1. BY: PAUL WANUME +256 782 349 670 paulwanume@gmail.com
Strategic planning requirements for identifying infrastructure opportunities
BY: PAUL WANUME

2. Key considerations in project identification
Feasibility stage should not be seen as an administrative step to obtain the necessary entity approvals
Understanding and incorporating the objectives and constraints of all stakeholders will ensure quality of PPP project
The use of consultants with strong expertise in PPP is essential, but the involvement of public sector officials (coordination, decision making, communication) should not be underestimated

3. Key steps in project identification
Needs analysis
Options analysis
Due diligence
Financial analysis
Affordability assessment
Value assessment
Economic analysis
Project viability
Verification and sign-off
Project management plan

4. Purpose of Needs Analysis
Define the service that the entity needs to deliver and specify the minimum standards for the output

5. An important objective is to ensure that the project is in line with the entity’s strategic objectives
During this step, the available budget will be identified and analyzed (incl. potential savings resulting from the project)
On the basis of the needs assessment, strategic objectives and budget, the following will be determined
Output Specifications
Performance Indicators

6. Content of Needs Analysis
Output Specifications
Output specifications forms the basis of project preparation
Output specification define what the required services are, but they do not specify how they should be delivered
E.g Defining a road in terms of routing, capacity and operational quality requirements

7. Performance Indicators
Performance indicators are defined to ensure that the service will be delivered to the desired level of performance
Performance indicators should be realistically set-up, as they will directly determine the cost of the service to the entity and/or users

8. Rationale for Options Analysis
Examine the range of reasonable options for meeting the entity’s output specifications, reject unviable options, and choose the best solution for further examination

9. Consider all technical, legal and financial options that meet the output specifications
Options considered should include low-investment solutions that can meet the needs (e.g managing demand for services instead of building new capacity)
Option analysis does not tell whether PPP is the correct option or not – it identifies the most viable option for further analysis

10. Conducting the Options Analysis
Listing and Evaluation of Options
List all reasonable options to be considered
Assess the advantages and disadvantages of each option based, for example, on:
technical aspects
funding and financial impacts
market capability and demand
environmental impacts and costs

11. Selection of Best Option
Reject all options that are illegal, too expensive or too risky
Analyze and score each option in a matrix form against each of the above mentioned criteria
Select the preferred option with justifications

12. Illustration of Option Analysis
Example of Options:
Build a new road vs. increase capacity of public transport
Develop current port or build a new one
Use of source of energy (coal, renewable, etc…)

13. Objective of Project Due Diligence
Identify and analyze ALL
Legal,
Land and Site,
Technical,
Social Environmental Issues

14. A thorough due diligence is expensive, but saves time and money down the road
Early identification of issues and quality of exercise is essential for future success
Importance of legal, social and environmental issues should not be underestimated

15. Scope of Project Due Diligence
Environmental and Land
Ensure compliance with all related government laws and regulations (at minimum)
Due diligence should go further and identify and mitigate any related issues that could raise concerns for the potential private partner

16. Revenue sources and Demand Analysis
Review should be professionally done and conservative
This analysis is the backbone of assessment of private sector interest and financial contribution from the entity

17. Legal
Ensure that all foreseeable legal requirements are met for the project development (incl. sector laws)
Poor legal review will raise concerns from potential bidders and could lead to delays in bidding and negotiations

18. Scope ……
Financing: Review the availability and cost of financing, financial instruments, hedging and risk mitigation products, insurances and applicable tax regime for the project
Market analysis: Review should include number, size and capacity of sponsors, contractors and financiers, as well as known competing projects being prepared in other countries, districts etc

19. Other items: Due diligence is also project-specific and examples include:
Technical site analysis
Technical design analysis
Availability and quality of supporting infrastructure
Availability of raw material and fuel supply

20. Financial Analysis Objectives
Demonstrate that the project will be financially attractive to the private sector
Assess the likely financial contribution from the entity to the project

21. The central component of the financial analysis is the development of a financial model
The financial model represents the costs of delivering the preferred solution through a PPP arrangement and may be called the PPP model
The results of the financial analysis are highly dependent on the quality of assumptions and advice from experts is essential

22. Financial analysis……….
Step 1: Technical definition of project
Determine the technical parameters of the project construction and operation with their cost implications
Step 2: Identifying direct costs
Direct capital costs are specifically associated with the construction of a new facility or the acquisition of a new asset.

23. Direct maintenance costs will include the full lice-cycle costs of maintaining the assets in the condition required to deliver the output specification (e.g. raw materials, equipment and labor)
Direct operating costs are associated with the daily operation of the service (incl. staff, raw materials, etc…)

24. Step 3: Identifying indirect costs
Indirect costs will include that portion of any additional overhead costs related to the project (e.g. personnel, accounting, billing, legal, rent, communications)
Step 4: Identifying project revenue
Revenue and demand study from due diligence is used as base case for revenue projection

25. Any assumption on revenue collected should reflect project’s ability to invoice and collect revenue – beware of revenue over-estimation
Step 5: Financing and other assumptions
Assumptions regarding financing, project structure and tax should be tested with financial experts
Proposed source of funding (e.g. debt, equity and government contribution) should be identified

26. Entity should assume that cost of capital would rely on project’s own credit, and not on government bond yield
All relevant financial ratios should be set out in detail (e.g. annual debt service cover ratio, return on investment for equity holders, etc…)

27. Step 6: Calculation of explicit government financial support to the project
Explicit government budget support will be required if base model with simple costs, revenues and financing assumptions will not meet required ratios

28. If budget support is needed, entity can undertake measures to:
1) reduce costs in PPP model
2) increase revenue in PPP model
3) reduce amount of private financing

29. Step 7: The Base Case model
The base case model is created based on the anticipated revenues, costs, assumptions, payment/subsidy mechanism and structure for this project

30. Step 8: Adjusting base model for risk
The base model is then adjusted to take into consideration all risks likely to impact the project, with a estimation of their potential impact
Entity should pay attention to optimal risk transfer – in general, risks should be allocated to party best able to manage them

31. Step 9: Adjusting PPP Model to reflect total cost to entity
The adjusted PPP Model includes “all-in” cost to entity for undertaking project through PPP
entity will still be responsible for some costs in PPP, such as costs of managing PPP agreement – these costs should be identified in Model

32. Step 10: Sensitivity Analysis
Sensitivity analysis determines resilience of PPP Model to changes in assumptions
Sensitivity of following variables should be tested on key variables, including demand, financial terms, capex and opex
The entity should learn how much its contribution to the project will change if key assumptions are different in reality

33. Affordability Assessment
Projects should provide services that are affordable either to
USERS of the services (tariffs)
GOVERNMENT paying for the services (availability payment, subsidies)

34. Affordability for users is assessed by willingness to pay for the specific services provided
Affordability for Government is based of expected payments during life of project and budget assumptions during same period
Determination of project costs and available budget should be as accurate as possible
Collaboration with Budget preparation is essential

35. What if a Project is NOT Affordable?
A project not affordable for users means tariffs are too high and can result in
Negative social impact if users don’t have alternatives
Reduced benefits or even project failure if alternative exists (ex. use of parallel road)
A project not affordable to Government means available budget is not sufficient to pay commitments to private partner

36. If project is not affordable, Government has several options
Reducing the scope/quality of services
Abandon the project
Obtain more financing from Budget

37. Value Assessment (VfM)
Value for Money (VfM) describes a net benefit, both in quantitative (financial) and qualitative terms, from the outcomes of a PPP project compared to the same project delivered by the public sector over the entire lifespan of the project.

38. VfM is not the choice of the goods and services based on the lowest cost bid
Several factors directly influence the VfM
Risk allocation between entity and Private Sector
Focus on whole life rather than upfront costs
Use of output specification approach
Sufficient flexibility in relation to design and service delivery

39. Economic Analysis
Estimate all economic costs and benefits of the project to ensure that it is the least-cost option and that all externalities to stakeholders have been considered
Economic analysis is required to calculate the incremental costs and benefits of the project to society as a whole – “with” or “without” project

40. This way the entity understands the various economic costs and benefits to the project entity, private sector entity, government and local community
Changes may be necessary to the project design if negative externalities are large

41. Stages of Economic Analysis
Determine economic costs of project
Determine major assumptions for economic analysis
Calculate EIRR and ENPV
Estimate economic benefits

42. Project Viability The project is viable if it is
Technically deliverable
Socially and Environmentally sustainable
Financially viable to investors
Affordable to users
Affordable to the entity
Provides Value for Money to the entity
Economically viable

43. Verification and Sign-Off
Entity and transaction advisers expected to sign off the feasibility study after all the analysis has been completed
Description of Assumptions
Description of how assumptions used in constructing financial model are realistic and appropriate

44. Explanation of Methodologies
Obtain record of methodologies used for valuing various costs, including costs of key risks
Sign-Off on Accuracy of Study
Ensure that all inputs into feasibility study are signed off as accurate and verifiable by Line Committee, PPP Support Unit and each of transaction advisor specialists

45. Project Management and Procurement Plan
The objective of the Project Management Plan is to summarize the key issues, institutional/approval arrangement and the schedule of activities until the completion of procurement
The plan should be part of the feasibility study and agreed by all the committees and agencies involved in the project

46. The plan should contain at least
Project timetable, with key milestones and approvals required
List of potential issues and how they will be tackle
Governance process to be used by the entity (incl. decision making)
List of all required approvals from all committees and agencies
Bid evaluation process and teams, and quality assurance process for bid documentation

47. Project identification: Key messages
Project identification is an essential component of project preparation and allocation of time, as well as human and financial resources, contributes to preventing issues later
The need to obtain entity approval should not undermine the project attractiveness to the private sector

48. THANK YOU