A Review of Tools for Project Financial Assessments

Abstract

Governments not always have the funds to build transport and other infrastructure projects that are economically justified and environmentally and socially sound. Under certain circumstances, projects meeting such conditions can be implemented by involving private financing, through public-private partnerships (PPP), which is a means to get projects completed by leveraging scarce public resources. In a PPP project, the sources of revenue to the private partner (or concessionaire) may include (i) the users of the facility (e.g., road tolling), (ii) the government (e.g. through availability payments, capital grants and shadow tolls), and (iii) both users and government, which is usually called a hybrid concession. As a key step in considering attracting private investors for such projects, decision makers and practitioners need to assess their financial viability, an endeavor that can be greatly facilitated by relatively simple tools now available. This paper reviews and provides case studies of two existing tools for assessing the financial viability of: (i) hybrid road PPP projects, which involve both tolls and availability payments; and (ii) output- and performance-based road contracts (OPBRC), which involves payments by the government. The main output generated by both models include the project’s internal rate of return, equity internal rate of return, annual debt service coverage ratio and the present value of the government’s cash flow.