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Appraising PPP Projects

41 Where We are in the PPP Process

The Appraising or Appraisal Phase, presented in this chapter, begins once the project has been clearly identified, screened as a PPP, and preliminarily defined (in terms of the scope of the proposed contract). It should end with the green light decision to procure the project through a PPP or to reject the project as such.

The starting point is the selection of the project solution[1] and its satisfactory screening as a PPP candidate. By then, several analyses will have been concluded that should be considered as inputs to the appraising stage. Typically, the technical and financial aspects of the project scope will have been defined to some detailed degree during the Identification Phase. As a natural evolution of the contract scope, those aspects are developed in further detail during the Appraisal Phase and relevant information is developed for the Structuring Phase.

The work begins with a considerable amount of available information, and adds both descriptive and analytic capacity to the progressive effort of preparing the project.

This PPP Certification Guide considers, as a default approach, the adoption of a formal green light decision to proceed or not to proceed with the project as a PPP at the end of the Appraisal Phase. It is one of the most important decisions the government makes during the PPP process because it commits the government to a process that requires a high level of resources, both internal and external, to further structure and draft the contract. In addition, it indicates to the relevant stakeholders the government’s intention to take the project to financial close.

FIGURE 4.1: Where We are in the Process Cycle

Note: VfM= Value for Money.

In some countries, specifically for very complex projects, a considerable part of the appraising exercise is pushed further along in the PPP process. In some cases, it is not satisfactorily concluded until the final draft of the contract or the issuing of the Request for Proposals, and it is done concomitantly with the structuring work. In this case, the final approval might be taken without a thorough feasibility evaluation, or it will be made after the structuring has been completed. These approaches, however, can create complicated problems for the following reasons.

  • The final decision might be taken too early, without a comprehensive understanding of issues that may cause the project to fail (see chapter 1). Thus, the main obstacles are not adequately anticipated and corrective action cannot be initiated on time. This often results in schedule delays and, because it frustrates expectations, creates political risks for the termination of the project; and
  • The final decision might be taken too late, potentially generating the waste of precious public money on unfeasible projects. Even worse, a delayed decision might produce strong incentives for biased conclusions. Given that so much effort has been put in place during the structuring of the project, a conclusion that a project is unviable is usually unlikely, or unwanted by the public officials.

It is therefore a good practice to conclude the Appraisal Phase with a formal green light decision based on relevant information before moving on to structuring the contract and detailing the commercial terms of any particular transaction.

[1] Depending on the degree of detail in the analysis, the works done in the Identification Phase may already include the “investment decision” (the approval of the project solution, irrespective of the procurement method, as a valuable project that is worth developing). However, the investment decision (which is highly dependent on cost-benefit analysis CBA) may also be made during this phase, in advance of the procurement decision (which is highly dependent on the Value for Money Assessment – see section 16).

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