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....
In the process of inputting data to the financial model, several assumptions would have been made, and the model must be sufficiently flexible to reveal the impact on the final cash flows of changes in those assumptions.
All the sensitivity drivers are typically concentrated in a summary sheet that...
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...
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),...
The commercial feasibility must be assessed from two different points of view: lenders (the debt providers) and investors (the equity providers).
8.1.1 The Lenders’ Perspective (bankability)
The key aspect of the lenders’ concerns is the capacity of the project company to repay its debt on the...
In user-pays PPPs, the exercise of commercial feasibility examines the capacity of the project to generate enough cash resources to meet its expenses. The exercise might consider several scenarios for the prices charged to users (if this is possible) or a given price that cannot be altered due to...
When government payments are considered in the revenue regime, the commercial feasibility exercise aims to define the amount of government financial support required to meet investors’ and lenders’ needs.
This produces a direct forecast of revenues to feed the financial model and the basic fiscal...
The commercial feasibility analysis provides a number of outputs.
For user-pays PPPs, it provides the following:
An assessment of the capacity of the project to attract investors and lenders, from a financial perspective;
An estimate of the government payments (grant financing or supplementary...
