Affordability relates to capacity to pay for building, operating and maintaining the TEN-T project, be it capacity to pay by users of the infrastructure services or by the government that has identified the need for the infrastructure asset to be built.
An affordability assessment requires a careful analysis of the expected operating and maintenance costs of the TEN-T project, together with the levels of cash flow required to repay the loans and provide a return to investors. The financial and technical advisers will develop a financial model to assess alternatives in terms of a range of capital, operating, and maintenance cost estimates, appropriate cost escalation indexes, and assumed financing structure and preliminary contract terms. At the pre-feasibility stage, the financial model is developed at a fairly high level. It is later on, at the feasibility stage and when PPP arrangement is designed in detail, that the financial model is further developed and refined. (see step 3.2.3, Prepare detailed design of the PPP arrangement).
The assessment of costs translates into an estimate of the required revenues to meet those costs:
□ In PPPs where users pay directly for the service (so-called revenue- based PPPs), the public contracting authority and its advisers need to examine the capacity and willingness of users to pay, especially if tariffs need to be increased from current levels to meet revenue cash-flow targets. In many PPPs, the public sector will need to subsidise the service in order to make it affordable. The use of public subsidies can impact the Value for Money of a PPP arrangement requiring that the net life-cycle efficiency savings from the PPP option be large enough to compensate for the use of public funds.
□ In PPPs where the public contracting authority makes the payments (so-called availability-based PPPs), assessment of affordability is a key consideration in the design of the project. The public contracting authority will enter into payment obligations over the life of the PPP contract, which represents long-term commitments by government, lenders and investors and can influence the design of the project and its Value for Money proposition. Sometimes, options may need to be examined that combine direct fees from users with government service payments or that contribute existing government assets to the project.
Thus, affordability relates not only to the financial balance of the PPP arrangement, but also to government expenditure items in general. A TEN-T project is considered to be affordable if government expenditure associated with it, whether it is via PPP or via conventional public procurement, can be accommodated within the inter-temporal budget limit of the government.