CP3P Financial & Economic Analysis 3 — Questions and Answers
Question 1: Which factor typically makes a PPP's weighted average cost of capital higher than government borrowing costs?
- Private financing includes risk premiums for equity and project-level debt (Correct answer)
- Governments are prohibited from borrowing long-term
- PPP projects pay no taxes
- Private lenders never require collateral
Correct answer: Private financing includes risk premiums for equity and project-level debt
Private capital prices project risk into debt margins and equity returns, so it usually costs more than sovereign debt.
Question 2: Value for Money in a PPP can still be achieved despite higher financing costs mainly because of:
- Lower tax revenues to the government
- Efficient risk transfer, lifecycle optimization, and innovation offsetting the financing premium (Correct answer)
- Elimination of all construction risk
- Guaranteed demand from users
Correct answer: Efficient risk transfer, lifecycle optimization, and innovation offsetting the financing premium
VfM rests on whole-life efficiencies and better-priced risk transfer outweighing the higher cost of private finance.
Question 3: A contingent liability for government in a PPP most commonly arises from:
- Scheduled availability payments
- Annual operating budgets
- Guarantees such as minimum revenue or debt guarantees that are triggered only by future events (Correct answer)
- Payments to the independent engineer
Correct answer: Guarantees such as minimum revenue or debt guarantees that are triggered only by future events
Contingent liabilities are obligations triggered only if uncertain events occur, such as guarantee calls or termination payments.
Question 4: In a Monte Carlo risk analysis for a PSC, what is the output most commonly used to price retained risk?
- The single most likely cost scenario
- The cost under the worst historical case only
- The bidder's quoted price
- A probability distribution of costs from which expected values or P-values (e.g., P50, P90) are taken (Correct answer)
Correct answer: A probability distribution of costs from which expected values or P-values (e.g., P50, P90) are taken
Monte Carlo simulation produces a distribution of outcomes, and expected values or percentile values are then used to quantify risk.
Question 5: Optimism bias adjustments in a project appraisal are intended to:
- Correct the systematic tendency to underestimate costs and durations (Correct answer)
- Increase forecast demand to improve viability
- Reduce the discount rate
- Remove inflation from cash flows
Correct answer: Correct the systematic tendency to underestimate costs and durations
Optimism bias uplifts correct for the documented tendency of appraisers to underestimate capital costs, durations, and overestimate benefits.
Question 6: When cash flows in a financial model are expressed in nominal terms, which discount rate should be applied?
- A real discount rate
- A nominal discount rate that includes expected inflation (Correct answer)
- The equity IRR of the bidder
- A zero discount rate
Correct answer: A nominal discount rate that includes expected inflation
Nominal cash flows must be discounted with a nominal rate for consistency; real flows use a real rate.
Question 7: A Debt Service Reserve Account (DSRA) is typically sized to cover:
- The total construction budget
- All equity distributions for the concession term
- A set number of months of upcoming debt service, often six (Correct answer)
- Government's annual availability payments
Correct answer: A set number of months of upcoming debt service, often six
A DSRA holds funds equal to a defined period of future debt service, commonly six months, to protect lenders against short-term cash shortfalls.
