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Appraising PPP Projects

48 Assessing Commercial Feasibility

From the financial perspective, a project or contract is considered to be feasible when the expected revenues (inflows) under a reasonable scenario are considered to be sufficient to cover all expected costs (outflows), that is, all operation and maintenance costs, financial costs (interests), taxes, payback of debts, and payback of the invested equity with a reasonable return. The purpose of the commercial feasibility exercise is different depending on the revenue regime assumed.

  • In the case of the user-pays revenue regime, the analysis will be focused on evaluating the project’s capability to raise funds (that is, the existence of a financial surplus after covering the current costs), the capability of such free cash flow to service debt and equity in order to fund the capital expenditure needs, and (if desired by the government) the ability of the SPV to pay a concession fee to the government;
  • When the project is not financially self-sustainable, the exercise estimates the amount of public resources that will make the project commercially feasible. Different alternatives for government support should be considered, including direct government payments to the project company; and
  • In projects that do not include user charges in the revenue mix, such government contributions are directly estimated.

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