A government may face a situation in which there is no room in the budget (either the current budget or a future budget) to procure all potential projects/government-pays PPPs, regardless of whether all those projects respond to relevant needs of the society in an efficient way, creating public wealth, and generating strong net benefits. In this scenario of a restricted budget, a government may need to undertake a prioritization exercise to choose between different projects.
In addition to budget restrictions, there are also, for example, limits to society's ability and appetite to make user payments. An individual project with user payments may be, in itself, financially and economically viable. However, if there are a large number of new projects with significant user charges, this may have an unacceptable impact on people's cost of living or the cost of doing business in the region.
Project prioritization enables the government to choose the right alternatives when there are numerous economically and technically feasible projects to address the public needs. See box 3.5. The main objective is to ensure that public funds are well spent and produce the highest benefit for society — even if there is a restriction in the budget or in users’ capacity to pay. Prioritization may require the government to abandon a project for the time being, or move it to later in the program.
Many jurisdictions use economic analysis to prioritize, that is, projects showing a higher economic Net Present Value (eNPV)[5] or higher economic Internal Rate of Return (eIRR) [6] will be prioritized. These and other techniques of prioritization are discussed in section 2.5.
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BOX 3.5: Areas of Focus to Enable Governments to Perform Rigorous Evaluation of Projects Governments need to invest in three areas to ensure that they can evaluate projects with the necessary rigor. First, they should train the right people and develop the appropriate systems for conducting these evaluations. One approach is to create new units within a government that have the experience and tools to conduct these analyses. Initially, it may make sense to tap outside experts to lead the effort while training in-house staff along the way. Second, governments must develop benchmark databases that collect cost information on both public and PPP infrastructure projects. This information, which should include not only the capital expenditures for developing a project but also the cost of operating the project over its life cycle, will drive the projected cost analysis of similar projects. One Asia-Pacific government developed a database of road construction projects for just this purpose. And third, governments need to develop standardized methodologies for making these assessments and identify a source of common key assumptions, such as what the financing costs would look like under a public-sector approach versus a private-sector approach. |
[5] eNPV is defined as the difference between the discounted investment expenditure and the discounted value of the social net benefits generated by the project during its lifetime. The social impact (benefits and costs) are calculated after taking into account externalities (such as economic, social, political, and environmental costs and benefits) not included in financial NPV calculation.
[6] eIRR is the project’s internal rate of return produces a zero value for the eNPV.
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