TRANSACTION ADVISORY SERVICES t Financial Appraisal Projects and Capital Acquisitions Presented by Andre Walcott of Ernst & Young Caribbean

TRANSACTION ADVISORY SERVICES

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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


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IntroductionRegional 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 youyou manage this dilemma?


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The DilemmaWith 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?


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Options AnalysisOptions 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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IRR

Other

Indirect

Savings/

Revenue

Other

Agenc

y

Saving

s/

Reven

ue

Sav

ings

/R

even

ue

NPV

Payback

Policy

Environ-

mental

Strategic

SupportInformation

ComparableProjects

Social

/

Servic

e

Delive

ry

Stakeholder

Support

ROI

Options Analysis

Methodology

Internal

Economic

Value

Score

External

EconomicQualitative

Risk

Process

Strategic

Alignm

ent

Gov

erna

nce


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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 and

benefits• 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

IncreasedRevenue

Economies of Scale

EmployeeProductivity

Savings

OtherutilisationSavings

Cruise line Savings/ Revenue

Policy (procurement/tender

guidelines)

Value ScoreSupportingInformation

Other AgencySavings/ Revenue

Social/ ServiceDelivery

ComparableProjects

Other IndirectSavings/ Revenue

Governance (transparency)

StakeholderSupport

Strategic (Port specific)

StrategicAlignment

(Country specific)

EnvironmentalThe Acquisition/

Construction process

Other Relevant Measures

Cate

gory

Leve

lSu

b-ca

tego

ry L

evel


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Identify and Categorise Costs


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Cost CategorisationCost categorisation involves more than examining the capital costs but also the operating costs associated with the acquisition or project.


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Operating Costs

Admin & Management

Personnel/Staff Expenses

Facilities Expense

Other Expenses

Insurance

Legal 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/Contractor’s fees

Financing Charges

Consultancy Fees

Assembly and training


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Information Gathering


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Information GatheringInformation 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.


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Information GatheringSome 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


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Estimating Costs and Benefits


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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


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Cash Flow Impact


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


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Cash Flow ImpactYr 0 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Total

Total Benefits ($m) 20 80 170 170 170 170 170 170 170 1290Total Costs ($m) -150 -150 -100 -60 -60 -60 -60 -60 -60 -60 -60 -880Net Benefits ($m) -150 -150 -80 20 110 110 110 110 110 110 110 410NPV ($m) $43.57Discount 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 ($m) 20 80 170 170 170 170 170 170 1120Total Costs ($m) -150 -150 -100 -60 -60 -60 -60 -60 -60 -60 -60 -880Net Benefits ($m) -150 -150 -100 -40 20 110 110 110 110 110 110 240NPV ($m) -$75.82Discount 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

MethodOptions Merits Demerits

Level of Applicability

1. 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 Funding

Government Bond Issue

-Consistent with Government’s 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 Financing

Operating Leases

-Preserve cash & working capital

-Lower debt ratios

-Applicable mainly to equipment purchases LOW


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Financing MechanismsFinancing Method

Options Merits DemeritsLevel of Applicability

4. Capital Markets

Loans from International Funding Institutions (IFI)

-Preferential interest rates-Long repayment periods

-Onerous terms and conditions-Long turnaround times-Require Gov. guarantees 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 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.

HIGH


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Bonds -Funds disbursed in tranches to match commitments-Attractive to investors with a long-term investment horizon

-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

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 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

HIGH


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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

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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7. Private Public Partnerships

PPP’s (BOLT, BLT, BOOT, etc.)

-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

-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 AnalysisRisk 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


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Risk Analysis

The main risk factors that are focused on in options analysis are consequence and likelihood.

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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Documents

TRANSACTION ADVISORY SERVICES t Financial Appraisal Projects and Capital Acquisitions Presented by Andre Walcott of Ernst & Young Caribbean