CP3P Financial & Economic Analysis 2 — Questions and Answers
Question 1: In a PPP financial model, what does the Debt Service Coverage Ratio (DSCR) measure for a given period?
- Cash flow available for debt service divided by scheduled debt service (Correct answer)
- Total debt divided by total equity
- Net present value of revenues divided by capital cost
- Operating expenses divided by gross revenues
Correct answer: Cash flow available for debt service divided by scheduled debt service
DSCR compares cash flow available for debt service (CFADS) to principal and interest due in that period.
Question 2: Which ratio compares the NPV of CFADS over the remaining loan tenor to outstanding debt?
- Project Life Coverage Ratio
- Loan Life Coverage Ratio (Correct answer)
- Interest Cover Ratio
- Gearing Ratio
Correct answer: Loan Life Coverage Ratio
The LLCR discounts CFADS over the remaining loan life and divides it by the debt balance outstanding.
Question 3: A government compares a PPP bid against a hypothetical traditionally procured project adjusted for risk. What is that benchmark called?
- Shadow bid model
- Affordability envelope
- Public Sector Comparator (Correct answer)
- Economic rate of return
Correct answer: Public Sector Comparator
The Public Sector Comparator estimates the risk-adjusted whole-life cost of delivering the project through conventional public procurement.
Question 4: Why does a PSC usually add 'competitive neutrality' adjustments?
- To include the private partner's profit margin
- To account for inflation over the contract term
- To reflect the cost of the bidder's financing
- To remove advantages or disadvantages the public sector has from public ownership, such as tax exemptions (Correct answer)
Correct answer: To remove advantages or disadvantages the public sector has from public ownership, such as tax exemptions
Competitive neutrality adjustments put the public option on a like-for-like footing by offsetting ownership-related advantages such as tax exemptions.
Question 5: A sensitivity analysis shows the project's equity IRR falls below target if construction costs rise 8%. What is the main purpose of identifying this?
- To determine which variables most threaten project viability (Correct answer)
- To set the final availability payment amount
- To calculate the government's discount rate
- To replace the need for a risk matrix
Correct answer: To determine which variables most threaten project viability
Sensitivity analysis identifies the key variables whose changes most affect financial outcomes.
Question 6: In economic (as opposed to financial) appraisal, which item is typically excluded as a transfer payment?
- Construction labor costs
- Travel time savings
- Taxes and subsidies (Correct answer)
- Vehicle operating cost savings
Correct answer: Taxes and subsidies
Taxes and subsidies move money between parties in society without consuming real resources, so economic analysis excludes them.
Question 7: What does a cash sweep mechanism do in a PPP financing structure?
- Lets equity investors take all surplus cash early
- Moves surplus cash to the government each year
- Converts senior debt into subordinated debt
- Uses excess cash flow to prepay debt, often when ratios fall below thresholds or late in the tenor (Correct answer)
Correct answer: Uses excess cash flow to prepay debt, often when ratios fall below thresholds or late in the tenor
A cash sweep uses surplus cash to prepay debt early, reducing lender risk.
