PPP Development Stage – Financing (Investments)
12.4 What are the key steps?
1. Perform a "reality check"
“Reality check” implies the simplest kind of comparison
if the potential benefits and costs of the project. The reality
check is a benchmark scoring system that sets a baseline
and establishes the strategic thinking and tactical work required
to achieve the goal.
It is based on answering basic questions about the project,
- Does the proposed project have a realistic chance of
- Does the business concept to be based on a sound technical
and business principles?
- Is there enough time between now and the date of the project
- Are adequate financial resources available?
- Is there a political will? etc.
2. Perform business valuation
A business valuation is a formal opinion regarding the
estimated value of an ownership interest in a business
entity at a given point in time. There are a number of instances
when there is a need to determine the market value of a
company. Raising funds is one of them.
There are a wide range of factors that go into the process – from
the book value to a host of tangible and intangible elements.
In general, the value of the business will rely on an analysis
of the company's cash flow. In other words, it's ability
to generate consistent profits will ultimately determine
its worth in the marketplace.
An accurate business valuation requires financial analysis
as well as many other aspects of a business including:
- Management capabilities
- Company strengths, weaknesses and vulnerabilities
- The competitive environment
- Overall expectations for the marketplace
- Current and future economic prospects for the industry
This whole process of business valuation is one of those
areas in business where hiring a professional to
provide this service is essential.
3. Perform investment projects feasibility analysis
CBA provides a mean for systematically comparing
the value of outcomes with the value of resources achieving the
outcomes required. It measures the economic efficiency of the proposed
technology or project. When all else is equal more efficient
projects should be chosen over less efficient ones. When
there are many options to consider during a decision-making
task, it is useful to evaluate the options with a common
metric. CBA refers to any type of structured method for evaluating
A CBA application includes the following stages:
- 1. General description of the project:
This part includes an explanation on the environment under
which each analysis is done such as the objectives,
the assumptions, the project/decision life etc.
- 2. List of alternative scenarios:
In order to decide which is the best option in the CBA
we have to consider the costs and the benefits for each
of these options. This section lists the options considered
during the analysis.
- 3. Identify Benefits and Costs:
In this part, the application lists the exact benefits
and costs met in each of the alternative scenarios.
The application divides these into two kinds: The ones
that are relatively straightforward to be measured and the
ones that are not very easy to be measured. Many factors
must be considered during the process of estimating the
costs associated with competing alternatives in a CBA. All
costs for the full system life cycle for each competing
alternative must be included. The following factors must
be addressed: Activities and Resources, Cost Categories,
Personnel Costs, Direct and Indirect Costs (Overhead), Depreciation,
and Annual Costs.
– Benefits are the services, capabilities, and qualities of each alternative
system, and can be viewed as the return from an investment. To estimate
benefits, first identify the benefits for both the customers and the organization
that provides the service(s) to the customers.
- 4. Schedule Benefits and Costs:
For each of the alternatives defined in step 2, the user
now identifies the value of each benefit and cost for
each year through the life cycle of the decision beginning
from Year 0, which is the start of the decision life. After
the costs and benefits for each year of the system life cycle
have been estimated, convert them to a common unit of
measurement to properly compare competing alternatives. That
is accomplished by discounting future values, which transforms
future benefits and costs to their "present value." The
present value (also referred to as the discounted value) of a future
amount is calculated with the following formula:
P = F (1/(1 + l)n)
where P = Present Value, F = Future Value, I = Interest Rate, and
n = number of years.
- 5. Comparison of alternatives:
In this part the application compares the alternative solutions.
The comparison is illustrated with tables and graphs so as
to facilitate decision making. When the costs and benefits
for each competing alternative have been discounted,
compare and rank the discounted net value (discounted
benefit minus discounted cost) of the competing alternatives.
When the alternative with the lowest discounted cost provides
the highest discounted benefits, it is clearly the best alternative.
- 6. Sensitivity Analysis:
In this part the application helps the user define how
sensitive the results are to changes in the costs and
benefits. This sensitivity involves costs and benefits whose
definition is not straightforward or is not easy to be exactly
defined. Sensitivity analysis tests the sensitivity and reliability
of the results obtained from the cost-benefit analysis.
Since the CBA is normally the key document in the investment
review process, reviewers want assurance that the analysis
is reliable. Sensitivity analysis identifies those input
parameters that have the greatest influence on the outcome,
repeats the analysis with different input parameter values,
and evaluates the results to determine which, if any, input
parameters are sensitive. If a relatively small change in
the value of an input parameter changes the alternative selected,
then the analysis is considered to be sensitive to that parameter.
If the value of a parameter has to be doubled before there
is a change in the selected alternative, the analysis
is not considered to be sensitive to that parameter. The
estimates for sensitive input parameters should be re-examined
to ensure that they are as accurate as possible.
Capital investment program is a multi-year plan of
capital projects listed in priority order by year with
anticipated beginning and completion dates, annual estimation
costs and proposed methods of financing. Annually, the
program is reviewed, revised and projected one year.
There is a number of reasons for designing the investment
- 1. PPP projects require multi-year expenditures because
they are expensive and may take more then one year to
design and construct.
- 2. PPP projects often involve multiple sources of financing
such as current funds, debts and grants, which must be
accounted for separately.
- 3. Financial resources for capital projects are limited
and therefore must be conspired and allocated in a
Capital investment program design is a dynamic process
that involves several steps. The complexity of the
process depends on the law, extend of central government
regulation and local government size, organization structure,
staff capability and financial conditions.
What are the key steps?
◊ "Reality check"
◊ Business valuation
◊ Investments programme design
◊ Investment projects feasibility analysis
◊ Approval and Realization