Introduction to the Toolkit Financial Models

Transcription

1 World Bank & Brazilian Ministry of Transport Workshop on the Toolkit for PPP in Roads and Highways Introduction to the Toolkit Financial Models Cesar Queiroz World Bank Brasilia, Brazil, June 8-9, 2010

2 Financial Assessment of PPP Projects OBJECTIVE 1 ASSESS WHETHER THE PROJECT COULD BE FINANCIALLY ATTRACTIVE TO THE PRIVATE SECTOR OBJECTIVE 2 ASSESS THE LIKELY (IF NEEDED) FINANCIAL CONTRIBUTION FROM THE GOVERNMENT TO THE PROJECT

3 What should be measured? Value-for-Money Optimum risk transfer to the private sector Affordability Demonstrated value in bringing the private sector -Cost efficiency -Investment (with risks) Risk allocated to party best able to manage it, e.g., construction risks to the private sector Issue of demand and economic risks Can Government afford short and long-term payments? Are Guarantees accounted for? Can Users afford the toll rates?

4 Cash-flow through concession life CAPEX Dividends (Equity) Taxes/Fees Debt Servicing (Interest/Principal) OPEX Taxes/Fees SUBSIDY (PUBLIC) EQUITY (PRIVATE) Operating Revenues and/or Availability Payment DEBT (PRIVATE) Construction Operations

5 Financial models of the Toolkit Purpose Familiarization of non-financial users with the basics of project finance and financial simulations for a highway PPP project Initial project analysis of possible PPP options at pre-feasibility level, to assess possible toll rates and subsidy levels Limits Simplified financial models not suitable for the detailed and specific project assessment More developed models required to analyze potential PPP projects during project preparation and transaction Financial models audited for mathematical accuracy in 2009 User guides available (Module 6: Financial Models) odels/index.html

6 Graphical model Represents the main financial features of a project company in graphic form and their sensitivity to a range of 14 key assumptions. Graphs change according to the key project assumptions Three graphs are available Cash Flow graph Debt graph Dividends graph Intended mostly for educational purposes

7 Numerical model Provides financial statements by a would-be concessionaire to analyze the construction and operation of a highway concession under a Build-Operate-Transfer (BOT) type of project Default data from real highway concession contracts in Eastern Europe Assumptions sheet contains all key input data input Financial model is not a banking model and is not intended to provide project-specific financial modeling Intended for initial project analysis at feasibility stage

8 Project cashflow

9 Main financial analysis indicators Project Internal Rate of Return (or Project IRR) Financial return or yield of the project regardless of the financing structure Project is considered to be financially viable when Project IRR is above a benchmark rate of return with respect to the country, sector and project characteristics (7% or more in real terms, depending upon countries and financial markets) OCFBF = Operating Cash-Flows Before Financing i= end of first year concession of construction (1 + ( OCFBF) PROJECT. IRR) i i = 0

10 Equity Internal Rate of Return (or Equity IRR) Yield of the project for the shareholders through the remuneration of their investment with dividends The project is profitable for the shareholders when Equity IRR is high. Generally, a minimum expected return rate (real return) is 10% (Shadow Toll) or 17% (Toll Roads). This Equity IRR minimum is called Hurdle Rate. end of the concession i= first year of construction Equity (1 + injected i + Equity. IRR) dividends i i = 0

11 Annual Debt Service Cover Ratio (ADSCR) Represents the ability for the project company to cover/repay the debt Project estimated viable for the lenders when the ADSCR is greater than 1 for every year of the project life. Generally, the minimum ADSCR should be greater than 1.2. CAFDS = Cash Available For Debt Service (Debt Service)i,n = Principali,n + Interesti,n ADSCR n ( CAFDS) n = 3 Debt Service i = 1 i, n

12 Loan Life Debt Service Cover Ratio (LLCR) Measure of the number of times the cashflow over the scheduled life of the loan can repay the outstanding debt balance Generally, the minimum LLCR should be greater than 1.2 CAFDS = Cash Available For Debt Service LLCR n = Net PresentValue Outstanding maximum maturity of the three tranches Debt. n j= n+ 1 end of period ( CAFDS) j )

13 Using the graphical model Five Worksheets Data sheet: summarizes the main characteristics (assumptions) of the PPP project Repayment of loan: (Principal + Interest) constant or Linear Distribution of works: from 1 to 5 years Operation costs: variable costs (per vehicle) State discount rate used to calculate NPV of government Cash Flow graph Represents concession company cash flow during the concession period

14 Using the graphical model Debt graph Yearly payment of principal and interest during the debt servicing period (grace period + repayment period) Changes in the two main bank ratios over the repayment period: Annual Debt Service Coverage Ratio (ADSCR) and Loan Life Coverage Ratio (LLCR) Dividend graph Equity mobilized by company shareholders during the construction period and the dividends received by them during the operation period. Changes in the two main investment ratios over the concession: Project IRR and the Equity IRR Summary of assumptions and results

15 Using the graphical model Project indicators / ratios Project IRR for the last year of concession in real terms Equity IRR for the last year of concession in real terms Minimum LLCR; Minimum DSCR PV of net financial contribution from government Government pays subsidies during the construction period and recovers taxes during the operation period The indicator shows the present value of this cashflow for the government

16 Using the graphical model Project indicators independent of the Financial Structure Project IRR for the last year of concession in real terms, Project payback (numerical model only) Project NPV Financing indicators dependent on the Financial Structure Equity IRR for the last year of concession in real terms, Minimum ADSCR; Minimum LLCR Public Authorities financial flows

17 Using the graphical model Project data: 14 key project characteristics Concession duration between 7 and 100 years Construction costs between USD 5 million and USD 5 billion indexed on inflation during the construction period Annual operation costs between USD 1 million and USD 500 million Equity rate percentage of investment cost

18 Using the graphical model Subsidy rate percentage of investment cost Debt Amount of debt calculated by the system to reach 100% of investment cost (Equity + Subsidy + Credit = 100%) Interest rate: varying from 0% to 25% Grace period: period during which repayment of the principal is deferred. Greater or equal to the duration of works Debt maturity: Grace period + repayment period Traffic Initial daily traffic: daily traffic of the first year of operation Traffic growth: estimation of the traffic forecasts during the period of the project

19 Using the graphical model Toll rate corresponding to the average toll paid by vehicles in the first year of operation Inflation rate used to estimate forecasts of revenues and operating cost and to calculate real rates of indicators Corporate tax rate corresponding to the corporate tax (profit tax) paid by the concessionaire VAT rate used to calculate the VAT paid annually to the State by the private partner from project revenues

20 Using the graphical model Comments and warnings Comments Displayed by the system to alert the user to unrealistic or impossible entries for project characteristics Warnings When the values of main indicators are less than the required minimum values (Project IRR Equity IRR LLCR ADSCR NPV for the State)

21 Using the numerical model Main differences with graphical model Data entry Four categories of traffic with growth and toll rates Three tranches of debt Construction and operational subsidies Outputs Produces financial statements, cash-flows etc of concessionaire Cashflow for public authority Additional ratios (payback period)

22 Using the numerical model Main characteristics Model includes Assumptions sheet Financial statements Results sheet Graphical sheets linked to a graphic simulation tool Key parameters of the model are defined in the assumptions sheet. Data entered using scroll bars Coherency of data is controlled in real time (e.g. coherency between concession life, construction period and operating period).

23 Traffic and toll 4 categories of vehicle 2 profiles of traffic Automatic profile: calculated from growth rates and initial daily traffic Special profile: traffic forecasts are input in Traffic sheet Toll rates USD / Km / Vehicle Indexed on inflation Results sheet indicates range of traffic through concession period

24 Thank you!