Training on PPP

Financial Modeling
Session No: 5

Presented by:
Imran Ehsan
Senior Consultant
Infrastructure Investment Facilitation Company
19 March 2014

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Contents Overview

 Financial Modeling
 What is it?
 What it does?
 Why is it needed?
 Model Requirement at Different Stages of a Project
 Some definitions
 Structure of a Financial Model
 Input Worksheets, Calculation Worksheets, Output
Sheets
 Golden Rules of Modeling
 A Sample Financial Model

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 What is a Financial Model

 A mathematical model of the business that

projects the future performance and health of
the business
 A custom built excel spread sheet used to
forecast different financial parameters of a
project
 A spreadsheet with linked cells, outputs of
which are automatically changed with input
change

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 What a Financial Model Does

 It helps to forecast different key project

parameters e.g. Project IRR, Equity IRR,
DSCR
 NPV of Projected net cash flow
 Project Payback Period
 Loan repayment profile
 Borrowing capacity of the project

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Uses of Financial Models for PPP
Projects at Different Stages

 Pre-Feasibility stage model

 Model during project development (Detailed

Feasibility Study stage)

 Final model for bid submission, raising

finance etc.

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 Pre-Feasibility Stage

Model during Pre- Feasibility Stage of a PPP

project:
 Model prepared by Executing Agency of Government

 Model has broad parameters, thumbs-rule cost

estimates, demand/ traffic forecast based on
previous reports or preliminary industry survey

 Result of model gives indication to Government

whether project will be viable as a PPP project.

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 Project Development Stage
Model during project development:
 Model will be subject to considerable change,
incorporating detailed data and parameters
 Tariff Rate
 Revenue Sharing
 Guaranteed Payment
 Incentives etc.
 Different PPP models will be investigated
 Different commercial structures will be investigated
 Detailed technical drawings will be prepared
 Cost estimates will be more detailed based on
technical analysis
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 Bid Submission Stage

Final model for bid submission, raising

finance etc.
 Model reaches a final form, established around a
base case.
 The model require little change from this point on.
 Model may be simpler than it was during project
development phase.

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 Model Requirement for
Different Stakeholders
 Executing Agency
 Financial Model used to set major parameters of project
 Risk allocation
 Determination of PPP model and Commercial Structure
 Adjust parameters so win-win situation for both Government and Private
Investor is ensured
 Determine hurdle rate of return

 Private Investor
 Assess financial viability of project
 Determine investment decision

 Lenders
 Determine financial health of the project
 Determine recovery of investment

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 Structure of a Financial Model

Processing
• Project Parameters Sheets • Income Statement
• Cost Estimate • Cash Flow
• Traffic Projection/ • Projected Revenue • Sensitivity Analysis
Demand Forecast • Projected O&M Costs • Scenario Analysis
• Tariff Structure • Assets Schedule • Summary Output Sheet
• Debt Servicing
• Depreciation
Output
Input Sheets
Sheets

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 Internal Rate of Return

 Project Internal Rate of Return (IRR)

 The discount rate at which the NPV = 0, i.e.
financial inflows = financial outflows
 Outflows: total project cost
 Inflows: operating income
 Accept a project if:
 IRR > Hurdle Rate
 Fix a hurdle rate and vary key project parameters
to reach desired IRR

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 Return on Equity

 Return on Equity (ROE)

 same as IRR calculation but only from the investor
perspective
 outflows = equity injections
 inflows = dividend plus + retained earnings

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 Coverage Ratio

 Debt Service Coverage Ratio (DSCR)

 Ratio of cash available for debt service / debt
service obligations
 Ability of the project to service its long term debt
obligations from project cash flow

 Uses of DSCR
 Go / No-Go decision for the lenders
 Measuring borrowing capacity
 Dividend payment monitoring

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 Sensitivity Analysis

 Changes in
 Project cost
 Financing terms (e.g. interest rate,
tenor/grace)
 Concession period
 Construction period: draw down
 Tariff Rates/ Lease Rates
 Traffic / Demand Projections

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 Scenario Analysis

 Model used for “What-If” Scenarios

 What If, project term is increased/ decreased
 What If, tariff rate is increased/ decreased
 What If, capital investment is increased/ decreased

Financial outputs for different scenarios helps

management decide on optimum parameters
to use.
Identifies problems that may be encountered
in the future and allows management to take
steps to avert such problems by structuring
project accordingly.
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 Golden Rules

 One financial model for one project. Do not try to use

financial model of one project for another project by
minor changing
 Input worksheet should allow majority of hard input
assumptions
 Output worksheet should look like a „Report Card‟ for
management use
 Do not bother the management with technical
explanation.

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 Points to Note

 Garbage in garbage out

 Needs to be flexible enough to enable

different users.

 Sufficient notes of assumptions and

comments to make it reliable.

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Quick Guide to Preparing a Financial
Model for a PPP Project

 Define Project Boundary

 Identify scope of work of the private investor and capital investment to be made by
private investor
 Prepare Capital Cost Estimate
 Prepare Demand/ Traffic Forecast for length of Term of PPP Project
 Identify O&M Costs
 Prepare organogram and salary structure of workers in company
 Identify hard costs and variable costs
 Incorporate cost escalations
 Incorporate Capital Cost phasing in model, if applicable
 Prepare Debt Schedule (interest rates, loan terms, grace periods)
 Prepare Revenue Forecast based of identified sources of income for
investor and proposed tariff rates
 Prepare Net income and Cash Flow statements
 Sensitivity and Scenario Analysis
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 Brief Case Study of Financial Model:

SME Industrial Park

 SME Industrial Park for three industries: Light Engineering, Plastics
and Electrical & Electronics
 150 acre Riverfront site in Keraniganj, total investment $68m
 Provision of serviced sites, administration and business centre
 523 leasable plots available, varying from 5,000 sq ft, 7,500 sq ft
and 10,000 sq ft.
 3x three floor standard factory buildings (SFB‟s), each 90,000 sq ft
will offer accommodation to 144 start-up companies
 Dedicated power plant and sewage treatment plant
 Phasing to reflect planning uptake of plots
 Three scenarios for demand tested: Aggressive Case, Base Case
and Conservative Case representing 5 years, 7 years and 12 years
to fill the SME Park

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20
 PPP Framework
Private IPFF / PFIs
Company

Government
Equity Loan

Government Funds

Concession
Agreement Lease
SMEF / Other Government SPV SME Units
Agency (Private Operator)

Royalty Lease
Payments

Land Acquisition & On-Site Development. Operation &

Development, Regulation Management

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 Demonstration of
the Financial Model

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