Project Finance and Value For Money

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
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Success in PPPs
realization of
efficiency gains
effective
mitigation of
fiscal risks
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Special purpose
vehicle
(private partner)
Special purpose
vehicle
(private partner)
Special purpose
vehicle
(private partner)
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✓ ✓
✓ ✓
✓
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Sources Uses
Equity Construction
Debt SPV cost
Grants Interest
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Sources Uses
Equity: $20 Construc:$100
Debt: $80 SPV cost: $0
Grants: $0 Interest: 10%
Construction period:
2 years
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28
Equity: $20
Debt: $83
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Revenues +
Operating revenues
Availability payments
Non-operating revenues
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Revenues +
Operating revenues
Expenses -
Operational cost
Maintenance cost
Heavy maintenance
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Revenues +
Operating revenues
Expenses -
Operational cost
Maintenance cost
Heavy maintenance
EBITDA =
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EBITDA +
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EBITDA +
Depreciation -
Interest -
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EBITDA +
Depreciation -
Interest -
Profits before taxes =
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EBITDA +
Depreciation -
Interest -
Taxes to be paid -
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EBITDA +
Depreciation -
Interest -
Taxes to be paid -
Net profits of the year =
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Portfolio risk
Idiosyncratic risk
Systemic risk
𝑅𝑝
𝑅𝑓
𝑅𝑝 = 𝛽 𝑅𝑚 − 𝑅𝑓 + 𝑅𝑓
𝑅𝑝 = 𝛽 ∗ ERMP + 𝑅𝑓
𝑟
𝑅𝑝 = 𝛽 𝑅𝑚 − 𝑅𝑓 + 𝑅𝑓
When applied to markets with short/volatile histories, we can estimate:
The base historical risk premium The country risk premium – i.e.
– i.e. the historical risk premium the additional premium that is
of a mature cap. market, in which observed to be required on
there is data to estimate the investments in the specific
premium country you’re interested in
𝜎𝑒𝑞𝑢𝑖𝑡𝑦
𝑐𝑜𝑢𝑛𝑡𝑟𝑦 𝑟𝑖𝑠𝑘 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 = 𝑐𝑜𝑢𝑛𝑡𝑟𝑦 𝑑𝑒𝑓𝑎𝑢𝑙𝑡 𝑠𝑝𝑟𝑒𝑎𝑑 ∗ ( )
𝜎𝑐𝑜𝑢𝑛𝑡𝑟𝑦 𝑏𝑜𝑛𝑑
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53
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✓
✓
✓
✓
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Process Task
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Value for Money
Shadow bid
Financial model of the PPP
company
- PPP cost for Gob

- Risk allocation
Project information Public sector

Capex, opex, etc; from
appraisal studies
comparator
Traditional
procurement cost Outputs
Expected value of VfM
Probability of VfM>0
Probability of VfM in (x,y)
Value for Money
Variable Measurable? Unit Quantifiable?

Road available earlier Yes Months/ years Yes
Better road construction
No. of repairs, no. of
quality (higher durability, less Yes Yes
accidents
repairs)
Better driving/ riding
Tricky/ not always Lower stress? Better health Very tricky/ not always
experience
No, it is different for
Better aesthetics No
different people
Faster ride Yes Minutes/ hours saved Yes
Yes, some aspects can be
Safer ride (reduced accidents) Yes No. of accidents
quantified
Loss of life and time, faster
Better response time for
Yes care for bodily injuries, few Yes
accidents
hospital days etc.
Increase in adjacent property Property values and related
Yes Yes
prices economic gains
Increase in school
Better access to education for Yes, some aspects can be
Yes enrolments, attendance,
children quantified
learning levels
Improved access to better Loss of life, time, work days, Yes, some aspects can be
Yes
health facilities quality of care quantified
Value for Money report
Value for Money: Drivers
Incentives
Bundling
Financial Cost
Value for Money: Drivers
Planning needs
User charges
Contract
renegotiation
Value for Money
Does not mean that the

project is a good idea
Does not mean that the

project is affordable
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69
✓ Land acquisition
✓ Design
✓ Cost overrun
✓ Delays
✓ Etc
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✓ Land acquisition ✓ Maintenance cost
✓ Design ✓ Demand
✓ Cost overrun ✓ Obsolescence
✓ Delays ✓ Catastrophe
✓ Etc ✓ Management
✓ Etc
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✓ Interest rate ✓ Land acquisition ✓ Maintenance cost
✓ Inflation ✓ Design ✓ Demand
✓ Foreign exchange ✓ Cost overrun ✓ Obsolescence
✓ Solvency ✓ Delays ✓ Catastrophe
✓ Etc ✓ Etc ✓ Management
✓ Etc
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74
75
76
77
78
79
80
✓
✓
✓
✓
✓
✓
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82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
✓
✓
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105
106
The Nicosia District Court
B. Risk allocation
Construction risk Base case
Design Mostly transferred

Land acquisition Fully retained
Construction cost Fully Transferred
Others
Maintenance and
operational risk
Operational cost Mostly transferred
Maintenance cost Mostly transferred
17%
17%
PSC for Alt. 1 € million € million
Cash costs and receipts PSC PPP

Capex 53.5
Opex 56.2
Revenues (VAT included) - -
Availability payments 121.9
Profit taxes - 11.0
Contract supervision cost -
Estimated costs for public sector 109.7 111.0
Risk adjustment (mean values)

Retained Risk 1.2 1.2
Transferred Risk 18.0
Added Risk 5.3
Total risk adjustment 19.2 6.5
Adjusted cost for public sector 128.9 117.5
PSC - PPP 11.4

PSC - PPP Alt. 1 (mean values)

140
120
100
80
60
Cash costs and receipts PSC PPP 40
Capex 53.5 20
0
Opex 56.2
Contract supervision cost

Total PSC
PSC - PPP
Opex
Profit taxes
Total PPP Type 2

Capex
Retained Risk
Transferred Risk
Retained Risk
Revenues (VAT included)
Added Risk
Profit taxes - 11.0
PSC Alt. 1 VfM

Retained Risk 1.2 1.2
Transferred Risk 18.0
Added Risk 5.3
Total risk adjustment 19.2 6.5
Adjusted cost for public sector 128.9 117.5
PSC - PPP 11.4

PSC - PPP Alt. 1 (mean values)

140
120
100
80
60
Cash costs and receipts PSC PPP 40
Capex 53.5 20
0
Opex 56.2
Contract supervision cost

Total PSC
PSC - PPP
Opex
Profit taxes
Total PPP Type 2

Capex
Retained Risk
Transferred Risk
Retained Risk
Added Risk
Profit taxes - 11.0
PSC Alt. 1 VfM

Retained Risk 1.2 1.2 PSC-PPP Distribution PPP Alt. 1
Transferred Risk 18.0 6.0% 100%

90%
Added Risk 5.3 5.0%
80%
Total risk adjustment 19.2 6.5 4.0%
70%
60%
3.0% 50%
Adjusted cost for public sector 128.9 117.5 40%
2.0%
30%
20%
1.0%
PSC - PPP 11.4 10%
0.0% 0%
41.1
-20.9
-18.3
-15.7
-13.2
-10.6
10.1
12.7
15.3
17.8
20.4
23.0
25.6
28.2
30.7
33.3
35.9
38.5
43.7
-8.0
-5.4
-2.8
-0.2
2.3
4.9
7.5
Probability Accumulated
Base case Alt. 1 Alt. 2

PSC-PPP>0 PSC-PPP>0 PSC-PPP>0
Probability 88% 86% 89%
PSC-PPP>0
Alt. 1
0%-20% 20%-40% 40%-60% 60%-80% 80%-100%
Please, answer all the questions
t enough information to provide a Value for M oney indicator
The project is unlikely to deliver Value for M oney
The project has low chances to deliver Value for M oney
he project has moderate chances to deliver Value for M oney
The project is very likely to deliver Value for M oney X
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Fiscal commitments matrix
Direct liabilities: Contingent Liabilities
Explicit Very low uncertainty Very high uncertainty

liabilities Legally signed Legally signed
Implicit Very low uncertainty Very high uncertainty

liabilities Based on expectative Based on expectative
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PPP fiscal commitments
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Management of the PPP related CLs
Why do we need to manage fiscal
commitments from PPPs?
We want everybody
Because we have to
knows we can made the
made the payments
payments
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Why do we need to manage fiscal
commitments from PPPs?
It will facilitate the It will be reflected in

financial close lower risk premiums
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Why this is not easy?
Long term
commitments
Many risk hard to

Uncertainty in assess
many variables
127
What is the problem we want to solve?
We want to know
the amount of
commitments
involved in a PPP
We want to know
what happen if
something goes
wrong
We want to estimate the likely fiscal

cash flow involved in the PPP
program
128
Why do we need to issue guarantees?
ROE
Risk
129
Where do we need to issue more guarantees?
Where the
volatility is higher
Legal Financial
Social Economic
130
Financial guarantees: examples
Minimum revenue Foreign exchange rate

guarantee guarantee
Variable term of the

Termination payments
contract
131
Financial guarantees: Minimum revenue guarantee
Ceiling on
revenue
Revenue
Estimated
revenue
minimum
revenue
guaranteed
Time
132
Ceiling on
PPP company shares
revenue
Revenue
Estimated
revenue
minimum
revenue
guaranteed
Government pays
Time
133
Can cover debt or debt

plus some equity, but
Higher fiscal
risk
Lower
must maintain some financial cost
private money at stake
Revenue
Estimated
revenue
minimum
revenue
guaranteed
Time
136
Financial guarantees: Foreign exchange rate guarantee
Exchange
rate
Time
Construction Long-term
financing refinance
137
Exchange
rate Free floating band
(1+a)E0
E0
(1-a)E0
Time
Debt service
financing refinance
138
Exchange
rate Free floating band
Government pays
(1+a)E0
E0
(1-a)E0
PPP co pays
Time
Debt service
financing refinance
139
Can be transferred to
the users (as well
inflation)
The scheme can be use

for other inputs: oil
140
Financial guarantees: Variable term of the contract
Revenue
Estimated
revenue
Present value is set at awarding
Expected end Time

of the contract
141
Revenue
Estimated
revenue
Actual end Time

of the contract
142
Revenue
Estimated
revenue
Time
Actual end
of the contract
143
Private sector: there

Mitigate demand risk
is no upside
Reduce probability of Private sector:

default variable term
financing is
expensive
Encourages fairer
Why this is not true?
renegotiation
Financial guarantees: Correlations matters
Systemic risk
𝜌<1 Economic 𝜌>1
activity
Interest
Usage
rate
𝜌>1 𝜌>1
Financial Maintenance
cost cost
Financial guarantees
“Politicians face perverse incentives to bypass the

formal controls, usually used over budget’s approval
and accountability, by applying contingent liabilities”
(Cebotari, 2008)
Financial guarantees: Design Specific
Must consider
asymmetries
Will claim more

Financial guarantees: From the fiscal point of view
The guarantees affect

Hard to estimate
the economic cycle
Impact on country risk Off budget

Project Finance and Value For Money

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2

Debt SPV cost

Equity: $20 Construc:$100

Debt: $80 SPV cost: $0

Grants: $0 Interest: 10%

Profits before taxes =

Profits before taxes =

Profits before taxes =

Net profits of the year =

When applied to markets with short/volatile histories, we can estimate:

- PPP cost for Gob

Project information Public sector

Variable Measurable? Unit Quantifiable?

Does not mean that the

Does not mean that the

Construction risk Base case

Design Mostly transferred

Cash costs and receipts PSC PPP

Risk adjustment (mean values)

Adjusted cost for public sector 128.9 117.5

PSC - PPP 11.4

The Nicosia District Court

Contract supervision cost

Total PPP Type 2

Revenues (VAT included)

Risk adjustment (mean values)

Adjusted cost for public sector 128.9 117.5

PSC - PPP 11.4

The Nicosia District Court

Contract supervision cost

Total PPP Type 2

Revenues (VAT included)

Risk adjustment (mean values)

Transferred Risk 18.0 6.0% 100%

Base case Alt. 1 Alt. 2

Direct liabilities: Contingent Liabilities

Explicit Very low uncertainty Very high uncertainty

Implicit Very low uncertainty Very high uncertainty

It will facilitate the It will be reflected in

Many risk hard to

What is the problem we want to solve?

We want to estimate the likely fiscal

Minimum revenue Foreign exchange rate

Variable term of the

Can cover debt or debt

The scheme can be use

Present value is set at awarding

Expected end Time

Present value is set at awarding

Actual end Time

Present value is set at awarding

Private sector: there

Reduce probability of Private sector:

“Politicians face perverse incentives to bypass the

Will claim more

The guarantees affect

Impact on country risk Off budget

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