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Appraising PPP Projects

47 Assessing the Technical Feasibility

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.

Specific viability criteria, appropriate for the type of infrastructure and the corresponding services, should be used. Those criteria should address, at least, the following issues.

  • Does the infrastructure design meet the need specified during the Identification Phase?
  • Are the engineering and architectural requirements of the project achievable? If so, are they achievable at a price comparable with similar infrastructure?
  • Is the proposed technology (if a specific technology is being proposed, this may not always be the best approach as it may constrain innovation) proven or can the associated risks be properly managed or allocated?
  • Does the technical description of the project avoid, as far as possible, significant geo-technical risks? Does it avoid other unbearable technical risks?
  • Is there a complete assessment of geo-technical conditions (that showed the technical potential of the required construction on the site) that can affect the project, in terms of costs and time? This is particularly relevant for transport infrastructure, but it should be an assessment for all greenfield projects.
  • Is the scope of service viable from a regulatory perspective?
  • Can the service be specified in terms of outputs? If so, can the service be measured adequately though performance indicators? and
  • Can the main technological changes in the service delivery be satisfactorily estimated?

If the answer to all of the above questions is a confident yes, and no other exceptional technical issue was raised during this exercise, the project is technically feasible.

If the answer to some of the questions above is a confident no, the technical feasibility assessment should provide feedback to the technical requirements which should be appropriately changed, if possible, until a technically feasible project is obtained. If those changes are not possible, a recommendation for cancellation of the project should be considered.

It should be recognized that some projects do pose particular challenges for passing the technical feasibility assessment, specifically those that incorporate high levels of technical risks. The following characteristics highlight relevant technical risks associated with infrastructure initiatives.

  • Initiatives with technological complexities, such as projects that will use novel technology not significantly tested, or that will adapt technology not fully operational in the same conditions as the project under analysis;
  • Projects requiring difficult engineering innovations, such as works of art or complex transport structures (tunnels or bridges);
  • Projects built in particularly uncertain geo-technical conditions with consequences for a major part of the project costs (that is, a tunnel project or a large sea bridge);
  • Projects in areas with extraordinary natural risks in terms of weather or earthquakes; and
  • Projects with other complexities and uncertainties concerning the reliability of costs and time of construction, such as unknown or very old utility locations.

When a project has any of these characteristics it is even more important to soundly evaluate the technical feasibility to assess, as far as possible, the risks associated with the construction and operation of the asset. In particular, the following precautions should be considered.

  • Including industry experts in the project team;
  • Conducting careful evaluations of benchmarks and precedent projects with comparable risks, associated with an investigation of market interest; and
  • Including detailed information about the identified risks in the market sounding exercise, particularly searching for feedback of players in the construction industry or other relevant industries (for example, equipment suppliers) (see section 9).

Whenever relevant technical risks are identified, the best available resources should be spent in investigating further how uncertain they may be, and deciding if the risk is tolerable without extraordinary contingencies. In all cases, further tests and investigations should be made so as to indicate to the potential bidders the parameters for their risk analysis.

This is important because relying on the future prospective bidders to do their own assessment often leads to an uncompetitive procurement process because uncertainties might push good quality bidders away, or create an uneven playing field between contenders. Thus, it is good practice to provide all bidders with a consistent risk assessment and detailed information on all outstanding technical risks identified.

Nevertheless, there may be projects in which technical risks cannot be adequately described or quantified. In this case, it may be appropriate to allocate the specific risk to the government as a part of the preliminary contract structure. This approach, however, should be taken with extreme caution[26] because it can disturb the incentives for performance, since the management of the technical risks becomes less relevant to the private sector. Ultimately, if the concerns cannot be effectively addressed in the contract structure, a case for a PPP project might be unsustainable. This could lead to a recommendation for cancellation of the project as a PPP.

 

[26] For a discussion about principles of risk allocation, see section 5.

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