Having established that the project is viable, the next step may be to consider whether, if structured as a PPP, it would be attractive to the market. Will private parties see the opportunity as something attractive to pursue? Generally speaking, private parties will find a project commercial attractive if it offers good financial returns, and requires the private party to bear only reasonable levels of risk.
Assessing returns typically involves financial analysis-that is, building a project financial model and checking project cash flows, returns, and financial robustness. The ADB's PPP Handbook [#8, pages 17-18] gives a brief overview of typical financial analysis of a PPP. Yescombe's chapter on financial structuring [#295] provides a more comprehensive description.
Where revenue from user charges exceeds costs plus the commercially required return on capital, the project will generally be commercially attractive (provided risks are seen as reasonable). Where user charges are not at this level, government can use the financial analysis to assess the government contributions that will be needed-which in turn needs to be assessed as part of the fiscal analysis discussed in Section 2.4.1: Assessing Fiscal Implications of a PPP Project.
Governments also often assess the appetite of potential partners for a proposed PPP, before taking it to market. This could include simply considering whether similar projects have previously been implemented with private partners in the country or region. It can also include testing market interest by market sounding- that is, presenting to potential investors the main parameters of the project (typically the project concept and initial structure, developed during the structuring phase described in Section 3.3: Structuring PPP Projects, for questions and comments. The following resources provide more guidance on market sounding:
• Farquharson et al's chapter on managing the interface with the private sector [#95, Chapter 8], which includes 'top 10 tips' for a successful market-sounding exercise
• 4Ps paper on 'soft market testing' [#229], which includes tips, practical guidance, and a case study of a market sounding exercise for a PPP in the United Kingdom
• Grimsey and Lewis' chapter on procurements options analysis [#121, pages 409-411], which describes a market sounding exercise for a hypothetical example hospital PPP project
• Singapore's PPP Handbook [#216, pages 56-57], which requires implementing agencies to conduct market sounding before pre-qualification, and describes the type of information that should be shared at this stage.
Market sounding may be done by government agencies directly, or may be delegated to transaction advisors. Experienced transaction advisors tend to know likely bidders for many kinds of PPP projects-using them to assess market interest allows government to take advantage of these relationships, which can result in market feedback that is more honest and specific than an inexperienced government agency would be able to elicit on its own. Where local experienced transaction advisors are not available, governments may perhaps hire advisory services from multilateral financial organizations, such as IFC PPP advisory services and support provided by the Multilateral Investment Fund (MIF)'s PPP advisory facility.