In designing and preparing PPP, there must be a process to balance service levels with the tariff levels, creating a package of price and service which is acceptable to customers and sustainable for the utility. Critical to this analysis is the structure of payments to and revenues for the private partner, including any subsidies that might be required.
This iterative process will encompass:
• technical analysis-to determine the cost of service;
• market and social research-to determine what people are willing and able to pay for certain service levels;
• financial analysis and modeling-to determine the cost recovery tariff required to support the desired coverage targets and service levels; and
• consultation and trade-offs-to agree any transitional subsidies until cost recovery is achieved or ongoing subsidies, e.g., to low-income customers. If the subsidies are not available, coverage and service targets may need to be reduced.
As described in section 3.5, the financial model must be flexible enough to accommodate a range of variables, allowing for an iterative process between the financial modeling and the PPP design. A key objective will be to ensure the financial sustainability of the utility through efficiency gains and through balancing of income and expenses. The financial model is a tool that helps achieve the right balance of affordability, cost recovery, and investment. The model will help prioritize investments and inform decisions on who should pay for investments, depending on the respective cost of capital. Some countries also find it useful to use a public sector comparator (PSC) model which helps government test whether a private investment proposal offers value for money compared with the most efficient form of public provision.
In preparing the transaction, three important considerations will be (i) the source of financing, (ii) the design of the appropriate tariff structure and tariff levels, and (iii) design and application of subsidies.