Supplement No. (B)
<PPP Project Name>
Feasibility Assessment
<Sponsor Agency>
Prepared By:
Document Version:
Date:
<Author>
<N.N>
<Month, Year>
<PPP Project Name>
1
TEMPLATE INTRODUCTION
The Feasibility Assessment Template will outline a methodology for evaluating feasibility a
PPP project.
Feasibility is essential in achieving value for money for a given PPP project. It is therefore a
key element of a business case and must be examined before a decision to use a PPP
approach is made.
The Feasibility Template will focus on affordability and value assessment, covering
development of:

Baseline Public Sector Comparator (PSC)

Risk-adjusted PSC

PPP Reference Model (to be compared with PSC)

Risk-adjusted PPP Reference Model
A Feasibility Assessment will help PPP sponsors complete four critical tasks:

To establish the benchmark cost of providing the service in-house (the PSC).

To determining whether a PPP option should be considered because its potential
benefits outweigh the costs.

PSC helps sponsor agency evaluate which bid offers best value for money.

Help create a formal risk management strategy before negotiating with a private
partner in order to optimize risk allocation.
Feasibility must be considered on a project-by-project basis. Each project has a different
potential for delivering value for money.
Developing a PSC and PPP Reference Model are significant tasks. Agencies should consider
engaging expert advice if this not available within the organization.
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TABLE OF CONTENTS
1
TEMPLATE INTRODUCTION .................................................................................................................... 2
2
EXECUTIVE SUMMARY ............................................................................................................................ 4
3
CONSTRUCT BASELINE PSC MODEL ......................................................................................................... 5
3.1
CALCULATE DIRECT COSTS ...........................................................................................................................5
3.1.1 Capital Costs .....................................................................................................................................5
3.1.2 Maintenance Costs ...........................................................................................................................5
3.1.3 Operating Costs ................................................................................................................................6
3.2
CALCULATE INDIRECT COSTS.........................................................................................................................6
3.3
CALCULATE REVENUE..................................................................................................................................6
3.4
MODEL ASSUMPTIONS ................................................................................................................................6
3.4.1 Inflation Rate ....................................................................................................................................7
3.4.2 Discount Rate ....................................................................................................................................7
3.4.3 Depreciation .....................................................................................................................................7
3.5
DEFINE THE BASE PSC MODEL......................................................................................................................7
4
CONSTRUCT THE RISK-ADJUSTED PSC MODEL ........................................................................................ 8
5
CONSTRUCT BASELINE PPP REFERENCE MODEL ...................................................................................... 9
5.1
IDENTIFY THE PPP PROJECT STRUCTURE AND THE SOURCES OF FUNDING ...............................................................9
5.2
CALCULATE AND CONSOLIDATE ALL COSTS .......................................................................................................9
5.2.1 Calculate Direct Costs .....................................................................................................................10
5.2.2 Calculate Indirect Costs...................................................................................................................10
5.2.3 Calculate Revenue...........................................................................................................................10
5.3
MODEL ASSUMPTIONS ..............................................................................................................................10
5.3.1 Inflation Rate ..................................................................................................................................10
5.3.2 Discount Rate ..................................................................................................................................10
5.3.3 Depreciation ...................................................................................................................................10
5.4
DEFINE THE BASE PPP REFERENCE MODEL ...................................................................................................11
6
CONSTRUCT RISK-ADJUSTED PPP REFERENCE MODEL .......................................................................... 12
7
SENSITIVITY ANALYSIS .......................................................................................................................... 13
8
DEMONSTRATE AFFORDABILITY ........................................................................................................... 14
8.1
8.2
9
DETERMINE SPONSOR AGENCY BUDGET FOR THE PROJECT ...............................................................................14
COMPARE RISK-ADJUSTED PPP REFERENCE MODEL WITH THE BUDGET ..............................................................14
INITIAL VALUE-FOR-MONEY TEST ......................................................................................................... 15
LIST OF TABLES
Table 1: Base PSC Model
Table 2: Risk-Adjusted PSC Model
Table 3: Base PPP Reference Model
Table 4: Risk-Adjusted PPP Reference Model
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<PPP Project Name>
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EXECUTIVE SUMMARY
< Write this section of the template to describe to the reader what has been done briefly in the
feasibility assessment to study the different procurement options. The final important results of the
study should be available here too.>
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<PPP Project Name>
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CONSTRUCT BASELINE PSC MODEL
<Construct in this section the Public Sector Comparator Baseline Model that does not account for
risks.
The base PSC represents the full costs to the sponsor agency for delivering the project using the
conventional public procurement method. The model shall count for all kinds of cash flows either
inflows or outflows:
 Direct Costs
 Indirect Costs
 Revenue.
All calculations of costs and revenues should have documentation to support the assumptions and
analysis attached as appendices to the PSC.>
3.1
CALCULATE DIRECT COSTS
Direct Costs are those that can be allocated to a particular service. These costs can be found from:



Most recent public sector projects to deliver similar infrastructure or services.
If there is no recent comparable public sector project, a best estimate should be made.
If there are no comparable projects in Saudi Arabia, costs can be based on similar projects in
other countries.
Direct Costs are categorized as:



Capital Costs
Maintenance Costs
Operating Costs
3.1.1 Capital Costs
Those costs are related usually to the delivery of new services. Capital costs may include but not
limited to:
 Constructing a new facility or other infrastructure needed to deliver the services
 Land Costs
 Raw Materials
 Plan and Equipment (including ICT hardware and software)
 Project management
 Professional fees
3.1.2 Maintenance Costs
Those costs are the costs to maintain the assets in a condition appropriate to deliver the output
specifications over the life of the project. Maintenance costs may include but not limited to:
 Tools and Equipment maintenance costs
 Maintenance labor costs
 The costs of raw materials for maintenance
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<PPP Project Name>

Insurance
3.1.3 Operating Costs
Those are the costs associated with the daily operation of the service(s). Operating costs may include
but are not limited to:



3.2
Costs of staff (Salaries, training, etc.)
Direct Management costs
Consumables
CALCULATE INDIRECT COSTS
Indirect Costs are those costs of resources from the sponsor agency that are not related directly to the
project. In general, they are the overhead costs.
Examples of such costs can be:



Senior Management's time and effort
Accounting
Legal service
The portion of the costs incurred by the project can be determined by several methods that are
dependent on the accounting rules of the sponsor agency. Some methods that are applicable, though
options should not be limited to them, are:


3.3
Number of project employees to the total number of sponsor agency employees for the
personnel costs.
Project costs to total sponsor agency costs for the accounting costs.
CALCULATE REVENUE
Projects like PPPs that deliver services can generate revenues. Those revenues shall be accounted for
as cash inflows. This inflow is important when constructing the PSC and PPP reference models.
Examples of situations where revenues can be generated are:




Users pay for the service or a part of it.
Renting of sponsor agency's assets can sometimes generate money for the sponsor agency.
Licensing any software (or intellectual property) created for the project to third parties.
Advertising or sponsorships.
Since PPP project extend over multiple years, it is also important to identify (assume) a revenue
growth rate over the lifetime of the project.
3.4
MODEL ASSUMPTIONS
All the assumptions when constructing the PSC model should be clearly identified. The model
assumptions usually cover areas like:
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


Inflation rate
Discount rate
Depreciation
3.4.1 Inflation Rate
Inflation rates should be projected on all expected future cash flows.
3.4.2 Discount Rate
Discounting future cash flows to present values is accomplished by applying a discount rate.
Agencies should consult with the Ministry of Finance (MoF) to establish an appropriate discount rate.
3.4.3 Depreciation
Depreciation is not included in PSC Models because those models are calculated on cash flows and
not on accruals.
3.5
DEFINE THE BASE PSC MODEL
Since all the costs of the project are forecasted for the whole life of the project, costs are incurred on
different time values. All the cash flows of the project (Outflows or Inflows) should be discount to
present time. A Net Present Value of all Cash Flows should be calculated based on the costs
mentioned above. Consulting with Ministry of Finance and any other Financial Consulting
Companies at this stage will be important in constructing the model, if adequate expertise within the
sponsor agency is not available.
An example of a Base PSC Model is shown in Table 1 below:
Year
Capital
Costs
Maintenance Operating Indirect
Costs
Costs
Costs
Revenues Total
Discount Discounted
Factor
Cash flow
Total
Table 1: Base PSC Model
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<PPP Project Name>
4
CONSTRUCT THE RISK-ADJUSTED PSC MODEL
<Develop in this section the risk-adjusted PSC Model. The risk-adjusted PSC model accounts for
risks that are usually overlooked by conventional public procurement methods. The risk-adjusted
PSC Model equals the Base PSC Model plus the costs of risks. The risks and their costs are derived
from the Risk Assessment Template. >
An example of a Risk-Adjusted PSC Model is shown in Table 2:
Year
Capital
Costs
Maintenance Operating Indirect
Costs
Costs
Costs
Revenues Risk
Total
Adjustments
Discount Discounted
Factor
Cash flow
Total
Table 2: Risk-Adjusted PSC Model
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<PPP Project Name>
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CONSTRUCT BASELINE PPP REFERENCE MODEL
<Construct in this section the Baseline PPP reference model that does not account for the costs of the
risks. The Base PPP Reference Model is the costing of the output specifications by the sponsor
agency as if the private partner is going to implement the project.
Comparing the PSC Model with the PPP Reference Model enables the sponsor agency to assess
whether service delivery by government or by private partner generates the best value for money.
The PPP Reference Model is generated using the same output specifications as those used in the
Baseline PSC Model.
As this is a hypothetical model where the sponsor agency assumes the role of the private partner, it is
to be known that it is impossible to come up with a 100% correct costing.
The following stages should be followed to construct the Baseline PPP Reference Model:






5.1
Identify the PPP project structure and the sources of funding
Develop the basis for the payment mechanism
Calculate and Consolidate all costs
Model Assumptions
Define the Baseline PPP Reference Model
Describe the results of the Baseline PPP Reference Model>
IDENTIFY THE PPP PROJECT STRUCTURE AND THE SOURCES OF
FUNDING
In this section, the following needs to be identified:




5.2
The relationship between the sponsor agency, any Special Purpose Vehicle (SPV) used,
lenders, suppliers, subcontractors, and other stakeholders.
The proposed sources of funding like:
o Debt and Equity
o Government Contributions
Equity returns
Costs and key terms of debt financing
CALCULATE AND CONSOLIDATE ALL COSTS
<The categories of costs covered here must be the same as in the PSC Model.
The key difference is that the PPP Reference model is expected to take into account the innovative
design, construction, and operational efficiencies that are expected from the private partner.
Those efficiencies should be identified here and used as a basis for the costing of the following
subsections (again, which must be the same as those used in the PSC Model discussed above in
Section 3).>
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5.2.1 Calculate Direct Costs
Direct Costs are the costs that can be assigned to a particular service. These costs are categorized the
same as in PSC model:
 Capital Costs
 Maintenance Costs
 Operating Costs
5.2.2 Calculate Indirect Costs
Indirect Costs are the costs that cannot be assigned directly to a particular service. Those are the
overhead costs like:
 Senior Management's effort and time
 Accounting
 Legal Services
5.2.3 Calculate Revenue
Projects like PPPs can generate revenues. Those revenues shall be accounted for as cash inflows. This
inflow is important when constructing the PSC and PPP reference models.
Examples of situations where revenues can be generated are:
 Users pay for the service or a part of it.
 Renting of sponsor agency's assets can sometimes generate money for the sponsor agency.
 Licensing any software (or intellectual property) created for the project to third parties.
 Advertising or sponsorships.
Since PPP project extend over multiple years, it is also important to identify (assume) a revenue
growth rate over the lifetime of the project.
5.3
MODEL ASSUMPTIONS
<The PPP Reference Model must be constructed on the same assumptions as in the PSC Model:
 Inflation Rate
 Discount Rate
 Depreciation>
5.3.1 Inflation Rate
Inflation rates should be projected on all expected future cash flows.
5.3.2 Discount Rate
The rate used to discount future cash flows to present values is accomplished by discount rates. The
proper discount rate is found by consultation with the Ministry of Finance (MoF)
5.3.3 Depreciation
Depreciation is not included in PSC Models because those models are calculated on cash flows and
not on accruals.
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<PPP Project Name>
5.4
DEFINE THE BASE PPP REFERENCE MODEL
<The Baseline Reference model uses all the previously identified costs without accounting for the
costs of the risks. The model is used the same way as the PSC Model where all cash flows (Inflows
and Outflows) are discounted to a Net Present Value (NPV).>
An example of a Base PPP Reference model is shown in Table 3 below:
Year
Capital
Costs
Maintenance Operating Indirect
Costs
Costs
Costs
Revenues Total
Discount Discounted
Factor
Cash flow
Total
Table 3: Baseline PPP Reference Model
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<PPP Project Name>
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CONSTRUCT RISK-ADJUSTED PPP REFERENCE MODEL
<The risk-adjusted PPP Reference Model equals the Baseline PPP Reference Model plus the costs of
the risks. Note in the table below the "Risk Adjustments" column"
The Risk-Adjusted PPP Reference Model will need to distinguish between Transferable Risk (risks
that are likely to be transferred to the private partner because they are best able to manage that risk)
and Retained Risk (risks that government proposes to maintain itself).>
An example of a Risk-Adjusted PPP Reference Model is shown in Table 4 below:
Year
Capital
Costs
Maintenance Operating Indirect
Costs
Costs
Costs
Revenues Risk
Total
Adjustments
Discount Discounted
Factor
Cash flow
Total
Table 4: Risk-Adjusted PPP Reference Model
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<PPP Project Name>
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SENSITIVITY ANALYSIS
<Write this section to determine the resilience of the baseline PSC Model and baseline PPP
Reference Model to changes in the assumptions which the model has been based on.>
The sponsor agency should test the sensitivity of key variables to test their impact on value for money
and affordability. The purpose of this is to test whether value for money will still exist if any key
variables change (for example, if inflation rate or operating costs are much higher than assumed.)
Those key variables could be:






Inflation rates
Discount rate
Service demand
Operating Costs
Revenue
And any assumed assumptions or costs.
A good example is the sensitivity analysis of the PPP Reference Model where high and low values of
the discount rates are examined. If both discount rate values support or reject the value for money of
the project, then the assumed or estimates values are reflective. Otherwise, the project should be
further examined.
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<PPP Project Name>
8
DEMONSTRATE AFFORDABILITY
<Write this section to demonstrate whether the PPP project is affordable or not. To do so:
 Determine the sponsor agency budget available for the project
 Compare the risk-adjusted PPP Reference Model with the sponsor agency budget for the
project.>
8.1
DETERMINE SPONSOR AGENCY BUDGET FOR THE PROJECT
The budget that the sponsor agency usually sets for such projects is to be estimated (or maybe known
by the agency). If it is not already known, this could also be figured out from the PSC Model costing.
This is because the PSC model is used in conventional public procurement.
8.2
COMPARE RISK-ADJUSTED PPP REFERENCE MODEL WITH THE
BUDGET
This section will demonstrate the affordability by comparing the budget with the risk-adjusted PPP
Reference Model. Based on the results of the comparison, two situations are possible:


If the PPP model costing or Net Present Value is less than the budget, then this is an
affordable project.
Otherwise, it is not affordable. In this case, the sponsor agency has two options:
o Abandon the project; or
o Modify the output specifications to bring the project within the affordability
constraint. For example, if some e-government services are required to work 24/7
which leads to more availability requirements (and higher costs), the project might be
modified so some of those services are available on a more limited basis.
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<PPP Project Name>
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INITIAL VALUE-FOR-MONEY TEST
< Write this section to provide an initial value for money test. The actual value for money test is
known by the RFP stage.>
The initial value for money test is accomplished by comparing the risk-adjusted PSC Model with the
risk-adjusted PPP Model. The Net Present Value (NPV) is compared from both models, and the one
that brings less NPV is considered as providing more value for money.
If the NPV are close to each other, other qualitative factors like quality and performance should be
considered to choose the best model for the project.
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