Appraising a project means answering a fundamental set of questions about the project;
- Is it sensible, from an economic perspective, to implement the project?
- Is it practical to procure the project as a PPP? How much will it cost? Is it affordable from the government’s perspective?
- Is there adequate market interest and capability to deliver this project? and
- What are the main obstacles for the project’s implementation (both the implementation of the technical solution and implementation of the preferred delivery method which may be a traditional delivery or delivery as a PPP)? Can they be overcome in a cost effective manner? How?
The answers to these fundamental questions are naturally progressive. As noted, several preliminary pieces of information will have been developed during the Identification Phase and are further developed during the appraisal. Several of the appraising exercises will also be further detailed during the structuring of the project and the drafting of the contract.
The analysis should be done to a very detailed level in order to establish a sound base for the potential recommendation of procuring the project as a PPP that can be defended against public opinion, courts of auditors, and others. This also allows for a strong evidence base of project data that is substantiated with a clear audit trail for decision-makers to check the assumptions, evidence, and calculations leading to the recommendations.
The Appraisal Phase serves to filter out projects that do not meet the feasibility criteria, keeping them from being launched as PPPs and avoiding an expensive waste of resources or a failure to deliver the service. It should be noted that some projects can be feasible economically and technically but are not appropriate for the PPP process for a variety of other reasons (for example, no real Value for Money [VfM] achieved by using the private sector).
In some countries, the appraisal exercise must follow regulations and established criteria in the form of compulsory guidelines or even legal provisions. For example, in some cases the conclusions reached on the VfM analysis, demonstration of affordability, or debt impact (all done during the Appraisal Phase) must be formally documented in order for the final green light decision to meet legal standards. This makes the appraisal of PPP projects all the more relevant and indicates that its importance has been institutionally recognized in these countries.
During the analyses, many choices are made about significant financial and technical aspects of the project. These decisions, despite being revisited in the following stages of the PPP process, represent a central contribution to the structure of the transaction and are a very important step toward the final draft of the contract. In fact, the Appraisal Phase produces the first true body of contract and business conditions that guide the following phases of the PPP process. Those decisions should be embodied in relevant deliverables of the phase, such as the following.
- The technical requirements of the project, produced as a part of the technical feasibility exercise described below;
- The financial model, which organizes the financial assumptions and forecasts relevant financial information, used for the commercial feasibility exercise and for some other evaluations described below;
- The preliminary contract structure, which identifies and allocates risks as well as defining the essential aspects of the revenue regime and the payment mechanism, as described below; and
- A procurement strategy which represents the basis of the competitive selection process that will be refined during the Structuring Phase.
Thus, the project team will, at the end of the Appraisal Phase, have decided if the project should be procured as a PPP (the procurement decision). To do this, the project team must have:
- Confirmed that the project is worth procuring (the investment decision);
- Developed good indications that the project, implemented as a PPP, delivers Value for Money (VfM);
- Developed a reliable feasibility assessment (often referred to as the “business case”) that allows the government to make an informed and defendable decision to move forward (or to abort the project);
- Ensured that the project faces no definitive or blocking obstacles to its launch and if it faces major threats, a general plan of action will have been put in place to overcome those barriers; and
- Established the basics of the project contract structure that will be refined during the Structuring Phase.
To meet this diverse set of objectives, the government must engage an experienced project team from the beginning of the Appraisal Phase. As chapter 3 explains, this team can be composed of government specialists but, often, also includes transaction advisers and/or industry experts. Whatever the composition of the project team, it is of utmost importance that all the expertise required for all the feasibility exercises are in place and committed during the Appraisal Phase.
Before detailing the content of each of the feasibility analyses, the following section presents an overview of the main groups of exercises that should be made and introduces the relationships between them.