Financing Large Projects:

Lenders insist on having greater oversight of the project, and thus the sponsor(s) or project management has less managerial discretion over it. Significantly, Project Finance lenders, rather than project managers, control the application of cash flows from the project to meet operat- ing expenses or pay dividends.

In a Project Finance context, the term project development refers to the process of preparing a new project for commercial operations. The process occurs in three distinct phases: Origination of a project, usually a capital-intensive facility, by securing a conditional right from a ceding authority pursuant to a tendering process or an unsolicited proposal to build the facility. Negotiating and formalizing the needed project agreements with major project participants that serve the purpose of defining the technical, economic and commercial outlines of the project. Mobilizing required financing through own resources, or jointly with lenders, as well as supervising the management organization, construc- tion and successful commissioning of the facility.

It is claimed that the private sector has greater expertise in managing complex projects, and hence delivering them on time and on budget, as well as maintaining services thereafter. This may well be the case, given that public-sector management of major projects has a fairly poor record, but PPP projects can be managed by the private sector without private-sector finance as well

6.2 PROJECT MANAGEMENT The procurement process can be very demanding for the Public Authority, which may have limited experience of procuring major projects, and even less with PPPs, since such projects are typically scattered across a variety of different public-sector bodies within a country. If this is the case, it does not make economic sense for the Public Authority to maintain staff with procurement skills, so once a deal has been done the project team will be disbanded. PPP procurement seldom forms part of the regular career path for a civil servant, and it is often difcult for expertise gained in a PPP by one Public Authority to be transferred to others. So although it can be argued that PPPs improve public-sector procurement skills (cf. 2.10), in reality the experience may be wasted. The importance of public-sector centres of expertise (cf. 3.2) is therefore evident. This is not a book about project management, but some of the organisational issues for a Public Authority taking a PPP project through procurement and negotiation to Financial Close are considered briey below.

nders need to continue to monitor and control the activities of the Project Company to ensure that the basis on which they originally assessed the projects risks is not under- mined. This may also leave the investor with much less independent management of the project than would be the case with a corporate nancing.

PPP Policy and FinanceThe scope of the technical advisers work can be wider or narrower, depending on the PublicAuthoritys in-house ability to take on rles such as project management; the work may thereforeinclude different aspects of the PPP project such as: general project-management services throughout the procurement process; preparation of construction costs and assumptions to be used for the initial feasibilityreview; support in drafting output specifications and risk analysis for the PPP Contract; structuring the technical aspects of the bid documentation; evaluating the technical aspects of bids; negotiation of technical aspects of bids; design review; construction supervision.

In projects with transfer of usage risk to the bidders, e.g. a Concession, the technical adviser will prepare the initial trafc or other usage studies. As discussed above, the technical advisers rle may even be extended into nancial advisory work. This work is generally undertaken by construction or services companies using their own experience in previous PPP projects, or by project-management rms. Depending on the scope of the work, parts of it such as trafc studies may be subcontracted. Alternatively the Public Authority may split the work among two or more advisers. Design review and construction supervision may be carried out by an independent Checker (also known as the Certier, Contract Administrator or Matre duvre). The Checkers rle is to be impartial between the Project Company and the Public Authority, and in due course to certify that the completed Facility meets the initial output specications. Costs

BIDDING AND PROJECT DEVELOPMENT Successful PPP project management requires a systematic and well-organised approach to carrying out a complex series of interrelated tasks. The Sponsors bidding and project- development team will need a mixture of disciplines, depending on the nature of the project: design and construction; service delivery/operation; legal, covering site acquisition, planning, project and loan documentation; accounting and tax; nancial modelling; nancial structuring. As the bidding and development process (to Financial Close) on all projects runs into months, and on some projects into years, Sponsors should not underestimate the scale of costs involved. High costs are unavoidable, with the Sponsors own development staff working for long periods of time on one project. The costs of external advisers (cf. 7.7) have to be added to this. There are also limited economies of scalelarge projects also tend to be more complex in structure, so the bidding and development costs also grow in proportion, although it is probably true to say that if a project is too small the bid costs will not reduce and so will become out of proportion with the size of the project. Bid costs alone can reach a signicant proportion (510%) of the project cost, and clearly if there are three bidders each may have a two in three chance of losing these costs. Regular participants in bidding for PPP Contracts therefore have to judge carefully which projects they want to bid for, and ensure they have adequate cost-control systems.

extreme the Project Company may have no permanent staff at all: all its key functions i.e. construction, operation and maintenanceare subcontracted out, and supervision of these Subcontracts, as well as corporate functions such as accounting, are carried out by third parties such as project-management companies and accounting rms.

Project Finance in Theory and Practice

During the construction stage, various periodic monitoring reports are prepared that summarize analyses and valuations made:

PPPs: the worldwide revolution in infrastructure provision and financeEarlier contracting methods and project management practices, whether involving private or public sector projects, have had the effect of putting the participating parties owner, designer and contractor into adversarial situations in which common project objectives get lost. This failure of communication and cooperation leads to disruptive conflicts, the results of which are cost and schedule overruns, lost time, wasted money, poor quality, low morale and ultimately litigation. Partnering, by contrast, centres around conflict management, team building, trust, commitment and mutual goals. The studies on partnering suggest ways of bringing about these results.

Also, PPPs are considered appropriate where private sector project management skills, more innovative design and risk management expertise can be brought in to give substantial benefits.

Challenges and Opportunities in PPPsDuring the design and construction phase, specifications in P3 contracts are generally drawn from agreed-upon designs, and typically include some prescriptive design standards. These standards should be made clear to proposers in the procurement process. Similar to traditional design-bid- build contracts, the public agency may choose to include procedural specifications in a P3 contract to ensure, for example, that a concessionaire conforms to safety and environmental standards. Additional performance specifications, either procedural or outcome-based, may be drawn from project management and quality assurance plans that the concessionaire may be required to develop. Performance measures may also be used to monitor aspects of construction performance such as work zone safety, minimization of service disruption, and the provision of timely and accurate communication with the public. Finally, public agency may set outcome- based goals, such as congestion-relief and allow private partners to propose alternative designs to help achieve those goals.