Specialized Hazards of Project Financed PPP

Technical Notes

Dec 16, 2009 — Neil Boyle

Debt governance hazard – the incentive “to go for the gold” and gloss over the unpriced hazards of unanticipated consequences that occur in the absence of credible commitments when there is the joining of the pre-emptive security of debt financing with the aggressive financial leverage that often accompanies the substitution of the nonredeployable assets of the project with the redeployable cash flow assets of the project.

Rules of Equity Hazard – the incentive “to yield to the bankers”  and gloss over the difficulty of balancing the threat of loss of managerial discretion of equity owners with an investment that yields to lender-led policy management of the project in the absence off credible commitment. What is at risk is the subtle but very valuable risk-return tradeoff capacities of high-performing equity managers who are often glossed over in the rush to financial closure. Yielding is due to the joining of pre-emptive security by lenders of high levels of debt financing with the aggressive financial leverage offerred by redeployable cash flows. Traditional analysis fails to account for poor capacity of commercial lenders to policy manage complex PPP projects and often discounts the value of the adaptive ingenuity of equity management.

Capital Structure Hazard – the incentive “to be practical” and gloss over the hazardous incentives that are sure to occur when the adaptive needs for differentiated attributes between debt governance and equity governance are not accounted for. Debt governance attributes of contractual restraint act through control mechanisms such as loan conditionality. Equity governance attributes of active managerial assertion act through the adaptive ingenuity and private ordering of equity managers such as their forging transaction specific management mechanisms such as a board of directors opting to have commercial bank representation directly on the board. Capital structure hazard poses adaptive needs for a balance between both types of differentiated governance attributes.

This article is filed in technicalnotes. Start or participate in a discussion below or click here to see more articles in this category.

Participate:

Please share your thoughts and comments about the article. We look forward to hearing from you. Fields marked with "*" are required: