CP3P Project Structuring & Risk Allocation 2 — Questions and Answers
Question 1: In an availability-payment PPP for a hospital, which party typically bears demand (usage) risk?
- The public authority (Correct answer)
- The EPC contractor
- The private partner (SPV)
- The senior lenders
Correct answer: The public authority
Availability payments are made when the asset meets performance standards no matter how much it is used, so the public authority keeps demand risk.
Question 2: How does an SPV usually pass construction cost and schedule risk down to its builder?
- Through a shareholder loan from the sponsors
- Through a fixed-price, date-certain turnkey EPC contract (Correct answer)
- Through a cost-plus construction management contract
- Through a public sector guarantee
Correct answer: Through a fixed-price, date-certain turnkey EPC contract
A fixed-price, date-certain EPC contract passes cost overrun and delay risk from the SPV to the contractor on a back-to-back basis.
Question 3: Which principle best describes good risk allocation in a PPP?
- Split every risk equally between the public and private parties
- Keep all risks with the public sector to keep financing costs low
- Allocate each risk to the party best able to manage it at the lowest cost (Correct answer)
- Transfer as much risk as possible to the private partner
Correct answer: Allocate each risk to the party best able to manage it at the lowest cost
Optimal allocation puts each risk with the party best able to control or absorb it at the lowest cost, which maximizes value for money.
Question 4: What is the main purpose of a direct agreement between the contracting authority and the project lenders?
- To replace the EPC contractor's performance bond
- To set the availability payment mechanism
- To transfer demand risk to the lenders
- To give lenders step-in rights and cure periods before the authority can terminate (Correct answer)
Correct answer: To give lenders step-in rights and cure periods before the authority can terminate
Direct agreements let lenders receive notice of default, cure problems, and step in or substitute the concessionaire to protect their security.
Question 5: Under a typical PPP contract, what does a 'relief event' give the private partner?
- Extra time to perform and protection from termination, but no financial compensation (Correct answer)
- An automatic right to terminate and receive equity compensation
- Full compensation for lost revenue and extra costs
- A permanent increase in the unitary charge
Correct answer: Extra time to perform and protection from termination, but no financial compensation
Relief events protect the contractor from default and termination and give extra time, but the contractor still bears the financial cost.
Question 6: How are prolonged force majeure events usually handled in a PPP contract?
- The public authority pays full compensation including lost equity returns
- Both parties get relief from performance, and either may terminate if the event goes on too long (Correct answer)
- Lenders take over the concession automatically
- The private partner bears all consequences with no relief
Correct answer: Both parties get relief from performance, and either may terminate if the event goes on too long
Force majeure is usually a shared risk: both parties are relieved of their obligations, and a long event gives a termination right with limited compensation.
Question 7: What range of senior debt gearing is typical for a well-structured availability-based PPP?
- 10-30%
- 50-60%
- 70-90% (Correct answer)
- 30-50%
Correct answer: 70-90%
Availability-based PPPs have stable, government-backed revenue, so they can usually support high gearing of about 70-90% senior debt.
