The Third File must, as a minimum, contain the following sections:
1. Executive Summary: The Executive Summary requirement is the same as for the Second File, except that all information and analysis shall be updated to reflect the Privatization project concept considered by the Third File and current information. This executive summary must provide grounds for granting final approval to engage in Privatization procurement for this project. The Third File shall contain a confirmation statement acknowledging that all information is complete and up-to-date, to the best of the Work Team's knowledge at the time the Third File is submitted to the Supervisory Committee. It also includes the recommendations to move the project to the Privatization procurement phase.
2. Administrative Context, including Concept Definition for the Project Considered in the Third File: The Administrative Context requirement is the same as at the Second File, except that all information shall be updated to reflect the Privatization project concept considered in the Third File, and current information. Note that the project name must be the same as in the First File stage, as this is used to track the project in the Project Registry.
3. Rational behind the Project Concept Considered in the Third File, and that the Need to Handle the Project is Still a Sector Priority: The Project Rationale and Assessment of Need requirement are the same as for the Second File, except that all information shall be updated to reflect the Privatization project concept considered in the Third File, and current information. The Work Team shall ensure that the information presented remains accurate and up-to-date, i.e., that any changes in the requirements or updated data are reflected, and that the stated need remains a sectoral priority. If additional project details are defined at the time of Third File preparation, these should be reflected.
4. Economic Benefits of the Project Concept Considered in the Third File, Including Negative Impacts: The Third File requirement for identification of economic benefits is the same as for the Second File. The Third File shall include an updated identification of project benefits and potential negative impacts, based on the Privatization project concept and current information.
5. Detailed Financial Case for the Project Considered in the Third File: The Third File shall explore the financial case for the proposed Privatization project. Note that in the Third File, the detailed cost estimate for the Privatization contract is not included in the Financial Case; instead these are considered in the Value for Money Analysis (see Part 12 of Chapter 4). All risk mitigation costs must be identified if there is likely to be a need for mitigation measures due to anticipated environmental or social impacts, and these will not be included in the Privatization contract, but will be separately provided by the government. The Third File shall also provide an analysis of the financial viability and sustainability of the Privatization project. At the Third File stage this shall be presented as a full financial model, which must identify the potential sources and value of revenue streams to the private sector party, i.e., budgetary payments from the Government, user fees from consumers of the project services, a combination of these sources, and/or other revenue sources. An estimate of the revenue produced from each source shall be provided, with supporting rationale, and shall assess whether these revenues are adequate to ensure the sustainability of the project. The proposed project payment mechanism shall be identified, and used to develop a projected schedule of payments over the contract term. Utilizing this information, combined with the estimates of implementation cost and operating costs, the Work Team shall assess the financial viability of the project.
The Third File also provides detailed documentation of, and rationale for, all assumptions and calculations, and provide evidence that the financial assumptions have been substantiated in the market or reflect recent sectoral transactions. The cash flow analysis shall include net cash flow from operations (operating receipts minus payments resulting from operations, including taxes) and net cash flow including the impact of investment expenditures. The following financial statements shall be generated: Income and Expenditure Account; Balance Sheet; and Cash Flow Statement.
The Third File shall utilize the financial model to:
a) Verify that a revenue generating project is financially sustainable and will have sufficient funds to meet its commitments at each stage of its life.
b) Identify any changes to tariff regimes or provision of budget subsidies that may be necessary, if the project is not financially sustainable.
c) Confirm, in the case where a project is potentially profitable, that Privatization should be a viable project execution model.
If the financial model indicates that the project is not likely to be financially viable or sustainable, the project concept shall be revised, and a new analysis performed, or the Entity may need to pursue a non-Privatization model of project execution.
For non-revenue projects, some additional financial issues should be investigated, to include adequacy of recurrent financing during operation, and financial management capacities, as well as affordability of capital costs. These will be generally the focus of separate budgetary analyses as per Paragraph Eight of this Section.
Based on the proposed Privatization model, the Third File shall provide examples of similar Privatization projects that have been successfully implemented, either in the Kingdom or elsewhere, and discuss their applicability to the Kingdom. If no similar examples can be identified, the Third File shall describe the envisioned Privatization model and explain why it is expected to be viable.
6. Assessment of Affordability and Budgetary Impact of the Project Concept Considered the Third File: if the project will be funded wholly or partially from Government funds, the Third File shall perform a full assessment of fiscal implications and commitments. This analysis shall address all of the budgetary issues discussed in the Second File, updated to reflect the Privatization project concept and current information.
The Third File shall also consider new tax revenues, (corporate and individual), which will be received by the Kingdom due to the project being performed by a private entity. Indirect taxes may also be generated, such as customs and excise and vehicle-related taxes, depending upon the specific function to be performed by Privatization, and its employment outcomes. Tax revenues may also be lost; for example, development of privately-owned vacant urban land may result in loss of White Land Tax revenues.
Regardless of whether direct Government funding will be required, the Privatization project will have fiscal and/or budgetary impacts on the Kingdom. These might include the cost of preparing the Privatization bidding documents and conducting the procurement, monitoring the construction and operation phases of the Privatization contract, and retention of advisors to assist in these processes, etc., as previously discussed. In addition, there may be contingent liabilities with potential fiscal and/or budgetary impact. The Third File shall identify all such costs, with supporting rationale and documentation of assumptions and calculations. Impacts during project implementation and operation may differ significantly, and both will need to be assessed. The analysis will also assist in establishing whether an investment is affordable from the fiscal perspective by enabling its assessment in relation to projections of expenditure ceilings and available fiscal space during budget preparation.
The format for displaying the budgetary analysis for the Third File is the same as for the Second File, but the analysis shall be updated to include the additional Third File considerations and to reflect current information.
The budgetary analysis must demonstrate that the project is affordable, or that the availability of ancillary revenue sources to close the budget gap must be demonstrable and secure.
7. Risk Assessment with Risk Allocation Analysis, including allocation methodology:
In the Second File, under Risk Identification, the Work Team identified potential project risks, mitigation strategies, and associated costs. The Third File shall undertake a formal risk allocation analysis, which will provide an initial identification of how these risks should be allocated between the parties to the Privatization contract. Risks may be assumed by the government, assigned to the private party, or shared between the government and private party according to clearly-defined parameters. The objective of the risk allocation is not to transfer all possible risks to the private party, but to maximize the efficiency and effectiveness of the contract by allocating risks to the party or parties with the best capacity to control and mitigate them. A separate discussion of the specific requirements of the Risk Assessment is provided in Part 11 of Chapter 4 of this Manual.
The costs identified in the Risk Assessment should be fully incorporated into the Third File's cost estimates of Privatization implementation for both the private and public sector, as appropriate. Significant risks, particularly if they will be borne by the private party, may also need to be specifically addressed in the Procurement Plan.
8. Quantitative Value for Money Assessment for the Project Concept Considered in the Third File: A Value for Money Assessment must be provide to demonstrate that the project will provide the Kingdom with a strong combination of cost and value over the term of the project (whole-life cost) as determined by quality and quantity of services. This Value for Money Assessment provides a final confirmation checkpoint before a decision to proceed with Privatization procurement. The quantitative Value for Money Assessment upon many of the analyses already completed in the Third File as well as the qualitative value for money assessment completed at the Second File. Quantitative assessment includes the analysis of costs and risks.
A simplified summary of the value for money assessment includes the following steps:
Assessment of Costs, Revenues, and Risks for Privatizations
a) Assessment of costs and revenues.
b) Assessment of risks.
Qualitative review
c) Review of project needs, objectives, and benefits.
Decision on the Value for Money proposition
A separate discussion of the specific requirements for the Value for Money analysis is provided in Part 12 of Chapter 4 of this Manual.
9. Market Assessment Keeping in Consideration Project Concept Discussed in the Third File: A Market Assessment was conducted at the Second File stage of the Privatization preparation process. If there are any significant changes to the proposed project concept during the Third File development which might impact the private sector appetite and capacity to undertake this project as a Privatization, or which introduce new project aspects in which private sector experience may be limited, the Market Assessment shall be updated. For a large, complex project, simply the testing availability of a robust business case and risk allocation concept may warrant additional interaction with the market. Additional interaction with industry, e.g., through an RFI and/or the conduct of an Industry Day may be performed as appropriate. Following this update, the Third File shall document whether:
a) There is private sector interest in undertaking the project.
b) There is private sector experience in similar projects, either in the Kingdom, regionally, or globally.
c) There is available private sector capacity (financial, technical) to undertake the project. With respect to financial capacity, the Third File shall identify the potential sources and quantum of debt and equity envisaged from these sources e.g., Private sector party, local and international banks, ECA's, multilateral agencies, etc., and the likely cost.
On the basis of these conclusions, the Third File shall document the rationale for considering private sector performance, and how any market concerns have been addressed in the project approach.
10. Additional Studies: The Third File shall include additional studies as required to address outstanding issues or concerns. Such studies may be identified by the Work Team, or may be required by the Supervisory Committee or NCP as a condition of Third File approval. Such studies may include, but are not limited to, the types of studies listed below:
Social Impact Assessment (SIA)
SIAs shall be conducted when necessary to evaluate a project's impact on the local or regional economy and community, including the impact on the health and well-being of citizens and the community, protection and development of culture or tourism, recreation or other land use, and impact on social services, housing, education and transport. The study may also assess the balance of short term effects, such as the construction of the facility, with the long-term benefits of the project. Aspects of the SIA may be incorporated into the project documents and performance requirements for social impact and benefit of a project. If a Social Impact Assessment was already conducted as part of the Second File, it must be updated as part of the Third File submission.
Environmental Impact Assessment (EIA)
An EIA study to assess the types and significance of a Privatization project's environmental impact on a project's site and the surrounding environment shall be performed when a project has the potential for material environmental impacts. The study will assess current environmental conditions, whether a project will meet applicable environmental standards and locational conditions, and suggest methods and design options for mitigating a project's negative impact. An EIA may also produce an environmental management plan that would be incorporated into the project documents and performance requirements for environmental compliance.
Demand or Market Study
The Third File shall include a demand or market study to assess of the market in which a proposed project would occur, unless this requirement is waived in writing by the Supervisory Committee. The study is sectoral in nature, and assesses market conditions at the time of the study and/or as forecasted for the time of project implementation. The study will assess supply and demand as well as the impact of known variables such population, demographics, income levels, current usage statistics for similar projects or alternatives, user fees or tariff rates, etc., with the goal of assessing whether the demand for the service justifies the proposed project.
Several common examples of such studies are covered in further detail in Part 7 of Chapter 4 of this Manual.
11. Project Plan, Including Detailed Procurement Plan and Legal, Contractual, Resource, Structural, Communication or Procurement Elements: The successful procurement and implementation of a Privatization project requires a significant investment in planning and resources. The Third File shall contain a detailed Procurement Plan, identifying the procurement strategy, approach, staffing, timeline, budget, and other key factors. The Procurement Plan shall include a draft of the envisioned Privatization contract.
The Third File shall identify any specific legal issues which must be addressed in order to undertake the project such as the legislative or regulatory provisions in draft form that need to be amended, rescinded, or enacted in order to enable a project.
The Third File shall identify the specific contractual and project structuring elements that will be required to undertake the project, including for example the degree and form of governmental participation; deviations from Privatization Standard Contract; deal funding including debt and equity mix, sources and cost of capital envisaged; necessary direct agreements, etc.
The Third File shall identify details of any requirement for Government equity:
a) the level of equity participation i.e., percentage holding required.
b) the amount of equity funding.
c) the form of this funding to be made available to the Project by the Government.
d) which Government entities will hold this equity stake.
e) any special rights that may be required to be attached to the Government's equity e.g., minimum guaranteed return.
With respect to any debt that may be made available by government, the Third File shall identify:
a) the amount.
b) the duration.
c) the conditions under which the debt will be made available to the Privatization Project.
The Third File shall identify the land acquisition that will be required and if expropriation is required, and a description of the plan for undertaking the same. The Third File shall also identify whether the project is impacted by any ongoing litigation and the likelihood of legal challenges.
The Third File shall also include a Human Resource Plan Approach, identifying the skills, expertise, and numbers of staff it will need to successfully manage the project over the full contract term, how it will acquire this expertise, train and develop staff, and how it will retain and build upon these skills to ensure the retention of institutional capacity. Intermingling contract staff with in-house staff may be part of this human capital strategy. The annual costs of implementing this Plan over the contract term shall be identified and included.
Third File shall include a Stakeholder Communication Plan in accordance with Section 1 of Chapter 4 of this Manual and identify the cost for its implementation. If there are ongoing concerns about Stakeholder opposition to a project, these shall be highlighted in the Stakeholder Communication Plan, and presented to the Supervisory Committee for consideration in its review of the Third File.
The Project Plan submitted as part of the Third File shall include all of the above elements, and the associated costs shall be fully incorporated into the Third File's cost estimates for the Privatization procurement.
12. Summary and Recommendation: Based upon the information provided in the Third File, and any additional explanatory or back-up data which the Work Team may wish to append, the Work Team shall summarize the major findings of the Third File and make a recommendation on whether the project should proceed to the Privatization procurement phase.