The payment mechanism of an availability-based PPP, worked for one month and tested against the lenders' cover ratio.
An availability deduction is the daily unitary charge times the weighting of the unavailable area, times a gearing factor for how critical it is, times the days it stays unavailable. On an illustrative €30.0 million a year PPP hospital, a closed operating theatre for three days, a ward for four and a lift for one, plus 160 chargeable performance points, cost €53,310 in the month, 2.13 per cent of the €2.5 million monthly payment. Whether that matters depends on who bears it: passed down to the facilities manager within its liability cap it costs the project company nothing; retained, about €1.83 million a year is enough to trip a 1.10 times lock-up.
Worked in full in The Infrastructure Investment Analyst by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Under an availability-based PPP the public authority pays a unitary charge for the asset being available and performing to specification, not for traffic or patients. The payment mechanism then takes money off for two kinds of failure. An availability failure is a functional unit, a ward, a theatre, a lane, a classroom, that cannot be used once its rectification period has run out. A performance failure is a service standard missed, such as a late repair or a cleaning audit failed, scored in points and converted into money. Contracts differ in their tables, but the arithmetic is nearly always the one below.
Two features sit around the formula and change the answer. The rectification period gives the operator a set time, hours for a critical area and longer for a minor one, to fix a fault before it counts as unavailable at all. And most contracts cap total deductions in a period at the unitary charge for that period, while repeated failures can trigger warning notices and, eventually, termination rights for the authority, which is a far larger risk than the money deducted.
Availability deduction = (annual unitary charge / 365) × area weighting × gearing × days unavailable
Performance deduction = (points in the period − points allowed free) × value per point
Excel: =UC/365*Weighting*Gearing*Days, and =MAX(0,Points-Free)*PerPoint
A fictional hospital with an annual unitary charge of €30.0m, paid monthly. Each functional unit has a weighting expressed as a share of the unitary charge, and critical clinical areas carry a gearing above 1.0 so that losing them costs more than their floor area suggests.
| Failure | Weighting | Gearing | Days |
|---|---|---|---|
| Operating theatre, critical | 2.5% | 3.0 | 3 |
| Ward, 28 beds | 3.0% | 1.5 | 4 |
| Outpatient lift | 1.0% | 1.0 | 1 |
| Performance points, 50 free, €120 each | 210 points | ||
Step 1, daily unitary charge. €30.0m / 365 = €82,191.78.
Step 2, availability deductions. The theatre: 82,191.78 × 2.5% × 3.0 = €6,164 a day, €18,493 for three days. The ward: 82,191.78 × 3.0% × 1.5 = €3,699 a day, €14,795 for four. The lift: €822.
Step 3, performance deductions. 210 points less 50 free is 160 chargeable points at €120: €19,200.
| Line | EUR |
|---|---|
| Operating theatre | 18,493 |
| Ward | 14,795 |
| Outpatient lift | 822 |
| Availability deductions | 34,110 |
| Performance deductions | 19,200 |
| Total deductions | 53,310 |
| Monthly unitary charge | 2,500,000 |
| Payment for the month | 2,446,690 |
The month costs 2.13 per cent of the payment. Repeated every month, that is €639,715 a year. The project company then passes deductions caused by its facilities manager down the subcontract, usually up to a cap. Here the cap is 20 per cent of the €6.0m annual FM fee, €1.2m a year. Only what the subcontractor does not bear reaches the lenders' cover ratio.
The debt was sized at 1.20 times: cash flow available for debt service is €30.0m less the €6.0m FM fee and €2.0m of lifecycle and company costs, €22.0m, so debt service is €18.33m. A lock-up at 1.10 times leaves €1.83m of headroom, 6.1 per cent of the unitary charge; the 1.05 default ratio leaves €2.75m.
| Annual deductions | % of UC | Borne by FM | Retained | DSCR | DSCR, no pass-down |
|---|---|---|---|---|---|
| 0.5 | 1.7 | 0.5 | 0.0 | 1.200 | 1.173 |
| 1.2 | 4.0 | 1.2 | 0.0 | 1.200 | 1.135 |
| 2.0 | 6.7 | 1.2 | 0.8 | 1.156 | 1.091 |
| 3.0 | 10.0 | 1.2 | 1.8 | 1.102 | 1.036 |
| 4.0 | 13.3 | 1.2 | 2.8 | 1.047 | 0.982 |
With the pass-down, deductions of €3.03m a year, 10.1 per cent of the unitary charge, reach the lock-up and €3.95m reach the default ratio. Without it, €2.0m already locks up distributions. The FM cap is therefore worth as much to the equity as the deduction regime itself, and a facilities manager in trouble is the moment the cap is tested: it is a credit exposure to the subcontractor, not just a contract clause. How CFADS is built for the same ratio is set out in how to calculate CFADS in project finance.
The diligence tracker and risk register that go with an availability-based asset are among the working documents in the free workbook for this book.
A multiplier applied to the weighting of critical functional units so that losing them costs more than their share of the unitary charge. In the worked case an operating theatre weighted at 2.5 per cent with a gearing of 3.0 costs 6,164 euros a day, three times its ungeared value. Ignoring gearing understated that month's availability deductions by 51 per cent.
Usually, for failures the facilities manager causes, but only up to a liability cap in the subcontract. In the illustrative hospital the cap is 20 per cent of a 6.0m euro annual FM fee, 1.2m euros. Above it the project company bears the deductions, and 1.83m euros retained in a year is enough to take the DSCR from 1.20 to the 1.10 lock-up.
It follows from the sizing ratio and the lock-up. With cash flow for debt service of 22.0m euros and debt sized at 1.20 times, debt service is 18.33m; a 1.10 lock-up leaves 1.83m of headroom, 6.1 per cent of the unitary charge, and the 1.05 default ratio 2.75m. Lenders test those figures against the FM cap and the subcontractor's credit.
This article is one calculation from The Infrastructure Investment Analyst. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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