Quiz n°1 - Chap5 - Execution

Appraisal provides relevant information and outcomes that feed into Structuring so as to be refined and further developed. Which of the following are true? 1.Appraisal provides definitive scope and preliminary technical design or at least a detailed project outline 2.During appraisal the contract has been preliminary structured including preliminary risk allocation, contract term, revenue regime, payment mechanism, potential co-financing and/or other financial support such as guarantees 3.The procurement strategy is first defined in appraisal including an outline of the tender process

• a. All are true
• b. Only 1 and 2 are true
• c. Both 2 and 3 are true
• d. None of them are true

What is true with respect to “structuring”

• a. There are two main types of structuring: financial and budgetary (or fiscal) and risk structuring
• b. The "structure" will be implanted into a set of documents — the RFP (and potentially the RFQ), and the contract itself
• c. The length of this phase does not depend on the work done in appraisal

Which one does not accurately describe tasks developed in Structuring Phase as described in the Guide?

• a. Establish the project team and finalize the project management plan, Define/confirm the contractual model and contract scope, Finalize due diligence and preparation, Further develop the project definition and technical requirements
• b. Develop and finalize the contract structure regarding financial structure & payment mechanism, Refine the contract structure regarding definitive risk structuring & allocation, Update the financial model & potential confirmation / reassessment of financial assessment matters; and Revisit economic analysis
• c. Test, market/promote and communicate the project; Define and draft other contractual terms and contract provisions; Define qualification (and potentially short listing) criteria & draft RFQ
• d. Define the proposal requirements and evaluation criteria & draft RFP; Draft the contract and package the tender documents; Develop pre-tender interaction; Carry a control check and handle approvals and authorizations; Launch the tender

Which does not include an accurate description of elements of Financial Structuring?

• a. Contract term, co-financing effort by grants, co-financing effort by public loans
• b. Equity provided by government, instruments of credit enhancement
• c. Termination scenarios, indexation of payments or user revenues
• d. Revenue regime definition, Payment mechanism structure

Which is NOT true with respect to term definition?

• a. The term should be long enough to include lifecycle costs but consider the impact of uncertainty (e.g. the risk of needing to upgrade a road)
• b. The term should allow bidders to maximize their gearing (which lowers wacc / increases affordability)
• c. A longer term implies more free cash flow and lower potential viability gap (or higher excess financial value of the project)
• d. Shorter terms are beneficial when users’ affordability is an issue

Government of Ribamontán is considering to develop a new road under a government-pays availability based PPP. Technical analysis and common knowledge talks about the need for at least 20 years of term to capture some of the life cycle risk. Government has some concerns regarding affordability so the longer the term the more affordable will be the Project in terms of yearly expenditure (lower availability payment per year). Lenders are able to provide long term finance up to 25 years and a more sophisticated private financing structure (by means of a miniperm followed by a project bond) could potentially allow for 30 years (however this has not been too much tested yet in the market). Which one provides a sensible decision and explanation?

• a. Contract term should be 30 years as that’s the maximum term for financing considering the different financing options.
• b. Contract term should be 30 years because that represents 5 years over the maximum term for financing available from the bank community so is giving lenders a material cushion, and going longer may imply higher liabilities in Net Present Value terms. If a project bond solution is possible, there could be still a benefit for the public party by means of longer debt term and higher gearing.
• c. Contract term should be 50 years, the maximum term available by the national legislation, because that will allow the procuring authority to enjoy the maximum potential increase affordability
• d. Term should be 25 years because is sufficiently more than the minimum term advised by technical experts and it is the maximum term available from Lenders

What is NOT true with respect to pure co-financing?

• a. Pure co-financing is also referred to as grant financing
• b. Situations in which the government provides pure co-financing generally includes viability gap financing, increasing commercial feasibility, and decreasing affordability
• c. Governments providing pure co-financing should take care to avoid spoiling VfM
• d. Pure co-financing is public financing that the private partner is not required to pay back

What of the following are true with respect to pure co-financing? 1.Direct grants are paid either during construction, or at construction completion or on a yearly deferred basis as fixed payments 2.Grants may also be made by another government (central or regional or local municipal government) 3.In government-pays PPPs, the amount of co-financing is commonly set by the government in the RFP while in user-pays PPPs, the amount of co-financing is usually proposed by the bidder

• a. All of them are true
• b. Only 1 and 2 are true
• c. Only 1 and 3 are true
• d. Only 2 and 3 are true

The government of Ribamontan is analysing a number of options for financial support. Which of the following strategies and assertions look adequate and sensible? NOTE: availability of finance is not a concern in this market 1. Co-finance by means of grant financing during the 3 years of construction, with a 20% of the CapEx amount, so as to decrease the volume of availability payments, provided that government can afford those payments during the years of construction period. This will for sure decrease the NPV of all payments and make the project more affordable. 2. Providing public equity is discarded as it will not help affordability (i.e. will not decrease the wacc of the Project) unless equity IRR for public party is lower, but then would be preferable to provide a soft subordinated loan to diminish risk exposure. Also government is concerned about issues of conflict of interest. 3. Providing a soft loan would be the best solution because the increase in affordability is the same than in the case of grant financing with the advantage of recovering the amount invested

• a. Only 1 and 2 are correct
• b. Only 1 and 3 are correct
• c. Only 2 and 3 are correct
• d. All are correct

Which of the following is true? 1.Excess revenue may be structured as an up front and/or deferred payment to the procuring authority and should not be applied to decrease the tariff/charge to users 2.The viability gap can be filled through pure co-financing, soft loans, or complementary payments 3.The most common form of indexation of tariff is CPI for a specific industry / sector or a polynomic formula, rather than general CPI

• a. Only 1 is true
• b. Only 2 is true
• c. Only 3 is true
• d. All are true