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Appraising PPP Projects

418 Formal Requirements Regarding the Appraisal of PPPs and the Conditions Established by the Framework for the Green Light Decisions

Chapter 2 (section 1.7.5) introduced some of the key points generally considered as decision drivers for governmental departments responsible for making the procurement decision. These decision drivers are often translated into national PPP frameworks. As introduced in chapter 1, having policy guidelines in place (binding or indicative) is extraordinarily helpful to diminish failure risks and gain time, efficiency and reliability in the PPP process.

In other words, many countries have formal requirements that must be satisfied in order to demonstrate that the project has been properly appraised before committing further resources to structuring the PPP deal, or launching it into the market.

The Brazilian PPP law, for example, institutes a series of reports that need to be prepared and upon which a green light decision to procure the project is based. This includes five main items.

  • The demonstration of the advantages of the PPP over traditional procurement; this could be a quantitative or qualitative VfM;
  • Affordability Analysis, indicating the long-term compliance of the project’s liabilities with the medium-term budgetary framework;
  • The impact of the project in fiscal aggregate, such as gross debt;
  • The results of a structured market test done through a public consultation of the project’s draft documentation; and
  • Environmental approvals or, at least, environmental evaluation describing the main issues regarding the tasks to obtain the appropriate permits.

At the federal level, all of these items should be structured in an appraisal report submitted for the approval of a PPP council (composed of the representative of the ministry of planning, the ministry of finance and the president’s cabinet) who is entitled to make the green light decision to procure a project.

The Australian state of Victoria also has an extensive policy regarding the assessments that need to be conducted before a final procurement decision is reached. In Victoria, agencies seeking approval to implement a PPP project need to develop a full business case that addresses several aspects of the project. One of them is “solution deliverability”. In summary, the full business case needs to demonstrate the following aspects of a project, among other issues.

  • Its commercial feasibility;
  • Its technical feasibility (details of the recommended solution);
  • Its financial feasibility, including bankability;
  • The market’s interest, through market sounding; and
  • The affordability or identification of adequate funding sources.

Similarly with the Brazilian case, this phase, named ‘prove’ in the policy guidelines of Victoria, creates a formal stage of assessment of the project that precedes the final procurement approval.

A comparable policy directive is used in Canada. Sub-national governments or agencies interested in applying for financial support from the PPP Canada National Fund need to produce and submit a robust PPP business case in support of their funding application. Thus, a final decision about the project, when partially funded by the national fund, relies upon several feasibility exercises.

According to the P3 Business Case Development Guide, the feasibility studies as part of the business case

“should assess the degree to which various features of the project are either sustainable or achieve the objectives desired by the project sponsor. In doing so, they should incorporate, wherever appropriate, consideration of project costs, project revenues, alternative revenue sources, alternative technical solutions, the legal environment in which the project is being implemented, emissions from the project, and other relevant information”.

In South Africa, Treasury Regulation 16 creates a formal Treasury approval of PPP projects based upon a feasibility report (Treasury Approval I). This approval allows the project to move to the next stage of drafting the contract and tender documents. According to the policy directives, the feasibility report needs to include the following, among other aspects.

  • Legal aspects such as use rights and regulatory matters;
  • Socio-economic evaluation;
  • Technical definition of project;
  • Discussion about costs (direct and indirect) and assumptions made about cost estimates;
  • Discussion about revenues (if relevant) and assumptions made about revenue estimates;
  • Discussion about all model assumptions made in the construction of the model, including inflation rate, discount rate, depreciation, and budgets;
  • Payment mechanism;
  • Statement of affordability; and
  • Statement of Value for Money (VfM).

These examples reveal that many countries recognize the relevance of a robust and comprehensive Appraisal Phase to allow for effective approval decisions for the project.

It should, therefore, be recognized that specific countries might have particular regulatory requirements for the content or form of the appraisal assessment. These requirements must be fully considered and the appraisal exercises need to be adapted accordingly.

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