Sobre la Importancia de la Información para la Evaluación Educativa

If a public sector modality has been selected for developing a project, then financial feasibility is not important. However, if a commercial modality is the best form of cooperation then financial feasibility is all-important (ADB, 1997). Therefore, the next step in the assessment process is to determine the financial feasibility of a candidate project and, for those projects that are not financially feasible, to calculate the minimum amount of government support that is required for the project to be financially feasible and therefore attractive to private sector developers (Sharan, Lohani et al. 2007). Decisions about support can be made using a systematic approach that is illustrated in Figure 14 below. A tool is needed to determine what, if any support is needed and then decisions need to be made about whether that support is made in the form of direct financial support by way of loans, grants or operating subsidies, or whether it is made via contingent support in the form of guarantees (Dailami, Klein et al. 1998).

Figure 14– Deciding on Government Financial Support

Devising a government support tool for projects to be privately financed centres on measuring their financeability. This depends very much on the capacity and appetite of equity investors and providers of debt capital (lenders). The main difference between these two types of finance providers is the relationship between return and risk. This is because equity investors anticipate taking higher risks and receiving commensurately higher returns. Lenders, on the other hand, take less risk and in return receive a lower return for their money. The flip side, of course, is that they enjoy better security than equity investors should the project fail for some reason.

Lenders spend a great deal of time understanding the risks associated with a project and are often considered as being the “weakest link in the chain” when it comes to finance. This is why there is a focus on the question of “bankability”, which is a measure of the likelihood that a project will be able to attract bank finance on terms that will leave equity investors with a reasonable rate of return and end users with a reasonably priced service (Sader 2000). This triangular relationship needs to be considered when making a judgement about whether a project is financially feasible and suitable for private sector development.

Figure 15 shows this triangular relationship more clearly. Lenders are concerned about considerations such as whether the cash flow generated from the project will be

as “debt service cover factors” (Ryan 2011), whereas equity providers are concerned about the rate of return from their investment and when they are likely to be repaid (payback). Customers want to make sure that the service is priced as cheaply as possible (without compromising quality) and this can be measured by considering willingness to pay criteria, primarily by looking at the prices of substitute services.

Figure 15 – Balance of Financial Relationships in a Project

Source: Author

Each of these factors help make up a financial viability assessment to make judgements about whether the project can be financed commercially. Even if the project cannot be financed commercially, sometimes it is in the best interests of government to find ways to make a project financially viable so that the economic benefits that stem from the project are not lost. Naturally government wants to minimise its financial support for a project and the support should be no more than what is termed as a “viability gap” (Sharan, Lohani et al. 2007). The term viability gap has been mentioned several times in this thesis and it now requires some further definition. It is the difference between the present value of the project at its minimum level of viability (shown as “NPV 2” in Figure 16) and the present value of the project before any government financial support is introduced (shown as “NPV 1” in Figure 16).

Figure 16 – Illustration of Project Economic and Financial Benefits and a “Viability Gap”

Source: Author

Figure 16, above, illustrates this viability gap hypothetically. The area shown in green represents the net economic benefits that are expected to be derived from this

hypothetical project. The area is shown in red depicts the project NPV and in this case let us assume that the project is not viable because it does not pass the financeability test for lender, investor and customer criteria. The minimum net present value required for that financeability test to be passed is shown in by the orange area. The gap between the orange and red areas is the “viability gap”. Government introducing financial support equal to the net present value of that viability gap can close this. That financial support is effectively a cross subsidy that sees a transfer of some of the net economic benefits (shown as the green area and “NPV 3” in Figure 16) to the private sector developer. This ensures that the project is developed so that the net economic benefit (less the value of the subsidy) can be obtained by society (Hodge, Greve et al. 2011).

If a candidate project has proceeded to this point, all that remains is for the service to be procured. Procurement is a vitally important (Toan and OZAWA) part of the