STRUCTURING/DELIVERING

INFRASTRUCTURE CENTRIC
SOLUTIONS THROUGH PPPS

PROF. B.P.MISHRA
XIMB

WHY PPP?
Availability of private sector finance (most commonly cited reason)
Through PPPs, governments can leverage private sector finances to
meet the infrastructure needs
Achieving greater Value for Money (VFM) through efficiency gains
In principle, PPPs can improve VFM by:

Incentivizing on-time and within-budget delivery

Optimizing life cycle costs
Providing an opportunity to innovate
Optimizing the risk allocation

Value for Money achieved by PPPs is often debated

EXPECTATIONS OF GOVERNMENT
& PRIVATE SECTOR

Private
sector

Viable business opportunity

Fair distribution of risk & responsibility
Transparency in procurement
Consistency in legal and regulatory framework
Stable political and economic environment

Government

Harness private sector efficiencies (on-time, withinbudget delivery, innovation)

Augment government resources
Provide better value for money
Facilitate improved access and service delivery

PPP LIFE CYCLE PROCESS

Phase 1:
Strategic planning,
Project prefeasibility, PPP
suitability testing,
Internal
clearance

PPP development pipeline

Phase 2:
Full
feasibility,
PPP
preparation,
Clearance

Phase 3:
Procurement,
Final
approval,
Award

PPP operation

Phase 4:
Implementation
and monitoring

PPP identification

PPP LIFE CYCLE PROCESS

PHASE 1: PROJECT IDENTIFICATION

Identify internal budgets

Obtain departmental approvals
Plan the next steps

PPP identification

Obtain internal clearance to

proceed to
Phase 2: Feasibility stage

Phase 1:
Strategic planning,
Project prefeasibility, PPP
suitability testing,
Internal
clearance

Project pre-feasibility
To evaluate preliminary feasibility
of the identified project:
Pre-feasibility analysis
Suitability as a PPP

Strategic planning

To understand user needs and service

delivery options
Preliminary needs assessment
Existing and planned capacity assessment
Identify project to meet service gap

NEED ANALYSIS

PURPOSE & KEY ELEMENTS

Enables government to more accurately assess the service needs & define
the delivery levels required in line with government priorities

Identify service need

Define delivery
outcomes

Need analysis
template

Collect information on existing service levels

Identify the service need and its scope based on
stakeholder consultation and government priorities

Decision to proceed to the options analysis stage

Provide explicit but broad description of the service need

to be met and its objectives

NEED ANALYSIS
PARAMETERS

EXAMPLE

Is there a pressing need for

change in service?

Only 50% of city gets drinking

water for 6 hours a day
Unaccounted for water (UFW) is
60%

Focus on services not assets

What are the expected benefits

to stakeholders?
Are these in line with
Governments priorities?

Improved access to drinking water

for population
Drinking water is Governments
top priority

What are the desired outputs?

100% connectivity
80% collections
Quality standards to be met

NEED ANALYSIS
BENEFITS

*
Identify
Helps early
identification of key
stakeholders and
potential
opportunities and
conflicts

Benefits
of Need
Analysis

Emphasis

Agree
Facilitates clear
agreement and
documentation of
objectives at the outset

Shifts emphasis to
identification of full
delivery need before
assessing the ways to
achieve it

Focus

Increases focus on projects

that may achieve
government priorities

SERVICE NEEDS, DELIVERY OPTIONS

& OUTPUT SPECIFICATIONS
A CLASSIFICATION EXERCISE

Traffic congestion

Time taken to travel from point A to

B has tripled in past 10 years

Construct a new road

[2]
Delivery
Option

85% of storm water drains to be desilted before onset of monsoons

(before 15th May each year)
Cross-over bridge on highways
95% of citys population to get at
least 6 hours of water supply in a
day

[3]
Output
specification

[1]
Service
Need

OPTION ANALYSIS

PURPOSE & KEY ELEMENTS

Aids identification of a set of preferred delivery options to address
service need and enables clear rationale for further evaluation (of
these options)
Also supports efficient planning and decision making

Confirm need
analysis

Consider
options

Evaluate
options

Option analysis
template

10

Note: Option analysis here refers to service delivery options or possible solutions to address
service need, this is different from PPP options analysis.

KEY ELEMENTS OF OPTION ANALYSIS

Confirm need
analysis

Consider
options

Evaluate
options

Option analysis
template

Confirm need analysis

11

To revisit the findings of Need Analysis to ensure that these are

still valid (in case there is a time gap between need analysis and
option analysis)

KEY ELEMENTS OF OPTION ANALYSIS

Confirm need
analysis

Consider
options

Evaluate
options

Option analysis
template

Consider options (one or a combination)

Existing asset options
Non-asset options

12

New asset based options

SERVICE NEED AND DELIVERY

OPTIONS: AN EXAMPLE
Service need: Reduce traffic congestion
Range of possible delivery options
Description

Example

Existing asset
solutions

Existing infrastructure held by government might be

Widening of roads to
used. This may involve upgradation or refurbishment to 6/8 lanes from
bring the infrastructure to required standard
existing 2/4 lanes

Non-asset
solutions

Service needs may be met without creating additional

assets, through reconfiguring the means of service
delivery, demand management, etc.

Traffic restrictions or
improvements in
traffic management

New asset
based solutions

New infrastructure may be developed, in case service

need cannot be met by above two options.

Construct a parallel
2/4 lane road

13

Criteria

KEY ELEMENTS OF OPTION ANALYSIS

Confirm need
analysis

Consider
options

Evaluate
options

Option analysis
template

Evaluate options
List the advantages and disadvantages of each option
Critically examine the risks to government of each option
Identify critical constraints
Examine the implementability of each option vis-a-vis the
constraints

14

Identify preferred option

ILLUSTRATION OF OPTION ANALYSIS

UNDER MULTIPLE CONSTRAINTS

NEED: PROVIDE 24 X 7 ELECTRICITY IN 8 DISTRICTS OF A

STATE
Improving metering to
achieve accurate billing

Balance industrial /
agri / domestic supply
to reduce peak demand

Look for
renewable
generation
sources

Improving
transmission
network
maintenance
to increase
efficiency

Differential tariffs to
manage peak demand
Shifting to HVDS
distribution to
improve efficiency

Distribution
franchise to
reduce power theft

Budget
Time horizon
Political will
Affordability

*Note: Multiple options may be pursued in tandem for service delivery

15

Purchasing
power from
other states

Increase
conventional
(thermal)
generation

KEY ELEMENTS OF OPTION ANALYSIS

Outcomes

Consider
options

Evaluate
options

Option analysis
template

Executive summary
Description of service requirements
Project function, objectives and critical success factors
Alignment with strategic objectives
Stakeholder identification
Option analysis
Project delivery alternatives
Preliminary risk assessment
Preferred option
Actions to progress to the feasibility stage
Supporting documents
Sign-off

16

Confirm need
analysis

OPTION ANALYSIS
BENEFITS

Allows identification of
process to manage risks
Identify
processes

Allows consistent
ranking of
proposals using
similar criteria

Service
delivery

Allocate
resources

Benefits
of
Option
Analysis
Rank
proposals

Quantify
investments

Supporting
studies

Helps identify and

quantify critical
asset investment
issues early in the
project lifecycle

Facilitates identification of the level

of supporting studies required

17

Provides a sound
basis for key
strategic decisions
to meet service
delivery
objectives, costeffectively

Facilitates
allocation of
resources to
proposals that are
most feasible

PRE-FEASIBILITY ANALYSIS
PURPOSE

To quickly establish that the identified project has merit to be

taken up by the government sponsor, and then a high level check
to verify suitability of the project being developed as a PPP

Key questions:
Whether the project is prima facie feasible?

18

Whether the project is suited for development as a PPP?

PRE-FEASIBILITY ANALYSIS
KEY ELEMENTS

Legal feasibility
Technical feasibility
Scoping social &
environment activities
Preliminary financial
viability
Likely PPP arrangement
Institutional capability
analysis

Establishing the service need

Analyzing the most suitable delivery option the project
Suitability of legal, policy and regulatory environment for a PPP
option
Technical and operational practicality of the project
Preliminary assessment of the technology, design and O&M aspects
Outlining the social and environmental issues, and activities that
need to be undertaken to address those issues
High level financial analysis
A preliminary assessment of market feedback and need for
government support, VGF, etc.
Role of private sector, likely project structure and contractual
framework
Resources, roles and responsibilities of key officials
Next steps

19

Needs & Options analysis

(summary/recap)

PRE-FEASIBILITY ANALYSIS
BENEFITS

Clearly
establishes the
initial case to
justify taking
up the project

Initial
business
case

Facilitates a quick
check regarding
amenability of the
project as a PPP

Allocate
resources

Benefits
of PFA

Suitability
as a PPP

Plan
ahead

Helps in overall
prioritization of
resources and
efforts from a
government
contracting
agencys
perspective

Helps the government

contracting agency to
plan ahead to establish
work plans, budgets,
approvals, etc.

20

Optimises
expense

Helps in optimizing project

development expenditures
by weeding out projects
with a poor business case

NEED FOR TRANSACTION ADVISOR (TA)

SCOPE OF WORK VS. SKILLS

Range of skills needed

Technical

Stakeholder consultations

Legal

Techno-economic feasibility analysis

Economic

Project structuring

Financial

Legal due diligence

Procurement

Procurement planning

Project management

Project marketing

Social and environmental

Bidding and contract award

Communication

Project Team

Transaction
Advisors

21

Tasks involved in project development

TRANSACTION ADVISORS
SELECTION: GUIDING PRINCIPLES

Fairness

Cost-effectiveness
Freedom from
conflicts of interest

as much information as possible should

be made publicly available

all parties should be treated equally

costs should be minimized without

sacrificing quality

the selection process should avoid both

actual and perceived conflicts of interest

22

Transparency

TRANSACTION ADVISORS SELECTION:

METHODS OF SELECTION
Available methods of selection
Quality and Cost based Selection
(QCBS)

Main consideration that may

guide selection procedure
High quality services
Economy and efficiency
Equal opportunity to all consultants

Quality Based Selection (QBS)

Transparency

Least Cost Selection

23

Single Source Selection

TRANSACTION ADVISORS
SELECTION: QCBS PROCESS
Preparation of the TOR
Preparation of cost estimate and the budget
Preparation and issuance of the RFP
Receipt of proposals
Evaluation of technical proposals: consideration of quality

Final evaluation of quality and cost

24

Evaluation of financial proposal: consideration of cost

TRANSACTION ADVISORS
SELECTION: QCBS METHODOLOGY
Cost evaluation

Quality evaluation
Advisors experience
Methodology
Key personnel
Transfer of knowledge
Participation by nationals
Total

0 10
20 50
30 60
0 10
0 10
100

Score for lowest-priced proposal - 100

The proposal score can be calculated as
per the given formula:
S = 100 x Fm / F
S is the financial score
Fm is the lowest priced proposal
F is the price of the proposal being
considered

Weightage
Technical score 80%
Financial score 20%
Proposals are ranked as per combined
score

25

Combined score

Establish bid evaluation panel

Define terms of reference
Prepare Bid Package
Publish advertisement, brief bidders and respond to
queries

Prepare to evaluate bids

Receive bids
Evaluate technical proposal
Evaluate financial proposal
Finalize and sign the contract with TA

26

PROJECT INCEPTION APPOINTING

TRANSACTION ADVISOR
Prepare to
select
Transaction
Advisor
Appoint a
Transaction
Advisor

KEY CONSTITUENTS OF TOR

27

Define Terms of
Reference

Introduction project, its objectives and aligning them

with institutions strategic vision
Scope of work Feasibility study of the project and bid
process management and procurement of PPP partner
(if applicable)
Background Institutional mandate to proceed with the
project, background documentation and preparatory
work, budget of the project
PPP feasibility study deliverables Components,
presentation and submission requirements for the
feasibility study report
PPP procurement deliverables Administration of
bidding process, evaluation of bids, PPP agreement
negotiations, management plans, agreement signature,
close out report, case study and financial closure
Required TA skill, experience, remuneration and
management
Rules of bidding, bid submission requirements and bid
evaluation

PPP STRUCTURING
KEY ISSUES

Does the PPP involve building new assets to provide the service
(capital expenditure), or does it require the private partner for
operations and management of the service only?
Which roles would the private sector carry out? For example, who
would provide the finance? Who would design and construct?
Who would own the assets?
What would be the duration of the PPP contract?
How are the various project risks allocated between the private and
public partners?
What would be the major revenue sources for the project whether
from charges to users (direct tolls), or payment from government for
the services (shadow tolls or annuity)?

28

Is the demand for the infrastructure service expected to be stable

over the period of the contract?

SCOPE

KEY ISSUES

Scope

Cost
recovery

Duration

PPP modal
variants

29

The scope of the PPP project does not have to be same as the scope
of the overall project
It can be less, e.g. in an airport project, PPP element may be limited
to landside activities, while airside facilities like runway construction
can be done by the public sector
It can be more e.g. adding rights for developing adjoining land in a
road project, say to enhance bankability, is likely to result in
enlarging the initial scope beyond road development
The scope of the PPP project is defined in terms of tasks and
responsibilities
And is related to the respective assets that are to be designed, built,
financed, maintained and operated

COST RECOVERY
KEY ISSUES

Scope

Cost
recovery

Duration

PPP modal
variants

Whether the project is likely to be bankable on the basis of user

charges?

Is demand sufficiently stable or is it very uncertain?

Is demand adequate to generate sufficient revenues?
Are users willing and able to pay fees?

Is there a risk of misuse of the projects monopolistic character by the private

partner?
If demand is more than expected will private partner earn excessive profits?
In case of viability gap, can the government provide support? To what extent?

30

If user charges are not feasible whether government can and is willing
to pursue the annuity approach (which would depend upon funds
availability)?

DURATION

Cost
recovery

E.G. SPECIFIC PROJECTS IN THE ROADS

SECTOR THROUGHOUT THE WORLD EXHIBITDuraon
SIGNIFICANT VARIATIONS IN DURATION

PPP modal
variants

31

Scope

DURATION

KEY CONSIDERATIONS

PPPs are typically characterized as long term arrangements to

allow for:

Life cycle cost optimization

Generation of sufficient revenue streams

The duration is typically aligned with the economic life and the
design capacity of the asset

32

Analysis is required to determine and specify the most suitable

duration
Duration can also be defined as a bidding parameter
Duration is also related to the PPP modal variant

HOW TO DEFINE THE DURATION?

SOME GUIDANCE PROVIDED BY MCA
Sector

Advised duration as per MCA

Urban Rail Systems

Between 30 and 40 years; with a provision for extension of

another 20 years

Operations and
Maintenance of
Highways

Maximum 10 years; guiding principle for fixing duration is to

take into consideration the periodic maintenance cycle of the
highway. (Current practice is to undertake major
maintenance once in 5 years)

Non Metro Airports

Between 20 and 30 years; however a longer duration may be

allowed for city side development with prior approval of the
government

Container Train
Operations

20 years with a provision for extension of 10 years

Redevelopment of
Railway Stations

Between 30 and 40 years; with a provision for extension of

another 20 years

Exact number still has to be defined on the basis of technical characteristics of

the project and financial implications

33

Source: MCAs Planning Commission, GoI

PPP MODAL VARIANTS

KEY ISSUES

Scope

Cost
recovery

Duration

PPP modal
variants

Pre-requisite: In the identification phase a project has been identified

and assessed as being suitable for PPP through the suitability filter
The next step is to select a mode most suitable for the project
characteristics and for meeting public objectives
The PPP mode is predominantly defined by the nature of risk
allocation, most specifically the allocation of:

Demand risk
Construction risk
O&M risk
Finance risk

34

Considering the project risks and objectives and the public sector risk
appetite most suitable PPP modal variant can be selected

Analytical Framework

for structuring an attractive and achievable PPP

Demand analysis

Risk analysis

Cost analysis

Revenues

Discount rate

Capex and Opex

Economic analysis

Financial analysis

Value for Money

analysis

Is the project
warranted?

Can the project be

developed through
a PPP?

Is the PPP better

than traditional
procurement?

35

Valuation

Demand Analysis; why relevant?

Demand estimates define the projected revenues and other benefits

The objective of developing infrastructure is to meet present and

future demand
We will need to estimate future demand in order to:
Design the capacity of an infrastructure
Estimate possible future revenues resulting from user charges
Estimate other future benefits resulting from use of the infrastructure asset

To allow prospective bidders to prepare their business case for

preparation of bids

36

Demand forecasts have proved to be inaccurate on many occasions

WHAT IS THE IMPLICATION?

IN CASES WHERE DEMAND RISK IS TRANSFERRED TO PRIVATE PARTNER

If actual demand is more than

estimate:

If actual demand is less than estimate:

Private partner might earn more than

the projected revenues

Private partner may earn less than the

projected revenues

Infrastructure capacity might be

insufficient

Tariffs may have to be increased

37

Government may have to step in and

provide support or even take over
the undertaking

Recap

ENSURE ACCURATE DEMAND FORECAST

A poor demand estimate can adversely affect project outcomes
A robust demand estimate is usually:
Grounded in realistic economic and demographic scenarios
Gives adequate attention to the likely impact of any competing facility
Based on a thorough assessment of the willingness to pay
Conservative in assuming revenues and does not unduly shy away in
accommodating higher growth scenarios (while determining design
capacity)
Carried out by experts using reliable data sources

38

Selected from amongst a range of highly possible scenarios

COST ESTIMATES: WHY RELEVANT?

INACCURATE COST ESTIMATES ARE A SIGNIFICANT RISK FOR PPPS

We will need to estimate the costs (capital and recurring) in order

to:
Assess the funding requirements
Assess whether the costs can be offset by future benefits (from an
economic perspective) or future revenues (from a financial perspective)
Arrange funding either from public sources or private sources depending
upon the outcome of the value for money analysis

If the cost estimate is inaccurate then:

Project will have shortage of funding in case cost estimate is lower than
actual

If the cost estimate is not properly substantiated then banks will

require detailed due diligence and revision of estimate before
committing to the financing package

39

Project will have excess funding and higher financing costs if cost estimate
is higher than actual

COST ANALYSIS
KEY ISSUES

Optimism bias
Scope changes
Land acquisition

40

Clearances

OPTIMISM BIAS

MITIGATE THROUGH ADEQUATE CONTINGENCY PROVISIONS

Systematic tendency to underestimate costs

Adequate level of contingencies should be built-in to compensate
optimism bias
Level depends on level of certainty required
To establish max required
budget with 50% certainty

To establish max required

budget with 80% certainty

Roads

15%

32%

Rail

40%

57%

Bridges & tunnels

23%

55%
Source: UK Department of Transport 2004

41

Uplifts on top of cost

estimate to compensate
Optimism bias

KEY CONSIDERATIONS

TO MITIGATE RISK OF COST OVERRUNS AND DELAYS

Conduct proper due diligence in defining the scope of civil works

and other key parameters of structuring
Ensure adequate contingencies
Ensure expeditious land acquisition (for instance through early
consultation with project affected persons)
Ensure effective interface with other key stakeholders, e.g.
relevant departments for statutory clearances and utility shifting,
users, media, civil society groups etc.

42

Conduct periodic reviews and undertake course corrections where

necessary

RECAP

ENSURE ACCURATE COST ESTIMATE

Think whole life costing
Understand cost drivers
Understand relation with demand
Ensure adequate level of contingencies
to mitigate optimism bias

43

Use reputed experts and reliable data

sources

WHY IS RISK ANALYSIS IMPORTANT?

INFRASTRUCTURE IS RISKY BUSINESS

To identify and value risks

To ensure accurate and risk adjusted input for the
financial and economic analysis
To ensure accurate input for the Value for Money
analysis
To understand the key risks of a project and address
them accordingly

44

Risk analysis has proven to be absent or rudimentary on many occasions

TYPICAL INFRASTRUCTURE RISKS

Regulatory
risk
Operation and
Maintenance risk

Political risk
Revenue
risk

Force
Majeure
risk

RISKS

Performance
risk

Financial
risk

Demand
risk
Construction
risk

Land acquisition risk

45

Technology
risk

RECAP

ENSURE ADEQUATE RISK ANALYSIS

Identify key risks
Understand nature of risks
Understand consequence of risks
Understand value of risks

46

Understand output of risk analysis

RELEVANCE OF ECONOMIC ANALYSIS

AN UNECONOMICAL PROJECT CAN NEVER BE A GOOD PPP

The economic analysis justifies the project

If project is not justified, stakeholders may question the projects
rationale
The economic analysis justifies if necessary use of public
resources e.g. fiscal support. In other words, should government
contribute to the project?
The economic analysis indicates if users are willing and able to pay

47

Economic justification is a prerequisite for a PPP

ECONOMIC JUSTIFICATION
THE CRITERIA

Net Present Value > 0

Economic IRR (EIRR) > Social Discount Rate

48

Benefit : Cost Ratio > 1

RECAP

ENSURE PROPER ECONOMIC ANALYSIS

Only accept projects that provide net economic benefits

Understand economic benefits and costs
Agree on social discount rate/ hurdle rate

49

Use sensitivity analysis

FINANCIAL ANALYSIS:
WHY RELEVANT?

TO INDICATE THE FINANCIAL VIABILITY

If PPP project is not commercially viable it is likely to fail to attract

private partners
Therefore it is crucial for the government to do a financial analysis
in order to design a PPP project in terms of risk allocation
A PPP project should be bankable in terms of meeting the
requirements of investors

50

To ensure commercial viability the government may simulate the

private sector perspective on the project through a shadow bid

KEY ASSUMPTIONS REQUIRED

Amount of debt financing
Cost of debt
Amount of equity financing
Cost of equity
Weighted average cost of capital

51

Inflation

VIABILITY GAP FUNDING (VGF) SCHEME

Revolving fund within Ministry of Finance
Supports PPP infrastructure projects which are:
Economically justifiable but NOT viable commercially

VGF provides funding in the form of a grant to meet the gap for
making a PPP project commercially viable

52

Upfront grant of up to 20% of project cost. Additional 20% can be

given by the sponsoring authority (if required)
Project implementation by a private sector company
Project should provide a service against payment of a pre-determined
tariff or user charge
Bidding parameter is VGF sought

RECAP

DESIGN A BANKABLE PPP

Understand the process of financial analysis

Understand the perspective and requirements of
potential sponsors and banks
Allow for a fair and reasonable rate of return

53

Understand the options for fiscal support and the

rationale

WHY VFM IS RELEVANT?

The financial analysis may design a bankable PPP. However, unless it also
delivers Value for Money it may not be superior to traditional procurement

54

To decide whether or not to pursue the project as PPP

At the end of VFM analysis phase, and
After bidding (to examine whether the winning bid delivers expected
VFM)
A robust VFM analysis can also be helpful in:
Optimizing PPP structure and the underlying risk sharing arrangement
Negotiations, to quickly assess the impact of changes in risk sharing
arrangement
Establishing acceptability threshold for bids

DEFINING VALUE FOR

MONEY
(IN INDIA YET TO BE DEFINED)
Value for Money represents economy, efficiency and effectiveness. In PPP
projects, VFM means that the provision of the institutional function or the
use of the public sector property by a private party or JVC, in terms of the
Concession Agreement, results in the benefit to the institutions defined in
terms of cost, price, quality, quantity, risk sharing and a combination thereof.

55

(Manual of PPP; South Africa)

VALUE FOR MONEY

= F(OPTIMAL RISK ALLOCATION, EFFICIENCY GAINS)

Risk transfer; effective balance required, meaning:
Risks are directly translated into financial implications
Risks should be transferred to the party best able to manage it in the most
cost effective manner

Output based specification of contract

Focus on whole life cycle costs
Long-term nature of contracts
Performance measurement and incentives
Competition amongst bidders

56

Private sector management skills

VALUE FOR MONEY ANALYSIS

COMMON ISSUES OR CONCERNS
Inaccuracy/inadequacy of data
Incomplete identification of key risks
Lack of consensus on discount rates
Wilful manipulation of analysis by vested interest
Time inconsistency (post-analysis, inordinate delays in actual
bidding)
Analysis may be very expensive
No robust public sector alternative/comparator

57

Source: PPIAF Gridlines Is the public sector comparator right for developing countries? (2006)

PUBLIC SECTOR COMPARATOR

MOST COMMON VFM ANALYSIS TOOL
Applied upon review of bids
To compare value for money estimate of the preferred bid to the
alternative of public procurement
All transaction costs that are already incurred are to be treated as sunk
costs
Used, among others, in:
UK
Netherlands
Australia

58

Canada

RECAP

ENSURE A PROPER VALUE FOR MONEY ANALYSIS

Agree on level of detail of the analysis
Quantitative or qualitative
Simple risk analysis or sophisticated risk analysis

59

Agree on perspective and discount rate

Understand the process
Involve key decision makers and relevant experts

HOW TO DEFINE THE OPTIMAL

STRUCTURE?
BY ANALYSING AND VALUING THE OPTIONS

Subject to the condition of

a positive value to the
private sector, and

Value for Money

analysis

Financial Viability
Indicator

Economic
analysis

Is the PPP
better?

Is the PPP financially

viable?

Subject to the condition

of a positive value to
the society at large
Is the project warranted?

60

The optimal structure

provides the maximum
Value for Money to the
public sector

HYPOTHETICAL EXAMPLE
OPTIONS

VGF
Extension of duration
Increase of tariffs
Reducing scope

61

Expanding scope

WHY IS REGULATION RELEVANT?

TO PROTECT THE PUBLIC INTEREST

Avoid excessive profits i.e. windfall gains

caused by circumstances not related to the
performance of the infrastructure developer
Examples:
Demand growth beyond expectation

62

Refinancing

FORMS OF REGULATION

TO BALANCE INTERESTS OF INVOLVED STAKEHOLDERS

o Benefit sharing
o Reduction of duration
o Rate of return regulation
o Price cap regulation
o Sliding-scale price cap regulation

63

o Benchmark approaches

BENEFIT SHARING

MOST COMMON IN INTERNATIONAL PRACTICES

If traffic exceeds target, the excess profit will be shared 50-50

For example
If Actual Average Traffic exceeds Target Traffic by more than 2.5%
The public sector receives 50% of the revenues generated by the excess traffic

64

Implies that public sector has access only to the upward potential and
not to the downside risk

REDUCTION OF DURATION
AS PER MCA

If traffic exceeds target, the duration will be reduced pro-rata

For example Urban Rail systems
If Actual Average Traffic shall have fallen short of Target Traffic by 2.5%
Or exceed Target Traffic by more than 2.5%
The concession period shall be deemed to be modified by 1.5% per 1 %
shortfall or excess
In other words, if Actual Average Traffic is 5% less than Target Traffic,
concession period will be shortened by 7.5%

65

Implies a risk for the public sector i.e. when will the concession end,
when will it need to re-tender

HOW CAN YOU REGULATE?

Contract

66

Law

67

thanks