Another important consideration for local government is the potential interest of the private sector in the proposed public private partnership. The private sector will be interested in providing some services more than others, and taxation and financial considerations will be fundamental issues for the potential private partner.
Generally, the private sector will be most interested in those services with:
• unmet demand
• revenue generating capability
• revenue development potential
• demonstrated project viability
• demonstrated strong political commitment to the project by local government
Also important, but less critical, are opportunities for:
• technology development
• expansion of service
An important issue in attracting a private sector partner is how the local government intends to deal with risk transfer.
The degree of risk to be transferred to the private partner will determine the extent of the return or reward required by the private partner. The more risk, the higher the expected return. The private sector will not be interested in opportunities in which the local government is unable or unwilling to offer rewards that are commensurate with risks the private sector may be required to accept. Proposals for public private partnerships that do not balance risks and rewards between the prospective partners have limited prospects for proceeding. The issue of balance to the private sector is based on market conditions and other opportunities for investment.
Another consideration for the private sector is the bottom line. Ultimately, the private sector will need to confirm that the financial rewards are consistent with the degree of risk that it is being asked to assume.
Various market factors will need to be considered, including existing and future demand for the service (price, future market conditions and the scale of the project). Simple cash-flow analysis can be used initially to determine whether there may be private sector interest in specific projects.
There are various types of financial analysis used to determine potential interest on the part of the private partner, such as net present value, return on equity or return on investment. The basis of the analysis should be life-cycle costs.
The most critical issue from the perspective of the potential private partner will be whether there is an adequate return to cover the potential risk.