Public Private Partnerships Project Financing and Special Purpose Vehicle

Public Private Partnerships; project financing through a special purpose vehicle

Training ByteSize, in conjunction with Maurice Diamond, have produced a series of short presentations which focus on specific areas of APMG’s CP3P certification.

In this first blog and video we look specifically at the purpose of project financing and the structuring of it through a special purpose vehicle, or SPV. This is often an area of Public Private Partnerships that students find difficult to understand, so this will benefit anyone going on a CP3P course or studying for their CP3P certification exam.

If you would like to download this presentation as a PDF click here.

What we know about Public Private Partnerships

Hi, my name is Martyn Kinch, I’m Chairman at Training ByteSize. Together with Maurice Diamond, our lead Public Private Partnership (PPP) and CP3P trainer, we have put together a number of short videos around public private partnerships, which I hope you’ll find useful .

Maurice Diamond is a Fellow of the Chartered Institute of Public Finance and Accountancy with extensive UK and international PFI and PPP experience. He has been involved in PPP in its various guises since its inception.

Maurice has advised on PPPs in the UK, Europe, Africa, and Asia for over 20 years and provided coaching, awareness, education and training on PFM (public financial management) and PPP (public private partnerships) for senior civil servants, government ministers, PPP practitioners and the private sector. He is also an accredited CP3P Foundation trainer.

Training ByteSize has been delivering PPP and CP3P training for many years now across the world and have one of the most experienced training teams available. The CP3P certification program aims to foster a common minimum level of knowledge and understanding amongst individuals working on PPPs or those interests in learning about PPPs, regardless of discipline or sector.

About the CP3P certification

The certification has been designed to create a consistency of terms using Public Private Partnerships and as a process for delivery of PPP projects worldwide. The term PPP stands for Public Private Partnerships and is both used and misused in equal measure. PPP is a useful way for the public sector to renew and develop its infrastructure and economy.

However, there are still many procurement practitioners who do not understand the key differences, to understand a procurement and a PPP. Sometimes this can be the primary cause of PPP procurement failure, either because a feasibility study is flawed and, or the deal has been poorly prepared and presented, and it therefore attract bidders and investors, or it fails to deliver improved value to the taxpayer.

A PPP Practitioner not only needs to understand project management, but prior and effective and realistic business cases, undertaking fair, competitive, and transparent procurement and contract management. They also need to understand the key tenants of PPP.

There also many people in the public sector who are not familiar with some of the key features of a PPP, the CP3P qualification, which is sponsored by the world bank and its agencies and accredited by the APMG seeks to overcome this problem.

This series of short talks focuses on these areas of the APMG syllabus that make a difference.

The first three in the series, focus on a basic introduction to infrastructure financing and restructuring, structuring cash flows and risk, and the special purpose vehicle financing. Although these are high level, they provide a good selection of information and insight, you felt you needed, but didn’t want to ask.

Project Financing

This first presentation focuses on project finance. It gives a great overview of project financing PPP’s. This is often an area of PPP’s that students find difficult to understand. So this will benefit anyone going on a CP3P course or taking the certification exam.

Public infrastructure is a relatively low risk high reward investment, and combining it with complex arrangements and contracts that guarantee and secure the cash flows make PPP projects prime candidates for project financing and the use of special purpose vehicles.

When infrastructure is procured by conventional means, the procuring authority pays for the work against its budget and assumes the entire responsibility of the asset, once construction is completed. Payments are usually made as work is progressing and at the stipulated price or subject to revisions, within the terms of the agreement, the contractor is likely to be responsible for fixing defects at his own cost.

But for a limited period, the contractor may also provide securities such as bank guarantees in respect of its liability for defects . The contractor may also remain responsible for hidden defects over a longer period, but with no security provided during this period.

The authority, usually contracts for ordinary maintenance tasks to be undertaken by a private party through a separate contract or contracts, however long-term management or life cycle management and related risks remain a direct responsibility of the government, public agency or corporation created for that purpose.

Renewables and major maintenance will usually be contracted and funded by the government or agency, as a nd when needed. The frequency and quality of ongoing buildings maintenance will be dependent on budget availability and priorities.

Consequently building assets are often allowed to deteriorate in favor of providing budgetary support to frontline services. Buildings provided under the PPP are part of a service delivery model where the public sector is paying for the availability of the asset and delivery of associated contracted services for the period of the contract, which could be an excess of 30 years.

This means that unless there is a renegotiation of the contract an upfront budgetary commitment is being made at contract signature to fund the services over the life of the contract. And that would not change.

It is a fact that in some countries, public servants prefer to work from a PPP building than one that is procured conventionally, simply because of quality of the office space is effectively maintained, even though in principle, those same people may object to the initiative as a whole.

The typical PPP financial structure, is based on non-recourse or limited recourse project finance techniques, limiting the risk exposure of the investor or promoter of the project, the sponsor.

Project finance is based on the financial analysis of the complete life cycle of a project. The cash flows generated by the project must be succinct to cover payments for operating costs and to service the debt in terms of capital repayment and interest.

Project finance requires a higher level of due diligence and control by lenders over and above that undertaken for corporate finance. A special purpose vehicle or SPV is usually established in order to deliver the project and this ring fences, the project finance and limited the risk exposure of the parent companies.

The Special Purpose Vehicle, or SPV

Let’s look at that structure and relationship between the different contracting parties. A special purpose vehicle is a separate legal entity created by an organisation or organisations.

CP3P Foundation Project Finance diagram

For example, a bidding consortium, the SPV is a distinct company with its own assets and liabilities, as well as its own legal status. It’s created for a single purpose or specific objective, for example, to isolate its financial risk.

The typical legal forms of special purpose vehicle are partnerships, limited partnerships or joint ventures. So here we have the authority, the public partner, contracting with the private partner or the SPV and between the two, we have the contract sometimes known as the project agreement.

The SPV or the private partners will comprise of equity shareholders and those equity shareholders, and those equity investors are typically the members of the consortium that bid for the original  piece of work, often a building partner and a service delivery partner.

We also then have the lenders who will provide, the loan, so we’ve got our equity and we have our debt financing. We have a loan agreement between the lenders and the private partner, the SPV.

We may also have what’s referred to as a direct letter or a direct agreement between the lenders and the public partner, that sets out the arrangements and ways that certain things will be dealt with  under certain circumstances during the life of the contract.

Then right at the bottom, we have the construction EPC contractor and the O&M contractors. Now they are, as I said before, typically the members of the bidding consortium. So they effectively have at least three roles. They were the bidding consortium. They are now the equity investors in the SPV.

One would hope that as we’ve done all the due diligence on these companies, and we’ve decided probably to take them forward as our partner, because of the work that they’ve done previously elsewhere, and their experience in the field, we would hope that they are going to be the contractors for the SPV.

So interestingly, of course the construction contractor will be paid as they go along during the construction period, and so this will be upfront during the life of the PPP. The O&M contractor will start to receive payment after the services commence, which could be two or three years downstream.

Hi there, we’re Training ByteSize

As experts in delivering accredited project management and IT service management training through a range of study styles, your success is key to our success.

We understand how people learn, we know how to train people to pass exams, we employ the best trainers and specialise in small class sizes to help you get the best from your investment. So, if you’re looking to enhance your project management skills and ensure you pass first time, Training ByteSize is a name you can trust.

We thrive on providing a reliable service to customers and we are proud to maintain an exceptional renewal rate with our corporate clients. Perhaps one of the biggest reasons for this success is our bespoke approach; we provide the training in the exact way you want it, whether that is on-site, online, virtual, classroom based or a combination of these.

As a family-run business we’re small enough to care, but big enough to support clients from start to finish in the way they would like to learn.

Our ability to adapt to the changing environment of learning and training ensures we remain at the forefront of the industry, which is why we continue to be first choice for many blue-chip clients. When you train with us, you’ll know straight away that you’ve made the right choice.

So, when people ask what’s the difference between us and our competitors, its quite simply us.

Study your CP3P certification with us

Achieving the APMG CP3P certification will give you the knowledge and skills to speak the common international language used to deliver PPP’s. Being a formal certification it will also bring international credibility to your career. This qualification will ensure you understand the roles, processes and sequence in which tasks need to be completed in a public-private partnership.

At Training ByteSize, we offer three levels of accreditation for PPP Professionals. Our Certified PPP Professional (CP3P) Level 1 Foundation course will give you an introduction to Public-Private Partnerships and explain the core terminology, processes and systems you’ll need to know.

The Certified PPP Professional (CP3P) Level 2 Preparation Course is provided at an Intermediate level. So, it’s ideal for those who have a basic understanding of Public-Private Partnerships but want to expand on their practical knowledge and application of skills. The course will enable you to demonstrate an understanding of how to apply and tailor the established procedures, roles and institutional responsibilities that determine how the government selects, implements and manages PPP projects, as outlined in the PPP Guide.

Finally, the Certified PPP Professional (CP3P) Level 3 Execution Course is aimed at individuals involved in the structuring and tendering of PPP projects and the management of PPP contracts, mostly public sector officials, practitioners and their advisors or consultants.

To learn more about becoming a certified PPP Professional as well as the variety of course options we provide, you can email our expert team; we are on-hand to talk you through the most suitable course for you and your career aspirations.

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