FavourableInvestment EnvironmentAccordingto the World Bank “a business and investment climate is the opportunities andincentives 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, theinvestment environment is the framework that enables foreign and domesticcompanies to conduct business and seek profits (Thompsen, 2005).
The desire ofprivate sector investors and creditors to engage in infrastructural projectsdepends on the conditions in which these projects operate. The business environmentcomprises “tax rates, incentives, political stability, rule of law,microeconomic conditions, perceptions of government, and the regulatoryenvironment” (OSCE Guide, 2006, p. 17). Since agood investment atmosphere is pivotal to a country ‘s strategy to stimulateeconomic growth, the operation of PPP schemes would succeed under favourablepolitical, legal, economic and commercial conditions (OSCE Guide, 2006; WorldBank, 2006). Usually, governments are betterpositioned to create environments that eliminate political risks, guarantee andprovide support to curtail risks such as changes in legislation, convertiblecurrencies, corruption and bureaucratic bottlenecks and certain risks of forcemajeure (Fitzgerald, 2008,Kumaraswamy & Zhang, 2001). The private sector’s readiness toparticipate in the development of public infrastructure depends on theinvestment environment in which the projects work. An environment where local leadershiphave bad credit and the quality of contracts not easily feasible may notattract private sector participation.
In order for the PPP to work there mustbe an environment favourable to the political, legal, and economic environmentfor private sector participation. Cuttaree (2008) and Babatunde (2012) haveobserved that sound legal and regulatory framework is a catalyst for successfulinfrastructure PPP delivery.2.3.2 AppropriateRisk Allocation via Reliable Contractual AgreementsThe identification and assignment of risks is animportant issue in contractual relationship, which determines the type andcontent of the contract in PPP. Its important to define the rights andobligations of the parties (Diekmann & Girard, 2012; Gordon, 1994).
Various risks can be handled efficiently by theassigned parties through appropriate contractual agreements, including theconcession agreement between the government and the concessionaire and the shareholdersagreement, the design and construction contract, loan, insurance contract,supply contract, agreement on the cooperation agreement and discharge betweenthe concessionaire and the relevant contractors (Merna & Dubey, 2008).2.3.3 Economic ViabilityEconomicviability is important for the project success. For a PPP infrastructureproject, it is dependent on a number of factors. Akintoye, Beck & Hardcastle(2003) have identified a number of factors that influence PPP infrastructureprojects such as profitability, long-term cash flow, limited competition fromother projects among others.
There are contemporarily four approaches that have been used forthe financial viability of PPP evaluations: the payback period, discountedpayback period, net present value and internal rate of return method. Thesemethods are based on the profitability of the project and with the conditionthat the project cash flows are insured. Inaddition, methods of sensitivity analysis and simulation are also used in theeconomic evaluation of major infrastructure projects (Woodward, 2005). ReliableConcessionaire Consortium with Strong Technical StrengthUsually,the government is better positioned to create an enabling environment for theprivate sector to function effectively in delivering public infrastructure. (Kumshe,Magaji & Bani, 2015; Thompsen, 2005). The role of the concessionaire isimportant to PPP project delivery.
Therefore, choosing the concessionaire withtechnical and financial capacities must be given much attention (Tiong &Alum, 2007).