Favourable for successful infrastructure PPP delivery. 2.3.2 Appropriate

Favourable
Investment Environment

According
to the World Bank “a business and investment climate is the opportunities and
incentives for firms to invest productively, create jobs, and expand” (OSCE, Guide, 2006, p.

17). A good business environment is necessary to attract investment.  In general, the
investment environment is the framework that enables foreign and domestic
companies to conduct business and seek profits (Thompsen, 2005). The desire of
private sector investors and creditors to engage in infrastructural projects
depends on the conditions in which these projects operate.

The business environment
comprises “tax rates, incentives, political stability, rule of law,
microeconomic conditions, perceptions of government, and the regulatory
environment” (OSCE Guide, 2006, p. 17). Since a
good investment atmosphere is pivotal to a country ‘s strategy to stimulate
economic growth, the operation of PPP schemes would succeed under favourable
political, legal, economic and commercial conditions (OSCE Guide, 2006; World
Bank, 2006).

Usually, governments are better
positioned to create environments that eliminate political risks, guarantee and
provide support to curtail risks such as changes in legislation, convertible
currencies, corruption and bureaucratic bottlenecks and certain risks of force
majeure (Fitzgerald, 2008,
Kumaraswamy & Zhang, 2001). The private sector’s readiness to
participate in the development of public infrastructure depends on the
investment environment in which the projects work. An environment where local leadership
have bad credit and the quality of contracts not easily feasible may not
attract private sector participation. In order for the PPP to work there must
be an environment favourable to the political, legal, and economic environment
for private sector participation.

Cuttaree (2008) and Babatunde (2012) have
observed that sound legal and regulatory framework is a catalyst for successful
infrastructure PPP delivery.

2.3.2    Appropriate
Risk Allocation via Reliable Contractual Agreements

The identification and assignment of risks is an
important issue in contractual relationship, which determines the type and
content of the contract in PPP. Its important to define the rights and
obligations of the parties (Diekmann & Girard, 2012; Gordon, 1994).

Various risks can be handled efficiently by the
assigned parties through appropriate contractual agreements, including the
concession agreement between the government and the concessionaire and the shareholders
agreement, the design and construction contract, loan, insurance contract,
supply contract, agreement on the cooperation agreement and discharge between
the concessionaire and the relevant contractors (Merna & Dubey, 2008).

2.3.3    Economic Viability

Economic
viability is important for the project success. For a PPP infrastructure
project, it is dependent on a number of factors. Akintoye, Beck & Hardcastle
(2003) have identified a number of factors that influence PPP infrastructure
projects such as profitability, long-term cash flow, limited competition from
other projects among others.

There are contemporarily four approaches that have been used for
the financial viability of PPP evaluations: the payback period, discounted
payback period, net present value and internal rate of return method. These
methods are based on the profitability of the project and with the condition
that the project cash flows are insured. In
addition, methods of sensitivity analysis and simulation are also used in the
economic evaluation of major infrastructure projects (Woodward, 2005).  

Reliable
Concessionaire Consortium with Strong Technical Strength

Usually,
the government is better positioned to create an enabling environment for the
private sector to function effectively in delivering public infrastructure. (Kumshe,
Magaji & Bani, 2015; Thompsen, 2005). The role of the concessionaire is
important to PPP project delivery. Therefore, choosing the concessionaire with
technical and financial capacities must be given much attention (Tiong &
Alum, 2007).