Funding for Projects

Faizal Deriwala
Project Manager, Electronic Highway Gantry Signs (EHGS)

The best place to position the

company within a Public-Private
Partnership scheme
Introduction
This paper examines the potential for a Public-Private Partnership (PPP) scheme for a new highway.
A local company, Electronic Highway Gantry Signs (EHGS), have been invited to join a tendering
promoter of the Special Project Vehicle (SPV) consortium. A theoretical assessment is carried out
considering whether to join the SPV or to remain independent and tender for the work as an external
secondary contractor. EHGS is considered a small company, therefore the major risks in making this
choice need identifying. How the risks will change if the bid is successful, either as part of the
promoter or as a secondary contract, also need to be recognised. The risks are considered in the
context of the short and long term financial implications of the options. The consequential effect of
these risks on cash flow, investment, exposure and business continuity is examined.
Upon considering the application of PPP, the roles of the company under each option are briefly
discussed. This allows for a better understanding of the risks and allows for a comparative analysis.
Finally the critical discussion section analyses the viewpoint of both options and identifies the best
position for EHGS to take up in the PPP structure.

Background
PPP is one of several means for procuring infrastructure. PPP is considered as the common ground
between traditional public procurement projects and full privatisation (Grimsey and Lewis 2005). It is a
proven approach within the UK with the market reaching a good level of maturity (Davies and Eustice
2005).
PPP is used when facing constraints in public resources and fiscal space (WBG 2011). The private
sector underwrites substantial funding mitigating the reliance on public money (Berger and Udell
1998). In many cases the inauguration of the project depends on the intervention of the private sector
due to the lack of public funding or the funding being engaged in other priorities (Muranyi 1996;
Boeing Singh and Kalidindi 2006)
Zitron (2004) states that PPP are quality based contracts. Therefore, the premise on which PPP
procurement is based on is attaining value for money. This is done under the notion of the private
sector providing its expertise, skills and knowledge; contributing to the public sectors proficiency in

Funding for Projects

University of Leeds

responsibility and accountability to create a successful partnership. There are number of different
variations of procurement methods which fall under PPP (e.g. PFI). Evenhuis and Vickerman (2010)
state that the main differences between these PPP contracts depends on the scope of tasks, transfer
of assets and the revenue generation agreed in the concession agreement.
There are three main forms of PPP in transport (Smith 2013): (i) The project costs are remunerated
through service charges paid for by the public sector. (ii) A joint venture is created between the public
and private sectors, the public sector contributes towards the project and the overall control lies with
the private sector. (iii) The project is financially free standing where the cost of the project is entirely
recovered through charges to the user.

SPV and Secondary Contractor

The core arrangement in a PPP is between the public sector principal (i.e. Government) and a SPV
promoter consortium. These two entities agree on a concession agreement; to join the SPV is the one
option for EHGS; another option for EHGS is to work on the project by considering tendering to the
winning promoter (SPV) as a turnkey contractor. Consequently, the position occupied within the PPP
structure will effectively dictate EHGSs role and responsibilities.
As a turnkey contractor EHGS would identify itself as working under traditional contracting terms. The
company will be working in the public sector but under private management techniques which change
the dynamics of the work carried out (Shen et al 2006). Merna and Njiru (2002) highlight the main
requirements of a turnkey contractor: the required performance of facility; performance specification;
standards and conditions; performance guarantees; proven technology which meets the contracted
specifications. The main performance criteria will be outlined by the Principal in the concession
agreement with incentivisation scheme outlined. This criteria will then be passed on contractually by
the SPV to whom the work is given to (sub-contractor). In most cases penalties will be passed on to
the contractor who bares the risk of poor performance. As a sub-contractor EHGSs period of work
would be medium to short term as in compliance to European Union regulations relating to public
sector contracts. The contract would be reviewed/re-tendered every seven and a half years (Bovis
2012).
Taking the SPV approach EHGS would be amongst a collection of companies set up under an
umbrella corporation used in projects which include operating and maintaining (BOOT) the project
over a concession period (Timar 1996). This period is determined by the length of time needed for the
facilitys revenue to be remitted (C McCarthy and L K Tiong 1991). Typically this can last between 2050 years for infrastructure projects (Ortiz and Buxbaum 2008) Merna and Smith (1996) state that
proven technology and historical operational data can be used to determine the operation and
maintenance requirements of the new structure.
In terms of the work required as a manufacturer and operator of highway signs, EHGSs skills and
reputation on a project level is proven. This is reflected by the SPV inviting the company to join the

Funding for Projects

University of Leeds

consortium. The main challenges are on a corporate level; for EGHS to get the business model robust
in order to succeed. This is done through considering the risks involved in selecting the right option,
deciding whether the company sees feasibility in this project and in then judging which position best
coincides with the future goals of EHGS.

Consideration of Options
The terms of the contracts need to be considered on the project to identify if it is feasible for EHGS to
pursue it. The project agreement will specify the details behind the chosen role of EHGSs position in
the PPP project structure. It will cover a number of terms of the concession agreement such as: terms
of contract, length of concession, risk of delay, unitary charges, construction risks, whole life cost risk,
output specification, specific requirements, incentivisation, revenues and payment mechanism being
some terms which would be included in detail (Commission 2006; Carlston 1958; Notteboom 2007).
The purpose is to define specifically the objectives of the project. As the role changes (SPV vs.
Secondary Contractor) the terms change and EHGS has to identify the affordability of the project
which regard to each option. The initial terms would be set out by the Principal and then the project
opened to invite SPV Consortiums to bid. There would be some flexibility into the terms of the
agreement in the final phase of negotiations. These would be contractually binding over the
concession period. EHGS has to consider how negotiable the terms are and the room for
manoeuvrability from the offset before investing resources into the project. If it is considered the bid
should be done as a sub-contractor, EHGS would have less freedom and input into the terms of
its contractual agreement for works would be limited (Li et al. 2004). The majority of the terms would
be dictated by the concession agreement between the principal and promoter. It would be able
to negotiate the financial aspects to an extent but the design specifications would be fixed (Watts et
al. 2000).
The probability of winning, either as part of a promoter bid or a solitary bid from EHGS, should then
be calculated. This is based on a judgement to what extent terms of the project agreement can be
met. The chances of winning the tender depends on the competitive number of bids entered (McAfee
and McMillan 1986). Each bid will be judged on the financial, revenue and technical competencies
and the then those which comply will be allowed to negotiate further.
As a single entity EHGS has more control over the terms of its tender bid and by extension its
competiveness. The SPV is made up of different members who in reality may have varying objectives
these need to be aligned; as for the majority the main objective will be for the for the SPV to be
profitable. Realising this potential the collective collaborations in the SPV team will enhance its
associate firms worth and business reputation and that of its intangible assets. Therefore, as
highlighted by Abdul-Aziz and Jahn Kassim (2011) it is important to select the right partners.
Kumaraswamy and Anvuur (2008) suggest the basic framework in assessing the value of team
members as: past performance; technical ability; sustainability as a business; and general relational
skills. EHGS will contribute to the diversity of the team with its skills as a specialist contractor in
manufacturing and operating the highway signs as well as offering its contemporaries the knowledge,
3

Funding for Projects

University of Leeds

understanding and experience of the local market. Offering these services will be a key appreciation
of the international firms on the SPV team. Creating a strong diverse team will provide a basis for
positive team work. The SPV will look more attractive and a better prospect for the Principal to
commerce with, increasing the probability of winning the tender.
Nevertheless, the ultimate decision of awarding the tender lies beyond the control of EGHS but the
company will take initiative to identify the requirements of the awarding body. In meeting these
requirements, it will allow EGHS (alone or as part of SPV) to put together a more competitive tender.
However, Meaney and Bain (2012) identify in certain cases like the Australian toll roads; concessions
have been put to market to create competition. The principal has done so by focusing on maximising the returns made to public sector. Therefore the concession was won by a promoter
which was willing to take the biggest risk (price infeasibly low) as opposed to the most efficient and
innovative tenders. Zitron (2006) refers to this situation as a winners curse where in these cases
the bids were over optimistic which led to a number of legal disputes. Effectively they are
caused either due to the passing of misinformation (of over ambitious returns) or the tender
being awarded to the wrong party for the wrong reasons (Bain 2013).
The empirical research carried out by Zitron (2006) highlighted that the consensus for which a
minimum ratio of bids (wins to losses) commonly suggested by a sample of companies which partake
in PPP was between 2:1 or 3:1. This was the ratio for which the Company needed to meet in order to
recover the cost of failed tender bids. EHGS will not bid unrealistically in order to protect itself from
over exposure of unnecessary risks. Therefore the probability of winning the tender has to be feasible
for EHGS to invest into the tendering process.
Assuming the probability of winning is practical then the next major consideration of options for EHGS
is to consider the cost of bidding as a small company with finite resources there is little reprieve for
a bad investment.
Considering the short term financial implications of the tender costs of the secondary contractor;
EGHS would bare the full burden of the tender. This may be considered an option which carries
greater risk as an SPV would be equipped to spread the burden across the team members. But the
SPV tender bid will be more complex and incur greater administrative cost - due to the general
nature of PPP contracts. The Government has recognised this and are taking action to reduce the
cost by producing standardised PPP contracts (Zitron 2006). Merna et al (1993) highlight that PPP
contracts are more complex than traditional contracts because of the risk sharing allocation.
Standardisation is difficult on larger infrastructure projects if flow of the market is to remain buoyant
and flexible terms as required. There are common terms within the structured concessions agreement
however, these mainly address the political and legal issues. Nonetheless, EGHS and the SPV team
investing resources into the finer details of the concession agreement will have short term implication but this will be beneficial in the long run as it allows for the greater appreciation and
understanding of risks at each stage and package of the concession.

Funding for Projects

University of Leeds

Furthermore, the company also takes into consideration opportunity costs. As every company has
limited sources of capital the cost of bidding absorbs resources away from other potential opportunities (Hutton and Baltussen 2005). Evenhuis and Vickerman (2010) state once the initial
investment is made the Promoter is in a vulnerable position. It cannot employ other
means of investing in the highway project beyond the scope of the Concession Agreement in order to generate an adequate return but is in a hold-up situation. Therefore, when deciding on which
option to choose other opportunities are also factored into the process. This needs to be considered over the whole contractor agreement (for sub-contractor) which may be easier then to
forecast than the opportunities over the whole, longer concession period (for SPV).
Securing sources of finance is an integral part of a project. Generally an infrastructure project can be
financed by a mixture of governmental grant, bonds or debt. The mixture of the finance is likely to
affect the way in which the governance of the project is structured (Ghnemann et al. 2006).
Considering the general financial structure of PPP schemes to compare EGHSs options is sufficient
as it provides a worst case risk consideration. A secondary contractor receiving a grant to work on the
project is not common as the contractor does not communicate with the public body as it is under the
span of control of the Private Sector Promoter. Therefore, in PPP schemes it is difficult for a
contractor to establish a relationship with the principal body. As a small contractor working on a big
project EGHS is expected to finance the initial investment through some debt. This is the most likely
of sources of borrowing as it is the cheapest capital available to EHGS. The Companys finances are
good and therefore a loan would be approved based on the Companys assets as collateral. Some
debt is acceptable as it is recoverable through tax savings. However, overburdening the Companys
resources may put some doubt in the firms financial integrity in future. Therefore, EHGS considers the
risk of failure to deliver (see below) in order to identify the contingency for servicing the debt and other
penalties applied by the Promoter.
With regards to borrowing as part of the SPV, EHGSs assets are protected from the claim of the
lenders. This is because the members of the SPV have limited liability and their company assets are
segregated from that of the SPV. An SPV borrows from lenders on a limited or non- recourse basis.
As the SPV has no real assets the lenders guarantee comes from the highways potential to
generate revenue (Iyer and Sagheer 2009). However, this does not mean that EHGS is completely
free of risk as part of an SPV. This is due to the fact the whole project is not financed through
debt but also through equity and bonds, the latter being less common in a recessive economy
due to fluctuation and decline of the market and the collapse of monocline insurers (Vaughan
2013). The lenders will want the SPV to show faith in the project by placing equity incentivises
showing the SPV expects to make a return and as debt repayments have seniority over equity dividends the lenders will be paid first. In a number of cases the lenders will also place an equity
share in the project if they are confident in its success (Demirag et al. 2011). The equity generally
depends on the financial strength of the project. This varies on each highway project, for example
the Dartford crossing, due to the confidence of the lenders only pin-point equity was required
(Telliford 2009). This is uncommon for road projects due to the large number of risks associated with
revenue generation.
5

Funding for Projects

University of Leeds

The Beiras Litoral and Alta Shadow Toll Road in Portugal for example; a project which cost excess of
one billion Euros, was a project with a concession agreement of an equity requirement of 8.9%
(around one hundred million Euros) the SPV team members made up of a diverse selection of
institutions (i.e. banks, financial investor, bonds, contractors) had to put a different share of
equity down but each construction firm was required to invest 3.3% of the overall equity (0.0029%
of overall project) which amounted to three million Euros each (Pereira and Andraz 2012). This
would be a large investment for a small firm the size of EHGS. The equity set down was fairly high for
a project based on shadow tolling. But as

Leviakangas (2007) identifies shadow tolls may not

always be de-risked projects. This was an example of a large bundled project of a whole network
of roads and therefore the cost of the project was high. Considering the proposed highway
EHGS takes into consideration the short term and long term implications of the equity investment,whether the Company has the capability to invest this amount and how does it affect the
long term continuity of the firm. Furthermore Demirag et al. (2011)
firms

states

that

investment

do not only consider the financial characteristics but would consider a number of non-

financial criteria such as: reputation/track record; knowledge of the market; relationship with
the principal; risk transfer to and quality of sub-contractors; availability of insurance for nontransferable risks; extent of standardisation in the contract; and compensation on termination. It
is apparent that these criteria are relative to the project agreement and to skill level of the SPV
team. As with the financial characteristics of the SPV the non-financial criteria is also easier to accomplish as part of a successful and diverse team.
Revenue generation is a vital factor in making the choice of options. A robust means of paying
EHGSs debt is required to reduce the risk of extensive interest payments and to ensure the company
of its long term future. The means of which the capital would be generated varies for both of the
options. As a secondary contractor EHGS would be paid an amount for the construction of the signs
and then a contract may be agreed for maintenance and operation of these sign over a fixed term
this would be negotiated over seven and half year intervals. As part of the SPV, EHGS would be
remunerated differently: (i) Money made available for manufacturing and operating costs with a
possible service fee; (ii) equity dividends. The service charges may be expected to be abridged or
waived as EHGS would be taking from its own pockets so the work would be carried out at a
discounted rate. The equity gains would only be paid if the revenue generated services the debt
instalments; the bonds; or other financial hybrid packages. The source of income of a PPP built
highway is through tolls, this may be direct through the traffic users or via tax payers money
through shadow tolling. Shadow toll rates rely on the SPVs guarantee that the road remains open
and under the specification identified in the Concession Agreement or penalties will be applied where
applicable (Gronau 1999; Baldwin and Baldwin 2004; Evenhuis and Vickerman 2010). Therefore the
revenue generation on the project for an SPV greatly depends on the traffic flow of the highway.
Traffic forecast are an integral part of a highway project. Sharp et al (1986) state that in the UK a toll
road must justify charging the public by providing exceptional benefits which would provide the users
with reason for willingness to pay. Haley (1992) highlights the first financial challenge is to structure a
corporate entity which will represents an acceptable credit risk. Effectively this means to justify the
6

Funding for Projects

University of Leeds

need for building a new highway which is done through high traffic forecasting. As the project is
established by the Public Sector this indicates that there is a need to relieve the traffic flow in the area.
The major risk in a highway project is when the revenue generation does not meet the forecast.

Risk Change Considerations

When the project bid is accepted and the EHGS is on the Concession Team or a sub-contract is
successful there are still a number of risks the Company needs to consider along with the risks of
making the choice.
Standard and Poors research into traffic forecast inaccuracies showed that of a sample of 87 toll road
cases the traffic forecasts were between 20% 25% of the actual flow (Bain 2013). This compared to
Flyvbjerg et al. (2005) research for toll-free forecasts (sample size of 187) which showed no
systematic bias (mean lies at or near unity). This highlights that overly optimistic prediction of future traffic flow is a common occurrence in toll (free and paid) road construction.

Bain (2009)

states that optimism may be created to make the need to construct a new highway seem more attractive. Having higher traffic forecasts allows the public sector to justify the project as well as create a competitive tendering by highlighting the revenue generation of the project. However, it
may be down to the unpredictability of the traffic in an area and the difficulty in gaining a reliable analysis of consumers willingness to pay over the whole concession period. There are a
number of factors such as: economical, network changes, degradation of road, change in
public

perception

or

environmental changes. The effects on the willingness to pay and to

forecast traffic correctly based on historical data is a difficult proposition. Underwhelming traffic
figures leads to the revenue generated by the project being insufficient to mitigate the costs
of the project and pose a big risk to the business model.
The PPIAF (2009) state that many toll contracts are created on the basis that the concessionaire
carry the majority of these risks (excluding the risks which are created through changing the terms of
the concession). On the other hand, Jin and Zhang (2011) provides a differing insight by
demonstrating that the best party needs to bear the risk and this may not always be the private sector.
As not all risks can be anticipated, mitigation measures should be afforded by the public sector. In a
number of cases where the business model of a PPP has failed this has been the outcome. In the UK
the most famous example was of the Channel Tunnel rail link which did not meet consumer usage
and needed to bailed out, and the project continues to lose money. The Hungarian M1 road from
Budapest to Vienna was an infrastructure success as it provided a transport means from Hungary to
mainland Europe but the traffic forecast was incorrect, as it did not take into consideration the
dynamic economical; social environment; and foreign changes (Timar 1996). Depending on the
outlook the project may be considered a success or failure but from a private investors perspective
the project was not profitable. EHGS has to consider the social and financial effects of forecasting.
Van Der Geest and Nunez-Ferrer (2011) state that often when the pricing data or forecasts have
proven to be inaccurate, additional compensatory payments such as shadow pricing of tolls is used.
Additionally Merna (2013) states that there should be a mitigation process in place and this is done by
7

Funding for Projects

University of Leeds

having flexibility of the terms in the concession agreement. It is not in the concern of any party for
wanting the project to fail. Considering this and allowing flexibility in the concession agreement
mitigates the concern.
The project agreement was the first consideration for the EHGS to take into account when choosing
an option. Changes to this agreement pose a big risk for EHGS. If the changes are due to public
sector then it will bare risk and remuneration. But other risks will be on the responsibility of the SPV
and contractor which pose questions of the financial stability of the firm. The overall risk will be down
to the SPV as it will be accountable for the penalties incurred. These risks include Force Majeure and
economic changes and therefore a flexible concession contract is required for the SPV to mitigate the
problem (Bain 2013). However, it is worth noting a secondary contractor some of this flexibility may not
be transferred and this is a risk which the sub-contractor faces.
Legislative changes are common due to the number of governmental changes over a concession
period. As a sub-contractor there will little tolerances and EHGS would be required to make changes
due to the short nature of the contract. This applies to legislation and changes to public procurement
methods, as the contract is retendered or reviewed every seven and half years the company may lose
the contract. But as part of a SPV during the PPP contract the public sector will bare the risk of
outlining the planning permission and the discriminatory regulation risk due to the new legislation
effectively waiving these penalties (Vaughan 2013).
Jin (2009) states that the common perception with regards to PPP is to transfer all the risk to the
private sector (mainly the Promoter). This occurs when the risk is allocated to a party less able to
refuse it; in situations where the Public Body has created a maximum competitive tension for the
tender. This creates a hazardous situation and set-ups a contractual imbalance creating over
exposure of project risks. It is the duty of both sectors to ensure that risk should be allocated to the
party which is best equipped to handle it. This makes the project structure more efficient and the risk
management more cost effective. (Hayford and Partner 2006). Therefore, to protect each member of
the SPV from over exposure to risk, considerations should be taken into the consequences of the
organisation being ill-equipped to handle it. Vaughan (2013) states that the risks that should be
shared between the private and public sector are those which carry uncertainties - difficult to
identify but can be managed. These include: (i) Volume risks (traffic forecasts); (ii) inflation risks; (iii)
general regulatory risks; (iv) force majure.
Even though the structure of a PPP may be considered risk-averse it may have indirect financial
implications. The continuity of the business may not be beset but the media and reputation of the
company may be impaired. Media and public perception are important as the revenue generation for
SPV is consumer-led (Nevin and Abbie 1993). In a number of situations the public have perceived the
SPV to be foreign company taking benefits over local routes and exploiting the locals (Imamura 2002;
Levy 2008). However, this would be mitigated through proper public relations and EHGS being a
example of locals benefiting from the investment. The impacts of the two options are a summarised
in Table 1 and Table 2 summarises the impacts considered for risk change.
8

Funding for Projects

Cash Flow
Decision
Risks:
Project terms
(agreement)

Greater profit
margins]

Special Project Vehicle

Investment
Exposure/
Opportunity
Reputation

Cost of
bidding
Sources of
finance

More attractive
proposition.
Less
competition
ST: initial cost
spread across
the SPV
members
Non- recourse
debt
ST: Equity
payment
required
Depends on
revenue stream

Equity

LT: Equity
dividend paid

Revenue
generation

Depends on
Traffic Forecast
ST: Services
paid on work

Cash Flow

Low risk of failure

to company as
assets are
separate to SPV
entity.
-

Less
profitability
than SPV

Limited change

Positive
exposure
No as big as
SPV team

More control

Limited
exposure

Opportunity
costs

Debt finance
through collateral
loan which affects
company future.

LT: Future
partnerships with
multi-nationals

Working with
international
firms. Enhances
EHGS brand

LT: Revenue
stream and growth
potential

Increases due to
intangible assets
of SPV team

Resource intensive
Complex

Limited

Limited

Full burden

Successful
payment of debt
improves credit
rating of company.
Establish trust with
lenders
ST: Limit
diversification as
finance will be
reduced
LT: Profitability
Equity losses may
be great
More capital
Greater income

Indication of
financial strength

Risk averse

ST: Less capital intensive

Shared profits

Probability of
winning

Secondary Contractor
Investment
Exposure/
Opportunity
Reputation

Business
Continuity

ST/LT: Debt repayments

Loss of equity

ST: No equity required

Improve value of
company

Depends on
Equity amount
and
Risk of losing
equity
Long term income

Fixed cash
flow

Shared profits

( LT = Long term, ST = Short Term, Negative, Positive, )

Business
Continuity

EGHS is skilled at
traditional
contracting terms.
The probability of
failure is low
-

LT: No profit from project success

Retendering of
contracts (7.5
years)

Funding for Projects

Cash Flow
Risk
changes:
Traffic
forecast

Project
risks
(change)

Force
majeure

University of Leeds
Special Project Vehicle
Investment
Exposure/
Opportunity
Reputation

Large effects on
Revenue
generation and
Debt repayments

Dispute
No agreement
between
different party
traffic data

Cost
implications?

Dispute
Who takes risk?

Uncertainties

Business
Continuity

Could cause SPV to

be liquidated.
No direct impact on
EHGS continuity.
Could make
company significant
profits ( refinance
debt savings)
Could cause SPV to
be liquidated. Break
down of project

Negative impact

Risk premium
Compensation
Remuneration

Arbitration

Leave project

Loss of equity and

bonuses
Business safe from
liquidation
Liquidation of SPV

Shared
responsibilities

Risk of
project
failure

Loss of revenues
Penalties

Damage to
reputation and
brand

Economic
changes

Uncertainties in
debt repayment
of loans
Reduced Equity

Retrenchment

Public sector
help
Negativity (bail
out )

Legislative
change

Public sector help

to waive
regulations
Planning
permissions
Affects to traffic
flows ( revenue
generation)

Build Corporate
Social
Responsibility

EGHS is a local
firm to establish
itself national
market

Low willingness
to pay
SPV considered
Foreign

Good press (public

relations)

Media and
public
perception

( LT = Long term, ST = Short Term, Negative, Positive, )

Safety of EHGH
assests

Cash Flow

Secondary Contractor
Investment
Exposure/
Opportunity Reputation

Business
Continuity

Limited or no repercussions

Remunerated by Public sector or promoter (not a risk contractors carry)

ST: Renegotiate
contract
LT: Leave
project
(compensation
agreements)
Loan
repayments +
penalties

Loss of
opportunity

ST: Negative
impact

LT: leave project to

consolidate losses
for future
sustainability

Retrenchment

Damage to
reputation and
brand

Possible
liquidation

Short term
contract (
LT: Affects the
inflation rates of
debt.
Limited help
from public
sector

Unknown

Required
compliance

Creates
uncertainties.

Legal action

Change in
procurement
methods and
Corporate Social
Responsibilities

Limited

10

Funding for Projects

Critical Discussion
It is critical for EHGS to consider the concession terms before entering into contractual obligations. As
highlighted, being a part of an SPV the company would have some participation in agreeing these
terms. As a secondary contractor it would be more in abiding to these terms agreed by the promoter
and principal. There is less freedom for sub-contractor who must work to the terms outlined in the
contract. Whereas the SPV has some suppleness which allows for the companies to be innovative; as
it is at its own risk. If the highway does not meet specifications then the public body is within its rights
to penalise the SPV. On the other hand, there is an opportunity for the companies involved to enhance
their reputation in ways which a limited in traditional contracting.
The risk of changes to the project agreement would have less of an impact on the contractor than the
SPV due to the length of contract and the risk transferred by principal to the promoter SPV. But an
effective and flexible contract allows for the stakeholders to effectively manage these risks.
The probability of winning the tender bid in either scenario was considered previously. As part of the
SPV it was identified that there were a number of considerations but as a prospect it was better for
EHGS as it would enhance the business rating of the company - as it would be amongst reputable partners. Competing as a secondary contractor would reduce the probability of winning
work compared to the SPV as the market is more competitive and it may force EHGS to lower
its profit margins in order to have a winning bid. Another consideration for bidding as a secondary contractor may be whether the winning promoter has a competing highway signs company as
part of its team. This would almost make the chances of winning improbable.
The cost of bidding for each option was discussed. It was identified that the secondary contractor bid
would be cheaper option and was a simpler contract to deal with. It is something similar to traditional
procurement methods which EHGS has substantial experience. Whereas, the SPV would be bidding
for the concession agreement; which is complex; has greater administrative duty; and higher costs
than traditional contracting. However, it was identified that there is a partial standardisation of the
contracts and the other packages were worth investing into for rigorous risk identification.
Furthermore, the overall cost of bidding would not be burdened upon a single company but spread
across the whole project vehicle.
The sources of finances identified highlighted that SPV debt it on non-recourse lending and the
subcontractor debt on collateral lending. The latter may be risk capital but EHGS would have to place
equity as part of an SPV which is most expensive capital. As a sub-contractor EHGS may be required
to carry some risk and pay equity in some cases. But EHGSs role as a second contractor is
considered an option was as a turnkey contractor where it is isolated from the core terms of the
concession agreement. As part of the Promoter, equity would be required but the short term
investment could give EHGS a long term return. A PPP agreement gives EHGS an opportunity to
compete in market where individually would be beyond its capabilities. Furthermore it provides
opportunity for growth and commerce with some of the partners in future. Successfully creating

Funding for Projects

University of Leeds

relationships allows opportunity for the company to grow and establish a reputation for possessing
effective partnering conduct.
It is evident that there is more risk for EHGS to tender as part of the SPV then as a secondary
contractor. But as is the premise of PPP risk is rewarded with greater premiums and opportunity.
EHGS is a ambitious company looking to expand and grow and being a part of a SPV with other
prestigious companies provides EHGS an opportunity to meet its ambitions. If the project is a success
then this provides a sustainable future for EHGS. It allows the company to be competitive in a
market that it would not be able to if it remained in stagnation. Therefore, EHGS has taken a decision
to enter the SPV team and bid on the PPP scheme as a promoter.

Conclusion
It was outlined that EHGS had two options which it was taking into consideration: whether to accept
the invitation as part of an SPV or to bid for a project work as a secondary contractor. The purpose of
the paper was to consider the options, critically discuss them and chose a solution which was done
successfully.
This paper identifies the major risks that would be faced by EHGS, in both options in the context of
the short and long term financial implications and the consequent effects on cash flow, investment,
exposure and business continuity. These were summarised into a Table 1 and Table 2. The major
concerns were identified with the uncertainties behind forecasting. This has an effect on the confidence in the projects revenue generation, by extension the confidence of lenders and amount
they are willing to cover through debt and at what rate. Higher the debt-equity ratio the more
risk free the project is considered, consequently cheaper the cost of borrowing for the SPV and
EHGS. The experiences of previous projects has taught PPP highway sector on mitigating the long
term risk by not inflating the traffic forecasts in the short term. A good method to mitigate
that is for an independent party to be given all the condensed data and to carry out its own analysis
to gain a more realistic forecast. Then mitigation measure included in the concession agreement is
there to build trust amongst the private and public sector.
The option of tendering as a secondary contractor was treated as being segregated from the principal
and was not considered being of direct benefit from the nature of a PPP scheme. Under this
assumption the option of secondary contractor could be treated as a turn-key contractor. In reality the
role of contractor can vary significantly and the two options overlap. In this circumstance there are
further considerations beyond the scope of this paper. But the two opposing options were considered
to give a better understanding of the effects of a

PPP scheme on EHGS. This allowed EHGS to

distinguish the risks associated with each option.

Risk identification and management is extensive but is a rewarding process. Before continuing on
in processing the tender further study into the risks of the decision to join the SPV is required. There
are a number of techniques tested by academics implemented in PPP procurement. Further studies
12

Funding for Projects

University of Leeds

such as Jin and Zhang (2011) application of Artificial Neural Network (ANN) technique for modelling the risk allocation in the decision-making process provides a useful tool and is a good
basis for further evaluation. There are a number similar of tools available and the main benefit of
this method is the consideration given to extensively find all the direct and indirect risks associated
with the project over its whole life cycle. A robust risk management system allows the successful
party to deal with the risk, making it efficient and cost effective. Aligning that with a concession contract which can flexibly accommodate for unforeseen risks and allows amendments for
risk changes then EHGS has the potential to be greatly successful in this PPP scheme.

Acknowledgements
The author wishes to thank Rob Bain and Tony Merna for their advice on the problems at hand. To
Nigel Smith for sacrificing his time to offer support and guidance into the right direction of study.
Finally to colleges and peers at University of Leeds for their moral support and help through during
the period of study.
[Taken from a Funding for Projects Module Report as submitted in partial fulfilment of
the requirements for the degree of MEng in Civil and Structural Engineering, University of Leeds By:
Faizal Deriwala]

13

Funding for Projects

University of Leeds

References
ABDUL-AZIZ, A.-R. and P. JAHN KASSIM. 2011. Objectives, success and failure factors of housing
publicprivate partnerships in Malaysia. Habitat International, 35(1), pp.150-157.
BAIN, R. 2009. Error and optimism bias in toll road traffic forecasts. Transportation, 36(5), pp.469-482.
BAIN, R. 2013. Toll Roads: Big Trouble Down Under. Infrastructure Journal, (Supporting Infastructure
Investment ).
BALDWIN, P. and R. BALDWIN. 2004. The Motorway Achievement. Thomas Telford.
BERGER, A. N. and G. F. UDELL. 1998. The economics of small business finance: The roles of
private equity and debt markets in the financial growth cycle. Journal of Banking & Finance,
22(68), pp.613-673.
BOEING SINGH, L. and S. N. KALIDINDI. 2006. Traffic revenue risk management through Annuity
Model of PPP road projects in India. International Journal of Project Management, 24(7),
pp.605-613.
BOVIS, C. 2012. EU public procurement law. Edward Elgar Pub.
C MCCARTHY, S. and R. L K TIONG. 1991. Financial and contractual aspects of build-operatetransfer projects. International Journal of Project Management, 9(4), pp.222-227.
CARLSTON, K. S. 1958. Concession Agreements and Nationalization. American Journal of
International Law, pp.260-279.
COMMISSION, P. 2006. Model Concession Agreement for PPP in HighwaysOverview of the
Framework. Planning Commission, Government of India, New Delhi.
DAVIES, P. and K. EUSTICE. 2005. Delivering the PPP promise: A review of PPP issues and activity.
Amsterdam: PriceWaterhouseCoopers. Retrieved February, 10, p2008.
DEMIRAG, I. et al. 2011. Risks and the financing of PPP: Perspectives from the financiers. The
British Accounting Review, 43(4), pp.294-310.
EVENHUIS, E. and R. VICKERMAN. 2010. Transport pricing and Public-Private Partnerships in
theory: Issues and Suggestions. Research in Transportation Economics, 30(1), pp.6-14.
FLYVBJERG, B., M. K. SKAMRIS HOLM and S. L. BUHL. 2005. How (In)accurate Are Demand
Forecasts in Public Works Projects?: The Case of Transportation. Journal of the American
Planning Association, 71(2), pp.131-146.
GRIMSEY, D. and M. K. LEWIS. 2005. Are Public Private Partnerships value for money?: Evaluating
alternative approaches and comparing academic and practitioner views. Accounting Forum,
29(4), pp.345-378.
GRONAU, R. 1999. The Economics of a Single Toll Road in a Toll-Free Environment. Journal of
Transport Economics and Policy, 33(2), pp.163-172.
GHNEMANN, A. et al. 2006. Transport Infrastructure Funding Systemsa Review of European
Experience.
HALEY, G. 1992. Private finance for transportation and infrastructure projects: a view. International
Journal of Project Management, 10(2), pp.63-68.
HAYFORD, O. and C. U. PARTNER. 2006. Successfully allocating risk and negotiating a PPP
Contract. Proceedings of 6th Annual National Public Private Partnerships Summit: Which
Way Now for Australia's PPP Market, pp.16-17.
HUTTON, G. and R. BALTUSSEN. 2005. Cost valuation in resource-poor settings. Health Policy and
Planning, 20(4), pp.252-259.
IMAMURA, T. 2002. Private sector's roles in application of private finance initiative to highway
development in Japan. thesis, Massachusetts Institute of Technology.
IYER, K. and M. SAGHEER. 2009. Hierarchical structuring of PPP risks using interpretative structural
modeling. Journal of construction engineering and management, 136(2), pp.151-159.
JIN, X.-H. 2009. Determinants of efficient risk allocation in privately financed public infrastructure
projects in Australia. Journal of construction engineering and management, 136(2), pp.138150.
JIN, X.-H. and G. ZHANG. 2011. Modelling optimal risk allocation in PPP projects using artificial
neural networks. International Journal of Project Management, 29(5), pp.591-603.
KUMARASWAMY, M. M. and A. M. ANVUUR. 2008. Selecting sustainable teams for PPP projects.
Building and Environment, 43(6), pp.999-1009.
EV
G S, P. 2007. Private finance of transport infrastructure projects. Value and risk analysis
of a Finnish shadow toll road project.
LEVY, S. M. 2008. Public-private partnerships in infrastructure. Leadership and Management in
Engineering, 8, p217.

14

Funding for Projects

University of Leeds

LI, B. et al. 2004. Risk treatment preferences for PPP/PFI construction projects in the UK. In:
Proceedings: ARCOM Conference, Heriot Watt University, pp.1259-1268.
MCAFEE, R. P. and J. MCMILLAN. 1986. Bidding for contracts: a principal-agent analysis. The RAND
Journal of Economics, pp.326-338.
MEANEY, A. and R. BAIN. 2012. Disincentivising Overbidding Toll Road Concessions. Sydney:
Australian Department of Infrastructure and Transport.
MERNA, A. 2013. Techniques of Refinancing and Restructuring In: MM3483 Funding for Projects,
University of Leeds.
MERNA, A., H. PAYNE and N. SMITH. 1993. Benefits of a Structured Concession Agreement for
Build-Own-Operate-Transfer (" BOOT") Projects. International Construction Law Review, 10,
pp.32-32.
MERNA, A. and N. SMITH. 1996. Privately financed concession contract, Vols. 1 and 2. Hong Kong:
Asia Law and Practice, pp.64-78.
MERNA, T. and C. NJIRU. 2002. Financing infrastructure projects. Thomas Telford Services Limited.
MURANYI, M. 1996. BOT in Motorway Development: Hungarian Experience. In: EBRD Conference,
London.
NEVIN, M. and L. ABBIE. 1993. What price roads?: Practical issues in the introduction of road-user
charges in historic cities in the UK. Transport Policy, 1(1), pp.68-73.
NOTTEBOOM, T. 2007. Concession agreements as port governance tools. Devolution, Port
Governance and Port Performance, Research in Transportation Economics, 17, pp.437-456.
ORTIZ, I. N. and J. N. BUXBAUM. 2008. Protecting the public interest in long-term concession
agreements for transportation infrastructure. Public Works Management & Policy, 13(2),
pp.126-137.
PEREIRA, A. and J. ANDRAZ. 2012. On the economic and budgetary effects of investments in
SCUTS: the Portuguese toll-free highways. The Annals of Regional Science, 48(1), pp.321338.
PPIAF. 2009. Case Study: M6 Toll, United Kingdom. Toolkit for Public-Private Partnerships in roads
and highways
https://www.ppiaf.org/sites/ppiaf.org/files/documents/toolkits/highwaystoolkit/6/pdfversion/uk.pdf: Public-Private Infrastructure Advisory Facility.
SHARP, C., K. BUTTON and D. DEADMAN. 1986. The Economics of Tolled Road Crossings. Journal
of Transport Economics and Policy, 20(2), pp.255-274.
SHEN, L.-Y., A. PLATTEN and X. DENG. 2006. Role of public private partnerships to manage risks in
public sector projects in Hong Kong. International Journal of Project Management, 24(7),
pp.587-594.
SMITH, N. J. 2013. LRT/Metro PPP: A Case Study - Funding London Underground Investment
Programme. In: MM3483 Funding for Projects, University of Leeds.
TELLIFORD, G. T. 2009. Public-Private Transportation Partnerships Around the World. Nova
Science Pub Incorporated.
TIMAR, A. 1996. Appraising and Awarding Concessions. In: T. MERNA, ed. Projects Procured by
Privately Financed Concession Contracts Volume 1. Asia.
VAN DER GEEST, W. and J. NUNEZ-FERRER. 2011. Appropriate financial instruments for publicprivate partnership to boost cross-border infrastructural development-EU experience.
VAUGHAN, L. 2013. Investment Risks and Private Fiance. In: MM3483 Funding for Projects,
University of Leeds. Price Waterhouse Cooper
WATTS, M. E. R. et al. 2000. Public private partnerships.
WBG. 2011. Government Objectives: Benefits and Risks of PPPs (World Bank Group) [online].
[Accessed 10/02/2013]. Available from: http://ppp.worldbank.org/public-privatepartnership/overview/ppp-objectives#risks.
ZITRON, J. 2004. PFI/PPP Projects-Are They Working? Major Projects Association www.
majorprojects. org.
ZITRON, J. 2006. Publicprivate partnership projects: Towards a model of contractor bidding
decision-making. Journal of Purchasing and Supply Management, 12(2), pp.53-62.

15