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...
The nature of the Appraisal Phase is intrinsically multidisciplinary. It consists of a series of intricate and interrelated exercises that detail the project, compare the project to a set of feasibility criteria, and prepare it for procurement (see figure 4.2).
FIGURE 4.2: Overview of the Appraisal...
As introduced in chapter 3.6, the Identification Phase will likely have provided a basic scope of the contract, describing what elements of the technical solution selected for the public need will be delivered by the private partner under the PPP contract.
However, in some projects, defining the...
Technical requirements, together with other PPP structure parameters, lie at the heart of the contract. The technical requirements should provide enough technical details about the project so as to allow a precise definition of the design of the infrastructure (and the characteristics of the...
Chapter 5.6 provides a comprehensive overview of risk issues and the risk management cycle in PPP projects. During the appraisal process, risk identification and risk assessment are key tasks that provide inputs for constructing the financial base case for feasibility, for Value for Money (VfM)...
Estimated risk-adjusted costs are a central output of the design of the technical requirements, and this data is used to feed the financial model. Depending on the type of infrastructure, the nature of this data can change. However, the typical sets of cost estimates that should be produced at this...
The further detailing of the scope and the design of the technical requirements provides fundamental outputs for the Appraisal Phase and, indeed, for the whole of the PPP process, since it provides the technical description of the project used as a basis for other feasibility exercises. See box 4.2...
One important aspect of the project, which needs to be preliminarily defined during appraisal, is the PPP contract structure, specifically in terms of the:
Financial structure from the government perspective (revenue regime, contract term, and so on). See box. 4.3.
Risk allocation structure....
The revenue regime of PPPs refers to the source of revenues collected by the project company. This can be broadly divided into two major groups. The first is the user charges. The textbook examples are the tolls collected directly by the private partner in road concessions, or the fees paid to...
PPP contracts allocate risks between the government and the private partner. In fact, risk allocation is one of the most important tasks conducted during the whole of project preparation since it underlies most of the PPP’s potential advantages, as presented in chapter 1.5.2.
During the structuring...
At the Appraisal Phase, the project must be accurately described in financial terms to allow for several feasibility exercises to produce meaningful results. For example, the following appraisal exercises in box 4.5 use some variation of the financial description of the project.
BOX 4.5:...
A relevant group of data that should be put into the Model are the macroeconomic assumptions. General inflation, relative inflation, base interest rates, risk-free interest rates, and exchange rates are key elements for long-term estimates.
General inflation and relative inflation are the first...
The initial capital expenditures (initial Capex) group represent the expenses incurred from the private consortium’s preparation of its proposal until the commissioning of the asset. These expenses commonly occur before the project company obtains any revenue. The expenses are mostly obtained from...
The operating costs or operating expenditures (Opex) and reinvestments (infrastructure renewals or life-cycle costs) are commonly distributed throughout the entire duration of the contract. Most of those costs are outputs of the technical requirements, but they must be organized in terms of yearly...
A considerable cost associated with the project is the cost of capital or the costs of obtaining the financial resources to implement the project. To correctly estimate these costs, the financial model must accommodate a fundamental problem in project finance[14]: where the required money for the...
The revenues represent all the inflows used by the Project Company to meet its costs.
The revenues from government payments, when they are included in the revenue regime, can be considered an output of the commercial feasibility exercise since they are determined by the affordability assessment (...
Building the financial model is essentially a financial exercise, that is, it does not primarily deal with accounting results. Its bottom line conclusion, the Equity Free Cash Flow, is a financial concept rather than an accounting concept. However, the financial model also needs to produce...
An important parameter of the financial model is the contract term, since it directly affects several of its conclusions. This is typically a variable preliminarily defined during the design of the financial model and is confirmed or adjusted during the structuring of the project. Some of the...
Two important outputs of the financial model are the free cash flow of the project and the free cash flow of the investor (shareholder).
The free cash flow of the project, for each period, represents all the revenues less the expenses incurred, including capital and operational expenditures....
