Leveraging Private Capital for Infrastructure Renewal (2019) / Chapter Skim
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Pages 26-35
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From page 26... ...
26 C H A P T E R 4 There are many considerations for public sponsors to address when they use an alternative procurement model such as P3s to deliver infrastructure projects, including several pertaining to the use of private equity in a project's capital structure. In this chapter, several of these considerations are addressed, and lessons from U.S.
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Considerations for Using Private Equity in Public–Private Partnerships 27 These incentives are manifest in projects in several ways. The first, and perhaps simplest, is in the pricing decisions of revenue risk projects.
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28 Leveraging Private Capital for Infrastructure Renewal slow down the process once the private companies actually submit the bids. The review period before accepting bids for a P3 involving leasing of existing assets such as this could be up to 60 days and should include an independent analysis of the costs and benefits of leasing the asset, hearings to get the opinions from outside experts and the public, and debate (by the council or relevant committee)
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Considerations for Using Private Equity in Public–Private Partnerships 29 • Ensure a smooth transition of the asset to the concessionaire (i.e., not increasing tolls straight away and ensuring that efficient service is maintained through change of management)
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30 Leveraging Private Capital for Infrastructure Renewal perception of high returns by infrastructure equity investors following secondary sales of their interests in project companies or debt refinancing (NAO 2012)
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Considerations for Using Private Equity in Public–Private Partnerships 31 These studies of equity returns in the PFI area highlight many issues that reduce competition and drive up the risks of infrastructure procurement. They also show (and were motivated by)
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32 Leveraging Private Capital for Infrastructure Renewal Under traditional public procurement, in which construction firms compete to submit lowcost bids for public works projects, companies also earn a profit, as do other consultants and design firms that compete in the industry. Even when those companies are public, however, profits are only reported in aggregate, and there is little public interest in or ability to determine how much contractors profit from traditional procurement.
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Considerations for Using Private Equity in Public–Private Partnerships 33 profit is measured or limited in some way. Metrics based on project revenues compared to a baseline forecast avoid many of these issues.
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34 Leveraging Private Capital for Infrastructure Renewal used to protect taxpayers' interests in a proposed change in ownership of the project company before the P3 agreement ends. Transaction approval requirements for P3 projects vary widely within the United States and abroad.
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Considerations for Using Private Equity in Public–Private Partnerships 35 lower market interest rates generally. First, the project's actual cash flows may be different during operations than originally forecast.
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