www.pppinindia.gov.inPPP TOOLKIT
PPP TOOLKIT for Improving PPP
Decision-Making Processes

Sector: State Highway  |  Module 2: Work through the PPP process

Full feasibility study and PPP due diligence

Financial viability and PPP due diligence

In this stage a quantitative analysis of the financial feasibility of the project using the most promising PPP modal option or options is carried out. This stage also allows an assessment of likely VGF or other public-sector financial assistance requirements (eg IIFCL or state-level PPP finance vehicles).

This financial analysis is an important part of the “due diligence” that should be carried out on the PPP project. Although the entire PPP process should be conducted with due diligence it is worth emphasising it at this critical stage.

The financial analysis will use information gained from the demand forecasts, technical feasibility, and cost estimates, and will reflect the PPP mode that has been chosen. It should include demand and cost scenarios. A typical structure and information flows in a financial model is shown in the figure and described more below.

Typical structure and flows in a financial model

A detailed financial analysis model would usually need to be tailored to the particular characteristics of the project. This would be done by transaction advisors unless the Sponsor has this specialist expertise in-house.

The inputs to the detailed financial analysis would include the following:

  • The life-cycle costs of the project and their timing. These include the estimated capital costs and operating and maintenance (O&M) costs identified in the cost assessment and a depreciation schedule for physical assets
  • Revenue options and the associated forecast revenue stream. This will include tariffs (where user-charges are possible), and secondary revenue sources from the project.
  • Forecast demand including scenario ranges from the feasibility study
  • Assumed capital structure (debt - equity mix) of private sector investment vehicle
  • Debt and repayment schedule
  • The discount rates for the public sector and private investor consistent with the capital structure and allocation of project risks
  • Project specifications (investment timing, lifetime etc)

    Sensitivity ranges on assumptions, designed to encourage a careful consideration of probable outcomes and reduce optimism bias.

The outputs of the model would include:

  • Expected returns from the project illustrated by the NPV, IRR (see below).
  • An assessment of subsidy or viability gap funding requirements where there is a viability gap between the revenue requirement and the revenues that can be raised from users
  • Summary financial information including ratio analysis

Together these outputs will provide a quantitative assessment of the financial viability of the PPP.

The scenario analysis may include different risk allocations and even variations in the PPP mode. This means there can be feedback between this analysis and the risk allocation.


Financial viability will usually be expressed as the project’s Net Present Value (NPV) or Internal Rate of Return (IRR). These are two very useful guides to decision making.

Financial viability should be analysed in present value terms, which means the costs and revenues over the life of the project are expressed in terms of today’s money. This is essential for making meaningful comparisons of benefits and costs that occur at different times and for comparing different projects.

Click for more information on the NPV and IRR criteria.

Cost of capital

An especially important input to present value analysis is the ‘discount rate’ (or required rate of return) to use. Separate analyses should be applied using different discount rates:.

  • In the first analysis, a realistic assessment of commercial discount rate should be used. This will determine what a commercial investor would require in order to invest.
  • The second analysis would use the government’s own cost of funds. This may be lower than that applied for private sector investors, particularly at the Central level. However, it is not always the case that the public sector is able to borrow more cheaply than the private sector. State or local governments in particular may face higher rates depending on their credit rating. The appropriate rate should be reflected in the analysis.

Click here for a brief explanation of discount rates.

The toolkit's PPP Financial Viability Indicator model can be used to carry out a more simplified analysis of the key questions of financial viability and to test these using ‘what-if?’ scenarios.


  Next Page: Economic feasibility