CP3P Financial & Economic Analysis 4

Question 1

What is the main purpose of an affordability analysis in a PPP appraisal?

Accepted Answer

To confirm the government can meet long-term payment commitments within its budget constraints

Answer

Affordability analysis checks whether projected government payments fit within available current and future budgets.

Question 2

A project has a positive economic NPV but a negative financial NPV. What does this usually indicate?

Accepted Answer

The project benefits society but needs public support, such as availability payments or viability gap funding, to attract private investors

Answer

Positive economic but negative financial NPV means the project creates social value but cannot cover costs from its own revenues.

Question 3

Viability gap funding (VGF) in a PPP refers to:

Accepted Answer

A capital grant or subsidy that bridges the shortfall making an economically justified project financially viable

Answer

VGF is public funding that closes the gap between a project's financial returns and what investors need.

Question 4

Gearing in a PPP project company refers to:

Accepted Answer

The proportion of debt relative to equity in the capital structure

Answer

Gearing is the debt-to-equity mix, and PPPs often use high gearing such as 80:20 or 90:10.

Question 5

Why do higher gearing levels tend to lower a PPP bid price?

Accepted Answer

Debt is generally cheaper than equity, lowering the overall cost of capital

Answer

Senior debt requires lower returns than equity, so more debt lowers the blended financing cost passed into the bid.

CP3P - Public-Private Partnership Certification Practice Test