Moody's Investors Service has published an announcement in which it explains that the appeal of public private partnership (PPP) projects to private long-term capital lies in their ability to deliver stable returns over a long period of time.
Ivan Chung, a Moody's Senior Vice President commented this at the Asia-Pacific Economic Cooperation (APEC) Seminar on the Public Sector's Role in PPP Modality, held on 21 and 22 May in Fuzhou, China.
Ivan Chung stated:
Our default study shows that the structural features of PPP projects are proving effective at limiting defaults and minimizing losses. Thus, PPPs can be structured to attract interest from private capital at a high speculative grade level (Ba level) or even investment grade level (Baa or above).
According to Moody's Project Finance Bank Loan Default Study, the 10-year cumulative default rate (BII) for PPPs is 5.2%, which is consistent with the 10-year cumulative default rate for corporate issuers in the Baa rating category.
Chung indicates that PPP projects typically carry two major types of risks. First, there are construction risks before a project commences operations. The public sector can typically provide a guarantee during this phase, such that the risks of cost overruns and delays can be contained. Second, regulatory risks may arise after a project's completion, particularly in emerging markets.
Additionally, Moody's will also consider the project's off-taker credit risk in rating a PPP.
Ivan Chung stated:
Usually, the government -- either directly or through an associated agency -- is the project off-taker. If the government has a weak fiscal position, additional support from a higher level government or supranational could reduce the off-taking risks and therefore prove beneficial to the rating.
Finally, in case there is no explicit government guarantee, the rating may also consider other forms of government involvement, such as funding support from policy banks.
The APEC Seminar was hosted by the Ministry of Finance of the People's Republic of China and organised by the Asian Development Bank. Topics covered at the seminar include a range of PPP issues, including the enabling of a policy environment, project planning and preparation, risk allocating, and long-term financing from private sector financial institutions and pension funds.