Financial Appraisal Projects

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TRANSACTION ADVISORY SERVICES

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Financial Appraisal Projects and

Capital Acquisitions

Presented by Andre Walcott ofErnst & Young Caribbean


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Agenda

Introduction

The Dilemma

Options Analysis Options Analysis Methodology


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Introduction

Regional Port Authorities are faced withthe ever present dilemma of efficiently andeffectively utilising the limited financial and

natural resources to fulfill the economicand social obligations of the primaryshareholder, usually Government.

How do you manage this dilemma?


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The Dilemma

With limited financial resources, theresistance of Government to guaranteefinancing obligations, and a country of

expectations, how do you know whichprojects to undertake and which capitalacquisitions to make at which time?


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Options Analysis

Options analysis:

examines the economic benefits

examines the costs

examines the non-financial benefits

identifies the risks and their impact on theinvestment

accounts for other qualitative supportinginformation


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Policy

OptionsAnalysis

Methodology

Internal

Economic

Value

Score

External

Economic

Qualitative

Risk


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Approach to Options AnalysisThere 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 andbenefits Information gathering Estimation of costs and benefits

Cash Flow Financing Mechanisms

Risk analysis Assembling the analysis in a business case


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Identify and Categorise

Benefits


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BENEFITS CATEGORISATION

Internal Economic External Economic Value Score Qualitative

Increased

Revenue

Economies of

Scale

Employee

Productivity

Savings

Other

utilisationSavings

Cruise line

Savings/ Revenue

Policy

(procurement/tender

guidelines)

Value Score

Supporting

Information

Other Agency

Savings/ Revenue

Social/ Service

Delivery

Comparable

Projects

Other Indirect

Savings/ Revenue

Governance

(transparency)

Stakeholder

Support

Strategic

(Port specific)

Strategic

Alignment(Country specific)

Environmental

The Acquisition/

Construction

process

Other

Relevant Measures

Category

Level

Sub-c

ategoryLevel


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Identify and Categorise Costs


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Cost Categorisation

Cost categorisation involves more thanexamining the capital costs but also theoperating costs associated with the

acquisition or project.


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Operating Costs

Admin & Management

Personnel/Staff Expenses

Facilities Expense

Other Expenses

InsuranceLegal fees

Consultants

Contractors

Salaries

Overtime

Training

Market research

Repairs and Maintenance

Interest costs and debt service


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Capital Costs

Market Planning

Asset Cost

Other Asset Costs

Other Expenses

Definition of requirement

Business Planning Costs

Options Analysis

Other

Procurement Charges/Contractors fees

Financing Charges

Consultancy Fees

Assembly and training


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Information Gathering


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Information gathering should commenceas soon as possible to ensure that themost reliable data available is collected

and collated to facilitate estimates andprojections of costs and benefits.


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Some of the challenges that may beencountered are:

Inability to locate data

Collection of unreliable data

Changes in project requirements

Changes in alternative options for analysis


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Estimating Costs and Benefits


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Estimating Costs and Benefits

Identify and categorise future internaleconomic benefits

Identify and categorise future costs

Select the cost assumption basis

Identify the cost benefit influences

Identify the volume basis for each cost andbenefit


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Basis for Estimating Costs


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Cash Flow Impact


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Cash Flow Impact

In assessing the cash flow impact we notonly examine the costs associated with theproject but also the timing of the projected

cash flows.


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Cash Flow Impact

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 80 170 170 170 170 170 170 170 1290

Total Costs ($m) -150 -150 -100 -60 -60 -60 -60 -60 -60 -60 -60 -880

Net Benefits ($m) -150 -150 -80 20 110 110 110 110 110 110 110 410

NPV ($m) $43.57

Discount Rate 11%

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 ($m) -150 -150 -100 -40 20 1 10 1 10 110 110 110 110 240NPV ($m) -$75.82

Discount Rate 11%

Scenario 2 Benefits begin accruing in Year 3:

Scenario 1

Benefits begin accruing in Year 2:


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Financing Mechanisms



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Financing MechanismsFinancing

Method

Options Merits DemeritsLevel of

Applicability1. Internal Sources Operating Cash

Flow

Cash Reserves

-Less burdensome on

Government-Insufficient cash flows

generated by the

Ports under current

operating conditions

LOW

2. Government

FundingGovernment

Bond Issue-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

-Tax exempt bonds,

eliminate potential

source of revenue-Increases Gov. debt

position

-Require Gov. guarantees

which can strain

current borrowing

limits

HIGH

3. Asset-Backed

FinancingOperating

Leases-Preserve cash & working

capital

-Lower debt ratios

-Applicable mainly to

equipment purchases LOW



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Method Options Merits DemeritsLevel of

Applicability

4. Capital

MarketsLoans from

International

Funding

Institutions

(IFI)

-Preferential interest

rates

-Long repayment

periods

-Onerous terms and

conditions

-Long turnaround times


which can strain current

borrowing limits-Increase Gov. debt position

HIGH

Loans from

Local/

International

Banks

-Quicker

disbursement times

than IFIs

-Syndicated loans are

available

-Can be expensive

-Require default assurance

from Gov. and can strain

current borrowing limits

-Typically shorter maturities

-Increase debt position onbalance 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.

HIGH



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Method Options Merits DemeritsLevel of

Applicability

Bonds -Funds disbursed intranches to match

commitments

-Attractive to investors

with a long-term

investment horizon

-High transaction costs


which can strain current

borrowing limits

-Increase Gov. debt position

-For foreign currencydenominated bonds,

repayments may strain

foreign reserves

-Balloon payment due at

time of maturity

HIGH

Sinking Fund -Funds disbursed in

tranches to matchcommitments

-Attractive to investors

with a long-term

investment horizon

-Balloon payment

financed at start

-Capital costs are tax

deductible

-High transaction costs

-Require Gov. guaranteeswhich can strain current

borrowing limits

-Increase Gov. debt position

-For foreign currency

denominated financing,

repayments may strain

foreign reserves

HIGH



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MethodOptions Merits Demerits

Level of

Applicability

6. Pooled

InvestmentsOffshore 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

MODERATE/

HIGH

Real Estate

Investment

Trust (REIT)

-Cash inflow

upfront

-Foreign currency

exposure minimised

-Investor require higher

return rates

-Insufficient capital

pool available locally/

regionally

MODERATE



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MethodOptions Merits Demerits

Level of

Applicability

7. Private

Public

Partnerships

PPPs

(BOLT, BLT,

BOOT, etc.)

-Debt burden appears

less in the short term

-Some risk-sharing

with the private sector

-Government retainsultimate control of the

facility

-Off balance sheet

financing

-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

HIGH



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Risk Analysis



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Risk Analysis

Risk analysis is about developing anunderstanding of the risk. Some of the major riskfactors 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



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Risk Analysis

The main risk factors that are focused onin options analysis are consequence andlikelihood.

Consequence x likelihood = risk rating



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Risk Analysis

Likelihood

Consequences

Insignificant Minor Moderate Major Severe

Almost Certain Medium High High Extreme Extreme

Likely Medium Medium High High Extreme

Possible Low Medium Medium High Extreme

Unlikely Low Medium Medium Medium High

Rare Low Low Medium Medium High



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Options Analysis Summary



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Financial Appraisal Projects

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