Project Structuring & Risk Allocation Flashcards
7 cards from real CP3P practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Project Structuring & Risk Allocation flashcards as text
In a long-term PPP, how is inflation risk on operating costs most commonly reduced?
Answer: Partly indexing the unitary payment to a price index such as CPI
Indexing part of the payment to CPI or a similar index shares inflation risk and avoids heavy risk premiums in the bids.
For a cross-border PPP in an emerging market, which party is best placed to manage currency convertibility and transfer risk?
Answer: The host government, often backed by political risk insurance such as MIGA
Convertibility and transfer risk is a political risk under the host government's control and is often covered by guarantees or multilateral insurance.
A government gives a toll road concessionaire a minimum revenue guarantee. What does this do to demand risk?
Answer: Shares demand risk by protecting the concessionaire against low traffic
A minimum revenue guarantee puts a floor under the concessionaire's revenue, so the public partner shares downside traffic risk.
Under a whole-life DBFOM contract, who usually bears lifecycle replacement risk, such as replacing major components on time?
Answer: The private partner
Whole-life contracts give the private partner the lifecycle risk, which pushes it to balance capital and maintenance spending.
What usually triggers a distribution lock-up in PPP project finance?
Answer: The debt service coverage ratio falls below a set threshold
Lock-up covenants stop dividends to sponsors when the DSCR falls below a set level, which keeps cash in the project for lenders.
Under a shadow toll PPP, who pays the private partner, and who carries the usage risk?
Answer: The government pays per vehicle; the private partner carries the usage risk
Under shadow tolls, the government pays the operator based on traffic volumes, so the private partner keeps demand risk even though users pay nothing directly.
In an availability-based PPP, how is the private partner penalized when a facility does not meet performance standards?
Answer: Through deductions from the unitary payment for unavailability or poor performance
The payment mechanism applies deductions for unavailability or service failures, which creates a direct financial incentive to perform.