Getting to financial close on PPPs: Aligning transaction advisor payment terms with project success
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Photo: Jakob Montrasio | Flickr Creative Commons
Getting to commercial close on a Public-Private Partnership (PPP) transaction is a major milestone. But the deal is far from done. Getting from commercial close to financial close involves satisfying a long list of PPP contract Conditions Precedent, the terms, and conditions of lenders, among other requirements. The process is tricky and involves a lot of heavy lifting, particularly in emerging markets where the market for PPPs and supporting institutional structures may not yet be robust. None of this is news.
Yet CPCS has experienced this firsthand as transaction advisors advising governments on PPP deals in developing economies.
Herein lies the rub. With limited control over many of the conditions required to reach financial close and their timing, transaction advisors can quickly end up over budget, pitting internal corporate interests against their commitment to helping clients reach financial close on their projects. This situation is typically bad news for PPP projects and can threaten the substantial efforts and resources invested in getting projects to the commercial close.
We have heard similar concerns from national PPP units, noting that support from transaction advisors with fixed-price contracts often wanes during the period between commercial close and financial close, particularly when the project becomes plagued with delays, such as those caused by changes in political leadership. We are aware of several examples of transaction advisors with fixed-price contracts incurring budget overruns running into the millions of dollars.
Consequently, the appetite of many transaction advisors to provide ongoing support beyond commercial close on the basis of fixed-price contracts is increasingly limited. We understand from one PPP unit that some transaction advisors have sought to explicitly limit contractual obligations beyond commercial close. This can leave governments without needed support beyond commercial close, which in turn can hinder the likelihood of successfully concluding PPP deals.
There are at least two options to addressing this issue and ensuring adequate support in getting to financial close:
- One option is to include an appropriate success fee component to the transaction advisory contract—payable on financial close. This aligns the incentives of the advisor to those of the client and encourages ongoing support to get to financial close.
- Another option is to use two contractual payment mechanisms for transaction advisory services: a fixed-price component to get to commercial close (typically easier to plan for and budget), and a time and expenses component thereafter until financial close is reached. This allows the client to leverage support services on an as and when needed basis, without the constraints of a fixed budget.
As in well-structured PPPs, where risks are allocated to the party best able to manage them, so too should contracts for transaction advisory services be structured to align payment terms with what transaction advisors can reasonably control, while ensuring the necessary incentives are in place to support clients in getting their projects to financial close.
To learn more about our work providing advisory services to meet the needs of clients in transport, power, and PPPs and mobilizing private investment for public infrastructure, visit our website.
Disclaimer: The content of this blog does not necessarily reflect the views of the World Bank Group, its Board of Executive Directors, staff or the governments it represents. The World Bank Group does not guarantee the accuracy of the data, findings, or analysis in this post.
* While working on PPP social project on 250beds Mukhtar A. Sheikh tertiary hospital in Multan, southern Punjab of Pakistan, that Workers Welfare Fund / Government of Pakistan with Fatima Group, One of the effective and efficient alternative was how advisory services be structured to align to payment.
Because of grinding halt & inordinate delays in the critical juncture of the social project of a fix price contract, I had no option but to minimize the risks by resorting to two streams of payments of transactions .
Government officials are not always attuned to the complexities in reaching financial close. Although the PPP documents may be deemed bankable by the advisors when the documents are signed, it is not always easy to anticipate the reaction of fickle lenders who are often very risk adverse and unwilling to sign onto transactions where they perceive institutional or political uncertainties. That is why I advise parties in PPP transactions to list Financial Close as a condition precedent to effectiveness of the PPP Agreements. It is also advisable to line up the lenders before commercial close and to get their buy in before the project documents are finalized. Transaction advisories should be structured to deal with this situation and the possible delays which are all too common.
Yes, Public -Private partnership (PPP) is a milestone, but this is, if they
work in collaboration with each other for the benefit of the population of the assigned developing countries that are chosen by the World Bank , this kind of cooperation is illustrated in right transparent ways of marketing for processing the adequate transactions with avoiding delays and financial risks to achieve the most possible adequate deal for the developing countries that are chosen by the World Bank.
*redacted*
Yours Very Respectfully,
Dr. Mohamed Taher Abdelrazik Hamada, Ph.D
Senior American Citizen
Retired Professor at Strayer University,USA
Thank you for the insightful piece which is an eye opener especially for emerging economies.
The biggest risk facing developing economies like Kenya in East Africa is that it takes several years to reach a financial close such that the project is thrown to another political regime. This is a big risk as the new regime might not be keen to take up the project. I think going forward it is important for Transaction advisors to ringfence the project against political changes and turmoils to ensure success.
The is a pervasive problem, which very often plagues projects leading to cost and time overrun, and renegotiations on concession period, and concession fee. This scenario disrupts and leads to failure of many projects which have achieved success in identifying a developer, which in itself is a tedious and long drawn process. The problem more often is that the parties in the transaction viz. public agency, developer and lender often function as adversaries rather than partners, and the transaction advisor is dragged into the scuffle to help restore some semblance of order to the process. This is unforeseeable at the start of the transaction, and is not budgeted into the scope as well as cost of advisory services, leading the inability on the part of the advisor to provide continued support to the process due to financial reasons. Even the process of leading to commercial close if often unpredictable and fixed fee advisory services prove inadequate in coping with the same.