addarrow-downarrow-outlinearrow-outline-downarrow-outline-leftarrow-outline-uparrow-upclosedownloadformat-pdfhelpinfoinfo-outlinelink-external-outlinemenusearchsource-handshakesource-klsource-web

Project Appraisal

Appraising a PPP project means checking that it makes sense to develop and implement the project as a PPP. This typically involves assessing the project and proposed PPP against four key criteria:

  • Project definition and feasibility;
  • Economic viability;
  • Commercial viability; and
  • Value for money

Project feasibility

Before a project is appraised, it must be defined using the following elements: its physical outline, the technology it will use, the outputs it will provide, and the people it will serve. Capital, operating, and maintenance costs should be estimated, as well as any revenue expected to be generated. This definition should be sufficiently broad to apply to a project delivered as either a PPP or a conventional publicly financed project.

It makes sense to do a project as a PPP only if the project itself is sound. Most governments therefore subject proposed PPP projects to the same technical and economic appraisal as any other major public investment project. There are two broad elements to this assessment:

  • developing, and assessing the feasibility of, the project concept; and
  • appraising whether the project is a good public investment decision—based on some form of economic viability analysis.

This assessment may take place prior to ever considering a project as a PPP. In other cases it may be undertaken as part of the PPP appraisal process. Either way, the project feasibility and economic viability analysis for a PPP should be no different from that of any other major public investment project.

Project definition and feasibility lay the foundation for the rest of the PPP appraisal. The project definition provides the basis for establishing economic viability, developing the PPP financial model and commercial viability analysis, and any quantitative value for money analysis.

Economic viability

Many governments undertake some form of economic viability analysis to decide whether a proposed project is a good use of public resources. A project is economically viable if the economic benefits of the project exceed its economic costs.

Generally speaking, the economic costs of the project are the same as its financial costs—though in some cases, other non-market costs, such as environmental damage, may be taken into account. The economic benefits are a measure of the value the project will deliver to people. The revenue a project will generate is usually a lower bound estimate of its economic benefits—but benefits can be much higher than revenues. For example, the benefits from improved transportation can exceed the tolls paid on a highway. The value of education at a high school is measured by the enhancement in the lives and prospects of the children who attend, even if no school fees are charged. Economic viability analysis can also include cost-effectiveness analysis, to determine whether the project is the lowest-cost way to achieve the identified benefits.

Commercial viability

Having established that the project is viable, the next step is to consider whether, if structured as a PPP, it would be commercially attractive to the market. Generally, private parties will find a project commercially attractive if it offers good financial returns, and requires the private party to bear only reasonable levels of risk.

Assessing returns involves building a project financial model and checking project cash flows, returns, and financial robustness. Where revenue from user charges exceeds costs plus the commercially required return on capital, the project will generally be commercially attractive (provided risks are seen as reasonable). Where user charges are not at this level, government can use the financial analysis to assess the government contributions that will be needed—which in turn needs to be assessed as part of the fiscal analysis of a PPP project.

Governments should also assess the appetite of potential partners for a proposed PPP before taking it to market. This could include simply considering whether similar projects have previously been implemented with private partners in the country or region. It can also include testing market interest by market sounding—that is, presenting to potential investors the main parameters of the project for questions and comments.

Value for money

A key objective of most governments in implementing PPPs is to achieve value for money in providing needed infrastructure. Value for money means achieving the optimal combination of benefits and costs, in delivering services users want. Many successful PPP programs require an assessment of whether a PPP is likely to offer better value for the public than conventional public procurement—often called value for money analysis. A value for money comparison can be done for a specific proposed PPP project. It can also be done at a program level for projects with common characteristics.

Value for money (VfM) analysis typically involves a combination of qualitative and quantitative approaches. Qualitative VfM analysis involves sense-checking the rationale for using PPP—that is, asking whether a proposed project is of a type likely to be suitable for private financing, and whether the conditions are in place for the PPP to achieve value for money (for example, that the PPP has been structured well, and that the project is attractive to private parties). This often takes place at a relatively early stage of PPP development.

Some PPP programs also require quantitative assessment of value for money. This typically involves comparing the chosen PPP option against what the project would look like if delivered through conventional procurement (what is known as the public sector comparator). This comparison can be made in different ways. The most common is to compare the fiscal cost under the two options. An alternative is to compare the two options on an economic cost-benefit basis—that is, to quantitatively weigh the expected benefits of a PPP over conventional procurement against its additional costs. This can be difficult to do meaningfully in countries with poor availability of benchmark data. In these situations, governments and their advisors should carefully consider the value of the qualitative approach.

Learn More

    • 2014
    • Asian Development Bank (ADB), World Bank Group (WBG), Inter-American Development Bank (IDB), PPIAF

    Project Appraisal

    PPP Reference Guide Version 2.0

    Appraising a PPP project means checking it makes sense to develop the project, and to implement it as a PPP. Section 3.2 of the PPP Reference Guide discusses the different criteria used to decide whether or not a proposed PPP project is a good investment decision. Value for Money analysis is discussed on pp. 132-134. The PPP Reference Guide presents a global overview of the diversity of approaches and experiences in the implementation of PPPs, providing an entry point to the substantial body of knowledge on PPPs that has been built up by practitioners in governments, the private sector, international institutions, and academics. It seeks to provide advice on what PPP practitioners should know, rather than provide advice on what to...

    • 2011
    • Philippe Burger and Ian Hawkesworth
    • Organisation for Economic Co-operation and Development (OECD)

    How To Attain Value for Money: Comparing PPP and Traditional Infrastructure Public Procurement

    Governments increasingly use PPPs to pursue value for money. However, value for money is (or at least, should be) the driving force behind traditional infrastructure procurement. Therefore, any project, whether it is a PPP or a traditionally procured project, should be undertaken only if it creates value for money. It seems that the choice between using a PPP or traditional procurement should be simple: governments should prefer the method that creates the most value for money. However, in practice the value-for-money objective is very often blurred, and the choice between using a PPP and traditional infrastructure procurement may be skewed by factors other than value for money. Some factors skew choice towards traditional procurement,...

    • 2010
    • Anand Rajaram, Tuan Minh Le, Nataliya Biletska, Jim Brumby

    A Diagnostic Framework for Assessing Public Investment Management

    This paper provides a pragmatic and objective diagnostic approach to he assessment of public investment management systems for governments. Since weaknesses in public investment management can negate the core argument that additional fiscal space allocated to public investments could enhance future economic prospects, attention to the processes that govern public investment selection and management is critical.

    • 2013
    • PPIAF, World Bank Group (WBG)

    Value-for-Money Analysis-Practices and Challenges

    How Governments Choose When to Use PPP to Deliver Public Infrastructure and Services

    A growing number of developing country governments are interested in using Public-Private Partnerships (PPPs) to provide public infrastructure assets and services. This Reference Guide exists to help them. Specifically, it aims to help government officials to understand the basics of PPPs, how to establish a sound PPP framework, and how to implement PPP projects. A substantial body of knowledge on PPPs has been built up by practitioners in governments, the private sector, international institutions, academics and advisors. This Reference Guide guides for government officials through the body of knowledge. It introduces key topics on PPP, sets out options, and directs readers to examples, and key references where they can find out more....

    • 2008
    • Asian Development Bank (ADB)

    Public-Private Partnership Handbook

    This Public–Private Partnership (PPP) Handbook is designed for the staff of the Asian Development Bank (ADB) and its developing member countries’ clients. It provides an overview of the role, design, structure, and execution of PPPs for infrastructure development. With inputs from policy and transaction specialists, this handbook addresses a range of matters associated with PPPs, from policy considerations to implementation issues. Each of the 10 chapters focuses on a specific area of information about PPPs:

    • Chapter 1: introduces and defines PPPs and their context within infrastructure and development finance.
    • Chapter 2: gives examples of evolving PPP experience within various infrastructure sectors.
    • Chapter 3: describes...

    • 2007
    • E.R. Yescombe
    • Oxford University

    Public-Private Partnerships: Principles of Policy and Finance

    This book reviews the general policy issues which arise for the public sector in considering whether to adopt the PPP procurement route, and the specific application of this policy approach in PPP contracts. This book also offers a systematic and integrated approach to financing PPPs within this public-policy framework. A section on due diligence can be found in Section 6.5.

    • 2010
    • Edward Farquharson, Clemencia Torres de Mästle, E.R. Yescombe, and Javier Encinas
    • PPIAF

    How to Engage with the Private Sector in Public-Private Partnerships in Emerging Markets

    This guide reviews the necessary steps to successfully engage and manage a public-private partnership (PPP) from the early stages. It presents a framework that highlights the requirements, options, and challenges that governments face when embarking into PPPs, and explains how to address them so that a sound PPP program can be implemented and the benefits for both public and private partners can fully materialize. This book draws on experiences from both mature and developing PPP markets across the world, and case studies illustrate the key messages throughout. It discusses the policies, processes, and institutions needed to select the right projects and then manage preparation for market and operation. It identifies the underlying...

    • 2009
    • Grimsey, Darrin & Mervyn K. Lewis, chapter in Akintola Akintoye & Matthias Beck
    • Wiley Blackwell, University of South Australia

    Developing a Framework for Procurement Options Analysis (Chapter 21)

    Policy, Finance & Management for Public-Private Partnerships

    This chaper in Akintola Akintoye & Matthias Beck's 2009 book describes a market sounding exercise for a hypothetical example hospital PPP project.

    • 2012
    • Government of Singapore

    Public Private Partnership Handbook

    This document published by Singapore's Ministry of Finance provides an introduction to the concept of Public Private Partnership (PPP) covering PPP delivery models and the roles of the public and private sectors in PPP Projects. It also explores the structuring process, procurement process, and management of a PPP relationship in depth.

    • 2013
    • PPIAF, World Bank Group (WBG)

    Value-for-Money Analysis-Practices and Challenges

    How Governments Choose When to Use PPP to Deliver Public Infrastructure and Services

    A growing number of developing country governments are interested in using Public-Private Partnerships (PPPs) to provide public infrastructure assets and services. This Reference Guide exists to help them. Specifically, it aims to help government officials to understand the basics of PPPs, how to establish a sound PPP framework, and how to implement PPP projects. A substantial body of knowledge on PPPs has been built up by practitioners in governments, the private sector, international institutions, academics and advisors. This Reference Guide guides for government officials through the body of knowledge. It introduces key topics on PPP, sets out options, and directs readers to examples, and key references where they can find out more....

    • 2005
    • Darrin Grimsey, Mervyn K. Lewis

    Are Public Private Partnerships Value for Money?

    Evaluating Alternative Approaches and Comparing Academic and Practitioner Views

    Determining value for money for a PPP is an area in which, despite strong criticisms by a number of academic writers of the methods used by practitioners to evaluate value for money, surprisingly little engagement has taken place between the practitioners and the academics on the issues involved. This paper attempts to provide such an engagement. At the same time, because many of the academic critiques focus on the situation in one country (particularly the UK or Australia), we try to put matters into a broader, comparative context by considering approaches to value for money tests in a number of countries. Our examination is thus comparative in the sense of considering value for money tests in different countries, while also comparing...

    • 2008
    • Organisation for Economic Co-operation and Development (OECD)

    Public-Private Partnerships: In Pursuit of Risk Sharing and Value for Money

    Through a joint regulatory and budgetary perspective, this book undertakes a systematic analytical discussion of questions associated with PPPs. The aim is to provide governments with a toolkit of issues to be explored and resolved from a public governance perspective before engaging in a PPP project. The book identifies possible good practices for the public sector to maximize the potential for PPP projects and to ensure that they are used appropriately to maximum general interest. These practices involve: affordability; value for money; fiscal rules and expenditure limits; risk sharing; the need for competition and transparency; regulatory issues; adequate institutional capacity; the public sector comparator; and the importance of...

    • 2009
    • PPIAF
    • PPIAF

    Toolkit for Public-Private Partnerships in Roads and Highways

    The Toolkit is a reference guide for public authorities in developing countries for the development of PPP (public-private partnership) programs in the highways sector, particularly in assisting in PPP policy development, project preparation and the sourcing and monitoring of external expertise. It provides guidance in the definition of strategy and policy for PPP, the characteristics of PPP projects and the stages for their preparation. Module 4, "Laws & Contracts" https://ppiaf.org/sites/ppiaf.org/files/documents/toolkits/highwaystoolkit/4/index.html examines the legal framework and regulatory environment for PPPs.  It provides a framework for diagnosis and reform and provides the basis for preparation of PPP contracts. Module 5,...

    • 2014
    • Asian Development Bank (ADB), World Bank Group (WBG), Inter-American Development Bank (IDB), PPIAF

    Evaluacion de Proyectos

    Asociationes Publico-Privadas: Guia de Referencia Version 2.0

    • 2015
    • European PPP Expertise Centre (EPEC), European Investment Bank (EIB)

    Value for Money Assessment

    Review of Approaches and Key Concepts

    This publication has been prepared to contribute to and stimulate discussions on public-private partnerships (PPPs) as well as to foster the diffusion of best practices in this area.This report is part of EPEC’s work on ‘PPP Investment Planning, Programming, Project Selection and Preparation’ and responds to EPEC members’ requests with regard to mapping approaches to Value for Money (VfM) assessments. The report is structured as follows: Section 2 highlights some of the main concepts around VfM assessment and provides an overview of the context in which VfM assessment takes place; Section 3 contains overviews of the VfM guidance available in France, Germany, the Netherlands and the UK1 together with references to the main sources of...

For legal and regulatory resources go to PPPIRC

Explore PPP Cycle