Operating Risk Ssrry

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Rating Moody’s Global

Methodology Project Finance
December 2007
Table of Contents: Operating Risk in Privately-

Summary 1
Rating Methodology Scope
Introduction to PFI/PPP
2
2
Financed Public
A Typical PFI/PPP Issuer
Rating Methodology Framework
3
4
Infrastructure (PFI/PPP/P3)
1. Project Risk Assessment 5
2. Capital Structure 23 Projects
3. Recovery on Concession Termination 29
4. Off-taker Credit Quality
Appendix A: Glossary
33
34
Summary
Appendix B: Project Moody’s is implementing this methodology in order to improve the
Complexity Definitions 36
transparency of its approach to evaluating operating period risk in privately
Moody’s Related Research 38
financed, public infrastructure projects (“PFI/PPP”). The methodology
incorporates the market comments received by Moody’s as part of a
review process initiated by the publication of our September 2007 Request
Analyst Contacts:
for Comment on this topic.
New York +1.212.553.7914 Moody’s will apply this methodology globally when assigning ratings to this
Bart Oosterveld class of project financings. The methodology standardizes the analysis
Senior Vice President and relative weighting of quantitative and qualitative considerations
considered in our analysis.
London +44.20.7772.8799
Moody’s has developed a scorecard model to accompany this rating
13 William Coley
methodology. The model is available to market participants at no cost
Vice President/Senior Analyst
upon the execution of a usage agreement. To obtain the model or for
Toronto +1.416.214.3854 further information please contact Moody’s at pppmodels@moodys.com.
13 Grant Headrick Moody’s is concurrently publishing a rating methodology for the analysis of
Associate Analyst construction risk in PFI/PPP projects. Consistent with existing practice, we
plan to consider separately risks in the construction and operations
Sydney +612.9270.8115 phases of PFI/PPP projects. Should projects be structured with a
13 Paul Ovnerud-Potter significantly higher risk profile in construction than in operations, Moody’s
Vice President/Senior Analyst would normally expect to adjust a project’s rating for the operations phase
to reflect successful construction and transition to project operations.
Moody’s will comment on the relative risk of the construction and
operations phases of new projects as ratings are assigned.
Rating Methodology Moody’s Global Project Finance
Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects
Rating Methodology Scope

This rating methodology sets out Moody’s approach to the analysis of the long term debt obligations of
privately financed public infrastructure companies (each a PFI/PPP Issuer, Issuer) that have reached
completion and have been successfully operating at or near expected levels long enough for any design or
construction-related issues to have been identified and resolved. A separately published methodology sets out
1
Moody’s approach to assessing construction risk in PFI/PPP projects. Moody’s applies both rating
methodologies globally.
The operating period methodology is designed to assess the risks of PFI/PPP Issuers that provide a variety of
building services including offices, accommodation projects and hospitals as well as services that support civil
engineering works such as roads and bridges. It is not intended to be used to assess PFI/PPP Issuers that
have complex operating requirements such as waste-to-energy plants or defence projects.
The methodology applies only to PFI/PPP Issuers that earn a majority of their revenue from availability-based
payment streams, and is not intended to cover Issuers whose revenue would be subject to a material element
of price, patronage or volume risk (such as shadow toll roads or waste water treatment plants). However,
where appropriate, Moody’s may apply sections of this methodology in other areas of project finance.
The risk profile of the construction phase of a PFI/PPP project may differ from the risk profile of the operations
phase. Should projects be structured with a significantly higher risk profile in the construction phase than in the
operations phase, Moody’s will assign a rating based on the construction phase risk profile. Following
completion of construction and transition to a steady state of project operations, Moody’s would (subject to
performance) expect to adjust a project’s rating upwards for the operations phase. Should the construction
phase risk profile be lower than that in the operations phase, the higher risk operational period will depress the
rating throughout the project’s life. Moody’s will comment on the relative risk of the construction and operations
phases of new PFI/PPP projects at the time the initial rating is assigned.
Moody’s notes that this methodology outlines the key considerations used by Moody’s to assess these
projects. For most transactions, the methodology should enable the reader to ascertain Moody’s credit rating
within a small range (one or two notches). While the analysis of different aspects of a transaction is
necessarily broken up into subsections of this report, our analytical focus will be on the relationships between
the aspects of a transaction to ensure that it is structured with an overall risk profile consistent with the rating
assigned. Finally, we emphasize that there may be any number of other relevant or deal-by-deal specifics that
need to be taken into account and that the ongoing and significant evolution of this sector precludes the
methodology from being an exhaustive treatment of all factors to be considered by Moody’s.
Introduction to PFI/PPP
Used extensively to finance public infrastructure in the U.K., where they were launched in the mid-1990s,
PFI/PPP structures are designed to shift certain financing, construction, and operating risks of public
infrastructure projects to the private sector. Private sector consortia are engaged through a bidding process to
design, build, and operate public infrastructure projects under long-term Project Agreements from a
sponsoring government or one of its agencies.
In addition to the U.K., where the structures are part of the government’s Private Finance Initiative (PFI), the
technique is being increasingly used in Australia and Canada, where the transactions are referred to as Public-
Private Partnerships (PPP or P3) and they have also been introduced across continental Europe. Availability-
payment P3s are not common in the United States, where most public infrastructure remains government
owned, but there is increasing interest in examining a range of financing options for public infrastructure, as
evidenced recently by the bidding process for the construction and operation of the Port of Miami Tunnel.
Most commonly known for the construction and operation of public hospitals, PFI/PPP has also been used to
facilitate the construction and operation of government buildings, such as courthouses or other administrative
1
Moody’s Rating Methodology: Construction Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects, December 2007.
2 December 2007 Rating Methodology Moody’s Global Project Finance - Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects

centres, as well as other public policy-mandated services such as the construction and operation of schools or
mass transit terminals.
PFI/PPP projects are usually distinguished from traditional government procurement arrangements by the fact
that they feature fixed-price, fixed-term construction contracts and incorporate a requirement to operate the
completed facilities pursuant to pre-agreed performance standards pursuant to a long term Project Agreement.
Performance failures can lead to abatement of the payment stream and, ultimately, to termination of the
Project Agreement. The risk of abatement or termination of the concession is usually offset by the experience
of the contractor or operator and various levels of performance or surety support.
In addition, contractual provisions usually permit the Issuer to replace sub-standard contractors well before
termination becomes a possibility. Typically, the capital structure of the project company includes a tranche of
loss-absorbing equity to provide additional credit support.
A Typical PFI/PPP Issuer

A typical PFI/PPP Issuer is a limited purpose entity established to purchase or construct and then operate a
public infrastructure asset pursuant to a long term Project Agreement with a sponsoring government or agency
(the Project Off-taker or Off-taker). The Issuer may hold title to the infrastructure assets or it may merely hold a
lease or concession right to operate the assets over the project term, typically 25 years or more. In either case,
at the end of the Project Agreement, the right to operate the assets and/or the legal title to assets themselves
usually reverts to the Project Off-taker. The Project Agreement typically requires the Issuer to hand back the
assets in good working order, consistent with their age.
Operating period services – The operating services provided by PFI/PPP Issuers typically fall into one of
three categories:
1. Operational activities such as catering, cleaning and security in buildings or the routine operation of simple
civil engineering structures, known as soft facilities management or Soft FM;
2. The routine maintenance of assets and replacement of small ticket items, known as hard facilities
management or Hard FM, and;
3. The replacement of high cost plant and equipment items or the performance of major repairs to civil
engineering structures to maintain the operating condition of an asset over the life of the Project
Agreement, known as Life Cycle or Major Maintenance.
Parties Involved in a Typical PFI/PPP Transaction
Shareholders Lenders
Equity Debt
Operating Project Construction

Sub-contractors
Operating Company and
Construction Contractor
Sub-contracts Issuer
Contract
Project
Agreement
Project
Off-taker

The Issuer may self-perform the operating services or it may sub-contract them to third parties for all or a
portion of the duration of the Project Agreement. The terms of sub-contracts generally pass down the service
obligations of the Issuer under the Project Agreement – including the risk of payment abatement or termination
for non-performance. The Issuer often imposes a more onerous performance regime on sub-contractors than it
is itself subject to, allowing for the replacement of sub-contractors before the Project Agreement becomes
subject to termination.
If an Issuer elects to self-perform the majority of its responsibilities, it will resemble a traditional operating
company (albeit one with limited management discretion), responsible for directly providing the full range of
operating services through its own workforce and supported by its own administrative staff. At the other
extreme, an Issuer that sub-contracts virtually all of its operational responsibilities is little more than an
administrative shell company. It will have a small staff and be responsible for administrative and performance
oversight of the various operating sub-contracts and for managing the business relationship with the Project
Off-taker. Issuers in the UK tend to self-perform a much larger percentage of the operating services,
particularly Life Cycle Maintenance 2 , when compared with Issuers in Australia and Canada.
Operating service fees – Operating services are typically divided into benchmarked and non-benchmarked
services. For benchmarked services (most commonly, some or all of the Soft FM and, in certain instances in
Australia and Canada, the Hard FM), the Project Agreement requires that the pricing of the relevant services
be periodically subject to a benchmarking or market tendering process. Under such a process, the Off-taker
and/or the Issuer checks the market price for the listed services and adjusts the pricing in the Project
3
Agreement accordingly, with sub-contract pricing moving in lock-step. In between benchmarking periods, fees
4
for benchmarked services are usually fixed.
In contrast, the price of non-benchmarked services such as Life Cycle obligations is usually fixed for the life of
the Project Agreement via an index-linked formula that adjusts the fees in line with a consumer or industrial
price index appropriate for the jurisdiction.
Performance standards – The Project Agreement specifies a performance regime which sets out the
standards that must be met by the Issuer in providing the Operating Services. It also provides for deductions
from the payment stream and/or the award of penalty points if assets or services are either delivered below
standard or unavailable for use.
The Project Agreement will usually list certain events (including hitting threshold levels of revenue deductions
and/or penalty points) that would lead to an event of default which would permit the Off-taker to terminate the
Project Agreement. In such circumstances there is commonly compensation payable to the Issuer in the form
of a Termination Payment.
A PFI/PPP Issuer is usually largely debt-financed and 90:10 debt to equity ratios are not uncommon. As such,
the debt providers usually seek to maximise their contractual protection, looking for a strong security interest in
the Issuer’s assets and contracts. In many cases, lenders seek certain contractual rights with key Issuer
counterparties through Direct Agreements which would delay/override certain aspects of the Project
Agreement or sub-contracts.
Rating Methodology Framework

The rating methodology breaks the analysis of operating phase PFI/PPP Issuers into four steps:
1. The Project Risk Assessment – the Project Risk Assessment reflects our view of a project’s intrinsic credit
quality – the volatility of the Issuer’s revenue, its costs of service delivery, the principal project terms and the
risks of termination. Moody’s review incorporates an assessment of the business risk of the Issuer, the nature
2
It is common for UK Issuers to retain exposure to Life Cycle risk even though the actual works are carried out by a sub-contractor; performance is
subcontracted but risk is retained, which from a credit perspective is comparable to self-performance.
3
In some cases, the Project Off-taker reserves the right actually to re-tender a benchmarked service if the results of the benchmarking exercise suggest a
significant difference between the current contract price and the prevailing market rate.
4
This may be on a unit volume basis (e.g., in a hospital, the price per standardized meal or unit of laundry) with a periodic inflation adjustment.

and harshness of the abatement regime and the likelihood of contract termination as a result of material non-
performance or Force Majeure.
2. Capital Structure – Moody’s will adjust the outcome of the Project Risk Assessment to reflect the Issuer’s
capital structure. As the amount of debt in the capital structure increases, the safety margin – as measured by
various coverage ratios – reduces and the probability of default grows. Then the effects of any structural
enhancements designed to offset the risks of operating at high leverage are also considered. These include
liquidity support, security arrangements and Step-in Rights, all of which are designed to reduce the likelihood
of termination. Once the Project Risk Assessment is adjusted for these structural enhancements, it reflects
Moody’s view of the Issuer’s stand-alone probability of default.
These first two components comprise a substantial part of our analysis. The inter-relationship between these
two component parts is critical. For instance, a project with a weaker Project Risk Assessment, with higher
consequent cash flow volatility, should require a more robust capital structure and structural support for a
given rating level. Similarly, as PPP projects are often very highly leveraged, any particularly negative features
in the Project Risk Assessment are more likely to cause cash flow or performance stress and lead to a higher
probability of default.
3. Recovery on Concession Termination – in order to generate a rating on Moody’s expected loss rating
scale, we will make adjustments for features of the project and financing documents which are likely to
enhance or reduce the recovery of creditors following a default as compared to Moody’s standard assumption
for corporate issuers.
4. Off-taker Credit Quality – the methodology makes a final adjustment based on the Off-taker’s credit
quality, reflecting its importance as payer during the project term and in the event a termination payment is
payable.
3. Recovery on Concession 4. Off-taker

1. Project Risk Assessment 2. Capital Structure Termination Credit Quality
Volatility of Revenue, Cost Financial Leverage, Concession Termination Regime,
Structure, and Force Majeure & Structural Features, Recovery Assumptions
Issuer Default Termination Refinancing Risk
Transaction Standalone Probability of Default
Transaction Expected Loss Rating
Transaction Expected Loss Rating Adjusted for Off-taker Credit Quality
Moody’s Operations Phase Model – the spreadsheet model associated with the methodology is available
free of charge to market participants upon the execution of a license agreement. The model will make the
calculations and adjustments intended by the methodology – based on inputs by the user – which will provide
a guide to the rating outcome within a 2 notch range, subject to the additional qualitative adjustments
contemplated in this report and the rating committee process. The model has been calibrated across our
existing rating portfolio, with consideration of the wide variety of structures seen both in that portfolio and
within the wider experience of our analysts. The model, which comes with a User Guide worksheet, will not
assign reliable ratings where inputs are inconsistent or highly unusual. In order to alert users to this concern,
the model warns users when certain inputs are nearly or actually outside the range of common experience.
1. Project Risk Assessment

The Project Risk Assessment considers the three key factors that drive the stand-alone credit profile of a
PFI/PPP Issuer:
1. Volatility of Revenue: the nature and quality of the Issuer’s contracted revenue;
2. Cost Structure: the form and level of the Issuer’s costs over the project term; and
3. Force Majeure and Termination: the likelihood that the Project Agreement may be terminated for material
non-performance by the PFI/PPP Issuer or due to unexpected events.
The three factors are assessed in terms of ten sub-factors. Each sub-factor is scored using many or all of
Moody’s broad rating categories (Aaa, Aa, A, Baa, Ba, B and Caa).
Each sub-factor for a project is scored by mapping it against a set of characteristics that represent the range of
possible rating outcomes for the sub-factor. Of course, given the diversity of projects being funded through
PFI/PPP, an Issuer’s characteristics may not exactly fit the features in the scoring table. In such
circumstances, Moody’s will assign a score that best matches the relative risk of the Issuer’s characteristics.
The factors, sub-factors and the weightings used to calculate the weighted average are as follows:
Factor Sub-factor Weight

Volatility of Revenue 1. Complexity of Project Operations 15.0%
2. Nature of Performance Regime 15.0%
3. Inflation Exposure and Change of Law and 10.0%
Off-taker Modifications
Cost Structure 4. Market Efficiency 15.0%
5. Sub-Contractor Efficacy 8.3%
6. Sub-Contractor Liability Caps 8.3%
7. Base Case Costs versus Benchmark 8.3%
Force Majeure & Issuer Default Termination 8. Force Majeure 6.7%
9. Issuer Default Termination 6.7%
10. Concession/Sub-Contract Interface 6.7%

The rating for each sub-factor’s score is then mapped to its corresponding idealized default probability rate as
illustrated below. The weighted average of each of the sub-factor default probability rates is then mapped back
to a rating using Moody’s full debt rating scale.
Idealized Idealized Project

Default Default Risk
Sub-factor Ratings Rate Table Assessment
Aaa 0.00% 0.00% Aaa
0.02% Aa1
Aa 0.05% 0.05% Aa2
0.10% Aa3
0.19% A1
A 0.35% 0.35% A2
0.54% A3
0.83% Baa1
Baa 1.20% Average 1.20% Baa2
Idealized
Default Rate 2.38% Baa3
of Sub-factors 4.20% Ba1
Ba 6.80% 6.80% Ba2
9.79% Ba3
13.85% B1
B 18.13% 18.13% B2
24.04% B3
32.48% Caa1
Caa 43.88% 43.88% Caa2
66.24% Caa3
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As is evident from the illustration above, the default rates in Moody’s idealized tables are non-linear. Default
risk increases by an increasing amount as the rating falls – using non-linear default rates rather than a linear
scale (e.g., Aaa=1, Aa1=2, etc.) allows the methodology to assign a relatively higher weighting to weaker
project attributes, which is consistent with our view that one or two very weak aspects may compromise a
project’s overall credit quality.
1.1 Volatility of Revenue
Given the high leverage and low debt service coverage typical of most PFI/PPP Issuers, the volatility of an
Issuer’s revenue is one of the primary drivers of credit quality. Moody’s evaluates the volatility of the revenue
received from the Off-taker using three measures:
(a) the complexity of project operations;
(b) the nature of the performance measurement/abatement regime; and
(c) the degree to which inflation exposure and mis-pricing risks remain in the structure.
Moody’s notes that in some cases, an Issuer will earn revenues from third parties in addition to the payments it
receives from the Off-taker. If such revenues are derived from services that are truly essential to the
concession, they would not introduce an appreciable amount of commercial risk to a transaction. However,
5
The rates used to score the sub-factors and derive an aggregate rating are Moody’s 4-year idealized default rates, consistent with the construction period
methodology and the convention in other areas of Moody’s research.

non-essential services may add commercial risk to a credit – they can be a distraction for management and, in
the extreme, may be difficult to provide successfully.
Revenues from Activities Related to the Concession – Moody’s considers as essential those services
provided (in addition to those dictated to be provided to the project Off-taker in the Project Agreement) that
satisfy the following criteria:
Provide support to the central objective of the concession,
Are logically located at or within the concession precinct, and
Have no substantial competition from other businesses outside the precinct.
The cash flows of these businesses are linked to the use by the public or Off-taker of the project, and given
that the project is being built to provide some essential government service it should be well patronized.
For example, visitor food services in a general hospital are both necessary and generally benefit from an ever-
changing but highly certain customer base. Similarly, hospital parking facilities are generally necessary for
patients, visitors and staff in all but the least congested urban locations. In addition, a pharmacy in a medical
office building likely represents an essential service.
Issuers may provide other services that do not provide an essential support to the central objective of the
concession. Examples of these services are non-health related retail outlets in hospitals or medical centres,
and evening community education classes at schools. Doctors’ consulting suites in a hospital could be
essential if the suites depend on the hospital to provide surgical support for the doctors, if the hospital has a
high load of day surgery sourced from the suites and the doctors are contractually bound to the hospital.
Given that most PFI/PPP projects are designed to carry out a policy objective which involves use of the project
by some segment of the population, Moody’s expects that the majority of un-contracted services will be
essential in nature and it would be unlikely for even non-essential services to be completely unrelated to the
concession. However, the risk profile of such businesses may be materially different than that of the
concession itself and lower the overall credit quality of the Issuer as a result.
Subject to deal-by-deal specifics (including consideration of the Issuer’s cash flow assumptions), revenue from
essential services may be treated as if it has the same risk profile as the Issuer’s primary revenue for the
purposes of calculating the project’s financial metrics. Moody’s will treat revenue from non-essential services
in the same fashion as long as the amount of such revenue is not material to the Issuer’s ability to service
debt.
Should revenue from non-essential services account for more than 2.5% of total forecast revenues, Moody’s
will separately evaluate the credit quality of that revenue stream and consider the impact on the credit quality
of the Issuer as a whole. The credit evaluation of a non-essential business will be performed using the
appropriate Moody’s methodology. Relying on material amounts of non-essential revenue may have a
significant negative impact on the credit quality of an Issuer.
1.1.1 Complexity of Project Operations

The scope and complexity of an Issuer’s operations largely set the challenge it faces to meet the performance
obligations under the Project Agreement. We assess Soft FM, Hard FM and Life Cycle obligations separately
as the performance obligations and abatement regimes of each can be materially different.
The provision of more basic services will likely result in a lower risk of revenue deductions than with more
complex services, unless a regime is randomly punitive. In addition, with regard to Hard FM and Life Cycle,
Moody’s believes that there is likely to be less risk associated with maintaining new assets built for the project
than when an Issuer takes over existing assets. This is particularly the case if the sub-contractor responsible
for Hard FM and Life Cycle worked closely with the construction contractor during the bid and development
stages – i.e. the sub-contractor knows what it will have to maintain and has priced its services appropriately.
Contrastingly, assuming responsibility for existing assets may increase the risk that the maintenance
obligations or the asset’s condition have not been fully understood and the services have been mis-priced as a

result. The same concern exists if a sub-contractor responsible for maintaining a project has had insufficient
involvement in the bid or development of the facility.
Moody’s scores the characteristics of each of Soft FM, Hard FM and Life Cycle separately. The lowest result
recorded from any of the services performed becomes the overall score. We use the lowest score – rather
than some weighting of all the service scores – in an attempt to capture the most complex obligation that the
Issuer is responsible for over the life of the concession.
However, Moody’s acknowledges that not all service obligations are created equal and that it is not necessarily
appropriate to judge the complexity of different types of services on the same scale. As such, Moody’s will
evaluate the specifics of each service obligation on its merits. If an Issuer is not responsible for providing any
services in a particular category – say there is no Life Cycle obligation, for example – that category’s score is
set at Aaa.
Soft Facilities Management – Soft FM services are scored according to their complexity alone. It is
presumed that Soft FM services are provided while the facility is in full, uninterrupted operation. Generally,
Moody’s would look to assign a single score to all Soft FM services in aggregate using the grid below.
However, if there are material differences in the complexity of the various services provided by an Issuer, each
will be assessed separately and the lowest score used on the basis of a “weakest link.”
Complexity Category Score

The Issuer is responsible for simple, low-skilled repetitive tasks that are not critical to the Off-taker's Aa
operation unless wantonly abandoned (e.g. routine janitorial services of simple buildings).
The Issuer is responsible for facilities management services considered routine for buildings and basic A
civil infrastructure
The Issuer is responsible for complex facilities management services such as maintenance for Baa
laboratory testing facilities, or complex civil engineering structures. This category also includes
maintaining technical equipment (e.g. standard IT networks, standard medical equipment and basic
training technology).
The Issuer is required to perform technically demanding services that, while not unique, do require Ba/B
specialist skill sets or demanding project management skills. This would include operating complex
medical or process engineering equipment.
Hard Facilities Management – Hard FM services are evaluated by considering three factors:
(a) the complexity of the assets being maintained;
(b) whether the obligations relate to assets designed and built under the Project Agreement or whether the
concession assumed existing assets; and
(c) whether Hard FM is a scheduled obligation or one that needs to be continuously provided within an
operating environment.
For the purposes of evaluating the complexity of the maintenance task, Moody’s assumes that the complexity
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of maintaining the facilities will be related to the complexity of constructing them in the first place.
Medium Complexity
Standard Assets Assets Complex Assets
Designed/ Designed/ Designed/
Built Assumed Built Assumed Built Assumed
Scheduled Hard FM Obligations Aaa Aa Aa A A Baa
24/7 Hard FM Obligations Aa A A Baa Baa Ba/B
6
Please refer to Appendix B for Moody’s six categories of project complexity and the scoring system supporting these categories.
Life Cycle Obligations – In contrast, the assessment of the complexity of Life Cycle obligations considers
only two factors: (i) whether the obligations relate to assets designed and built by the Issuer, and (ii) as with
Hard FM, the degree of complexity associated with the construction of the assets.
Medium Complexity
Standard Assets Assets Complex Assets
Designed/ Designed/ Designed/

Built Assumed Built Assumed Built Assumed
Score Aa A A Baa Baa Ba/B
1.1.2 Nature of Performance Regime

Project Off-takers are relatively free to set whatever performance standards they deem appropriate – limited
only by what the market will accept and by what is possible to document. Consequently, Issuers can be
subject to performance regimes ranging from very benign to very harsh in terms of the likelihood and amount
of potential revenue deductions or penalties. In some cases, a significant portion of an Issuer’s revenue may
not even be exposed to any performance-related deductions at all, thereby providing a highly reliable cash
flow for debt service.
The myriad of services that can be provided, the ways in which performance can be measured and penalties
meted out makes it difficult to compare directly the characteristics of different regimes across assets and
jurisdictions. Instead, Moody’s makes a judgment about the likely impact of the specific performance regime
on the Issuer’s cash flow. However, Moody’s starts with the assumption that the performance regime is not
punitive. Moody’s will separately consider on a case-by-case basis transactions with punitive performance
regimes. As such, the remainder of this section will apply only to the spectrum of transactions ranging from
those with a very mild performance regime to those with capped revenue deductions.
Punitive performance regimes – Moody’s regards a performance regime as punitive if it imposes

disproportionate penalties for performance failures. That is, as the severity of performance failures increases,
the severity of the penalties increases substantially or alternatively there are very large one-off payment
deductions. Ratchet mechanisms whereby penalties become increasingly severe if problems persist or go
unremedied are not considered punitive in principle, but may be if the ratcheting is too extreme. The most
extreme form of a punitive performance regime, expected to be rarely seen, would expose the Issuer to a
termination for a single severe performance failure. A less extreme punitive regime might feature revenue
deductions that could exceed the total Issuer revenues in a given measurement period – causing deductions
to roll over from period to period.
We measure two primary characteristics of a performance regime:
(a) the level of revenue deductions likely to occur in the ordinary course of business; and
(b) the quality of the information available in order to assist us in our assessment of the performance regime.
When considering the level of revenue deductions, it is not intended that we consider what happens when the
7
project is under significant stress – i.e. this is not a worst case scenario. Rather, we consider the normal level
of variability of performance and the level of deductions that are likely in the case of ordinary performance.
They are expressed in terms of the monetary impact of the deductions as a percentage of all revenue.
Revenue deductions for availability failures and deductions for underperformance are considered together.
7
Stress testing is discussed in Section 2.1.

Moody’s will look to a reputable technical advisor to report on the issues set out above and to generate the
8
base case ordinary poor performance scenarios. We view the provision of adequate information as a relevant
factor in for consideration in itself, as set out in the table below.
Quality of information
Comprehensive Comprehensive Report and No report but Inadequate

report & report, limited scenario detailed information
detailed scenario analysis of scenario
scenario analysis limited value analysis
analysis
Percentage of 0-5% of Aa A Baa Baa B
revenue at risk in Revenue
base case
ordinary >5% of Baa Ba Ba B Caa
performance Revenue
The above approach applies regardless of whether the Issuer has passed the risk of abatement onto any sub-
contractor in full or part, which is separately considered in section 1.2 (Cost Structure). We will also separately
take into account performance regimes where the Project Agreement provides that debt service is not at risk
under any circumstances.
1.1.3 Inflation Exposure, Change of Law and Off-taker Modifications

A Project Agreement typically provides for pre-defined payments from the Off-taker. Given the lengthy
concessions common to this sector, in some cases up to 40 years or more, exposure to inflation can be a
significant risk. Most Project Agreements provide for some or all of the payments from the Off-taker to be
indexed against rising costs (including real return debt service costs). Typically, a portion of the service
payment is adjusted to match changes in a general government inflation index. However, projects have also
been structured with everything from a complete pass through of all cost increases on a dollar for dollar basis
to mechanisms which match inflation in very specific regional or industrial price indices, such that revenue
adjustments mirror expected cost increases.
Project Agreements also usually provide for the Off-taker to change the specification of the building or the
nature of certain services to be provided by the Issuer (Off-taker Modifications). Off-taker Modifications will in
many cases give rise to higher capital and/or operating costs. In addition, the Issuer’s costs may increase due
to events beyond its control such as those arising from a Change of Law. Given the significant leverage
common to most PFI/PPP transactions, even moderate cost increases could impede debt service or increase
the risk of default. Consequently, the Project Agreement would ordinarily provide for the recovery of such costs
from the Off-taker, albeit that the amount that can be recovered could vary significantly. The methodology
considers the Issuer’s exposure to inflation, as well as to increased costs due to Off-taker Modifications and
Change of Law.
Inflation Exposure – in respect of exposure to inflation, Moody’s considers the percentage of the cost base
that is covered by revenue increases linked to an appropriate indexation mechanism, or indeed whether the
Off-taker may (in rare instances) absorb all actual cost increases on a pass through basis. Moody’s working
assumption is that the Issuer’s exposure to interest rate risk has been hedged by a match of debt service and
9
revenues on a linked basis . To the extent this is not the case, Moody’s will make additional downwards
adjustment to the Issuer’s rating. Consequently, the Issuer’s exposure to inflation focuses on non-debt service
costs.
8
Where a comprehensive independent report is not available, a comprehensive business analysis may be an acceptable substitute; this should include at
least an adequate independent technical report, supplemented by information from other sources.
9
E.g. part of the revenues inflate at a fixed rate if the issuer has raised fixed rate finance, or the revenues wholly or partially inflate in line with a well-established
consumer price index that is embedded within an indexed debt obligation.
Inflation Exposure Score
Off-taker covers all cost increases on a pass through basis Aaa

Substantially all costs are indexed, with indices broadly in line with the expected input costs of the Issuer Aa
Substantially all costs are indexed in line with a general price index A
A material element of the cost base is not covered by indexed revenues, but at least 75% of costs are Baa
covered by indexed revenues
A significant element of the cost base (more than 25%) is not covered by indexed revenues Ba/B
Moody’s notes that in most cases a general inflation index is likely to be used, which would generally pick up
movements in prices in the economy. However, Moody’s will separately consider the details of any
transactions that have very specific indices, where it is expected that the relevant index would match the
movement of the Issuer’s costs more closely over time. Specifically, where labour costs are material and are
expected to increase faster than the general price index trend, Moody’s will consider the adequacy of the
pricing approach which might involve linking portions of the revenue to a labour index and/or a contingency
reserve for differential inflation exposure.
Off-taker Modifications/Change of Law – Moody’s will measure the coverage of additional costs due to Off-
taker Modifications by qualitatively assessing how well the Project Agreement allows the Issuer to recover
such costs. Similarly, we consider how additional costs associated with non-discriminatory Change of Law are
covered under the terms of the Project Agreement. It is assumed that the Issuer is protected against
discriminatory Changes of Law and has no specific protections against changing rates of taxation unless these
are considered discriminatory. To the extent that either assumption is incorrect Moody’s may make further
positive or negative adjustments to the Issuer’s rating. When assessing exposure to non-discriminatory
Changes of Law Moody’s looks at the residual exposure of the Issuer, i.e. the exposure less any reserves that
the Issuer may have dedicated to cover such potential costs. Off-taker modifications and change of law are
scored based on the following tables:
Off-taker Modifications Score
Off-taker pays Issuer on a full pass-through basis Aa

Off-taker pays; Issuer can price adequately for time, price, and risk; no expectation of increased risk or A
increased deductions after allowance for contingencies.
Off-taker pays; Issuer can price but only partially or imperfectly with a consequent increased expectation of Baa/Ba
risk/deductions
Issuer pays with no compensation from Off-taker B
Change of Law Score
Issuer fully protected from all general and discriminatory Change of Law Aa
Issuer has modest but manageable exposure, A
with no losses expected in most scenarios after allowing for contingencies.
Issuer is significantly exposed, but capitalisation is adequate for most/many scenarios Baa/Ba
Issuer is fully exposed, inadequate capitalisation B
In order to determine the score for this sub-factor, Moody’s will take the average score for each of Inflation
Exposure, Off-taker Modifications and Change of Law.
1.2 Cost Structure
An Issuer’s cost structure – meaning the ease and cost of procuring required services, the ability to replace
suppliers or sub-contractors as needed and the linkage of costs to revenues – largely determines whether a
change to an Issuer’s costs may be large enough to imperil debt service.
The cost structure of Issuers varies significantly as a function of the type of services being provided, the
organizational strategy of the Issuer and the requirements of the Project Agreement. The evaluation of an
Issuer’s cost structure is based on the following considerations, as applicable:
(a) Benchmarking and Sub-contracting – the extent to which the Issuer’s costs under the Project Agreement
are subject to a benchmarking or market testing regime and the extent to which the Issuer sub-contracts or
self-performs its obligations under the Project Agreement
(b) Market Efficiency – the nature and behaviour of the market for those services;
(c) Sub-contractor Efficacy – the competence of the sub-contractors providing the services, the terms of the
sub-contracts and the willingness of the sub-contractors to meet their contractual obligations;
(d) Sub-contractor Liability Caps – the amount of performance penalties and other costs a subcontractor is
prepared to absorb on an annual basis and the costs it will remain liable for in the event of its termination;
(e) Base Case Costs vs. Benchmarks – how absolutely reasonable the base case costs are and how they
compare to relevant benchmarks for providing the services.
1.2.1 Benchmarking and Sub-contracting

Moody’s may make adjustments to the other Cost Structure sub-factor ratings to reflect the extent to which the
Issuer’s service costs are benchmarked or market-tested – i.e. if those service costs are subject to a periodic
benchmarking exercise, an open market tender or both. Similarly, Moody’s may make adjustments to the other
Cost Structure sub-factor ratings (below) to reflect the extent of risk transfer achieved by the Issuer sub-
contracting the provision of services on long term fixed price contracts.
Generally, it is our opinion that services that are both market tested and sub-contracted represent less credit
risk to the Issuer than those that are neither market-tested nor sub-contracted.
Benchmarking or market-testing typically occurs on a periodic basis (for example, every 5 years) for certain of
the service costs to be undertaken by the Issuer. Whilst, typically, hard facilities management and
lifecycle/maintenance costs are not subject to benchmarking, often the costs of soft facilities management
services and insurance have the benefit of these mechanisms. Whilst there is limited actual experience of
benchmarking in PPP/PFI projects to date, Moody’s expects that such mechanisms will reduce the risks of
having to otherwise price such services, upfront, on a long-term basis.
The level of risk assumed by a sub-contractor in terms of performance risk and price risk will likely lead to a
corresponding reduction in risks affecting the Issuer.
However, with appropriate structuring, a self-performing Issuer should be able to score well on the other Cost
Structure sub-factors below. For example, by delivering market standard services which could ultimately be
contracted out if there was a change of management strategy or through the provision of appropriate ring-
fenced internal contingencies and reserves. As such, self-performers can be assessed against these criteria
as well as Issuers who choose to subcontract.
Whilst Moody’s does not express a preference for or against sub-contracting per se, it is a limitation of self-
performance that risks may be mitigated but are never transferred. On the other hand, sub-contracting to a
party with very weak credit will not be perceived more favourably than self-performance.
1.2.2 Market Efficiency

The nature of the market for the services to be provided defines the cost to the Issuer of either providing a
service directly or through sub-contractors. Where services are directly provided, the Issuer needs to access
markets periodically over the life of the concession to procure labour and material. If services are sub-
contracted, it may be that a sub-contractor needs to be replaced because of under-performance or insolvency.
Given the lengthy term of most PFI/PPP concessions, market efficiency can have a significant effect on the
risk profile of an Issuer.
The services provided by an Issuer vary from transaction to transaction, and range from those that are easily
available from a large pool of possible contractors (e.g. cleaning services) to those that require a specially
trained labour force (e.g. correctional services staff). Similarly, the prices of services can either be dictated by
broad supply-demand dynamics or they can be controlled by regulation or by a small number of market
participants. Moody’s evaluates a market’s efficiency in the provision of the relevant services through an
analysis of both the depth of the market and the likely future evolution of sub-contractor prices.
The depth of the market is measured by considering the number of suppliers able to provide the service.
Market depth is an indicator of not only the efficiency of pricing, as discussed below, but also the degree of
difficulty likely to be encountered when seeking replacement sub-contractors and the risks that a particular
sub-contractor has mis-priced its contract. In general, the greater a market’s depth, the greater the degree of
price transparency that will exist and the easier it will be for an Issuer to detect (and avoid) mis-priced bids by
potential sub-contractors.
To appraise the likely future evolution of sub-contractor prices, Moody’s considers those factors which drive
sub-contractor pricing behaviour. In particular, we assess whether any constraints or other distortions might
apply to the market for the provision of the relevant services, and any sources of underlying cost uncertainty,
such as market volatility or technology risk. These factors may lead to sub-contractor pricing behaviour which
departs from efficient market pricing associated with strong competition between a large number of potential
sub-contractors.
Examples of market constraints/distortions would include: (i) circumstances in which the terms and conditions
of the sub-contracted services are regulated; or (ii) a situation where the workers performing the sub-
contracted services are necessarily members of a common union with identical wages, benefits and terms of
service, such that sub-contractors may either be limited in their ability to capitalize on benefits arising from
innovative working practices, or be subject to labour cost increases due to collective bargaining processes
beyond their influence. Examples of sub-contracted services which may be considered to have elevated cost
uncertainty risk include services involving the supply of energy, or technology-based services.
Generally, the score used for market efficiency will be that of the lowest-scoring market accessed by the Issuer
for any material amount of subcontracted services.
Depth of Market
Commodity Limited (3-5) 1 or 2 suppliers

Service, large Sufficient (5+) number of in a market for
(10+) number reputable reputable services that Single source
of potential suppliers to suppliers, none makes with no
suppliers with support an of which competitive development of
similar open tendering exercise tenders very competitors
characteristics process market power difficult likely
Predictable
underlying costs -
Aaa Aa A Baa Caa
stable or long term
decline
Predictable
underlying costs -
Factors influencing future evolution of sub-contractor prices
Aa A Baa Ba Caa
steady inflationary
pressure
Reasonably
predictable
underlying costs;
A Baa Baa Ba Caa
some cyclical
inflationary
pressures
Underlying costs
predictable within
a broad range; may
be subject to
cyclical inflationary
Baa Baa Ba B Caa
pressures and/or
limited volatility;
limited potential
for structural
changes in market
Underlying costs
are difficult to
predict. Significant
cyclicality of
underlying costs Baa Ba Ba B Caa
and/or volatility.
Potential for
structural changes
in market.
1.2.3 Sub-Contractor Efficacy

A sub-contractor’s ability to perform its obligations can be affected by its competence to provide a particular
service and the contractual obligations it is agreeing to take on. The sub-contractor’s proven competence in
providing similar services is an important indicator of its ability to perform the contracted services to the
standard required of the relevant sub-contract. Moody’s will generally assume that the sub-contractor’s
performance record indicates a willingness to meet contractual obligations. Evidence of a history of non-
performance will shift the score on this sub-factor down sharply.
Moody’s assesses two factors to determine the qualitative strength of sub-contractors: (a) the competence of
the sub-contractor and its ability to meet its contractual obligations based on its track record, and (b) the
general characteristics of the sub-contracts.
To assess a sub-contractor’s competence, Moody’s considers its track record in delivering services on this or
similar projects, and as a secondary consideration, whether there is evidence of such expertise or whether
such a judgment call is difficult to make. The highest result applies where sub-contractors can be judged to be
highly competent based on a long track record of providing on the same terms and conditions set out in the
Project Agreement. In contrast, a low result applies where there are serious question marks over the sub-
contractor’s ability to perform.

Moody’s also considers the terms of the sub-contracts. If they are considered market standard, a number of
industry participants would likely be attracted if a tender for replacement is required. If the terms are
significantly specialised or onerous, they may limit or delay the success of a subsequent tender. The highest
score is awarded where contract terms follow an established and documented industry contract model and the
lowest where terms are highly specialised or extremely difficult to meet – especially to the extent that re-
tendering may be problematic.
Contractual Terms
Specialized or Highly specialized or

Follow industry onerous terms may onerous terms make
model and/or no limit bidders, but still re-tender
onerous terms expect some interest problematic
Competent sub-contractor, long track
Aa A Baa
record, identical or similar projects
Sub-contractor without track record but
Competence
A Baa Ba
expected to be competent
Question mark over sub-contractor's
Baa Ba B
ability, no specific evidence
Serious question marks over sub-
Ba B Caa
contractor's ability
1.2.4 Sub-Contractor Liability Caps

If a sub-contractor seriously under-performs a service, the sub-contract may be terminated. Many sub-
contracts require the sub-contractor to bear the costs incurred by the Issuer in replacing the sub-contractor
with a new party on the same terms as those set out in the sub-contract. The sub-contractor may also be liable
for the increased price a new sub-contractor may charge the Issuer for a service, over and above the price
agreed between the Issuer and the original sub-contractor.
However, sub-contractors often seek to limit their liability to the Issuer under sub-contracts. Moody’s reviews
any limitation of these obligations in detail because any such limitations or caps on liability may weaken
contractual protections included for the benefit of the Issuer. Moody’s begins with the working assumption that
all deductions to revenue resulting from a sub-contractor’s failure to perform will be passed down to the
relevant sub-contractor. No specific value will be assigned to provisions that permit sub-contractors to
subsequently increase liability caps as this would usually be at the option of the sub-contractor rather than an
absolute obligation.
In accordance with the table below, Moody’s will assess the liability caps on the basis of both (i) the revenue
deduction passed down to the sub-contractor(s) expressed as a percentage of the sub-contractors(s) annual
fee and (ii) the sub-contractor(s) termination liability in the event that the sub-contract(s) are terminated,
expressed as a percentage of the sub-contractors(s) annual fee.
Termination liability
>500% of
annual fee or
uncapped 250%-499% 150%-249% 50%-149% <50%
>250% of annual fee Aa Aa Aa A Baa
liability cap
150%-249% Aa Aa A Baa Baa

Annual
100%-149% Aa A Baa Baa Ba

50%-99% A Baa Baa Ba B
<50% Baa Baa Ba B B

Where a single aggregate liability cap is imposed across a multi-year subcontract without being refreshed, we
will divide the aggregate cap by the number of years as a proxy for the annual liability cap. In transactions with
more than one sub-contractor, Moody’s will determine a final score for this sub-factor based on the relative
importance and complexity of the services being provided by each subcontractor.
1.2.5 Base Case Costs versus Benchmarks

Issuers must project the costs of providing the operating and maintenance obligations set out under the
Project Agreement over the project’s life. If material operating and maintenance costs are not sub-contracted
for the life of the project, then the projected costs in the Issuer’s financial base case are the best estimate of
net cash flow that will be available to service the debt. If these costs are underestimated, the Issuer’s debt
service capacity would be overstated. Moody’s therefore considers it appropriate to measure the Issuer’s
exposure to this risk.
Where operating and maintenance costs are sub-contracted for the life of the project, this risk is partially
mitigated, however it is not completely removed as the Issuer will still be exposed to mis-pricing risks in the
event the sub-contractor has to be replaced for whatever reason. Moody’s assesses two features to determine
this sub-factor:
(i) the information available to judge whether the costs assumed in the Issuer’s base case cash flow forecast
are reasonable; and
(ii) how the cost assumptions compare to what might be reasonably considered a market price or Benchmark
Level. Moody's would ordinarily expect Benchmark Levels to be determined by a qualified Technical
Adviser. To the extent a Technical Adviser doesn’t provide this information in a useful form, Moody’s
would use comparators from other projects and estimates from the Issuer, provided the latter were
supported by external information sources believed to be reliable, taking due account of the Issuer’s
obligations and exposure including handback obligations, taxation and residual risk in respect of
insurance, Change in Law etc.
Moody’s will also consider the number of bidders on a project, together with the type of services the Issuer
must provide. In a well established market with multiple bidders and non-specialized services, Moody’s may
form a view that costs determined through an open bidding process are at or near benchmark levels, absent
evidence to the contrary.
Overall, the highest scores will result where there is substantial market data available to determine appropriate
benchmark prices for the exact contracted services and there appears to be considerable buffer between the
budgeted costs and the benchmarks. In contrast, the lowest scores will apply when there is little data available
to make sensible estimates of benchmark costs, there are few bidders, the services are highly specialized and
what information exists suggests that costs have been underestimated.
Base Case Costs versus Benchmarks
Conclusion based on satisfactory report, Conclusion based on limited data, base case
base case costs: costs:
> approximately < > approximately <

benchmark = benchmark benchmark benchmark = benchmark benchmark
Substantial data
available relating to
Aaa Aa Baa Aa A Ba
exact contracted
services
Sufficient data relating
to exact contracted Aa A Baa A Baa B
services
Adequacy of information
Limited data relating

to exact contracted
services, but proxies
Aa A Ba A Baa B
available or multiple
bidders and generic
services
Limited data relating
to exact contracted
services, approximate
A Baa B Baa Ba B
comparators only,
services specialized or
few bidders
Little data available,
specialized services, 2 Baa Ba B Ba B Caa
bidders or less
1.3 Force Majeure & Issuer Default Termination
The Issuer’s ability to generate revenue is derived almost exclusively from the Project Agreement. The Project
Agreement will generally contain provisions that provide for its termination in the event either that certain
10
intervening events make delivery of the service impossible (i.e. Force Majeure) , or the Issuer fails to
undertake certain obligations or meet certain standards (an Issuer Default Termination Event).
It follows that the circumstances that may lead to a declaration of Force Majeure or an Issuer Default
Termination Event (and the likelihood of them occurring) are critical to the credit of the Issuer. There may also
be a range of factors that mitigate the likelihood of termination occurring. For example, the nature of the
project documents may allow for the Issuer to avoid a possible termination for underperformance if the
offending sub-contractor is replaced on a timely basis.
10
Events that could cause a termination due to a default by the Project Off-taker are not considered in the Project Risk Assessment. Rather, they are
considered by over-laying the effect of the credit quality of the Off-taker on the stand-alone credit quality of the transaction (see Off-taker Adjusted Rating).

While Moody’s will consider all aspects of the Force Majeure and Issuer Default Termination sections in the
Project Agreement – and the likelihood of these occurring – the two key areas we focus on are the provisions
that deal with the ability to terminate for Force Majeure and the level of Issuer under-performance required for
termination.
In the majority of PFI/PPP transactions, the Off-taker is obliged to make a Termination Payment to the
11
Issuer at some point following Force Majeure or Issuer Default Termination. The nature, size and timing of
the Termination Payment all affect the recovery of creditors in the event of a Project Agreement default rather
than the likelihood of the default itself and are, as a result, dealt with in section 3 (Recovery on Concession
Termination).
1.3.1 Force Majeure

Moody’s considers two main factors in evaluating the terms of a Project Agreement’s Force Majeure
provisions:
(a) the scope of the Force Majeure definition; and
(b) the ability of the Issuer to withstand a Force Majeure event.
The scope of the Force Majeure definition is important because it determines when the Issuer may be relieved
of its obligations and when it may be entitled to compensation from the Off-taker.
The ability to withstand a Force Majeure event addresses the extent of the relief and compensation from the
Off-taker and any liquid reserves. In most cases, the Issuer will be relieved of its performance obligations to
the extent the Force Majeure makes it impossible to provide the services. However, the question is whether
the Issuer will continue to be paid the full service fee by the Off-taker or some reduced fee that may or may not
continue to service debt and cover a portion of the Issuer’s operating costs (including amounts sufficient to
keep any sub-contractor on site). It also follows that the amount of dedicated liquidity supporting any
temporary or permanent interruption shortfall will be important.
Moody’s specifically considers whether the Issuer will be able to service its debt (and meet any continuing
operating costs) without interruption from the time the Force Majeure occurs until the Issuer has the right to
terminate the Project Agreement (and receive a termination payment from the Off-taker) due to the extended
Force Majeure period.
The level of business interruption insurance carried by the Issuer is not explicitly evaluated in this section.
Moody’s expects PFI/PPP Issuers to carry commercially reasonable amounts of insurance cover and to have
the level of cover they acquire validated by an external insurance consultant. While business interruption
insurance is valuable in the ultimate recovery of costs of a payment disruption, a period of time may exist
between claim submission and payment. Moody’s believes that in cases where immediate liquidity is required,
business interruption proceeds may not arrive in as timely a fashion as would be required to forestall a debt
default if limited or no payments are being received from the Off-taker.
11
In some Project Agreements, the Off-taker is not required to make a termination payment following certain specific termination events – e.g. abandonment of
the project. In rare cases, the Off-taker may not have an obligation to make a termination payment at all.
Force Majeure – Definitions
Usual
insurance
carve outs +
carve outs for
terrorism and Usual
All material events beyond insurance
circumstances Issuer's carve outs + Usual
not the fault of control, eg terrorism carve insurance No relief for
Issuer strikes out carve outs only FM
Off-taker pays debt service +
sufficient amount to keep
sub-contracts on foot for Aaa Aa Aa A n/a
entire period of FM, revenue
not subject to abatement
Off-taker pays debt service +
sufficient amount to keep
sub-contracts on foot for
Aa Aa A A n/a
entire period of FM, revenue
subject to abatement for
services still provided
A combination of Off-taker
revenue + reserves is
sufficient to service debt, Aa A A Baa n/a
Force Majeure - Effect
keep sub-contracts on foot

for entire period of FM
sufficient to service debt,
A Baa Baa Ba n/a
for a minimum six month
period
sufficient to service debt,
Baa Ba Ba B n/a
for a minimum three month
period
insufficient to service debt,
Ba B B B Caa
for a three month period or
no FM relief
1.3.2 Issuer Default Termination

The degree to which an Issuer can under-perform on its service obligation to the Off-taker before the
concession can be terminated is a defining characteristic of a project’s risk profile. If there is little room
between the default threshold and the expected base case level of performance, or there is little tolerance for
short periods of under-performance, there is a material danger of concession termination.
Moody’s expects that an Off-taker would have the right to terminate the concession following a default by the
PFI/PPP Issuer in any of the following circumstances:
(i) Insolvency of the Issuer and/or the company holding the Project Agreement (if different);
(ii) Abandonment of the project;
(iii) An extended period of continued gross negligence;
(iv) Breach of undertaking having a material adverse effect; or
(v) Mis-representation having a material adverse effect.

As a result, no specific rating distinctions would likely arise from the inclusion of these events of default in a
Project Agreement. However, projects usually include events of default specific to the project and to the goals
of the Off-taker – subject in most cases to some mitigating structural or other features. The remoteness of
these events – and their effect on the probability of causing a concession default by the Issuer – will also be an
important determinant of credit risk.
Performance and termination regimes typically work on the basis of Penalties that are assigned for service
failures or unavailability of the facility. Penalties can take the form of “penalty points” assigned for each service
failure, a direct revenue deduction for each service failure or some combination of the two.
Consequently, in pursuit of a uniform measure of an Issuer’s exposure to potential termination for under-
performance, Moody’s considers how much worse than projected base case performance the actual
performance can be before the Off-taker can terminate the Project Agreement (the Distance to Termination).
This Distance to Termination must be viewed in the context of how probable such a level of under-
performance actually is – something which is already taken into account in section 1.1.1 (Complexity of Project
Operations) and section 1.1.2 (Nature of Performance Regime).
Give the wide range of services provided in PFI/PPP projects and the myriad ways of measuring performance
and setting penalty regimes, determining the Distance to Termination is necessarily a qualitative exercise,
albeit one with quantitatively expressed targets. Each project’s Distance to Termination is allocated to one of
three categories; “Normal”, “High”, and “Low” and the rating score for Issuer Default Termination is then
derived from the table below.
Distance to Rating
Termination score Description
High Aa The service standards and penalty thresholds are set at a considerable distance from
normal industry operating standards. It would be rare for the Issuer to be assessed any
Penalties from under-performance and they are not expected to incur peak penalties at
all. Termination for under-performance is extremely unlikely.
Expressed in quantitative terms, over the entire life of the concession, the probability of
under-performance sufficient to permit the Off-taker to terminate should be less than 5%.
Normal A The service standards and penalty thresholds are reasonable given the obligations of the
Issuer. The Issuer is expected to be assessed some Penalties in the ordinary course of
business and may occasionally, due to unexpected events, be assessed peak penalties for a
short time. However, assuming that the operator is acting in according with industry
practice, the occurrence of sufficient Penalties to permit the Off-taker to terminate the
concession is very unlikely.
under-performance sufficient to permit the Off-taker to terminate should fall in the range
of 5% - 10%.
Low Baa The service standards and penalty thresholds are set at or very near to normal industry
operating standards. The Issuer is expected to be regularly assessed Penalties for under-
performance and the assessment of peak penalties would not be uncommon. Termination
for under-performance is possible.
under-performance sufficient to permit the Off-taker to terminate is greater than 10%.
To date there is a limited history of operating phase PFI/PPP projects around the world. To the extent that it
becomes possible to create experience-based stochastic models of service standards and service error rates
in the future, the guidelines noted above may be refined.
Once an Issuer has reached the operations phase, Moody’s will focus its analysis on the Issuer’s ongoing
performance against the Project Agreement’s regime, specifically the actual revenue deductions and penalty
points as compared to the base case. While a short term problem may not lead to rating action, a significant
and/or sustained underperformance as compared to the base case almost certainly would.
1.3.3 Concession/Sub-Contract Interface

In many cases, the Issuer’s service obligations are partially or fully sub-contracted. Typically, Moody’s would
expect the Issuer to protect itself from a sub-contractor failure by fully mirroring the Project Agreement’s
performance obligations and penalty regime in the sub-contract(s). The contractual terms of the sub-contracts
are important as they specify how the Issuer’s obligations under the Project Agreement are passed on to the
sub-contractors, how performance problems get resolved, and ultimately, how a sub-contractor is replaced
before their under-performance prejudices the continuity of the Project Agreement. For projects that do not
feature material amounts of sub-contracting, this sub-factor is moot and we would score it at the same level as
the Nature of Performance Regime sub-factor.
The key area of concern is the Sub-Contract Headroom between the performance requirements and penalties
specified in the Project Agreement and the sub-contracts. That is, the degree of under-performance between
when a sub-contractor can be terminated and when the entire Project Agreement is at risk. A Project
Agreement may explicitly address Sub-Contract Headroom – e.g. by expressing the degree of
underperformance that is tolerable in a sub-contract before it must be terminated – or it may be silent and
require a comparison of sub and master contracts.
In the case of poor sub-contractor performance, a Project Agreement may also grant certain rights to the Off-
taker to approve replacement sub-contractors or even permit the Off-taker to step into the shoes of the sub-
contractors. Although these provisions could prejudice the Issuer’s ability to act appropriately with sub-
contractors, Moody’s expects the usual desire of all parties to have projects succeed makes it generally
unlikely that Off-takers will interfere materially with an Issuer’s good faith decisions about sub-contractors.
It is difficult to convert the concept of Sub-Contract Headroom into an accurate measurement given the
existence of multiple sub-contracts in most projects and the many ways in which performance requirements
and penalties may be passed down to different sub-contractors.
In the majority of cases, there is some but not absolute linkage between the performance of sub-contractors
and the continued viability of the Project Agreement. In these circumstances, the characteristics of the
concession/sub-contract interface are mapped to rating outcomes as described below. Generally, the looser
the linkage between sub-contractor performance and the consequences to the Issuer, the higher the score.
Penalty Points
automatically wiped Penalty points No mechanism for
clean on sub-contractor wiped through the wiping penalty
replacement passage of time points
Can replace failing sub-contractors multiple

Aa A Baa
times without imperiling concession
Can replace failing sub-contractors once
without imperiling concession. Subsequent A Baa Ba
failures may cause termination
Generally, it is Moody’s experience that the form of the concession/sub-contract interface is broadly consistent
across all sub-contracts in a given transaction. To the extent that a material sub-contract features a
dramatically more restrictive interface than the others in a transaction, the evaluation will reflect the terms of
that more restrictive sub-contract.
2. Capital Structure
Moody’s adjusts the Project Risk Assessment for the risk of leverage in the Issuer’s capital structure, offset by
the effect of any structural enhancements designed to mitigate the risks of operating at high leverage,
including appropriate liquidity. In the majority of cases, we would expect to adjust the Project Risk Assessment
by no more than two rating notches as a result of our analysis of the capital structure.
2.1 Financial Leverage
Moody’s will use the transaction sponsor’s financial model to calculate the Issuer’s credit metrics. The
objective is to determine the overall probability of default, taking into account the inter-relationship between the
project’s intrinsic credit characteristics and the capital structure. A project with a weaker Project Risk
Assessment, with higher consequent cash flow volatility, should require a more robust capital structure and
structural features for a given rating level. Similarly, as PPP projects are often very highly leveraged, any
particularly negative features in the Project Risk Assessment are more likely to cause cash flow or
performance stress and a higher probability of default. The financial model is critical to the analysis of the
transaction as it is used to calculate the profit and loss account, balance sheet and cash flow statements. It is
also important for purposes such as determining revenue re-setting where appropriate (e.g. following an Off-
taker requested modification) and changes following a change of capital structure. As a consequence, the
output from the financial model will typically be the primary quantitative tool for all parties to the Project
Agreement to monitor the financial performance of the Issuer.
To consider the effect that financial leverage has on an Issuer, Moody’s calculates three primary credit metrics
for each transaction – two coverage ratios and a cash break-even ratio:
(a) A Minimum Debt Service Coverage Ratio (DSCR) – which looks at the point in time at which the direct
coverage of debt service costs is lowest on a post-tax basis;
(b) An Average DSCR – which looks at the average coverage of debt service costs on a post-tax basis; and
(c) A Cash Break-Even Ratio – which measures the maximum percentage that projected operating and
capital expenses can be increased by a fixed percentage per annum over each year of the Project
Agreement life while still leaving enough to service debt and meet all other costs when due.
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All three primary metrics are based on the most recent base case cash flow forecast of the Issuer. Additional
revenues from essential concession-related services are added to primary revenue for the purposes of
calculating the project’s financial metrics subject to the caveats set out in section 1.1 (Volatility of Revenue).
Moody’s will treat revenues from non-essential services in the same fashion as long as these represent 2.5%
or less of total revenues. Transactions with non-essential revenue materially greater than 2.5% of total
revenue are likely to be analyzed outside the scope of this methodology.
Moody’s acknowledges that these metrics are usually calculated quarterly, on an annual look back basis,
consistent with the determination of any applicable distribution tests. Moody’s will adjust these calculations if
necessary in order to take into account any further weakness in the structuring of the projected cash flows,
that leads to very low coverage levels in a single Measurement Period. Note that Moody’s will also typically
ignore any tail end period where there are very high coverage ratios which may not be representative of the
project’s real risk profile.
2.1.1 Minimum and Average Debt Service Coverage Ratios

The Minimum and Average DSCRs are traditional measures of financial leverage. The ratios test the Issuer’s
exposure to debt service costs and measure the ability to sustain lower cash flow from unexpected events
before debt service is impaired.
12
Where the Issuer has an established operating history, Moody’s takes into consideration the most recent actual levels generated by the cash flow forecasting
model as well as the projected levels over the remaining life of the longest maturity rated financial instrument. To the extent that there are material differences
between historical and projected values, Moody’s will focus on the results it believes are most useful in defining the future performance of the Issuer.

DSCR = Net Cash Flow Available
13
Senior Debt Service
Where Net Cash Flow Available = All Revenue less all benchmarked & non-benchmarked Costs less Tax – i.e.
the DSCR is calculated based on cash flows after payment of tax or tax-like amounts. It also includes
scheduled movements to and from timing reserve accounts (such as maintenance and tax reserve accounts)
but excludes unscheduled movements to and from reserves dedicated to funding contingencies (such as debt
14
service reserve accounts).
2.1.2 Cash Break-Even Ratio

The Issuer’s financial exposure to an increase in operating costs is tested using a Cash Break-Even Ratio.
The test is intended to cover all costs including operating costs and capital/lifecycle costs and irrespective of
benchmarking or sub-contracting. The ratio increases all of the Issuer’s costs by the largest fixed percentage
that enables the remaining cash flow to pay scheduled senior debt service in every Measurement Period.
The Cash Break-Even Ratio should reflect consumption of all available operational cash reserves (such as
maintenance reserves or tax reserves) but without drawing on the Debt Service Reserve or other mandatory
financing reserves.
Whilst the above Cash Break-Even Ratio will be the primary test, Moody’s will also review additional
breakeven analysis, which may provide additional insights into the nature of the revenue and costs stresses
the Issuer may be able to withstand according to the specifics of the project. Moody’s will take this additional
break-even analysis into account in assessing the overall transactions structure in section 2.2. For example,
Moody’s would expect to review the following additional break-even analysis: (i) revenue; (ii) non-
benchmarked costs; (iii) benchmarked costs; (iv) subcontracted costs; and (v) non-subcontracted costs.
For example, benchmarking (already considered in section 1.2.1) may have a significant protective effect.
Moody’s may consider this through a second run of the model with an amended input, but we will be alert to
projects which are unduly reliant on benchmarking, such that the use of the mechanism becomes probable
rather than possible. This carries additional risk and may trigger affordability or other problems. Sub-
contractor support is assessed in section 1.2.3 but where unusually strong subcontracting arrangements are in
place this may help to mitigate a low Cash Break-Even Ratio through a qualitative adjustment as set out
below.
2.1.3 Using the Output

Depending on the outcome of the three ratio calculations specified above, the results of the Project Risk
Assessment will be notched up or down as follows. The final result is the weighted average of the individual
metrics, adjusted as required, and rounded to the lower rating result.
-2 or more
notches/out
of modeling
range -1 notch None +1 notch +2 notches
Minimum Debt Service Coverage <1.05 1.06 to 1.10 1.10 to 1.20 1.20 to 1.30 >1.30
Average Debt Service Coverage <1.10 1.10 to 1.15 1.15 to 1.25 1.25 to 1.35 >1.35
Cash Break-Even <15% 15-25% 25-35% 35-45% >45%
As noted above, the model will not assign reliable ratings where inputs are inconsistent or highly unusual. To
alert users to this concern, the model warns users when certain inputs are nearly or actually outside the range
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It is Moody’s expectation that the documentation will include a cash flow waterfall providing both that junior debt and equity are subordinated and that
periodic payments to them will not be made unless certain distribution tests are met. If this is not the case, then Moody’s will base the coverage ratios on all
of the debt that is pari passu with senior debt.
14
This gives credit to timing reserve accounts (which are designed to cover lumpy cash flow items) but does not allow initial funding or releases of funds used
to cover specific uncertainties such as debt service reserve accounts or change of law reserves to be reflected in the ratio.

of common experience. The model will specifically warn the user against using values indicated in the ‘-2 or
more notches/out of modeling range’ above. Such features would generally not be consistent with investment
grade credit in the absence of significant other supportive transaction features.
2.2 Structural Features
The structure of a typical Issuer incorporates certain features designed to offset the risks of operating at high
leverage. Moody’s review of these features may cause the result of the Project Risk Assessment, after
considering any changes for financial leverage, to move up or down depending on their efficacy.
Moody’s begins with an assumption of certain baseline structural features. For example, Issuers typically grant
a security interest over their contractual rights under the project documents, are usually restricted to solely
undertaking the services described in the Project Agreement and are not permitted to lend money or invest in
other ventures. To the extent a given transaction’s features are either stronger or weaker than the baseline
assumptions, Moody’s assessment of its credit quality will be notched up or down.
2.2.1 Step-in Rights and Security Structure

An appropriate security package affords substantial control rights to creditors if the Issuer’s performance
deteriorates. Similarly, Step-in Rights permit the creditors to step into the shoes of key contractual parties,
including the Issuer under the Project Agreement. Effectively, these control rights can give creditors the power
to control an Issuer and avoid a formal concession termination and/or a bankruptcy process while corrective
action can be taken.
Moody’s baseline assumptions about an Issuer’s security structure usually include the following:
Debt providers benefit from a charge over the shares in the Issuer, which if enforced gives the debt
15
holders the right to appoint directors.
In addition, the debt providers have a full security interest over all assets of the Issuer including charges
over assets, pledges and assignments (to the extent permitted by the jurisdiction), to achieve an interest in
all key assets and contracts including the Project Agreement and the major sub-contracts.
Debt providers have a right to step into key sub-contracts if the Issuer breaches the terms thereof, and to
step into the Project Agreement following an Issuer event of default, and replace the Issuer with a new
entity (such entity to be approved by the Off-taker, such approval not to be unreasonably withheld).
Neither the Issuer nor creditors would usually have the right to force a Project Agreement termination, this
being almost always at the option of the Off-taker. In the vast majority of cases the adjustment is likely to be
limited to 2 notches. Below are examples of possible notching adjustments:
Possible Rating
Example of Security Structure Feature Adjustment
In addition to the baseline assumptions, the debt holders have the option to force a Project + 1 Notch
Agreement termination and receive a Termination Payment if they choose not to step-in
following an Issuer event of default
No direct agreements or step-in rights with key sub-contractors - 1 Notch
Inadequate security package - 2 or more Notches
2.2.2 Payments to Equity and Distribution Lock-ups

Moody’s also considers the protections the financial structure affords debt holders in the event the financial
performance of the Issuer or other key transaction participants deteriorates. In particular, Moody’s sees value
in Equity Lock-ups that retain cash in the Issuer by stopping payments to junior debt and equity in the event of
15
Typical in the UK and Australia and likely to be common in North America.

deteriorating performance. Moody’s would expect to see the Equity Lock-up apply to all (quasi-) debt
instruments that rank below the senior rated debt.
The relative value of an Equity Lock-up trigger is partially a function of an Issuer’s debt service coverage
ratios, with projects with a low debt service coverage ratio benefiting from a trigger that is ‘close by.’ In
Moody’s opinion, an Equity Lock-up trigger should be set above 1.075x in order to add substantive benefit to a
transaction structure. The table below outlines the adjustments to the Project Risk Assessment to reflect these
considerations:
Possible Rating
Equity Lockup Trigger Adjustment
Protective: trigger set at high level (1.20x or above) + 1 Notch
Standard: trigger set at a level higher than 1.075x, and within 10 basis points of the 0 Notches
transaction’s projected minimum DSCR
Weak: Trigger set at a DSCR of less than or equal to 1.075x or no DSCR based trigger - 1 or more Notches
2.2.3 Liquidity
Liquidity dedicated to meet debt service buys time for the Issuer to deal with unforeseen problems and can
come in the form of cash reserves or unconditional credit obligations from highly rated entities. In order to
provide benefit to a transaction, a liquidity reserve would have to be either a cash reserve in a dedicated
account with a Prime-1 rated bank or an unconditional and irrevocable letter of credit or loan facility, which
16
may be drawn on short notice.
Consistent with the framework outlined in our methodology for the analysis of construction risk in these
transactions, in Moody’s opinion a reserve equivalent to six months of debt service is generally regarded as
the baseline preferred level of liquidity to cover operational challenges an Issuer might have to overcome
during the life of the concession. The notching table below reflects this principle.
Possible Rating
Debt Service Reserve Adjustment
Protective: 12 Month Debt Service Reserve + 1 Notch
Standard: 6 Month Debt Service Reserve 0 Notches
Weak: Debt Service Reserve of less than 6 months - 1 or more Notches
Whilst the Debt Service Reserve is the main concern in this section, Moody’s analysis will also take into
account all other reserves and the designated purpose for each of those reserves as out lined in the next
section.
2.2.4 Sub-contractor Credit Quality, Third Party Financial Support and

Other Reserves/Structural Features
Sub-contractor Credit Quality – The credit quality of the sub-contractor indicates the likelihood that the sub-
contractor will become insolvent and need to be replaced. At best, sub-contractor insolvency could cause
temporary disruption to the services being provided and additional costs associated with replacement. At
worst, if few companies in the market can provide the contracted services or there are unusual or onerous
contractual provisions, difficulty in finding a replacement may lead to more serious problems for the Issuer.
The credit quality of the sub-contractor is also important because PFI/PPP Issuers usually expect to pass
down revenue deductions from the Off-taker under the Project Agreement to the sub-contractor, in the form of
16
Any debt service reserve facility or letter of credit should operate in a manner that is equivalent to a cash reserve. It must be available at the time it is needed
– i.e. when there is a payment shortfall. It should be repayable out of excess funds and must be available to be re-drawn. The facility should be available at
all times prior to maturity of the senior rated debt.

deductions from the fee that the Issuer would ordinarily pay to the relevant sub-contractor for the delivery of
the service.
Many of the companies that typically act as sub-contractors to major PFI/PPP projects around the world are
substantial entities with established track records. However, most are in industries that have typically
depended on the bank markets for financing, rather than the public debt markets and are also typically smaller
in terms of their debt financing needs than most public debt issuers. Further, the business models for many of
the industries that are represented as typical PFI/PPP sub-contractors do not need to achieve investment
grade ratings, higher speculative grade ratings, or ratings at all in order for them to be economically
successful.
As a result, relatively few sub-contractors – even on the largest projects – are rated entities. Moody’s
acknowledges this economic reality but also notes that, all other things being equal, a sub-contractor of
stronger credit quality is generally better for a transaction than one with a weaker credit quality. As a result, if
an Issuer’s obligations have been passed down to an established, highly rated sub-contractor, Moody’s will
factor the financial strength and rating of that sub-contractor as notching adjustments as appropriate.
Third-party Financial Support – A PFI/PPP Issuer may also procure Third Party Financial Support from one
or more of the sub-contractors, in support of the relevant sub-contractor’s obligations. Such support usually
comes in the form of bank guarantees or performance bonds. The support may be specifically available to
meet any revenue abatement that exceeds the sub-contractor’s fees or costs incurred by the Issuer, following
sub-contractor termination, whether due to performance failure or insolvency.
Moody’s will view such Third Party Financial Support as an additional form of credit support if it materially
improves the ability of the Issuer to survive performance or financial failures by the sub-contractor. As such,
Moody’s expects to make adjustments to the Minimum and Average DSCR calculations and the Cash Break-
Even calculations to reflect the specific additional level of support provided. The adjustment will take into
account the size and the nature of the security, the relative value of the sub-contract and the percentage of
benchmarked services. Moody’s will also take into account the sub-contractor’s obligation to refresh the Third
Party Financial Support and how the sub-contractor’s contractual liability caps (considered in section 1.2.3)
may be affected by using such security.
Where additional external support is provided to supplement a project’s internal cover ratios, Moody’s may
review and amend any capital structure notching adjustment indicated by the model, having regard to factors
such as to certainty over the support’s availability, whether it will be replenished or must be repaid, and the
beneficial impact on breakeven sensitivities and loss absorption before debt recovery is impaired.
Other Reserves/Structural Features – Moody’s analysis will also take into account all other reserves and
other structural features that may be included as part of the project’s total project and finance structure. The
designated purpose of any reserve will be important to this analysis. Some reserves will be funded for a
specifically contemplated future payment obligation. Other reserves will provide additional back-up liquidity or
credit support.
Reserves funded to meet a contemplated payment obligation include reserves for future lifecycle/capex or
future tax obligations. These reserves are usually required to cover a future shortfall in the expected operating
cash flow, usually due to mismatch in timing between revenue and expense profile. Moody’s assessment of
these reserves will include a focus on (i) whether the reserve will be fully funded or whether it is required to be
built up out of the project’s cash flows; (ii) whether assumptions about interest earned are conservative; (iii) the
impact of differing actual inflation rates compared to the assumed inflation rate in the base case model and the
corresponding impact it might have on the actual reserve balance at the time required, and its ability to fund
the required cash expenditure at that time.
Payments that are scheduled to be paid into such reserves in the base case model should be included ahead
of debt service in the project’s cash flow waterfall and as an expense in the DSCR calculation. In Moody’s
opinion, these are moneys the Project requires in the future. Scheduled payments out of such reserves should
be included in cash available for debt service at the required time. Unscheduled payments out of such
reserves should not be included in the DSCR calculation.

Back-up reserves that provide additional liquidity or credit support include change of law reserves and
operating cost reserves (i.e. over and above the 6 month debt service reserve). Depending on the quantum
and uses of such reserves, the Moody’s committee may make qualitative adjustments to the Capital Structure
assessment, if our analysis indicates that there is a consequential reduction in the probability of default.
Moody’s also acknowledges that sponsors and financiers will continue to develop their own particular
structures and mechanisms for creating competitive advantage or otherwise improving their approach for PPP
projects. Moody’s will assess each of these structural features on its merits, whether such feature increases or
decreases risks to debt holders.
2.3 Refinancing Risk
Moody’s believes that the most appropriate financial structure for an Issuer provides for a repayment of debt
on a regular basis from operating cash flow over the life of the debt, so that the Issuer is not exposed to
refinancing risk. This is most often achieved by an amortising debt profile intended to reflect expected cash
flows over time. Furthermore the Issuer would be expected not to be exposed to material interest rate risk
and/or residual foreign exchange risk.
Nevertheless, Moody’s understands that in certain jurisdictions financing with very long term maturities to
match long Project Agreement lives may not be feasible or preferable to sponsors, and hence Issuers have
been structured to accommodate an element of refinancing risk. Issuers that are exposed to un-hedged or
imperfectly hedged refinancing or other external financial risks fall beyond the scope of this methodology and
will be analyzed on an individual basis.
3. Recovery on Concession Termination

The Project Risk Assessment, combined with adjustments for the Issuer’s capital structure, effectively forms
an opinion of the standalone probability of default for the transaction. When combined with Moody’s view of
the likely senior debt recovery if the transaction is terminated early, this yields an expected-loss based
assessment for the transaction on a standalone basis.
For reasons articulated in previous research, Moody’s concludes that it is very difficult to quantify likely
recoveries of debt instruments in default, particularly those likely to be far from default (as implied by
investment grade credit ratings). Nevertheless, the concession framework and financial structure common to
PFI/PPP Issuers in operation provide some degree of certainty around a range of termination or sale values
that would likely underpin a recovery value in the event that a debt instrument was to default. Consequently,
Moody’s looks to the contractual termination rights embedded in a Project Agreement to determine what may
underpin a recovery value for the Issuer’s debt instruments in default relative to a “standard” recovery
assumption embedded in Moody’s ratings. This is done by considering the specific terms of the Project
Agreement and how it provides for termination payments to be made to the Issuer following the Issuer’s
default under the Project Agreement.
3.1 Concession Termination Regime
Moody’s considers three common termination scenarios other than termination due to concessionaire default:
(i) voluntary termination by the Off-taker (Termination for Convenience); (ii) termination for Force Majeure; or
(iii) termination due to Off-taker default. However these scenarios would either not be expected to result in a
material loss to the Issuer’s debt funders (items i and ii) and therefore do not reflect a likely default scenario, or
the possible negative effects are captured elsewhere in this rating methodology (item iii). In particular:
(i) In the case of Termination for Convenience, Project Agreements will generally specify a formula for pre-
payment of all of the debt capital. As a result, no loss would be expected to occur; and
(ii) Similarly, Moody’s looks for Force Majeure termination clauses also to provide for a payout sufficient to
17
retire the rated debt and separately considers the likelihood that an Issuer will have sufficient liquidity to
survive under a Force Majeure until a termination payment is received; and
(iii) The risk that the Off-taker will default on its obligations under the Project Agreement is captured in the
credit assessment of the Off-taker.
Nevertheless, Moody’s will review the provisions relating to these termination regimes and non-standard
contractual arrangements may need to be reflected as additional rating adjustments.
Moody’s notes that while in the vast majority of cases the debt would default prior to or coincident with
concession termination, it is theoretically possible for a debt default to be avoided even when the concession
is terminated early. For example, certain transactions provide for the Off-taker to continue to make sufficient
payments to cover debt service between termination of the Project Agreement and receipt of the termination
payment. Moody’s will evaluate such transactions on a case-by-case basis, but notes that any adjustments to
expected senior debt recovery require that debt be kept current until principal is repaid, that they suffer no
economic loss on receipt of the termination payment and the debt instruments provide for an early payout
18
under an early termination of the underlying Project Agreement.
17
The question of whether there are sufficient funds to keep rated debt current until a Force Majeure Termination Payment is received is addressed in the
Liquidity section of this methodology.
18
Moody’s definition of default is intended to capture events that change the relationship between the lender and issuer from the relationship which was
originally contracted, and which subjects the lender to an economic loss. Technical defaults (covenant violations, etc.) are not included in Moody's definition
of default.
3.2 Recovery Assumptions and Loss Calculations
3.2.1 Compensation Regimes and Baseline Loss Given Default

Project Agreements employ a number of ways to determine the compensation that is payable to the Issuer if
the concession is terminated by the Off-taker due to Issuer default. While contractual terms may vary, they can
all be placed into one of the following categories:
1. Re-tendering Process – Compensation is set be means of the Project Off-taker offering the Concession to
a third party for the remaining term of the Concession. This is intended to be a competitive tendering
process and amongst other things, compensation is dependent upon the future cost of capital of a
tenderer.
2. Fair Market Value – Expert Determination. Compensation is set by a third party expert.
3. Fair Market Value – NPV Formula. Compensation is set in accordance with a pre agreed formula set out
in the Concession Agreement. Importantly, the NPV formula usually references the PFI/PPP issuer’s
original cost of capital.
4. There is no compensation payable to the PFI/PPP Issuer.
In the majority of PFI/PPP transactions, the Project Agreement provides for a re-tendering process. In certain
cases, the re-tendering may very well be offered into a thin market and/or lead to a sale at a significant
discount due to the same economic factors that triggered the Issuer default in the first place. Additionally, even
in the best of circumstances, the time involved in conducting a succesful re-tendering may affect the ultimate
economic recovery for creditors. If it is determined that no liquid market exists and the re-tendering process
cannot be effective, many transactions rely upon provisions that specify that a form of the Fair Market Value
approach will be used to calculate the termination payment.
In Moody’s opinion, senior debt recovery is likely to be higher on average for those transactions that determine
the value of a termination payment via a Fair Market Value mechanism. We believe this to be the case since a
failure of a project is likely be priced into the bids entered in a retendering via a higher risk premium than the
original transaction. All other things being equal, then, the additional risk premium would lead to a lower
termination value. A Fair Market Value – NPV Formula is considered better still as it further eliminates the risk
of a change in the Concession’s cost of capital.
Other common provisions that may affect final payment to debt upon a retendering include those governing
the compensation of the Off-taker for the costs of the retendering process, as well as (usually fixed) amounts
due to the Off-taker for “loss of bargain.”
Given the nature of PFI/PPP Issuers, Moody’s will apply a common loss given termination approach to all
Issuers, regardless of whether their adjusted Project Risk Assessment falls into the investment grade or
speculative grade rating categories. We believe that this approach is appropriate as:
A PFI/PPP Issuer is usually a single purpose entity – unlike a typical industrial corporation, an Issuer has a
very limited ability to enter into businesses or engage in ventures that are not essential to its primary
purpose; and
Unlike that of a corporation, a PFI/PPP Issuer’s capital structure is typically fixed over its life. The typical
contractual provisions in a debt indenture severely restrict or prohibit the issuance of additional debt or
19
allow any other material changes without creditors’ approval.
As a result of the termination payment mechanism, the restrictions on additional activities imposed by the
single purpose entity structure of a PPP/PFI Issuer and limitations on an Issuer's ability to raise additional
19
Note the difference with the rating approach for speculative-grade, non-financial corporations as outlined in Moody’s “Probability-of-Default and Loss-Given
Default Ratings for Non-Financial Speculative-Grade Corporate Obligors” publications, published for the United States and Canada in August of 2006 and for
Europe in November of 2006. For corporations, Moody’s assumes a base case LGD of 55%, with high standard deviations. The large standard deviation and
particularly the restriction of the approach to speculative grade corporations is in large part because the relative freedom of (particularly un-regulated)
organizations to change their operations and capital structure makes it difficult to predict what the company will look like at default based on its structure long
before default becomes likely.

indebtedness, Moody’s believes that losses experienced by senior creditors in the event of a default of a
PFI/PPP transaction will, in the majority of cases, be lower than the 55% assumed in the base case for most
speculative grade non-financial corporations. Correspondingly, Moody’s believes suitable baseline Loss Given
Default (“LGD”) assumptions for PFI/PPP transactions to be between 20% and 30%. We would expect those
transactions featuring an NPV formula Fair Market Value compensation on average to be on the lower end of
this range, with the top end of the range more appropriate as an average for transactions featuring a re-
tendering process. A significant exception for application of this indicative range is formed by those
transactions which feature no compensation regime.
In deriving the expected LGD for a PFI/PPP transaction, it is our assumption that the transaction documents
stipulate that the contractual provisions surrounding the Project Agreement termination payment explicitly
survive the termination itself. Our baseline LGD assessment incorporates the following provisions standard to
most PFI/PPP transactions: compensation of the Off-taker for the costs of the retendering process, as well as
(usually fixed) amounts due to the Off-taker for “loss of bargain.”
3.2.2 Adjustments to the Baseline Loss Given Default

Subsequent adjustments to the baseline LGD are based on an assessment of how derivative instruments,
timing provisions, the payout formula and miscellaneous other provisions might affect lender recovery. For
each of these factors a range of possible adjusments that may apply. The cumulative adjustment to the
baseline LGD will be the sum of the adjustments for each of the five categories set out below:
Hedges/Swap termination Payments – Moody’s will adjust the LGD to reflect the potential exposure a
PFI/PPP Issuer may have to a hedge counterparty’s in-the-money swap or other hedge termination payments.
If the PFI /PPP Issuer has hedge transactions but any termination payments due to hedge counterparties are
subordinated, there will be no adjustment to the LGD. The adjustment will depend on the seniority of
swap/hedging payments relative to rated debt and the nature of the hedging contracts (i.e. the possible
quantity of likely payments, which recognises that cross currency interest rate swaps will have a higher
propensity to create large termination payments than, say, fixed rate/CPI swaps).
Timing provisions – Adjustments will be made to reflect the survivability of project revenue for a period
between concession termination and receipt of a termination payment and the time that may be expected
between a termination of the concession agreement and the receipt of a termination payment. To the extent
that an Issuer would continue to receive revenues under a concession agreement following a termination until
the receipt of a termination payment, Moody’s will reduce the LGD assumption accordingly, with the amount of
reduction a function of the revenue calculation methodology. However, Moody’s may increase the LGD
assumption if the terms of the concession agreement and/or practices within the jurisdiction would likely result
in an extended period of time between a concession agreement being terminated and the Issuer receiving a
termination payment. Such an adjustment will be the highest for those concession frameworks or jurisdictions
where we would expect a significant period (a number of years) without compensation.
Pay-out formula – In certain jurisdictions or within the contractual terms of certain concession agreements,
there may be adjustments to a termination payment to reflect additional charges, such as process costs,
penalties or other deductions intended to reflect loss of value to the Project Off-taker. To the extent that these
exist, Moody’s will increase the LGD assumption, in an amount to be determined in accordance with the
specific circumstances.
Project life cover ratio/tail – The length and richness of any tail period, within the concession but after the
final scheduled amortisation of senior debt, can be a material factor affecting LGD. While the economic value
in this phase would normally flow to equity, it represents a buffer that must be eroded by rectification or similar
costs arising on termination before senior debt becomes exposed to loss. The greater this buffer, the greater
the project’s ability to absorb the full impact of downside events, so the lower the expected LGD.
Other factors – To the extent that other terms of the concession agreement would likely reduce a termination
payment, Moody’s may further adjust the baseline LGD as appropriate.
3.3 Using the LGD to Derive the Issuer’s Expected Loss Rating
The combination of the probability of default rating derived in the first two sections of this methodology and the
assessment of likely losses given termination creates an expected loss rating as follows: the LGD derived by
adjusting the baseline LGD with the adjustments above is multiplied by the default probability consistent with
the Project Risk Assessment as adjusted for its capital structure. This expected loss is then mapped back to
Moody’s idealized expected loss curve to determine a final rating. Since the adjusted LGD from section 3.2 is
likely lower than the 55% LGD supporting Moody’s idealized expected loss table, it will lead to an uplift for a
typical Issuer’s rating in this sector, as illustrated by the example below.
Loss Given Default
Standard 55% 45.0% 35.0% 25.0% 15.0% 5.0%
Probability of
Rating Default Expected loss
Aaa 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Aa1 0.02% 0.01% 0.01% 0.01% 0.01% 0.00% 0.00%
Aa2 0.05% 0.03% 0.02% 0.02% 0.01% 0.01% 0.00%
Aa3 0.10% 0.06% 0.05% 0.04% 0.03% 0.02% 0.01%
A1 0.19% 0.10% 0.09% 0.07% 0.05% 0.03% 0.01%
A2 0.35% 0.19% 0.16% 0.12% 0.09% 0.05% 0.02%
A3 0.54% 0.30% 0.24% 0.19% 0.14% 0.08% 0.03%
Baa1 0.83% 0.46% 0.37% 0.29% 0.21% 0.12% 0.04%
Baa2 1.20% 0.66% 0.54% 0.42% 0.30% 0.18% 0.06%
Baa3 2.38% 1.31% 1.07% 0.83% 0.60% 0.36% 0.12%
Ba1 4.20% 2.31% 1.89% 1.47% 1.05% 0.63% 0.21%
Ba2 6.80% 3.74% 3.06% 2.38% 1.70% 1.02% 0.34%
Ba3 9.79% 5.38% 4.41% 3.43% 2.45% 1.47% 0.49%
B1 13.85% 7.62% 6.23% 4.85% 3.46% 2.08% 0.69%
B2 18.13% 9.97% 8.16% 6.35% 4.53% 2.72% 0.91%
B3 24.04% 13.22% 10.82% 8.41% 6.01% 3.61% 1.20%
Caa1 32.48% 17.86% 14.62% 11.37% 8.12% 4.87% 1.62%
Caa2 43.88% 24.13% 19.75% 15.36% 10.97% 6.58% 2.19%
Caa3 66.24% 36.43% 29.81% 23.18% 16.56% 9.94% 3.31%
In the example, the hypothetical project has a Ba1 Project Risk Assessment as adjusted for features of the
capital structure, which corresponds to a 4.2% probability of default. When combined with the standard LGD
assumption this would result in a Ba1 level EL of 2.31%:
PD LGD EL Unadjusted rating

4.20% x 55% = 2.31% Ba1
However an assessment of the project’s recovery expectations leads us to assign a non-standard LGD
assumption of 15%, which combines with the original probability of default assumption to deliver a revised EL
and therefore a revised rating:
PD LGD EL Adjusted rating

4.20% x 15% = 0.63% Baa2
The improvement in LGD is sufficient to justify a two-notch rating uplift, in this case lifting a project with a
speculative grade default probability into investment grade.
4. Off-taker Credit Quality

Up to this point, the methodology reflects Moody’s opinion of the expected loss of the Issuer on a standalone
basis – that is, independent of the credit quality of its income. Where appropriate, Moody’s will make
adjustments to an Issuer’s rating based on the rating of the Off-taker. Off-taker ratings, whether public or
estimated, typically lie in the Aaa-Aa3 range. Where an Off-taker rating is unusually strong, or below the
typical range, we may apply a notching adjustment to reflect this. The Off-taker rating will also constrain the
overall rating of the project, which should normally be capped at two notches below the Off-taker rating. If an
Off-taker is rated Aaa, Rating Committee may adjust an Issuer’s rating upward by a notch, depending on the
perceived commitment of the Off-taker to the PPP/PFI framework and its local success.
Implicit in Moody’s view of the Off-taker’s credit quality is the stability of the Off-taker, and that language in the
Concession Agreement will prohibit assignment of the Off-taker’s obligations, or as a minimum, will prohibit
assignment of the Off-taker’s obligations to a lower-rated entity.
Off-taker Rating Possible Rating Adjustment

Aaa 0 or + 1 Notch
Aa 0 Notches
A or below - 1 or more Notches
It is Moody’s preference to have an explicit Off-taker rating as an input to this process. In those circumstances
when there is no published Moody’s rating of the Off-taker, Moody’s can also reference an already published
20
opinion on the credit strength of a particular sector (e.g., public hospitals in Ontario, Canada.) The mid-point
of any such opinion would then be used as an input into the methodology. If neither an explicit rating nor an
industry estimate of an Off-taker is already published, Moody’s will generate an internal estimate of the Off-
taker’s credit quality.
20
Please see Moody’s Special Comment Creditworthiness of Ontario’s Hospital System Near that of the Province of Ontario, published in December 2006.
Appendix A: Glossary
Availability-Based (or Availability) Payments – payments by an Off-taker to an Issuer for operating and
maintaining a public asset per contracted standards. In PFI/PPP transactions based on Availability Payments,
the Issuer’s revenue is not subject to a material element of price or volume/traffic risk as long as performance
remains acceptable.
Benchmark Level – the reasonable market price for the services provided under a Project Agreement, usually
determined by a qualified Technical Adviser.
Cash Break-even Ratio – measure of the maximum percentage that projected revenue can be reduced, or
costs increased by over each year of the Project Agreement life while still leaving enough free cash flow to
service debt and meet all other costs when due.
Distance to Termination – Moody’s consideration of how much worse than projected base case performance
the actual performance of an Issuer can be before the Off-taker can terminate the Project Agreement.
Direct Agreements – contractual relationships between a PFI/PPP Issuer or its contractor and the debt
providers, providing those providers with security interests over the issuer’s assets and contracts that may
delay and/or override certain aspects of the Project Agreement or sub-contracts.
Force Majeure – events described in the Project Agreement that are outside of the control of the Issuer or Off-
taker and render delivery of the Operating Services impossible.
Hard Facilities Management (or Hard FM) – the routine maintenance by an Issuer of assets and replacement
of small ticket items such as painting, consumables replacement and inspection.
Issuer (or PFI/PPP Issuer) – a limited purpose entity established to purchase or construct and then operate
public infrastructure assets pursuant to a long term Project Agreement with an Off-taker.
Life Cycle Maintenance (or Major Maintenance) – the replacement of large ticket plant and equipment or the
performance of major repairs to civil engineering structures to maintain the operating condition of the assets
over the life of the Project Agreement.
Loss Given Default (or LGD) – the loss experienced by lenders as a percentage of the face amount.
Measurement Period – the time period of the payment frequency on the rated transaction debt.
Non-benchmarked Services – those services provided by an Issuer which are fixed for the life of the Project
Agreement via an index-linked formula that adjusts the fees in line with a consumer or industrial price index
appropriate for the jurisdiction.
Operating Services – the services the PFI/PPP Issuer undertakes to provide pursuant to the Project
Agreement.
Penalties – penalties usually form the basis of a Project Agreement’s performance regime. Penalties can take
the form of “penalty points” assigned for each service failure, a direct revenue deduction for each service
failure or some combination of the two.
Performance Regime – those provisions in a Project Agreement that set out the performance standards that
must be met by the PFI/PPP Issuer in providing the Operating Services, as well as the Penalties if those
services are either delivered below standard or the assets or services are unavailable for use in accordance
with the Project Agreement.
Project Agreement – the concession contract governing the relationship between an Issuer and the Off-taker.
Project Off-taker (or Off-taker) – the governmental entity or agency sponsoring a PFI/PPP project.

Soft Facilities Management (or Soft FM) – activities performed by an Issuer such as catering, cleaning and
security in buildings or the routine operation of simple civil engineering structures.
Step-in Rights – contractual provisions that permit a project’s creditors to step into the shoes of key contractual
parties, including the Issuer under the Project Agreement, effectively giving them the power to control an
Issuer and avoid a formal concession termination and/or a bankruptcy process while corrective action can be
taken.
Sub-Contract Headroom – the implicit or contracted degree of under-performance between when a sub-
contractor can be terminated and when the entire Project Agreement is at risk.
Technical Adviser – an independent consultant retained to provide to the finance parties periodic assessments
of the performance and costs of the construction works and/or Operating Services the Issuer is providing.
Termination Payment – the compensation due to the Issuer by the Project Off-taker in the case of a
termination of the Project Agreement.
Third Party Financial Support – security in the form of an unconditional and irrevocable performance bond or
bank guarantee from a highly rated counterparty, which may be drawn on by the Issuer as cash support in the
event of performance failure or sub-contractor insolvency.
Appendix B: Project Complexity Definitions

Building Projects
Medium Complexity
Standard Building Building Complex Building
Score for Each 1 2 3

Category Below
Height Low rise (1 to 3 storeys) Medium rise (4 to 6 storeys) High rise (7 or more storeys)
Services Standard Services (1) Small number of Additional Significant number of Additional
Services (2) Services (2) and/or highly
complex/specialized Additional
Services
Proliferation of Additional Services provided to Additional Services provided to Additional Services provided to
Services less than 10% of the rooms in the between 10% and 50% of rooms in greater than 50% of the rooms in
building the building the building
Design Standard design with repetition Moderately complicated design Complex design or complicated
of numerous units and/or engineering engineering, unique structure
Excavation No excavation or single storey Multi-storey, basement in known Multi-storey, basement in
basement geology unknown or complex geology
Site Access No issues – lots of room, no limits Issues – limited space OR limited Issues – limited space AND
of time for access period of construction limited period of construction
(1) Standard Services are assumed for all building projects and include electricity, water and sewer, mains gas, standard
telephones, fire protection, basic access control, and IT network cabling.
(2) Additional Services include special lighting, special fit-out (“clean rooms”), medical labs, audio-visual media, specialized
climate control, medical gases and steam supply, high tech telephony/data specification (fibre optic spines), security
cameras/advanced access control (e.g. prisons).
6 – 11: Standard Building. Examples: houses, accommodation, schools.
10 – 14: Medium Complexity Building. Examples: small/low complexity hospitals, low security prisons.
13 – 18: Complex Building. Examples: large/high rise hospitals, high security prisons.
Civil Infrastructure Projects
Standard Civil Medium Civil Complex Civil

Infrastructure Infrastructure Infrastructure
Score for Each 1 2 3
Category Below
A. Road and Rail No below grade work Some cut-and-cover tunnelling Some bored tunnelling
Projects
excluding
Bridges, Stadia
OR
B. Bridges Simple concrete spans across Moderate length spans, pre- Long spans across estuaries –
small rivers, highways or roads cast concrete work done in situ
Environment No issues Issues are known and Working in extreme
manageable through standard temperatures, beside or
construction techniques underneath water
Material (1) Sand, clay and soft rock Moderately soft rock Hard rock
Past Experience Well documented past civil Industry has some experience No previous civil work in the
of the Industry experience in area in the area area
Design Standard design with linear Moderately complicated design Using complicated engineering,
repetitive work and/or engineering unique structure, tunnelling
under buildings
Site Access No issues – lots of room, no Issues – limited space OR Issues – limited space AND
limits of time for access limited period of construction limited period of construction
[1] Moody’s will have the discretion to score this dimension depending on the kind of project and the usual regional
geotechnical conditions. For example, in tunnel projects using a tunnel boring machine, hard rock is generally the preferred
geotechnical condition while soft rock with boulders may be more problematic.
Scoring – Decide which of the categories the civil project fits and pick A or B. Then, add the scores for A or B
to the other scores.
6 – 11: Standard Civil Infrastructure. Example: road project that involves no tunnelling.
10 – 14: Medium Civil Infrastructure. Example: pre-cast bridge structures.
13 – 18: Complex Civil Infrastructure. Example: bored tunnels.
Moody’s Related Research
Special Comments:
Request for Comment on: Construction Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3)
Projects (98409)
Request for Comment on: Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3)
Projects (104538)
The ABCs of PPPs (104646)
Creditworthiness of Ontario’s Hospital System Near that of the Province of Ontario (100829)
Rating Methodology:
Construction Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects (106407)
Probability of Default Ratings and Loss Given Default Assessments for Non-Financial Speculative-Grade
Corporate Obligors in the United States and Canada (98771)
Request for Comment on Probability of Default Ratings and Loss Given Default Assessments for
Corporate Obligors in Europe, Middle East and Africa: Recommended Framework (100673)
Corporate Default and Recovery Rates, 1920-2006 (102071)
Default & Loss Rates of Structured Finance Securities: 1993-2006 (102733)

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication
of this report and that more recent reports may be available. All research may not be available to all clients.
Report Number: 106479
Authors Senior Associate Production Associate

Andrew Blease Nechama Aryeh David Ainsworth
William Coley
Grant Headrick
David Howell
Andrew Kriegler
Nicola O’Brien
Bart Oosterveld
Paul Ovnerud-Potter
© Copyright 2007, Moody’s Investors Service, Inc. and/or its licensors and affiliates including Moody’s Assurance Company, Inc. (together, “MOODY’S”). All rights
reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR
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Rating Moody’s Global

Table of Contents: Operating Risk in Privately-

Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects

Rating Methodology Scope

Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects

A Typical PFI/PPP Issuer

Parties Involved in a Typical PFI/PPP Transaction

Operating Project Construction

Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects

Rating Methodology Framework

Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects

3. Recovery on Concession 4. Off-taker

Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects

1. Project Risk Assessment

Factor Sub-factor Weight

Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects

Idealized Idealized Project

1.1 Volatility of Revenue

(a) the complexity of project operations;

(b) the nature of the performance measurement/abatement regime; and

Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects

 Provide support to the central objective of the concession,

 Are logically located at or within the concession precinct, and

 Have no substantial competition from other businesses outside the precinct.

1.1.1 Complexity of Project Operations

Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects

Complexity Category Score

(a) the complexity of the assets being maintained;

Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects

Designed/ Designed/ Designed/

1.1.2 Nature of Performance Regime

Punitive performance regimes – Moody’s regards a performance regime as punitive if it imposes

We measure two primary characteristics of a performance regime:

Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects

Comprehensive Comprehensive Report and No report but Inadequate

1.1.3 Inflation Exposure, Change of Law and Off-taker Modifications

Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects

Inflation Exposure Score

Off-taker covers all cost increases on a pass through basis Aaa

Off-taker Modifications Score

Off-taker pays Issuer on a full pass-through basis Aa

Change of Law Score

Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects

1.2 Cost Structure

1.2.1 Benchmarking and Sub-contracting

Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects

1.2.2 Market Efficiency

Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects

Commodity Limited (3-5) 1 or 2 suppliers

1.2.3 Sub-Contractor Efficacy

Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects

Specialized or Highly specialized or

1.2.4 Sub-Contractor Liability Caps

150%-249% Aa Aa A Baa Baa

100%-149% Aa A Baa Baa Ba

Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects

1.2.5 Base Case Costs versus Benchmarks

Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects

Base Case Costs versus Benchmarks

> approximately < > approximately <

Limited data relating

1.3 Force Majeure & Issuer Default Termination

Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects

Provide support to the central objective of the concession,

Are logically located at or within the concession precinct, and

Have no substantial competition from other businesses outside the precinct.

The ABCs of PPPs (104646)

Corporate Default and Recovery Rates, 1920-2006 (102071)

Default & Loss Rates of Structured Finance Securities: 1993-2006 (102733)