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Financial Management and Management Overview – Tips for financial modeling

INFRASTRUCTURE & GOVERNMENT. Financial Management and Management Overview – Tips for financial modeling. Water PPP: Overview and Training Workshop February 26-27, 2009. ADVISORY. The importance of the Concessioning Authority to have a good Financial Model while inviting PPP bids.

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Financial Management and Management Overview – Tips for financial modeling

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  1. INFRASTRUCTURE & GOVERNMENT Financial Management and Management Overview – Tips for financial modeling Water PPP: Overview and Training Workshop February 26-27, 2009 ADVISORY

  2. The importance of the Concessioning Authority to have a good Financial Model while inviting PPP bids • Understand project financials, and implications for • Tariff / user charges • Need for additional revenue sources • Need for financial support (Viability Gap funding) • Potential “negative grant” • Test bankability based on project cash flows (Cash Flow Available for Debt Servicing – CFADS) • Lender ratios (DSCR, LLCR..) • Loan covenants (Debt service reserve….) • Test implication of Risk sharing • Demand variation / Tariff variation…. • Inflation • Choice of bidding parameter (fixed, variable, combination) • Scenario analysis to design SPV commitments • Performance levels • Investment commitments • Need for “transfer value” at end of contract Risks RISKS Revenue – Operating Expenses Project viability (compare with WACC) Financing Costs Bankability (DSCR, …) Return to shareholders Equity return (compare with CoE)

  3. 1. Structuring the model – think through the business logic to be used Growth Projections need to apply to actual demand Or, work on a Cash inflow minus, basis Performance levels • Periodicity of the model • Quarterly, Annual, Combination • Linkage with variables like inflation Capex Demand Inter linkages between primary variables and dependent variables important to avoid unrealistic scenarios

  4. 2. External variables need to be factored carefully ILLUS TRATIVE Capex schedule on timeline important for projects which have multi-year construction period Similarly, consistency in inflation assumptions across construction and operations period important to understand IRR, Discount rate, WACC, etc

  5. 3. Modeling of initial cash gaps needs careful consideration and will impact financing assumptions ILLUS TRATIVE Cashflows inadequate for interest payments in the initial years. Cashflows available for debt service (Rs. Million) • Options that could be considered and modeled in the financial model (not exhaustive) • Equity infusion in the initial operation period • Longer tenure of debt drawdown • Moratorium on interest payments? • Subordinate-debt financing with bullet repayment of principal and interest Lender interface useful to understand debt servicing flexibility available

  6. 4. A user-friendly output which supports sensitivitity analysis and aids decision making is important ILLUS TRATIVE Key Inputs Key Outputs

  7. Presenter’s contact detailsManish AgarwalExecutive DirectorKPMG in India+91 9967574800manishagarwal@kpmg.comwww.in.kpmg.com

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