For the renewal of the urban water system the city is looking to establish a PPP with the following terms:

• Water Rate should not exceed $3/m^3 allowing for an inflation rate of 2% (to account for inflation rate refer to the time conversion below)
• Expected consumption of 500,000 m^3/day for a population of 2 million
• The private sector partner will be in charge of project financing, renewal, operation and transfer of the renewed infrastructure system at the end of contract period to the city government.
• Renewal capital cost of P = $5Billion USD; for the project financing the private sector partner will have to take a loan with an interest rate of 5% (to calculate future values of capital investment refer to time conversion below)
• Agreed benefits for the private sector partner 7% of the capital cost

Address the following questions

1.What is the minimum contract period which will be acceptable for the private sector partner?

2.In the above PPP contract

• What is the risk for the Private Sector partner?
• What is the risk for the local government?

The present worth [P] denotes the present amount at T=0, and the future worth [F] at time T=n [Year]:

F=P(1+i)n(Eq1)

Where i is the interest rate.And conversely:

P=F(1+i)n(Eq2)