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SADC PPP Feasibility Study Framework

Learn how to conduct a comprehensive feasibility study for Public-Private Partnerships (PPPs) in SADC. Covers needs analysis, options analysis, project due diligence, value assessment, economic valuation, and procurement planning. Understand the legal, strategic, and economic aspects of PPP projects.

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SADC PPP Feasibility Study Framework

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  1. Public Private Partnerships SADC PPP NetworkPPPs in SADC Kogan Pillay Head SADC PPP Network 7 March 2014

  2. Public Private Partnerships PPP Feasibility Study

  3. Stage 1 – Needs Analysis Contents Stage 2 – Solutions Options Analysis Stage 3 – Project Due Diligence • Developing PSC, Risk-adjusted PSC and PPP Reference • Demonstrating affordability • Demonstrating value for money Stage 4 – Value Assessment Stage 5 – Economic Valuation Stage 6 – Procurement Plan Stage 7 – Contents of the Feasibility Study Report Stage 8 – Revisiting the Feasibility Study

  4. PPP Project Cycle

  5. Feasibility Study Framework STAGE 1 Needs Analysis STAGE 2 Options Analysis STAGE 3 Project Due Diligence STAGE 4 Value Assessment STAGE 5 Economic Assessment Legal Base PSC Strategic Objectives Options Analysis STAGE 6 Procurement Plan Site Risk-Adjusted PSC Budget Options Selection Socio-Economic PPP Reference Budget STAGE 7 Submit Feasibility Study for TA1 Risk-Adjusted PPP Institutional Environment Sensitivity Analysis Project Definition Affordability STAGE 8 Review at TAIII to PPP Contract Term Value for Money (VfM) Procurement Choice Info Verification

  6. Stage 1 - Needs Analysis • Demonstrate that the project aligns with the institution's strategic objectives • Identify and analyse the available budget(s) • Demonstrate the institution's commitment and capacity • Specify the outputs • Define the scope of the project

  7. Output Specifications • Description of the service delivery need • List of BEE and socio-economic outputs that the institution wishes to achieve in the project • Identify output specifications to meet service delivery need • Specify minimum standards required • Can output specs meet institution’s ongoing service needs over time? • To deliver on its needs, what services does the institution require? • Serviced accommodation • Location • Size (offices, workstations, parking) • Plant and equipment • Services • Cleaning • Security • Maintenance • Technology platforms

  8. Feasibility Study Framework STAGE 1 Needs Analysis STAGE 2 Options Analysis STAGE 3 Project Due Diligence STAGE 4 Value Assessment STAGE 5 Economic Assessment Legal Base PSC Strategic Objectives Options Analysis STAGE 6 Procurement Plan Site Risk-Adjusted PSC Budget Options Selection Socio-Economic PPP Reference Budget STAGE 7 Submit Feasibility Study for TA1 Risk-Adjusted PPP Institutional Environment Sensitivity Analysis Project Definition Affordability STAGE 8 Review at TAIII to PPP Contract Term Value for Money (VfM) Procurement Choice Info Verification

  9. Stage 2 – Solutions Options Analysis • Choosing the best way of responding to a service need: the solution first, then the procurement choice • A PPP is not a solution option. A PPP may be a procurement choice for a preferred solution option E.g. Serviced Accommodation Plans • Institution builds new building • Rents accommodation • Refurbishes accommodation • List all the solution options the institution has considered • Evaluate each solution option • Choose the best solution option

  10. Evaluate each Solutions Option • Brief description • Financial impacts • Funding and affordability • Risk • BEE and other socio-economic impacts • Service delivery arrangements • Transitional management issues • Technical analysis • Site issues • Legislation and regulations • Human resources • Market capability and appetite • Qualitative factors • Early considerations of suitability for a PPP

  11. Feasibility Study Framework STAGE 1 Needs Analysis STAGE 2 Options Analysis STAGE 3 Project Due Diligence STAGE 4 Value Assessment STAGE 5 Economic Assessment Legal Base PSC Strategic Objectives Options Analysis STAGE 6 Procurement Plan Site Risk-Adjusted PSC Budget Options Selection Socio-Economic PPP Reference Budget STAGE 7 Submit Feasibility Study for TA1 Risk-Adjusted PPP Institutional Environment Sensitivity Analysis Project Definition Affordability STAGE 8 Review at TAIII to PPP Contract Term Value for Money (VfM) Procurement Choice Info Verification

  12. Stage 3 – Project Due Diligence • Legal issues • Site enablement issues • BEE and other socio-economic issues

  13. Feasibility Study Framework STAGE 1 Needs Analysis STAGE 2 Options Analysis STAGE 3 Project Due Diligence STAGE 4 Value Assessment STAGE 5 Economic Assessment Legal Base PSC Strategic Objectives Options Analysis STAGE 6 Procurement Plan Site Risk-Adjusted PSC Budget Options Selection Socio-Economic PPP Reference Budget STAGE 7 Submit Feasibility Study for TA1 Risk-Adjusted PPP Institutional Environment Sensitivity Analysis Project Definition Affordability STAGE 8 Review at TAIII to PPP Contract Term Value for Money (VfM) Procurement Choice Info Verification

  14. Stage 4 – Value Assessment • This is the pivotal stage of the feasibility study • This stage puts three key questions to the test: • Is it affordable? • Does it appropriately transfer risk from the institution to the private party? • Does it provide value for money?

  15. Affordability and Value for Money (VfM) Determined Affordability Limit Rand Preliminary VfM (Value for Money) TA : I Nominal Affordability Preliminary Affordability Value for Money TA : III Retained Risk PSC Public Sector Comparator Risk Adjusted PSC PPP Reference Private Sector Proposal

  16. The PSC for an Accommodation Project • What is a PSC? • Costing the construction of the facilities as if built on a traditional Public Works contract • Cost the life cycle of the facilities, equipment and service outcomes using existing data where possible • Use an equivalent recent government accommodation project as the data source • Life cycle could mean for 20+ years • Must cost according to the output specifications in order to get a basis for comparison

  17. Existing position New building Urgent replacement Little or no maintenance Ideal position - PSC Reduced risk levels Regular life-cycle maintenance The Public Sector Comparator

  18. Construct the Base PSC Model • Provide a technical definition of the project • Calculate direct costs • Calculate indirect costs • Calculate any revenue • Explain all assumptions used in the construction of the model (e.g.. inflation rate, discount rate, depreciation, budget(s), MTEF) • Construct the base PSC model and describe its results

  19. Types of Risk

  20. Risk-adjusted PSC = Base PSC + Risk Formula for the Risk-Adjusted PSC Model Rand Preliminary VfM (Value for Money) TA : I Nominal Affordability Preliminary Affordability Value for Money TA : III Retained Risk PSC Public Sector Comparator Risk Adjusted PSC PPP Reference Private Sector Proposal

  21. The PPP Reference Model • The PPP reference is ideally a ‘virtual bid’ constructed by the transaction advisors (experience necessary) • The risk-inclusive costing of the PPP reference must be based on the same outputs as used in the PSC (‘apples with apples’) • Needs its own risk assessment using same risks (identified in the PSC) but with a different costing –do market testing • Remember that not all risk is transferred to the private party –some is retained and must be accounted for in the PPP reference model

  22. Construct the PPP Reference Model • Confirm the type of PPP • Describe the proposed PPP project structure and sources of funding • Develop the core components of the payment mechanism • Set and cost BEE targets • Calculate and consolidate all costs • Construct the PPP reference model and explain all assumptions and indicators

  23. Government Generic Project Finance Structure for PPPs PPP Agreement Private Party (Special Purpose Vehicle) [SPV] Equity Debt Shareholding Loan Agreements Subcontracts Subcontractor e.g. Operations Subcontractor e.g. Construction

  24. How to Set and Cost BEE Targets • Draft a proposed PPP BEE balanced scorecard for the PPP, taking account of: • The Sector (Incl. Sectoral Charters) • Proposed PPP Project Structure • Sources Of Funding • BEE Issues Identified In The Needs Analysis, Solution Options Analysis And Project Due Diligence

  25. Getting BEE Targets Right • The BEE work in the feasibility study phase is crucial to ensuring a sound BEE outcome in a PPP • Getting these targets right or wrong may significantly impact on the project’s affordability and value for money, and the private party’s willingness to assume risk – and will certainly impact directly on the sustainability of BEE in the project

  26. Private Party Equity • A1 Black Equity • A2 Active Black Equity • A3 Cost of Black Equity • A4 Timing of Black Equity Returns • Private Party Management and Employment • B1 Black Management Control • B2 Black Women Management Control • B3 Employment Equity • B4 Skills Development Subcontracts C Sub-Contracting C1 Project Capex to Black Enterprises C2 Project Opex to Black Enterprises C3 Black Management Control C4 Black Women Management Control C5 Employment Equity C6 Skills Development C7 Procurement to SME’s Subcontractor e.g. Construction Subcontractor e.g. Operations D Local Socio-Economic Impact

  27. Construct the Risk-Adjusted PPP Reference Model • Because of the private sector’s better capacity to manage risk, risk is incorporated into the costing of the project and should be reflected as: • specific line items in the model dealing with direct risk-related costs (eg. insurance or guarantee costs) • subcontractor costs • increased required return on equity • increased cost of debt • The PPP reference model must reflect, as specific add-on costs, the risk retained by the institution

  28. Risk-adjusted PPP Reference Model = PPP Reference Model + Retained Risk Formula for the Risk-Adjusted PPP Reference Model Rand Preliminary VfM (Value for Money) TA : I Nominal Affordability Preliminary Affordability Value for Money TA : III The PPP reference model cost is thus an ‘all-in’ cost to the institution for undertaking the project through a PPP Retained Risk PSC Public Sector Comparator Risk Adjusted PSC PPP Reference Private Sector Proposal

  29. Sensitivity Analysis • A Sensitivity Analysis determines the resilience of the base PSC model and the base PPP reference model to changes in the assumptions which the model has been based on

  30. Sensitivity of Key Variables Must Be Tested: • Project term • Inflation rate • Discount rate • Construction costs • Total operating costs • BEE costs • Service demand • Third-party revenue, if any • Residual value • Financing terms

  31. Initial Value-for-Money (VfM) Test • Check the models • Establish the initial indication of value for money • Assess BEE value for money

  32. Value for Money Comparison

  33. A PPP or Not? Make the Procurement Choice • The institution should procure a PPP if: • the PPP reference model shows that the project is affordable as a PPP • a PPP will result in a lower net present cost to the institution than a public procurement • there is a value-for-money BEE outcome Verify Information and Sign Off • Verify information used in the feasibility study • Draw up a checklist for legal compliance • Sign off the feasibility study

  34. Feasibility Study Framework STAGE 1 Needs Analysis STAGE 2 Options Analysis STAGE 3 Project Due Diligence STAGE 4 Value Assessment STAGE 5 Economic Assessment Legal Base PSC Strategic Objectives Options Analysis STAGE 6 Procurement Plan Site Risk-Adjusted PSC Budget Options Selection Socio-Economic PPP Reference Budget STAGE 7 Submit Feasibility Study for TA1 Risk-Adjusted PPP Institutional Environment Sensitivity Analysis Project Definition Affordability STAGE 8 Review at TAIII to PPP Contract Term Value for Money (VfM) Procurement Choice Info Verification

  35. Stage 5 – Economic Valuation • An economic valuation may be required in: • Greenfield projects • Capital projects • Projects that warrant an analysis of externalities(e.g.. major rail, port, airport projects) • Give a clear economic rationale for the project • Identify and quantify the economic consequences of all financial flows and other impacts of project • Detail the calculation or shadow prices/opportunity costs for all inputs and outputs

  36. Feasibility Study Framework STAGE 1 Needs Analysis STAGE 2 Options Analysis STAGE 3 Project Due Diligence STAGE 4 Value Assessment STAGE 5 Economic Assessment Legal Base PSC Strategic Objectives Options Analysis STAGE 6 Procurement Plan Site Risk-Adjusted PSC Budget Options Selection Socio-Economic PPP Reference Budget STAGE 7 Submit Feasibility Study for TA1 Risk-Adjusted PPP Institutional Environment Sensitivity Analysis Project Definition Affordability STAGE 8 Review at TAIII to PPP Contract Term Value for Money (VfM) Procurement Choice Info Verification

  37. Stage 6 – Procurement Plan • A procurement plan demonstrates that the institution has the necessary capacity and budget to undertake the procurement of the PPP Key Elements of the Procurement Plan • A project timetable to take the project forward from TA:I to TA:III • Confirmation that the institution has available budget for the project team and transaction advisor to take theproject forward until TA:III and implementingthe PPP agreement • Identification of potential challenges to the project and how these challenges will be addressed by the project team

  38. Feasibility Study Framework STAGE 1 Needs Analysis STAGE 2 Options Analysis STAGE 3 Project Due Diligence STAGE 4 Value Assessment STAGE 5 Economic Assessment Legal Base PSC Strategic Objectives Options Analysis STAGE 6 Procurement Plan Site Risk-Adjusted PSC Budget Options Selection Socio-Economic PPP Reference Budget STAGE 7 Submit Feasibility Study for TA1 Risk-Adjusted PPP Institutional Environment Sensitivity Analysis Project Definition Affordability STAGE 8 Review at TAIII to PPP Contract Term Value for Money (VfM) Procurement Choice Info Verification

  39. Stage 7 – Contents of the Feasibility Study Report • Introduction • Section 1: Needs analysis • Section 2: Solution options analysis • Section 3: Project due diligence • Section 4: Value assessment • Section 5: Economic valuation • Section 6: Procurement plan • Annexures

  40. Stage 8 – Revisiting the Feasibility Study Treasury Regulation 16.4.4: • The Feasibility Study must be revisited not only before financial closure of the PPP, but at any time that any assumptions may differ materially from the original assumptions, in which case a revised feasibility study must be submitted for revised TA:I

  41. Thank you KoganPillay Email: kpillay@sadc-dfrc.org T: +267 319 1146 F: +267 319 1147 Or visit us on the web: www.sadcpppnetwork.org

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