CP3P Core Concepts and Principles 5 — Questions and Answers
Question 1: Why are PPP contracts typically long-term, often 20-35 years?
- To allow the private partner to recover investment and bear lifecycle risk over the asset's life (Correct answer)
- Because federal law requires a minimum of 30 years
- To avoid any need for refinancing
- To prevent the government from monitoring performance
Correct answer: To allow the private partner to recover investment and bear lifecycle risk over the asset's life
Long terms match the asset's life and allow investment recovery and lifecycle cost optimization.
Question 2: What is the main purpose of a PPP unit within government?
- To act as the private partner's lender
- To operate PPP assets directly
- To provide expertise, guidance, and quality control for PPP programs across agencies (Correct answer)
- To set user tariffs for all concessions
Correct answer: To provide expertise, guidance, and quality control for PPP programs across agencies
PPP units centralize expertise, develop policy and standards, and support or review agency PPP projects.
Question 3: Which is a common risk of poorly structured PPPs?
- Too much competition among bidders
- Lack of flexibility, making future service changes costly (Correct answer)
- Excessively short contract terms
- Lower transaction costs than traditional procurement
Correct answer: Lack of flexibility, making future service changes costly
Long-term contracts can be rigid, so unplanned changes may be expensive if variation mechanisms are weak.
Question 4: Fiscal commitments from PPPs that depend on uncertain future events (e.g., guarantees) are called:
- Direct liabilities
- Availability payments
- Capital grants
- Contingent liabilities (Correct answer)
Correct answer: Contingent liabilities
Contingent liabilities, such as revenue or debt guarantees, become payable only if specified events occur.
Question 5: Which statement about PPP financing cost is generally true?
- Private financing usually costs more than government borrowing, so VfM must come from risk transfer and efficiency (Correct answer)
- Private financing is always cheaper than municipal bonds
- Financing cost is irrelevant to VfM analysis
- PPPs never use debt finance
Correct answer: Private financing usually costs more than government borrowing, so VfM must come from risk transfer and efficiency
Private capital typically has a higher cost, so PPP VfM depends on efficiency gains and effective risk transfer.
Question 6: A 'brownfield' PPP refers to a project that:
- Involves building a completely new asset on undeveloped land
- Concerns only environmental remediation
- Involves an existing asset being rehabilitated, expanded, or operated (Correct answer)
- Is financed solely by green bonds
Correct answer: Involves an existing asset being rehabilitated, expanded, or operated
Brownfield PPPs involve existing infrastructure, whereas greenfield PPPs involve new construction.
Question 7: Which party in a PPP typically holds the 'first-loss' position if project cash flows fall short?
- Senior lenders
- Equity investors (Correct answer)
- The public sector authority
- Construction subcontractors
Correct answer: Equity investors
Equity sits below debt in the capital structure, so equity investors absorb losses first.
