The financial viability of PPI projects is of great concern to the Government. If a project is found not to be financially viable, then its economic evaluation is reviewed to determine whether the investment is justified in terms of its expected benefits to the economy as a whole. If a PPI project is not financially viable but found to be economically viable, various options are considered for improving the project's financial rate of return. The acceptable financial rate of return of a project is determined by taking into account three main factors:
(a) The average cost of borrowing for infrastructure projects;
(b) The risk premium associated with the type and scale of the project;
(c) The rate of return for similar projects in other countries competing for investor funds.
The reference range for determining the rate of return for PPI projects is 11 to 14 per cent. The rate of return for a particular project is determined through negotiations taking into account the type of project and the level of risk.
Under the new PPI law, the Government can offer a wide range of incentives and take various other measures in order to reduce the risks and uncertainties that may be associated with a PPI project. The incentives are offered in a way that can significantly improve the financial viability of projects and reduce their implementation risks to make them attractive for the private sector. These incentive measures are discussed next.