A «risk premium»
As we now all understand, the transfer of part of the risks of a project from the state to the private sector is one of the essential differences between budget financing and public-private partnerships. The private investor takes into account these risks transferred to him in the expected profitability of the project.
And the project is long, 25-30 years.
Insurance, taxes, etc.
One of the problems associated with long-term PPP contracts is the need to coordinate the cost of the private partner, far into the future, for 30 years in advance.
The lenders (banks and financial institutions) want to be sure that the state’s payments to the private partner over the life of the contract will be sufficient so that they get their money back, with interest.
Incidentally, this is where a kind of «conflict of interest» lies, when documents on the private initiative of a PPP project are prepared by the bank together with the private partner.
Given in some cases the low qualifications of public servants, and plus the inability of the state in the short term to hire qualified consultants to help them «tweak» such documents, the bank and the private partner seek to lay the mechanisms that would protect them in the future.
And it turns out that as part of the costs of the private partner proposed to be paid from the budget for many years, there are increased costs, premiums «for risk.
An example is a 20 percent premium on the market price of the cost of insuring a facility during the construction phase and during the operational phase
Or let’s take another of the common options:
The sponsor of a PPP project (sometimes referred to as an investor, which is not always correct) can provide financing either by purchasing shares/contributing funds to share capital or by providing a so-called equity loan.
The tax consequences will be different.
And be sure, even if the sponsor/investor initially showed in the financial model the most costly way of raising funds for him in terms of taxes, he, at the first opportunity will optimize his actions in order to pay less taxes.
But here’s the question: should the state partner «monitor» such a situation and offer to «share» the revenues received?
Let’s talk about this separately…
Games with the discount rate
Any new investment project, which is a PPP project by definition, has not only large-scale capital expenditures, but also various other costs throughout its life cycle.
Maintaining a PPP facility, in our case a school, a hospital, throughout this time requires significant expenditures. These costs are quite difficult to quantify.
And the financial model, as a calculation tool, should include estimates of all the costs of the life cycle of the project, including financing costs.
A change in the discount rate applied to future costs may also affect whether such a PPP project is viable in principle from a Value for Money (VfM) perspective.
It must be said that there is no exact translation of this term.
You can, of course, stick to the literal translation «cost-effectiveness», «value for money», but in our practice APMG PPP International adheres to the translation as «budget cost efficiency».
When calculating Value for Money it is important that the way of PPP implementation is more profitable than construction for budget funds.
In world practice various methods are used for this kind of calculations. For example, detailed guidance on Public Sector Comparator (PSC) in Great Britain was accompanied by the template files developed in Microsoft Excel for quantitative analysis of «price-quality» criterion.
And the methodological material on public-private partnerships in South Africa includes a detailed description of the calculation and application of the Public Sector Comparator in assessing the feasibility of a project.
If you are interested in this never-ending topic, you can download and watch presentations from, for example, the VfM Roundtable held in 2013.
Let’s return to the discount rate…
And here is where the Uzbek government has a choice as to how to calculate this discount rate (and this is just a fraction of the many options):
At the cost of government loans, as they say, «as of today»? Let me remind you that Uzbekistan placed two debut issues of U.S. dollar-denominated Eurobonds on the London Stock Exchange in February 2019, with a combined
$1 billion and the yield on the $500 million issue maturing in 2024 was 4.75% and the yield on bonds maturing in 2029 was 5.37%, or
By «tying» the discount rate to the actual value of government bonds to be placed in the future, as Germany and the U.S. are doing?
ignore the cost of government borrowing altogether, based on some methodology…
Surprisingly, there is no uniform approach to determining the discount rate of the public sector.
And from that