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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
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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Information Gathering
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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Financing MechanismsFinancing
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
-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 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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Financing MechanismsFinancing
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
-Require Gov. guarantees
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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Financing MechanismsFinancing
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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Financing MechanismsFinancing
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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