10. Testing PPP Suitability and Affordability

To avoid the risk of sinking resources into the analysis and structuring of a non-feasible PPP project, the government must determine whether the project makes sense as a PPP, provided that it has been satisfactorily tested as economically sound or sensible (under the CBA as explained).

This issue can be determined by answering the following questions.

• Are there any significant risks or uncertainties within the project that are not manageable by a private partner? Is there a risk of non-availability of the land/right of way and land acquisition cost overrun?
• Can the project be accommodated within the legal framework as a PPP? Have all relevant laws been taken into consideration?
• Is the project’s size big enough to justify the implicit costs of the transaction (to justify structuring and managing a complex tender)? Is it not too big for the market? Is it too large for local construction companies to take on, or so costly that it could not be successfully financed?
• Would there be investor market appetite? Are there competitors interested in the bid process? Are there precedent transactions that were already developed as PPPs for this type of project in the country/region/similar countries?
• Does it make sense to bundle construction and operations and/or maintenance in a single contract?
• Are the output requirements clearly identifiable?

Another important question is affordability: if the project is developed as a PPP, can the public sector afford the necessary payments (Capex and Opex)? In this case, there are several issues that need to be considered, depending on the circumstances. See figure 3.4.

1. Can the project be funded in the sense that the required user charges and/or long-term call on the government budget are affordable? This question has to be considered before screening for PPP potential;

2. If the answer to question 1 is “No”, traditional delivery is not possible but the project can still be screened for PPP potential, in which case there is an additional question that must be answered: “Are innovative structures available that can make the project affordable if delivered as a PPP?” For example, a PPP may give synergistic commercial development opportunities to the private sector that reduces the need for user charges or budget funding;

3. Assuming the project is affordable in the long term, the final question is a cash flow question for the government in the short term. It should be considered in the context of both traditional delivery and PPP delivery. The question is: “Are there constraints on government financing (for example, borrowing restrictions) such that, even though the project is affordable in the long term, the government cannot finance its investment in the project in the short term?” If the answer is “yes”, then we finally come to the issue of whether a PPP can be structured to overcome that issue;

The result of the suitability test may be one of the following;

• The project appears to be sound as a PPP and can move on to the next stage;
• The project is not suitable as a PPP. Appraising the project for traditional procurement methods is recommended if a public budget is available; and
• The project is missing relevant information, or there is a need to clarify some uncertainties. In this case, the appraiser has to state the project’s weaknesses and recommend a further analysis by the procuring authority.

FIGURE 3.4: Screening Decision-Making Process

Screening ensures that the project is better prepared for procurement, that uncertainties are identified, and that the necessary resources and schedules are duly accommodated for a more reliable procurement process. If the screening has been satisfactorily conducted, the government will avoid the risk of unnecessarily consuming resources by continuing the process, thus benefitting from the stage-by-stage approach. The procuring authority/PPP unit may then enter the next phase of the PPP process cycle: the full appraisal.

However, before the definitive decision of moving forward within the PPP cycle is taken, it is desirable to develop an initial project management plan, as well as design a governance strategy for the project process (see section 2.11 and following sections).