Having covered, so far, such essential features for understanding PPP projects as their concept, benefits and limitations, their various models, how to create and enable the environment in which they are best working and their risks and how these are risks are identified and allocated between the public and private partners. This section of, Visionary Consulting Company’s Executive Guide, covers another important issue of PPP projects, that is the “PPP Project Cycle”, from identifying suitable projects to managing operational issues.

1. Project identification

Identifying an infrastructure project typically starts with a government’s planning process. Once a priority project is selected, its suitability for PPP implementation versus traditional procurement must be assessed using specific criteria:

Project Scale: The project must be large enough to justify the high transaction costs of PPPs. Due to their complexity, PPP projects are costly to prepare, so they should be substantial enough to warrant these expenses.

Infrastructure needs: There must be a long-term, predictable need for the infrastructure. Signing a long-term contract, like 20 or 30 years, only to find out after a few years that the infrastructure is no longer needed, would be detrimental.

Private sector performance: The project should have clearly defined output arrangements to effectively monitor the private sector’s performance.

Local capacity: Assessment of whether local private sector organizations have the capacity to manage long-term projects. If local capacity is limited, an interest and willingness from international investors are considered. A preliminary value-for-money (VfM) qualitative assessment is essential to determine if a PPP would deliver more value. As with any infrastructure project, a pre-feasibility analysis in the identification phase is crucial. This involves collecting basic information regarding the project scope and objectives, assessing technical, legal, and financial viability, and evaluating the need for public financial support. Based on these considerations, determine whether a project has the potential to be developed as a PPP, and obtain internal clearance to proceed with the preparation phase.

2. Project preparation

The project preparation phase begins with the development of the project’s business case. This phase involves several critical steps:

Feasibility study: The project’s viability is confirmed through a full-scale feasibility study, which extends the pre-feasibility study from the identification phase.

Technical studies: The project’s output requirements are determined, and technical feasibility is confirmed. Key questions include whether established technologies can deliver the project objectives and estimating probable capital and operational costs.

Socio-economic benefits: The project’s impact on job creation and economic growth is assessed. An evaluation of whether the economic benefits exceed the economic costs is undertaken to ensure that the project makes sense in socio-economic terms.

Financial analysis: A financial model to simulate different scenarios based on various assumptions is developed. Consequently, an estimation of the number of users, potential revenue, expected returns is undertaken plus an evaluation the project’s bankability. The project’s fiscal sustainability is reviewed to ensure affordability for the government, alternatives to minimize government financial demands are explored in addition to the determination of whether government subsidies are necessary.

Legal and regulatory review: Potential legal and regulatory challenges are evaluated such as the clear legal basis for a PPP structure and potential regulatory constraints that could delay the project.

Environmental and social impact: Potential adverse effects are also considered, such as population resettlement and increased carbon emissions, while compliance with social and environmental standards are warranted. Market-sounding activities, like road shows, gauge investor interest. The VfM analysis to confirm if PPP is the best procurement method is further refined. Some countries use a public sector comparator (PSC) to quantitatively compare PPP costs with traditional procurement. However, due to data requirements and methodological limitations, not all countries employ this approach.

At the conclusion of the project preparation phase, all the information required to seek approval to proceed to the transaction phase should be available. This approval is crucial to confirm political buy-in and avoid spending transaction costs on projects unlikely to succeed.

3. Project transaction

The transaction phase is guided by the principles of competition, fairness, and transparency. These conditions are essential to attract private investors and ensure satisfactory results for the public authority.

Bidding Documents: Documents are prepared, including a draft PPP contract that outlines roles and responsibilities.

Procurement strategy: Evaluation criteria and the level of bidder interaction allowed during the transaction are defined. The project is publicized with a pre-bid conference and procurement notice.

Pre-qualification: A request for qualification (RFQ) is issued to select companies with the capacity to handle the project. This process ensures that only companies capable of delivering the project are selected, resulting in a limited pool of pre-qualified bidders, usually four to seven. This number maintains competitive pressure while facilitating interaction with bidders and increasing their chances of success, encouraging them to invest in the bidding process. The bidding process begins after pre-qualification. A full set of bidding documents, including the draft PPP contract, to pre-qualified bidders is sent. A conference is organized to allow bidders to seek clarifications, then, bidders submit their proposals. In a single-stage process, technical and financial proposals are submitted simultaneously. In a two-stage process, bidders submit technical proposals first, discuss them, potentially amend bidding documents, then submit both technical and financial proposals. The evaluation phase follows the bidding process. If financial criteria for selection is used, technical proposals is opened first and assessed on a pass/fail basis. If accepted, the corresponding financial proposals, are reviewed against criteria like lowest tariffs for users or lowest cost to the government.

Alternatively, financial and technical criteria are combined for evaluation, though this increases the risk of subjective assessment and corruption. After evaluation, a preferred bidder is selected, final negotiations to clarify remaining issues are initiated and the contract specifics are updated.

No material changes should be made to the contract agreed upon during the bidding phase to ensure fairness. Lenders may pressure for contract changes, threatening to withhold financing if their requests are not met, jeopardizing the process. Once the contract is finalized, it is submitted for public authority approval, financing agreements are finalized, and ensuring conditions are fulfilled. The project reaches “financial close” when funds are disbursed to implement the project.

Unsolicited proposals

Projects can also be proposed directly by the private sector, this is called unsolicited proposals. While this can bring innovative solutions, it can divert attention from national priorities, increase corruption risks, and require mobilizing internal resources for assessment. To introduce competition, methods like the Swiss challenge invite competing proposals, with the initial proposer given a chance to match them.

4 Project management

Successful management of a PPP project requires clear procedures and resources for:

Performance monitoring: Reporting requirements are established for the government to stay informed of progress and identify issues early.

Continuous adjustments: Protocols for renegotiation due to unforeseen events are developed. Dispute resolution: Disputes are settled quickly and fairly to maintain project momentum.

Contract termination: End-of-contract issues like termination payments and asset conditions are addressed. Effective management ensures the project delivers its intended benefits and maintains the trust of both public and private partners. The PPP unit can support the implementing agency in managing complex issues, establishing efficient communication channels, and enforcing penalties if required. By developing clear procedures for project management and allocating sufficient resources, PPP projects can be successfully managed throughout their operational phase.

Note: Hassan Abdulrahim is senior instructor, Economics & Finance, at Canadian College Kuwait and Deputy CEO at Visionary Consulting Company