Risk Management in Transport PPP Projects
In the Islamic Countries
36
technical skills. Among these, the following ones should be singled out: a sound understanding
of the needs of the transport sector, expertise in economic and financial appraisal of projects
and PPPs and in structuring privately-financed infrastructure project contracts, as well as
expertise in procurement and contract management and in dealing with the private sector. A
systematic program to improve internal capacity through training and dissemination is
instrumental to this end, complemented by a with periodic monitoring of the alignment to state-
of-the-art methodologies.
Investment attraction
In a PPP, the private partner is responsible for providing funds contributing to the development
of the infrastructure. The public authority commonly provides part of the funds (through public
grant financing) if the PPP is a co-financed project, or it can act as co-lender or equity partner.
The private actor entrusted through a PPP contract with the development and operation of a
public asset in the transport sector usually creates a so-called Special-Purpose Vehicle (SPV), i.e.
a company delivering the project and assuming all related rights and obligations. Based on the
scale of the investment and the cost-efficiency of debt, the sponsors use debt to leverage the
investment (APMG, 2016).
Debt finance is frequently provided through project finance, i.e. a financing technique in which
lenders are paid only from the revenues of the SPV without resorting to equity investors. The
project financing will thus be a combination of debt provided lending agents (e.g. commercial
banks) and equity provided by the shareholders of the project company, i.e. the successful
bidding consortium.
In this regard, investment attraction lies at the core of a PPP policy for transport infrastructures.
Multilateral development banks (MDBs) such as the World Bank Group, the Asian
Development Bank, the African Bank for Development and the Islamic Development Bank have
a key role in supporting the growth of PPPs in order to attract private funding. In particular,
MDBs have various instruments to support the creation of a favorable environment for the
implementation of PPP projects, covering a wide spectrum of activities (including horizontal
support to the creation of PPP units and the implementation of legislative reforms, support for
the preparation of documentation in individual PPPs, provision of transaction advisory
services). As concerns financing, the primary role of MDBs lies in their lending function (usually
through long-term loans). In addition, an MDB may provide guarantee facilities against political
risks. Significantly, however, MDB also catalyze private investment and boost private
participation in infrastructure projects. Private investors perceive MDB participation as a
protection assurance, which leads to considerable risk reduction and credit enhancement.
Financing infrastructures involves a wide array of risks, the severity of which varies depending
on specific project conditions. At the investment attraction stage, risks relating to the capacity
of the public counterpart to meet its obligations need to be considered. In developing contexts,
investors often consider public authorities as risky borrowers. So-called sovereign risk refers
in particular to the capacity and willingness of a government to service its debt in accordance
with stipulated agreements. Ultimately, a higher risk category rating might translate into a
higher interest rate, which reduces the financial viability of PPPs. Therefore, sovereign risk
mitigation is often needed and, to this end, governments can issue state guarantees, i.e. legally