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COMMERCIAL REVIEW

Commercial Review

A commercial review is a review conducted by the GCA to prepare a project agreement structure under the PPP scheme. A complete commercial review contains two parts:

  • A technical preparation review and
  • A commercial preparation review.

Technical Preparation

This section consists of three parts – Technical preparation assessment; Determination of output specifications; and Determination of PPP form.

I. Technical preparation assessment

  • The site review begins with the determination of the project location. This review explains the existing conditions of the site that make it suitable for the proposed PPP project. The GCA assesses the suitability of the site by examining the availability of land area and contour, land ownership status, the resilience of the site location to external conditions (climate, disasters etc.), and other factors.
  • The description shall include details of the access routes or pathways to the project if there is a need for route access to the site location.
  • Based on the explanation of the site conditions, the GCA shall explain the activities that need to be done to prepare the project site and its access route. The project site and the access route, both are required to be in line with the needs of the PPP project.

  • The GCA shall describe the initial design of the PPP project. This shall incorporate the basic technical design of the PPP with the facilities, infrastructure, the basic engineering design, the standards & specifications of the construction of the infrastructure and other components that make up the design, to fulfil the scope of the PPP. The GCA shall adjust the initial design to the needs and characteristics of the sector to which the PPP project belongs.

  • The GCA shall review the technology options if there are many available to develop the PPP project service. The GCA shall explain the selection of the technology from the available options i.e., what is the technology, why is it being selected, what are the domestic components of the technology as per sector regulation, how does the selected technology contribute to the PPP project, and why is the selected technology better as compared to other technological options available to the GCA.

  • The GCA shall describe how it has administratively completed the requirements of the location or site determination application for the PPP project in accordance with legal / statutory regulations. The GCA shall mention the details in this section.

  • The GCA shall describe the activities it has undertaken so far and shall undertake to fulfil the land acquisition plan for the proposed PPP project. If the proposed PPP project is on community-owned land, the GCA shall describe whether there is a need for resettlement activities. Therefore, here the GCA shall describe the land acquisition as well as resettlement needs and plans, both adhering to prevailing legal / statutory regulations.

  • While preparing the Pre-FS, the GCA is expected to provide supporting documents related to environmental and social studies done for the PPP project in line with environmental laws and regulations. To be able to provide the documents related to environmental and social studies, the GCA must identify these supporting documents that it needs to prepare to obtain an environmental permit, example: an AMDAL or UKL-UPL or SPPL, based on the related regulation of the Ministry of Environment. To fulfil this activity of preparing any of these supporting documents, the GCA can choose to appoint a consultant or a drafting team, in line with the regulation of the Ministry of Environment. Refer also to the ESG Manual of the Ministry of Finance.

  • It may be so that the GCA may indicate the need to utilise state-owned or regional government-owned assets or goods in the PPP project. This may be indicated only if necessary to utilise these assets or goods. If there is such a need, the GCA shall describe here which assets and/or goods shall be utilised and how the GCA is preparing to utilise the state-owned or regional government-owned assets and/or goods. Alternatively, if there is no necessity to utilise these goods and/or assets, the GCA shall mention so here.

  • In this section, the GCA shall review social aspects related to the PPP projects. The social aspects include resettlement planning & proposed activities for communities who have thus far inhabited the land. The resettlement planning shall be a part of the land acquisition plan as per the section on ‘Land acquisition planning as per legal regulations’ above, but its social aspects shall be thoroughly examined here. This examination shall include:
    • identification of the affected parties and status of related land
    • identification of the social and economic characteristics of the affected parties
    • identification of the actions to be taken for the needs of the PPP project site, whether submitting a utilisation permit, purchasing land, renting, or others
    • identification of value or price of the land to be acquired
    • determination of the compensation to be given to the affected parties by considering the GCA’s capacity to provide the calculated compensation
    • appointing an institution or forming a team responsible for land acquisition and/or resettlement activities
    • conducting public consultations with affected parties and
    • preparing a schedule to implement land acquisition and/or resettlement activities.
  • The other social aspects that the GCA shall review would include legal regulations and the use of domestic products, the plan for empowerment of micro & small businesses and/or cooperatives, and the plan for implementation of gender equality including persons with disabilities (Persons with Disabilities) and/or specific social or disadvantaged groups in line with the laws and regulations. If the potential social impact of the PPP project is significant in any of these areas, the GCA shall provide details here. Refer also to the ESG Manual of the Ministry of Finance.

II. Determination of output specifications

  • The GCA shall describe the extent of services that will be provided by the Implementing Business Entity (IBE) to fulfil PPP project-specific requirements and matters. This GCA shall identify the level of service that will become the standard or benchmark for services to be expected of the IBE and as agreed upon in the PPP agreement. This standard or benchmark of service shall be measurable in quantity and measurable in terms of quality. The service indications, minimum service standards/service level agreements (SLA), and/or output specifications shall align with the project’s requirements and requirements based on the needs of the project owner.

  • The GCA shall describe the extent and level of service expected from the IBE in terms of measurable quantity and quality. The GCA shall also describe the service in terms of an indicative schedule of the PPP project’s construction work and equipment provision. From the indicative schedule, the GCA shall identify the activities to be monitored. The GCA shall also identify compliance with environmental, social, and safety management especially in construction and operational stages of the PPP project. The GCA shall also provide details of the monitoring arrangements including details of the procedures to measure service performance so that performance can be compared with the output specifications as agreed in the PPP agreement.

  • The GCA shall establish asset handover or transfer or management requirements for the end of the concession period (cooperation agreement) in line with the clauses stated in the PPP agreement. This is related to the intention of the IBE to return the asset/infrastructure that has been constructed during the concession period, back to the GCA for the purpose of full handover or transfer or management. In this section, the GCA shall mention the conditions that the IBE must meet before the process of the return of assets takes place. Some of these conditions include examining the extent and level of service performance provided by the IBE as per agreed SLAs and the technical details of the condition of the facilities and infrastructure and their completeness.

III. Determination of form of PPP

In determination of the form of PPP, the GCA needs to consider the following:

Refer to the Risk Allocation Template for more details on various forms of PPP for different infrastructure sectors.

  • PPP are collaborative agreements between GCA and IBEs to finance, design, implement, and operate infrastructure projects or public services. The scope of a PPP typically includes the following activities:
    • Infrastructure Development: Roads, bridges, airports, ports, railways, water supply, sanitation, energy, and telecommunications.
    • Service Delivery: Healthcare, education, public transport, waste management, and other essential services.
    • Project Lifecycle Involvement:
      • Design and Build: The private partner (IBE) may be responsible for designing and constructing the asset.
      • Finance: Private entities often provide upfront capital investment.
      • Operate and Maintain (O&M): Long-term operation and maintenance responsibilities may lie with the IBE.
      • Transfer: At the end of the contract, assets may be transferred back to the public sector/GCA (e.g., BOT – Build-Operate-Transfer model).The GCA will need to conclude on the scope of the PPP arrangement based on the risk assessment and the quantitative VfM analysis conducted in the Economic Review section.

    The GCA will need to conclude on the scope of the KBPU arrangement based on the risk assessment and the quantitative VFM analysis conducted in the Economic Review section.

  • The duration of a PPP contract varies depending on the complexity, capital investment, and expected return on investment. Typical durations include:
    • Short-Term: 5–10 years (e.g., service contracts or small-scale projects).
    • Medium-Term: 10–20 years (e.g., management contracts, lease agreements).
    • Long-Term: 20–40 years or more (e.g., BOT, BOOT – Build-Own-Operate-Transfer, or concession agreements).

    Longer durations are common in capital-intensive infrastructure projects to allow the private partner/IBE to recover investments and earn a reasonable return.

  • Involvement of third parties plays a critical role in ensuring transparency, accountability, and effective project delivery. These third parties are not direct signatories to the PPP agreement but contribute to various capacities throughout the project lifecycle. The various third parties that can get involved in a PPP arrangement are:
    • Regulatory Authorities: Government agencies or independent regulators oversee compliance with legal, environmental, and safety standards. They ensure that the PPP operates within the framework of public interest and policy objectives.
    • Financial Institutions: Banks, investment funds, and multilateral development banks (e.g., World Bank, Asian Development Bank (ADB)) often provide debt or equity financing. Their involvement brings financial discipline and risk assessment to the project.
    • Technical Advisors and Consultants: Independent experts may be engaged to conduct feasibility studies, risk assessments, and technical evaluations. They help both public and private partners make informed decisions.
    • Legal Advisors: Legal experts assist in drafting, reviewing, and negotiating PPP contracts to ensure clarity, enforceability, and alignment with applicable laws.
    • Legal Advisors: Legal experts assist in drafting, reviewing, and negotiating PPP contracts to ensure clarity, enforceability, and alignment with applicable laws.
    • Auditors and Monitors: External auditors may be appointed to review financial statements, performance metrics, and compliance with contractual obligations. This promotes transparency and builds public trust.
    • Insurance Providers: Third-party insurers offer coverage for construction risks, operational liabilities, and force majeure events, helping mitigate financial exposure.
    • Civil Society and Community Stakeholders: NGOs, local communities, and advocacy groups may be involved in consultations to ensure that the project aligns with social and environmental goals.

  • The assets that will be used in the PPP infrastructure provision will be reviewed. These assets can be local government assets (Local Government Property - BMD) and/or BUMD/BUMN assets, as well as central agency assets (State Property - BMN) and other agencies in the region that will be used for this cooperation. Also mention the applicable system of asset use.

  • Asset ownership in PPP is determined from the risk allocation, financing, and long-term control. The ownership structures vary depending on the PPP model adopted, the nature of the asset, and the legal framework governing the partnership. Various ownership models in PPPs are:
    • Public Ownership (e.g., Design-Build-Finance-Operate (DBFO), O&M Contracts): The GCA retains ownership of the asset throughout the contract/PPP agreement duration. The IBE is responsible for design, construction, financing, and/or operation of the project. This is common in sectors like water supply, public transport, and healthcare.
    • Private Ownership during Contract Term (e.g., Build-Own-Operate (BOO), Build-Own-Operate-Transfer (BOOT)): The IBE owns the asset during the concession period/contract duration. Ownership may be handed over to the GCA at the end of the term (in BOOT models). This model is suitable for capital-intensive projects like power plants or toll roads.
    • Joint Ownership: Both GCA and IBE share ownership, often through a Special Purpose Vehicle (SPV). This model promotes shared risk and decision-making and is common in Port and airport infrastructure.
    • Lease or Franchise Models: The public sector owns the asset but leases it to the IBE for O&M. This model is common in utilities and transport services.

Commercial Preparation

The commercial preparation of the PPP project includes three components. These include -

  • Potential demand
  • Market analysis, and
  • and Revenue potential

I. Potential demand

  • In this section, the GCA assesses the potential demand for the PPP project. While reviewing the demand potential for the PPP project, the GCA shall ensure to cover the user’s ability to pay, the user’s willingness to pay, and the user’s willingness to be served by the PPP project. The GCA shall administer a real demand survey (RDS) to obtain results on the willingness and ability parameters. The RDS contains calculations and analysis of demand for the PPP project. The GCA is required to conduct an RDS because it will be a reference in determining whether this PPP project needs to be developed, in determining the community's (users’) willingness to pay, and the community's ability to pay for the planned facilities and the planned infrastructure, amongst other parameters. Thereafter, the GCA shall test the elasticity of demand.

  • Overall, there are three steps in the methodology to conduct demand analysis – data collection, data documentation, and data analysis.
  • Besides RDS, as mentioned in the previous section, the GCA can choose to administer another survey with respondents too. The calculation of potential demand can consider the service requirement’s historical data. The GCA is required to carefully select the respondents of the RDS or the survey based on the sector and the potential beneficiaries or users of the PPP project. The parties or agencies that have access to respondent data can be used to select the sample for the respondent survey or RDS, i.e., type – both primary and secondary - and amount of data to be analysed to obtain the potential demand results, and maintain the related documentation and tabulation of the survey results.

  • The GCA has either used the RDS or other survey methods, and has identified the respondent and sample size, and collected the data, with the help of third parties/agencies, as per the previous section. The GCA has also documented the data collected. This data needs to be analysed using appropriate methods to obtain the results of the potential demand for the PPP project. The GCA can use various methods to analyse the data collected, for example, descriptive analysis methods, cross tabulation (crosstab) analysis, and/or multinomial logistic regression analysis.

  • The GCA’s last step in assessing the potential demand for the PPP project is testing the elasticity of demand for the PPP project. Elasticity of demand is also called price elasticity. Elasticity of demand is the extent to which the quantity of a good or service demanded by users changes in response to changes in price or cost of the service being provided. It means that elasticity measures the way users / consumers react to price changes. The greater the demand elasticity, the more sensitive users / consumers are to price changes i.e., the quantity of the service that users / consumers demand or want, can drop as prices rise.
  • Testing the elasticity of demand, based on the results of the RDS or the respondent survey, means that the GCA can understand its users / consumers better, can use the elasticity test to set an optimum price for the service, can help estimate the revenue potential from the provision of the service, can help estimate the growth or fall in demand based on the price, and use the results for strategic decision making in the provision of infrastructure services. The GCA can choose to use any one of the various methods available to test the elasticity of demand, for example: percentage method, total outlay method, point method, Arc method etc. The GCA shall mention which method has been used and provide details.

II. Market analysis

  • The GCA shall conduct the market analysis by including the following aspects
    • market sounding i.e., explore the interest in the market regarding the proposed PPP project by gathering inputs, interest, and responses regarding the PPP from stakeholders via one-to-one meetings or promotional activities.
    • selection of strategy to reduce market risk and increase market competitiveness or healthy competition in the PPP procurement process and
    • market structure assessment to determine the level of competition for the PPP project in the relevant sector.

III. Revenue potential

  • The GCA shall ensure that the analysis of the revenue potential of the PPP project includes:
    • calculation of the balance between the PPP costs and income/revenue during the partnership period/period of cooperation of the GCA with the IBE.
    • identification of initial payments/early tariff/rates, as well as establishing the reference index for adjustment during the PPP agreement period. This is achievable by conducting an RDS.
    • identification of service availability payments or Availability Payment (AP) and
    • identification of impact on revenue in case of PPP costs overrun, early completion of construction of the PPP project, provision of incentive or payment cuts related to fulfilment of obligations and identification of potential combined investment returns in the PPP.

Summary of Commercial Review

  • The GCA shall mention the key conclusions and findings of the commercial review given its two main parts - the technical preparation and the commercial preparation, during the Pre-FS preparation. Briefly mention the key takeaways from each section of the commercial review including the following:
    • i.whether the site has been prepared or mention the plans to prepare the site.
    • the progress of the initial design and the selection of the technological option.
    • progress with land acquisition planning.
    • progress with environmental approval.
    • whether utilisation of state-owned/regional government-owned assets/goods is necessary and if yes, mention the plan for such utilisation.
    • whether all social aspects listed have been reviewed and their key takeaways.
    • whether output specifications have been determined regarding service quality, quantity, availability, schedule and whether the GCA has clarity regarding asset handover or transfer or management.
    • whether the form of PPP has been determined considering scope, duration, phases, third party involvement, schemes for utilisation of state/regional government-owned asset/s, asset ownership during and after the PPP agreement, and consideration of project needs during the whole lifecycle by GCA for project types.
    • the potential demand has been calculated using the appropriate data collection, documentation and analysis methods and the elasticity of demand has been tested.
    • whether market sounding has been carried out as per the indicated inclusions and
    • the revenue potential of the PPP project has been calculated while including the factors indicated in the section. The GCA shall conclude this section with a brief statement on the technical and the commercial preparation takeaways, challenges, and highlights.