International Construction Law Review
INCREASING THE EFFICIENCY OF RISK ALLOCATION IN PROJECT FINANCED PUBLIC PRIVATE PARTNERSHIP (PPP) TRANSACTIONS BY REDUCING THE IMPACT OF RISK NOISE – Part II
By Jeffrey Delmon1
Infrastructure is key to economic and social development as well as the reduction of poverty and improving human welfare2. The developing world, in particular, is desperate for improved infrastructure to reduce poverty, improve standards of living, promote economic growth and save lives. But fiscal constraints and inefficient management by public utilities of infrastructure stock limits the ability of developing countries to provide the infrastructure services that their economies and citizens so desperately need. The private sector can satisfy some of the needs of these developing countries. One of the key financial instruments available for private capital to address infrastructure needs given fiscal and balance sheet constraints is limited-recourse or “project” financing3.
Privately financed projects can be undertaken directly by private companies with strong balance sheets (through models commonly known as “public private partnerships”, or “PPPs”4), either through self-financing or corporate borrowing. However, these sources of finance can be expensive or otherwise undesirable. The private company is more likely to use project finance techniques. By using such techniques, the investors can reduce substantially both their financial investment (through debt leverage) and exposure to project liability by creating a special purpose vehicle, called the project company, which implements the project. Under project financing, the lenders rely on the cash flow of the project for repayment of the debt
1 The author would like to thank Philip Britton, Professor Phillip Capper, Professor John Uff QC and Professor Ragnar Lofstedt of King’s College, London, Professor Philip Wood of Oxford University, Professor John Perry of the University of Birmingham, Martin Barnes, Niels Kraunsoe, Fred Ottavy, CEO of Inframed Management, Richard Drummond, of the Export Credits Guarantee Department of the UK, Chauncey Starr, of EPRI, Professor Paul Slovic, of the University of Oregon, Professor John Adams, of University College, London and various of my erstwhile colleagues at Allen & Overy, including Steven Blanch, John Scriven, Michael Moore, Roy Freke and Graham Vinter, and current colleagues at the World Bank, including Nikita Yatchenko. Any error or omission in this article is that of the author. The findings, interpretations, and conclusions expressed herein are those of the author and should not be attributed in any manner to the World Bank, its affiliated organisations, or to the members of its Board of Executive Directors or the countries they represent.
2 United Nations Development Program, Starting a Pro-Poor Public Private Partnership for a Basic Urban Service (2014), Deloitte, Closing the Infrastructure Gap: The Role of Public-Private Partnerships (2006), Willoughby (2004), Coudouel A, J Hentschel and Q Wodon (2006) Poverty Measurement and Analysis. http://povlibrary.worldbank.org /files/5467_chap1.pdf.
3 Delmon J (2009) Private Investment in Infrastructure: Project finance, PPP projects and risk (2nd Edition), The Hague, Kluwer International.
4 Delmon J (2010) Public Private Partnership Projects: An essential guide for policy-makers, Cambridge University Press.
Pt 3] Risk Noise
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