A PPP concession that closes is not the result of a good negotiation. It is the result of a structure that makes approval rational for every party at the table — the sponsor, the government, the lender, and the community. Getting one wrong does not slow the deal. It collapses it.
The Four-Party Alignment Problem
Development finance institutions will not commit capital to a PPP concession where the interests of the four parties are not structurally aligned. The sponsor needs commercial returns above their cost of capital. The government needs a structure that is politically defensible, fiscally prudent, and serves the public interest. The lender — whether a DFI, commercial bank, or bond market — needs debt serviceability with appropriate security. The community needs affordable access and demonstrable benefit. A concession structure that optimises for one at the expense of another does not fund.
The Key Structural Instruments
The instruments that make PPP concession structures work for DFI financing are: (1) Risk allocation — each risk held by the party best placed to manage it. Traffic risk, construction risk, political risk, and currency risk each have established allocation conventions that DFI credit teams expect to see documented. (2) Sovereign support — government comfort letters, minimum revenue guarantees, or availability payment structures that provide a floor for debt service in downside scenarios. (3) Blended finance layers — concessional DFI capital that subordinates returns expectations for a portion of the capital stack, enabling commercial return on the equity tranche. (4) Step-in rights — lender rights to assume control of the concession if the operator defaults, which is a standard requirement for most DFI infrastructure finance.
What DFIs Look for in the Capital Structure
DFIs appraise PPP capital structures on four dimensions: gearing (debt-to-equity ratio, typically 70:30 to 75:25 for infrastructure), DSCR (debt service coverage ratio, typically minimum 1.3x in base case), IRR (project and equity, benchmarked against sector and country risk), and downside scenario performance (does the project still service debt under the stress scenario?). A structure that passes the stress test is a structure a DFI can approve.
Kaamil Buckas, CA(SA)
Founding Partner — Evolve Business Consultants
Related Questions
What is the typical debt-to-equity ratio for a DFI-financed PPP?
Most DFI-financed infrastructure PPPs target a gearing ratio of 70:30 to 75:25 (debt to equity). Higher gearing increases return on equity but reduces headroom for debt service in downside scenarios. DFIs typically require minimum DSCR of 1.3x in base case and positive DSCR in stress scenarios.
What is a minimum revenue guarantee and when does it apply?
A minimum revenue guarantee is a government commitment to make up the difference if actual project revenue falls below a defined threshold. It is typically used in PPPs where demand risk is difficult to transfer to the private sector — transport infrastructure with variable traffic being the most common example. It increases the government's fiscal exposure but is often necessary to attract DFI financing.
How does blended finance work in a PPP structure?
Blended finance introduces concessional capital — typically from a development finance institution — that accepts below-market returns in exchange for achieving development objectives. This concessional layer reduces the overall cost of capital for the project, enabling commercial investors to achieve acceptable returns at a tariff level that remains affordable. It is not appropriate for all projects and works best where there is a clear public benefit that justifies the concessional subsidy.
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