The conclusions of the financial appraisal will be based on many runs of the financial model. Returns to project, equity, and the LGU, if applicable, under different scenarios, with sensitivities to key variables, all need to be taken into account. The financial appraisal report must state whether the project is capable of generating adequate returns to the private investor, and whether the project cash flows are capable of servicing the necessary debt.
When financial results are marginal, the key to financing infrastructure will be credit enhancement, i.e., taking measures to improve the risk and return profile of a project (provided that it is economically viable) to attract financing so that it will proceed to financial closure.
The term "credit enhancement" may have a variety of meanings. In principle, anything that improves a project's bankability may be considered credit enhancement. In broad terms, this may include (1) a sound, credible, transparent cooperation program; and (2) project identification and structuring which understands and addresses the concerns of the private sector.
Usually, the term includes one or more limited guarantees, which seek to minimize the typical risks found in any infrastructure venture. They include measures agreed upon by the sponsors and developers (the equity participants) that will improve the chances for the recovery of loans extended by the debt participants, with some of these measures directly involving the host LGU. It is important, however, for the LGU to be involved, to be aware of, and conversant with these techniques as a part of their oversight and due diligence responsibilities in procuring and monitoring the desired infrastructure services.
Examples of government support include a range of instruments such as a take or pay agreement, a revenue guarantee, or tax incentives that the LGU can provide to improve the predictability of project cash flows and reduce the levels of risk, as perceived and analyzed by the PPP concessionaire, and especially its lenders.
In practice, most public-private partnerships require both public and private investment. For example an LGU may opt to build the distribution network of a water supply project and let the private partner undertake water source development, treatment and transmission. Or more commonly the LGU pays for the right of way and the rest is paid by the private partner. A big part of getting the project structure right is setting the best mix of public and private investment. The financial model will have to be run under scenarios that vary the amount of government input. The conclusions to the financial appraisal will present options to government. For each scenario, assuming a certain amount of credit enhancement support is provided, it should be clear if the project is financially feasible under a reasonable set of assumptions. The decision to adopt a particular structure and to proceed to tendering will depend on many considerations, the financial appraisal being one of them.