Financial Appraisal Projects

TRANSACTION ADVISORY SERVICES
Financial Appraisal Projects and Capital Acquisitions

Presented by Andre Walcott of Ernst & Young Caribbean
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Agenda
Introduction The Dilemma Options Analysis Options Analysis Methodology
Introduction
Regional Port Authorities are faced with the ever present dilemma of efficiently and effectively utilising the limited financial and natural resources to fulfill the economic and social obligations of the primary shareholder, usually Government. How do you manage this dilemma?
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The Dilemma
With limited financial resources, the resistance of Government to guarantee financing obligations, and a country of expectations, how do you know which projects to undertake and which capital acquisitions to make at which time?
Options Analysis
Options analysis:
examines the economic benefits examines the costs examines the non-financial benefits identifies the risks and their impact on the investment accounts for other qualitative supporting information
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Options Analysis Methodology
Risk
Policy
Internal Economic
Value Score
External Economic
Qualitative
Approach to Options Analysis

There are seven tasks in detailed option analysis: Identify and categorise the benefits Identify and categorise the costs Develop a basis for the estimation of costs and benefits Information gathering Estimation of costs and benefits
Cash Flow Financing Mechanisms
Risk analysis Assembling the analysis in a business case t
Identify and Categorise Benefits
BENEFITS CATEGORISATION
Category Level
Internal Economic External Economic Value Score Qualitative
Increased Revenue Economies of Scale
Cruise line Savings/ Revenue Other Agency Savings/ Revenue Other Indirect Savings/ Revenue
Policy (procurement/tender guidelines) Social/ Service Delivery Governance (transparency) Strategic (Port specific) Environmental
Value Score Supporting Information Comparable Projects Stakeholder Support Strategic Alignment (Country specific) The Acquisition/ Construction process Other Relevant Measures
Sub-category Level
Employee Productivity Savings Other utilisation Savings
Identify and Categorise Costs
Cost Categorisation
Cost categorisation involves more than examining the capital costs but also the operating costs associated with the acquisition or project.
Operating Costs Admin & Management Insurance Legal fees Consultants
Contractors
Interest costs and debt service Personnel/Staff Expenses Salaries
Overtime
Training Facilities Expense Repairs and Maintenance
Other Expenses
Market research
Capital Costs Market Planning Definition of requirement Business Planning Costs Options Analysis Other Asset Cost Other Asset Costs Assembly and training
Procurement Charges/Contractors fees

Financing Charges Consultancy Fees Other Expenses
Information Gathering
Information gathering should commence as soon as possible to ensure that the most reliable data available is collected and collated to facilitate estimates and projections of costs and benefits.
Some of the challenges that may be encountered are:
Inability to locate data Collection of unreliable data Changes in project requirements Changes in alternative options for analysis
Estimating Costs and Benefits
Estimating Costs and Benefits

Identify and categorise future internal economic benefits Identify and categorise future costs Select the cost assumption basis Identify the cost benefit influences Identify the volume basis for each cost and benefit
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Basis for Estimating Costs
Cash Flow Impact
Cash Flow Impact

In assessing the cash flow impact we not only examine the costs associated with the project but also the timing of the projected cash flows.
Cash Flow Impact

Scenario 1 Benefits begin accruing in Year 2:
Yr 1 Yr 2 Yr 3 Total Benefits ($m) 20 80 Total Costs ($m) -150 -150 -100 -60 Net Benefits ($m) -150 -150 -80 20 NPV ($m) $43.57 Discount Rate 11% Yr 0 Yr 4 170 -60 110 Yr 5 170 -60 110 Yr 6 170 -60 110 Yr 7 170 -60 110 Yr 8 170 -60 110 Yr 9 Yr 10 Total 170 170 1290 -60 -60 -880 110 110 410
Scenario 2 Benefits begin accruing in Year 3: Yr 0 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Total Total Benefits ($m) 20 80 170 170 170 170 170 170 1120 Total Costs ($m) -150 -150 -100 -60 -60 -60 -60 -60 -60 -60 -60 -880 Net Benefits ($m) -150 -150 -100 -40 20 110 110 110 110 110 110 240 NPV ($m) -$75.82 Discount Rate 11%
Financing Mechanisms
Financing Method 1. Internal Sources Options Operating Cash Flow Cash Reserves Government Bond Issue Merits -Less burdensome on Government Demerits -Insufficient cash flows generated by the Ports under current operating conditions -Tax exempt bonds, eliminate potential source of revenue -Increases Gov. debt position -Require Gov. guarantees which can strain current borrowing limits Level of Applicability
LOW
2. Government Funding
-Consistent with Governments current savings initiative -Overall cost of borrowing lower with tax-exempt bonds -Attractive to investors with a long-term investment horizon -Can be used in conjunction with other financing methods -Preserve cash & working capital -Lower debt ratios
HIGH
3. Asset-Backed Financing
Operating Leases
-Applicable mainly to equipment purchases
LOW
Financing Method 4. Capital Markets Options Loans from International Funding Institutions (IFI) Merits -Preferential interest rates -Long repayment periods Demerits -Onerous terms and conditions -Long turnaround times -Require Gov. guarantees which can strain current borrowing limits -Increase Gov. debt position -Can be expensive -Require default assurance from Gov. and can strain current borrowing limits -Typically shorter maturities -Increase debt position on balance sheet, make performance ratios less attractive -If size of financing is significant, lending institution may require head office approval, resulting in delays, increased due diligence etc. Level of Applicability
HIGH
Loans from Local/ International Banks
-Quicker disbursement times than IFIs -Syndicated loans are available
HIGH
Financing Method Options Bonds Merits -Funds disbursed in tranches to match commitments -Attractive to investors with a long-term investment horizon Demerits -High transaction costs -Require Gov. guarantees which can strain current borrowing limits -Increase Gov. debt position -For foreign currency denominated bonds, repayments may strain foreign reserves -Balloon payment due at time of maturity -High transaction costs -Require Gov. guarantees which can strain current borrowing limits -Increase Gov. debt position -For foreign currency denominated financing, repayments may strain foreign reserves Level of Applicability
HIGH
Sinking Fund
-Funds disbursed in tranches to match commitments -Attractive to investors with a long-term investment horizon -Balloon payment financed at start -Capital costs are tax deductible
HIGH
Financing Method Options Merits Demerits Level of Applicability
6. Pooled Investments
Offshore Real Estate Fund
-Lower transaction & overall costs -Quicker turnaround times -Unlimited pool of investment capital
-Investors require higher rates of return due to mandated hurdle rates -Investor returns paid in foreign currency will strain foreign reserves -Extensive marketing effort required to attract international investors -Investor require higher return rates -Insufficient capital pool available locally/ regionally
MODERATE/ HIGH
Real Estate Investment Trust (REIT)
-Cash inflow upfront -Foreign currency exposure minimised
MODERATE
Financing Method 7. Private Public Partnerships Options PPPs (BOLT, BLT, BOOT, etc.) Merits -Debt burden appears less in the short term -Some risk-sharing with the private sector -Government retains ultimate control of the facility -Off balance sheet financing Demerits -Relatively new to Barbados -Complex, require finance expertise to ensure adequate structuring -Higher financing costs due to private investor hurdle rates added to financing costs -Clearly defined project terms and responsibilities required Level of Applicability
HIGH
Risk Analysis
Risk Analysis
Risk analysis is about developing an understanding of the risk. Some of the major risk factors for Port projects are: They require major political involvement The project budget is overrun The project completion time is overrun There is a failure to achieve anticipated benefits Cruise ship boycott Natural disasters t
Risk Analysis
The main risk factors that are focused on in options analysis are consequence and likelihood.
Consequence x likelihood = risk rating
Risk Analysis
Consequences Likelihood
Insignificant
Minor
Moderate
Major
Severe
Almost Certain Likely Possible Unlikely Rare
Medium Medium Low Low Low
High Medium Medium Medium Low
High High Medium Medium Medium
Extreme High High Medium Medium
Extreme Extreme Extreme High High
Options Analysis Summary

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TRANSACTION ADVISORY SERVICES