Phase I : Selection
This section describes the process of developing concept notes, applying a screening framework, and prioritizing proposed projects.
Planning processes identify new investments, including improvement or expansion of existing services. Municipalities are sometimes confronted with new project demands on a more ad hoc basis, for example, responding to natural disasters, unanticipated demand, and unsolicited proposals. Planning needs to reflect economic justification benefit to the government, through cost-benefit or value for money assessments. The assessment function needs to adjust for the possibilities of incentive bias and bias toward new build as opposed to refurbishing existing assets to ensure an objective assessment.
Common planning processes focus on the efficient allocation of public funding, and therefore the most feasible projects are generally allocated for public funding and financing. Those remaining projects that are not allocated public funding, generally more risky or complicated projects, tend to be relegated to private development, including PPP. However, private financing is risk based—private financing for more risky projects attracts a higher financing cost, less risky projects can be financed at a lower interest rate. Therefore, the usual allocation dynamic should be reversed—the least risky, most feasible projects should be developed with PPP. For example, there are countries where for every project that asks for public funding, the project team must elaborate why the project cannot be implemented through a PPP structure to ensure that scarce public funding is used only to the extent necessary.
As part of the analysis of proposed new investments, the municipality should prepare a concept note to capture key summary information (that is project description, project rationale, identified sources of revenue/financing). (See Module 3: Sample Project Concept Note) The concept note can also be used for the scoring exercise used to evaluate potential projects. (See Module 2: Project Concept Assessment Tool)
There are certain fundamental characteristics that a good project should exhibit. These include:
- Strong rationale
- Institutional readiness
- Project readiness.
- PPP suitability
At the selection phase, the level and quality of data is likely to be very poor. Definitive decisions should not be taken based on such preliminary data but rather indicative to help guide the municipality and identify additional data required and further analysis to be done.
To learn more about Project Selection, download the full Guidance Note.
The private finance and investment markets can only absorb so much project risk for PPP, with this market demand liable to shift over time. The municipality should consider the market appetite, how that appetite is likely to evolve over the short to medium term, and therefore how many and which projects should be prepared as a priority to fit with the market appetite and avoid exceeding market appetite.
Prioritization should also reflect resource constraints of the municipality. Constraints may include, for example, the capacity of the municipal PPP team, the budget available for project preparation, and the fiscal space available for the provision of financial support to PPP projects, such as availability payments or guarantees.
To learn more about Prioritization, download the full Guidance Note.
The decision to select and prioritize a potential municipal PPP should include a decision to provide funding for project preparation. The concept note should include an assessment of the scope and cost of the project feasibility study and to bring the project to tender and award. The cost of project preparation can vary significantly based on the size and complexity of the project, and the capacity of the municipality.
The municipality might access support from national or international bodies, for example many countries provide access to PPP expertise through PPP units and extra-budgetary funding for PPP project preparation. National development banks or investment funds may be available to provide finance for municipal or private entities on more attractive terms or pricing to implement the project. Such support may also be available from bilateral or multi-lateral entities (for example the World Bank).
To learn more about Project Funding, download the full Guidance Note.