The market sounding exercise’s fundamental output is a general alignment between the government and the private sector during the Appraisal Phase. This can anticipate issues that reduce the market interest in the project, which otherwise would only be explicit during the more formal Procurement Phase, and it significantly reduces the risks of non-competitive procurement processes.

An effective market sounding exercise provides an opportunity for a structured dialogue between the private and the public sectors at early stages of the PPP process. This not only tests the viability of the project’s details, but it also obtains precious feedback on how aspects of the project should be defined to ensure private sector participation and foster competition.

The key aspects of the generic process for market sounding relevant to its success are as follows.

The project team should ensure that the commercial feasibility exercise captures the potential investor’s perspective of the project. The assumptions made, and the base case they generate, will be completely ineffective if the project team fails to understand the private sector’s value drivers and the main financial and operational constraints companies might face during the provision of the infrastructure and services.

The commercial feasibility analysis provides a number of outputs.

For user-pays PPPs, it provides the following:

When government payments are considered in the revenue regime, the commercial feasibility exercise aims to define the amount of government financial support required to meet investors’ and lenders’ needs.

This produces a direct forecast of revenues to feed the financial model and the basic fiscal commitment structure that will be tested in the affordability exercise (section 11).

In user-pays PPPs, the exercise of commercial feasibility examines the capacity of the project to generate enough cash resources to meet its expenses. The exercise might consider several scenarios for the prices charged to users (if this is possible) or a given price that cannot be altered due to regulatory or legal standards. In either case, there are three possible outcomes.

The commercial feasibility must be assessed from two different points of view: lenders (the debt providers) and investors (the equity providers).

8.1.1 The Lenders’ Perspective (bankability)

The key aspect of the lenders’ concerns is the capacity of the project company to repay its debt on the agreed schedule.

From the financial perspective, a project or contract is considered to be feasible when the expected revenues (inflows) under a reasonable scenario are considered to be sufficient to cover all expected costs (outflows), that is, all operation and maintenance costs, financial costs (interests), taxes, payback of debts, and payback of the invested equity with a reasonable return. The purpose of the commercial feasibility exercise is different depending on the revenue regime assumed.

The technical requirements will naturally be designed with the aim of defining a feasible PPP project. However, the development of specific technical feasibility criteria can be useful to organize the information properly, increase overall transparency, and promote a stronger base for the recommendations provided at the end of the Appraisal Phase. Assessing technical feasibility can also highlight specific risks of the project that should be considered for the green light decision.

In the process of inputting data to the financial model, several assumptions would have been made, and the model must be sufficiently flexible to reveal the impact on the final cash flows of changes in those assumptions.

All the sensitivity drivers are typically concentrated in a summary sheet that communicates the main assumptions adopted and their effects on the bottom line cash flows. Some typical drivers identified are: