All projects require a detailed planning and feasibility study based on the most recent data and information usually collected from a variety of primary and secondary sources and previous studies. The physical components of the project and their capacities are determined on the basis of the outcomes of the feasibility study. These elements, in turn, determine the service requirements that the project has to deliver.
Any PPP project should be subject to social cost-benefit analysis based on a proper feasibility study to examine its public as well as private benefits. Results of the analysis provide an essential input for the political decision making process.
A financial analysis with due consideration of all costs will also have to be undertaken to assess the commercial viability of a project. The economic and financial analyses12 are undertaken to establish the need and size of the project, and also to provide the basis for any government support (including participation in financing), if necessary.
All cost calculations for a project should be based on its life cycle costs. Consideration of life cycle costs is necessary to establish the business case for a project. Such costs may include:
• Capital cost (construction, equipment and land costs);
• Soft costs (interest cost, bidding and development costs, management and consultation fees, etc.);
• Operational costs;
• Life cycle maintenance and refurbishment costs; and
• Cost of any necessary associated/complementary infrastructure (for example, access or physical integration infrastructure)
The work involved in the project planning and feasibility study is generally undertaken by the transaction advisor. The implementing agency prepares detailed terms of reference for the study, and the in-house project team remains directly involved in overseeing the conduct of the study.
The success of a PPP project depends on the quality of project planning, stakeholders' support, consideration of the major implementation issues in the planning stage, and implementation arrangement. The main issues that are generally considered in project planning are:
• Project selection and engagement with the private sector;
• Realistic demand analysis; and deciding location, structure and size of the project;
• Social and environmental impacts and mitigation measures;
• Sector specific issues/physical and natural characteristics;
• Legal and regulatory aspects that the project has to satisfy;
• Pricing of the product and services;
• Implementation issues;
• Liabilities on the government and government support that may be required; and
• Financing
Some of these issues require more elaborate discussion and are considered in separate sections.
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12. Both the economic and financial analyses use a systematic format to account for all relevant costs and benefits (or revenues) of a project year by year. One of the major differences between these analyses is in the identification and valuation of the cost and benefit items. While the economic analysis considers all costs and benefits (including externals costs and benefits) to the economy as a whole and valued at their economic prices, the financial analysis considers only those costs and benefits that are internal to the project and are valued at their market prices. Both the analyses apply the discounting technique to find the present values of all future costs and benefits. This is done to reflect the time value of money or resources (see also footnote 26).
Often, the internal rate of return or IRR of a project is used to examine its viability. The IRR is the discount rate, which, when applied to the yearly stream of costs and benefits of a project, produces a zero net present value. A project is considered viable when its IRR is greater than a pre-determined cut-off rate. Both the economic and financial IRRs are calculated to establish the economic and financial viability of a project.