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PPP Introduction and Overview

18.4. The Private Sector's (prospective bidders') Interest and Concerns about the Entire PPP Process

PPPs require the existence of private agents willing to enter into a long-term contract assuming significant risks, as well as financial investors willing to invest equity (and sometimes debt) in the projects, and banks willing to lend to those projects.

The projects have to be commercially feasible (and to be commercially feasible the project needs to be bankable). This is a necessary condition for developing a PPP contract, and it is as relevant as other conditions of feasibility (for example, economic feasibility, that is, the right project; the suitability of PPP tool; and affordability).

However, a private partner as a potential bidder is also concerned about all aspects of feasibility, including socio-economic and affordability considerations.

  • If a project has poor economic value or there is a higher risk of a lack of government commitment to the project, there will be a higher probability of termination or of a new government seeking to renegotiate; and
  • A private partner will have a natural interest in the project being affordable for the government. This avoids the risk of a breach of contract by the government.

In addition, the private sector will also want a reliable timetable, that is, it will expect that the project process is handled in accordance with the announced timetable. More generally, the private sector’s willingness to invest will be influenced by the overall management of the whole PPP process.

Table 1.7 presents a list of the main conditions that a project should meet to be acceptable to a prospective bidder, beyond the strict commercial feasibility. It assumes that the risk allocation is tolerable, that the project is bankable and financing is accessible, and that the payments ceiling is acceptable/feasible (that it, it provides a potential IRR commensurate to the risks).

TABLE 1.7: Requirements or Conditions from the Private Sector and Characteristics of an Acceptable and Attractive Project

Each project must necessarily meet a number of conditions to be acceptable to the private sector.

The private sector’s willingness to bid and invest rests on the commercial feasibility (adequate risk/return ratios). This embeds a number of feasibility concerns, largely in line with the concerns of government when procuring a PPP. The project and the contract must meet the following conditions.

Condition

Description

Economically feasible or sound

The project must be the most suitable solution for the need: a project which fails as an appropriate solution (for example, utilization is much below expectations) will produce a risk of diminishing commitment from the public sector, and may also compromise financial feasibility (for example, the case of demand/traffic-related projects).

Suitability as a PPP (PPP delivery will enhance VfM of the selected project)

If an unsuitable project is tendered as a PPP, it will have an artificial and inefficient risk structure that will likely result in no bids or failures in the later development of the project.

Technically feasible

From the perspective of a private partner, this means that commercial feasibility is not compromised by non-assumable technical risks.

Commercially feasible

This means that the upper limit for payments or the price of the contract is sufficient to cover all costs and those contingencies associated with the risk transfer structure.

Bankable

The lender community (and the investor community) must be willing to provide the finance required for the project.

Legally feasible

The contract solution or contract structure has to meet the legal framework requisites in a clear manner. This will avoid limitations on rights, creating grounds for nullifying the contract, or the likelihood of challenges by third parties.

Affordable

In a more subtle manner, a private bidder may be concerned about loose approval of projects by the government with a lack of realism in terms of real capacity to afford the project.

Duly prepared

Sufficient due diligence to identify and address all the material risks/obstacles has been applied. The government must be realistically capable of meeting its responsibilities (for example, acquisition of the right of way for a project). For those risks transferred to the private sector, information has to be consistent and available (environmental approval process, utilities allocation information, and so on).

Duly structured (contract) – inherent in the commercial feasibility

Risks assigned to the private sector have to be assumable and manageable by them, and they also have to be implemented in the contract in a clear and objective manner. Payment mechanisms and performance regimes must be clear, objective and achievable. The contract must provide protection against disputes and potential breaches from the public side.

Duly structured (tender process/RFP)

The project must be tendered on the basis of balanced capacity requirements and transparent selection criteria. Good/reputable players will demand high levels of capacity and project technical proposals so as to avoid unfair competition in the form of unrealistic and aggressive offers.

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