Potential PPP projects must undergo an appraisal process to ensure that developing and implementing them makes sense. For any proposed PPP project, there are five key criteria that governments should consider when deciding whether or not to pursue a project as a PPP:
- Feasibility and economic viability of the project (Assessing Project Feasibility and Economic Viability)—whether the underlying project makes sense, irrespective of the procurement model. First, this means confirming that the project fits in with national development and sector strategies, policy priorities, and sector and infrastructure plans. It then involves feasibility studies to ensure that the project is technically feasible, and the technology is easily available in the market and unlikely to become obsolete in the medium term; and economic appraisal to check that the project is cost-benefit justified, and represents the least-cost approach to delivering the expected benefits. Attention should be paid to environmental and social issues (E&S), addressed in Environmental and Social Studies and Standards.
- Commercial viability (Assessing Commercial Viability)—whether the project is likely to attract good-quality sponsors and lenders by providing robust and reasonable financial returns. This is subsequently confirmed through the tender process.
- Value for money of the PPP (Assessing Value for Money of the PPP)—whether developing the proposed project as a PPP can be expected to best achieve value for money compared to other options. This includes comparing against public procurement (where that would be an option) and other possible PPP structures. Some countries, like Australia and India, mandate the development of a public sector comparator during the appraisal process. This is an estimate of the hypothetical, whole-of-life cost of the project if financed by government under traditional procurement. This ensures that the proposed structure provides the best value for money.
- Fiscal responsibility (Assessing Fiscal Implications)—whether the project’s overall revenue requirements are within the capacity of users and the public authority to pay for the infrastructure service. This involves checking the fiscal cost of the project—both in terms of regular payments and fiscal risk—and establishing whether this can be accommodated within prudent budget and other fiscal constraints.
- Project management (Assessing the Ability to Manage the Project)—whether the contracting agency has the authority, capacity, and fiscal resources to prepare and tender the project, and to manage the contract during its term.
These criteria (with some variations) are described in more detail in Chapter 5: “Public-Sector Investment Decision” in Yescombe’s book on PPPs (Yescombe 2007); Chapter 4: “Selecting PPP Projects” in Farquharson et al's book on PPPs (Farquharson et al. 2011), Module 3 of the Caribbean PPP Toolkit (Caribbean 2017), and Chapter 1: “Project Identification” in the EPEC Guide to Guidance (EPEC 2011b).
Appraising PPP Projects shows how project appraisal fits in to the overall PPP process. Initial assessment against each criterion is typically done at the project identification and initial screening stage, as described in Identifying PPP Projects. Detailed appraisal is usually first conducted as part of a detailed business case alongside developing the PPP project structure, as described in Structuring PPP Projects. For example, assessing the value for money of the PPP depends on risk allocation, an important part of PPP structuring.
PPP appraisal is typically re-visited at later stages. The final cost, affordability and value for money is not known until after procurement is complete, when the government must make the final decision to sign the contract. Many governments require further appraisal and approval at this stage.