When considering the need for fiscal support, it is important to gain a thorough understanding of the project's financial characteristics. This implies that an accurate and flexible financial model has been built, and that it is based on accurate information. The following discussion sets out some review steps regarding the financial characteristics of a project, as a guide to selecting appropriate support instruments.
If the business is likely to cover all of its cash outflows within 10 years, i.e., operating costs including interest, principal and a yield to the investor of at least 5-10% annually, then the cash flow problem, if it exists, is only short term and will disappear once patronage builds or tariffs ramp up to full cost recovery levels, or both. Very likely, no support will be required.
If the business is likely to cover all its cash outflows within 10-years, i.e., operating costs including interest but has a yield to investor of 5% p.a., or less, then the following types of support may be considered: (1) minimum revenue guarantees in the early years, (2) patronage guarantees for the early years, and (3) subsidies for low income users.
If the business does not generate operating profits beyond the tenth year, and does not leave some surplus to contribute to capital costs, then the project is unlikely to be viable as currently structured. Bundling, unbundling, or full or partial deferral or traditional procurement may be considered.
If, however, the business does generate operating profits beyond the tenth year leaving some surplus to contribute to capital costs, then an investment grant can bring down cost and hype up return on investment. Calculation of the fixed investment grant needed to make a project viable can be done through model simulation. Calculate of the expected value of a variable operations subsidy (minimum revenue guarantee, public support, traffic guarantee, etc.) given to a PPP project from LGU can also be done through model simulation.
If the technical risks to the project are not significant and unlikely to deter investors or cause them to propose an excessively high internal rate of return, no further action is necessary. However, if the technical risks are significant and will most likely deter investor or cause them to propose an excessively high internal rate of return, the use of partial guarantees of construction may be considered.