Financial Appraisal Projects and Capital Acquisitions

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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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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?

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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 the
  investment
• accounts for other qualitative supporting
  information

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Options Analysis Methodology
Policy
Governance
Payback
Social/ Service Delivery
NPV
Risk
Strategic
ROI
Environ- mental
IRR
Support Information
Other Indirect Savings/ Revenue
Comparable Projects
Other Agency Savings/ Revenue
Stakeholder Support
Strategic Alignment
Savings/ Revenue
Process
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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

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Identify and Categorise Benefits
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Identify and Categorise Costs
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Cost Categorisation

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

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Information Gathering
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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.

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Information Gathering

• 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

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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 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.

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Cash Flow Impact
Scenario 1 Benefits begin accruing in Year 2
Scenario 2 Benefits begin accruing in Year 3
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Financing Mechanisms
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Financing Mechanisms
Financing Method Options 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 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 Financing Operating Leases -Preserve cash working capital -Lower debt ratios -Applicable mainly to equipment purchases LOW
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Financing Mechanisms
Financing Method Options Merits Demerits Level 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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Financing Mechanisms
Financing Method Options Merits Demerits Level of Applicability
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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Financing Mechanisms
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 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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Financing Mechanisms
Financing Method Options 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 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 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

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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 Consequences Consequences Consequences Consequences
Likelihood 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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