back 289 Chapter 16 Funding Competition, Debt Refinancing and Equity Sale 292 §16.1 Introduction 292 §16.2 Funding Competition 293 §16.3 Equity Competition 296 §16.4 Debt Refinancing 297 §16.5 Equity Sale 307 Chapter 17 Alternative Models 310 §17.1 Introduction 310 §17.2 Public-Sector Procurement 311 §17.3 Post-Construction Take-Out 312 §17.4 Public-Sector Debt Funding 313 §17.5 Joint-Venture PPPs 321 §17.6 Not-for-Profit Structures 321 Bibliography 327 Glossary and Abbreviations 334