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

Pre-feasibility analysis

The pre-feasibility of the project should include the following preliminary analysis::

  • Needs and options analysis
  • Legal feasibility
  • Technical feasibility
  • Scoping social/environment safeguards analysis
  • Preliminary financial viability including expectations of required Government financial support
  • Institutional capability analysis
  • Identification of next steps required

A preliminary analysis means the depth of study at this stage is enough to guide a decision to proceed further, but it is much less detailed than the analysis in a full feasibility study.

Unless the Sponsor has in-house capacity to carry out the study, an external advisor would be engaged. See engaging external advisors for further guidance.

Funding for a pre-feasibility study is sometimes available from project development agencies or other institutions that play a similar role (such as the PPP Cell). In other cases it will have to be met from the budget of the Sponsoring Authority. The costs may be recovered later from project revenue if the project reaches implementation.

The Tools in this toolkit provide support to several aspects of a pre-feasibility study, particularly as they relate to PPPs. These include:

Additionally, the Suitability Filter can be used to highlight the capacity of the institutions and the private sector from a PPP point of view.

The needs analysis will expand on the analysis made during the strategic planning process. The needs analysis must have a focus on the services required by end-users. Areas that should be assessed in the needs analysis include those in the table below

Elements of a service needs analysis

Assessment element Examples and notes
The existing level of service – does current service fall short of requirements, and if so where are the shortfalls? Examples of shortfalls are:
  • Unserved demand (undercapacity), for example, roads sector a highly congested route resulting in long waits and trip times.
  • High operating costs (operating inefficiency).
  • Poor standards of service (sometimes related to undercapacity), for example roads sector unsafe road due to poor design or poor maintenance.
Desired level of service - defined in terms of services. For example, level of demand to be met (units of service to be provided or handled), service standards to be achieved
Benefits that would be provided to the users – the level of expected benefits should be one of the key justifications for the targeted level of service  
Sponsoring Agency’s objectives - How would a project to provide the desired level of service meet the Sponsor’s own objectives, such as policy priorities? Would it fall within the Sponsor’s mandate?  

A preliminary options analysis should also be carried out at the pre-feasibility stage. The options analysis asks the question: which delivery options are best for meeting the identified needs.

The purpose of infrastructure projects is to deliver services, not assets.

Delivery options may involve new assets, existing assets, or solutions requiring no assets.

Options analysis

Option for meeting the service need Related PPP modes and examples
Use a non-asset solution – Focus on management practices or demand management to meet or reduce the need. Typically the simplest type of PPP. For example, management contract
Improve existing assets – Upgrade or refurbish existing assets.

PPP may involve management, maintenance, and some capex. For example, O&M concession.

A road sector example would be add additional lanes to an existing road.

Use new assets – Develop new infrastructure to meet the service need, where existing assets or non-asset solutions are not possible or insufficient. New asset solutions are the most complex option, and will typically require the greatest commitment of resources. For example, BOT.

Detailed technical studies (eg structural, geotechnical, hydrological, drainage etc) are not required at this stage, but sufficient technical and survey work must be undertaken to be able to provide a cost range for the project (including alternatives). A preliminary cost estimate should be prepared along with the preliminary design. The technical pre-feasibility should consider:

  • The engineering and technical aspects of the project
  • The manageability of the operational aspects of the project
  • Preliminary assessment of all likely technical and operational risks.

The preliminary financial and economic viability of the proposed project should include an assessment of:

  • The cost recovery/income generation assumptions of the project
  • Likely private sector interest in the project
  • The overall project cost (capital + operations + maintenance costs)
  • Possible financial risks
  • Identification of likely economic benefits generated by the project

The Financial Viability Indicator tool has been designed to assist with the analysis for this task.

The next steps to be taken if the project proceeds should also be identified, by:

  • Assessing the resources required to complete the project preparation process
  • Identifying parties responsible for completing next steps
  • Determining the roles and responsibilities of involved parties
  • Determining the time frame required for completing project preparation.

Planning for PPP project management is covered in more depth in Phase 2 of the toolkit.

Financial Viability Indicator model

A simplified Financial Viability Indication model is provided in the tools and resources to help the Project Sponsor make their own assessment of the PPP project. The model is a spreadsheet that runs in Microsoft Excel.

The Financial Viability Indicator can be used at this stage to make a preliminary assessment of the likely viability of the project for the private sector. This tool allows:

  • An assessment of the level of user charges or other payment needed to make the project attractive to the private sector
  • An initial test of whether and how much government support is likely to be needed (for example, through VGF funding)
  • What-if?’ tests of different project designs and alternative project outcomes

The model tests viability from the perspective of a private partner (ie, the model looks at after tax returns compared to expected after-tax ROE for a commercial developer).

The complexity of the financial viability model has been deliberately reduced to make it applicable across sectors and projects, while still retaining all of the key financial inputs and variables that affect a project. In this way it is a valuable tool to highlight the key project details to Project Officers in a way that is most accessible.

It is important to note that the toolkit’s financial viability model does not have the level of detail required for the full financial analysis that should be done as part of a Feasibility Study. This level of detail is very project-specific, meaning that a customised model would be developed to take into account the particular details of each individual project. A Transaction Advisor should be engaged to do this if the Project Officer does not have the capacity in-house.

However, at the full feasibility stage the PO may wish to use the simplified model with the updated financial information. The reduced level of detail can be helpful as a tool for helping the PO focus on the fundamental issues affecting the project.

Click to download the Financial Viability Indicator model

 

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