Risks in Project Finance Initiatives: Current Trends and Future Directions

This thesis is an analysis of Public Private Partnership (PPP). PPP refers to the provision of public assets and service through the participation of the government, the private sector and the consumers. The purpose is to analyze the main risks involved in a PPP initiative and to understand how they affect its capital structure. To this aim, different datasets have been analyzed in order to trace consistent and coherent lessons. After that, this thesis aims at proposing PPP models for innovative project in the Smart City context, based on the assumption that innovative financial schemes can fit innovative projects. In particular several PPPs for Smart City projects have been analyzed and a Project Finance contract for the replacement of traffic light lamps has been proposed so that the applicability of the financial tool in new fields of application have been tested. The success of a PF initiative is strictly related to a careful analysis of all the risks associated with the project. As a matter of fact, many risks could occur during the life of the project and they can significantly affect its outcomes. For this reason risks have been categorized in sources and associated to their indicators. For each indicator, several parameters have been identified. The main sources of risk are Country, Financial, Market and Construction. First a dataset of worldwide toll road has been analyzed. The private concessionaire that constructs the infrastructure collects revenues generated by users, and the infrastructure by itself represents a solid collateral. The analysis highlights that inflation rate, the investment size, the construction duration, the financial strength of the Special Purpose Vehicle and the number of partners has a significant influence with the share of the equity into the total investment. This study might help the purpose of providing better opportunities for sponsors to improve the equity profitability and for lending agencies to better handle with risks associated with the debt supply. The analysis has been then focused on the British market, which is one of the most important ones and wherein the Project Finance is actually developed and the legislative context is well defined. Based on the idea that the Unitary Charge (UC) periodically corresponded by the public authority (and in turn the capital structure) is associated with the project risk profile, the study investigates risks that might have significant impacts on the UC of a PF hospital project. The study demonstrates that it is possible to achieve a higher level of Value for Money (VFM) in PF hospital projects within a good economic and political environment. In Italy the PF market has rapidly grown, in light of the need for the public sector to find a feasible way to construct or renovate infrastructures in a context of scarce public finance. Based on past projects developed in Italy an empirical analysis has been carried out in order to identify the main aspects that can impact on the success of a PF initiative. As a matter of fact, evidence has shown that not all the projects appear to fit for PF, and often a project fails to go further out of the early contract procurement phases. Therefore, there is the need to understand what are the key factors affecting the construction of a PF initiative. The study shows that large-sized projects developed in wealthy conditions in terms of political and economic stability and levels of GDP, have good chances to be constructed, especially whenever the time is given to parties to negotiate the contract provision. The analysis provides with a hint for policy makers to learn that PF is a valuable system to be used in stable and developed environments for large projects with little time pressure. PF mechanism was launched in Italy in 1999 and after ten years the Italian market is the second largest one in Europe, especially in the healthcare sector. However, financially freestanding privately-funded PF hospitals are rare and the capital structure of most projects requires a considerable share of public funding. The most proper amount of money invested by the public authority should cover the non-self-financing (and therefore the riskier ones) of the investment costs, but it often happens that the level of public contribution exceeds this limit. The results of the analysis highlight that the financial strength of the SPV, the number of services that are granted to the private partners, the level of borrowing of the public authority, and the duration of the concession period appear to be significant factors of the public fraction of financing required to deliver the project. These results originate some important considerations about the relevance of risks in the development of PF initiatives. PF better fits in stable politic and economic environments, but at the same time it is largely adopted in emerging countries with large demand of new infrastructures and high level of risk (in terms of level of transparency, corruptions, currency exchange). From a financial perspective a robust SPV is likely to better deal with the project with a positive impact on the capital structure. The market risk is associated with the number of customers that exploit the facility and the number of services that privates manage. If the demand of services is not enough to generate sustainable profits, the public party could reimburse an additional fee, in order to cover for this risk. The project risk is mainly related to the complexity of the project in terms of the number of partners in the SPV and the investment size. The last part of the thesis is associated to the future and potential scenarios associated to PF and more in general to PPP scheme. In fact the aim is to propose PPP models in the smart city (SC) arena, a promising field of innovation and investments. SC appears to be as a new paradigm to carry out innovation that marks a shift between traditional way of completing technology-push processes and the new approach based on the user’s needs. In this political and economic scenario, the PPP seems to be a solution for the development of smart projects and the design of PPP models should become an integral part of the SC agendas. As demonstrated in the development of traditional infrastructure, the involvement of privates allows to manage more efficiently the project.The analysis shows that PF is more applicable in case of projects with tangible assets, and the main strength of this scheme is the clear separation between the cash flows of the SPV and the cash flows of the investors. On the contrary, PF is more expensive in terms of contractual and transactional costs. These aspects related to PF have fostered to develop a proposal model for the application of this financial scheme in the Municipality of Torino. In particular the project is based on the replacement of the traditional lamps of the traffic lights with new ones exploiting the innovative LED technology that is supposed to guarantee savings in terms of energy consumption and maintenance cost. The project has proved to be bankable and profitable if the Public Authority corresponds a fee that includes both the availability of the lamps and the maintenance costs for ten years. On the contrary the project is only bankable and profits are not guaranteed if the fee paid by the public is only associated with the availability. The findings have validated the applicability of PF even in case of projects without assets systems as collateral and with small-medium investments size. Some first general guidelines for the policy maker are provided in order to foster the development of SC initiative even in a period of financial public shortage. Project Finance, and more in general the PPP, can be the engine of an efficient exploitation of the potentiality offered by the SC.