P3 Toolkit

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P3-VALUE: Financial Assessment Tool User Manual

April 19, 2013

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Chapter 4. Viability Assessment

Prior to conducting a value for money analysis to determine whether a public or private delivery structure would provide greater value, public agencies conduct a viability assessment (also known as "affordability assessment" or "financial feasibility assessment") to analyze:

• The overall project viability;
• The level of funding that may be required to deliver the project if the project costs are greater than its revenues; and
• The associated financing costs of providing this level of funding.

Unlike a VfM analysis, a viability assessment does not consider the project procurement method (i.e. public or P3). Based on users' assumptions, the "Viability Assessment" section of the Financial Assessment Tool calculates a project's net costs. The "Viability Assessment" section also provides a scenario analysis function for the user to assess the cost to the agency if it utilizes financing in delivering the project as a P3. The sheets of the "Viability Assessment" are detailed below.

Assumptions

The "Assumptions" sheet provides the data inputs for constructing the project cash flows, which provide an estimate of the net cost of the project, before consideration of the project procurement method (the PSC Tool and Shadow Bid Tool reflect those assumptions specific to public or P3 project delivery methods, respectively).

Using the Financial Assessment Tool

The general categories of assumptions included in the Viability Assessment are:

• Project and Traffic Scenarios
• Project Delivery Structure (i.e., whether O & M and tolling are included)
• Timing
• Construction Costs
• Operating & Maintenance Costs
• Toll & Other Revenue
• Funding
• Inflation and Discount Rate
• Other Project Costs for the Agency

The assumptions are explained below and users may also refer to the PSC User Manual and Shadow Bid User Manual for a better understanding of the Viability Assessment inputs, though unlike the Shadow Bid and PSC Tools, the Viability Assessment reflects neither a private nor a public delivery.

Project and Traffic Scenarios

The "Example Scenario" demonstrates the range of assumptions that underpin a Viability Assessment. Users can select the "Example Scenario" from the "Project" drop-down menu at the top of the "Assumptions" sheet and click "Load Project" to view the assumptions. Upon loading the scenario, users can save edits made to the assumptions by pressing the "Save Project" button. Pressing the "Refresh Project List" button will refresh the assumptions back to the initial scenario. A new scenario can be included by clicking the "Create Project" button, inserting the scenario name and pressing the "Load Project" button.

The Viability Assessment also includes tolling examples that can be included in the scenario. Users can select the "Variable Tolling Example," "Simple Tolling Example," or "Toll Scenario Template" from the "Traffic Scenarios" drop-down menu. Upon selecting a traffic scenario, users can click on the "Load Scenario" button to load the scenario. They may then navigate to the corresponding sheet and modify the pre-populated toll rate and traffic volume assumptions (though if the "Toll Scenario Template" is selected, users must populate the entire sheet).

Project Delivery Structure

The example project stored in the Financial Assessment Tool demonstrates the viability analysis for different Project Delivery Structures (e.g., whether tolling and O & M are included). Users can alter the delivery structure of an example project through selecting or de-selecting the 'Project Delivery Structure' check boxes. The Financial Assessment Tool allows users to enter assumptions relevant to the Project Delivery Structure selected. The components of the Project Delivery Structure provided in the Financial Assessment Tool are:

• Design Build: The 'design' aspect refers to completing plans for the project, which includes producing engineering drawings and selecting construction materials and the construction site. 'Build' refers to constructing the road, which includes reviewing conditions at the building site, providing construction staff and materials, selecting equipment, and, when necessary, amending the design to address problems discovered during the construction phase.
• Finance: Financing includes providing capital for the project, which may include issuing debt such as project revenue bonds.
• Operations: Operations facilitates the performance and availability of the highway, which includes removing debris and snow. It may also include the cost of collecting traffic data.
• Maintenance: Maintenance keeps the project in a state of good repair, which includes filling potholes, repaving or rebuilding roadways, and ensuring the integrity of bridges and highways.
• Toll Collection: Toll collection includes the installation and operation of toll booths.

Timing

The "Timing" assumptions develop the project cash flows and define when specific costs and inflation factors apply to the project. The project delivery structure determines which "Timing" assumptions are applicable for the example project. For example, if toll collection is not included in the project delivery structure, then the tolling-related timing assumptions are not visible.

Users can manually input data for the following "Timing" assumptions:

• Base Date (date - format YYYY)
• Construction Period (no. years from 1 to 10)
• Construction Start (date - format YYYY)
• Operations Period (no. years from 1 to 75)
• Operations Start (date - format YYYY)

Based on the inputs to these "Timing" assumptions, the following fields will be calculated:

• Concession Period (no. years) - Sum of the construction period and the operations period
• Construction End (date) - Adds the construction period to the construction start
• Operations End (date) - Adds the operations period to the operations start
• Tolling Period (no. years) - Equals the operations period
• Tolling Start (date) - Equals the operations start
• Tolling End (date) - Adds the tolling period to the tolling start

The "Timing" assumptions are used to support the project delivery structure selected in the Financial Assessment Tool. For example, a design-build-finance delivery structure can be shown by checking the Design Build and Finance check boxes. The "Timing" assumptions and other assumptions fields that relate to this structure, such as "Construction Start" and "Financing", are then visible and can be completed.

Entering Cost Assumptions

Users should estimate their cost assumptions in base year dollars (not current or year of expenditure dollars) consistent with the base date defined in the "Timing" assumptions table. All costs are inflated based on the user's assumptions entered in the "Inflation" table.

Other Project Costs

These assumptions reflect the project costs incurred by the agency as the project owner. The types of costs incurred by the agency can vary and may include costs associated with the acquisition of any right-of-way (ROW), preliminary design costs, procurement or transaction costs, quality assurance, related works, owner costs / construction engineering costs (which include the allowable costs for environmental evaluation and documentation, permits, or approvals), or other miscellaneous project costs.

Construction Costs

The "Construction Costs" reflect the costs associated with the project's design and construction phases. Specific costs may include the cost of the design-build contract or the total of the separate costs of the design contract and construction contract (under a design-bid-build structure, the bid costs are reflected under "Project Costs"). These costs are provided in the "Asset Type" column. Based on estimated costs, users may input the total dollar value of each cost in the "Cost ($)" field and then determine the allocation of each cost across the design and construction phase as percentages of the total cost.

Operating and Maintenance (O&M) Costs

In the Financial Assessment Tool, the operations and routine maintenance costs are provided as annual values, and can be entered as either a percentage of construction (Column E) or as a dollar value (Column F). Users may enter operation and maintenance cost assumptions in the "Assumptions" sheet. Typical maintenance costs include:

• Routine maintenance that is planned and performed on a routine basis to maintain and preserve the condition of the highway system; and
• Periodic or preventive maintenance that includes resealing, re-gravelling, or new line markings at regular intervals during operations.

The assumptions required for "Periodic Maintenance Costs" are the same as for routine maintenance; however, users can enter a number in the "Years Per Period" field to indicate how often the periodic maintenance is completed. For example, if the "Years Per Period" field indicates "8", then the "Periodic Maintenance Costs" will occur every eight years during the operations phase. Note that if users choose to input O&M costs as dollar values, the adjacent cells in column E black out to ensure that the inputs are only either dollar values or percentages

Toll & Other Revenue

Public agencies typically conduct traffic and revenue (T&R) studies to evaluate the feasibility of tolling a project based on specific policy objectives. The policy objectives usually include one of two criteria: revenue generation or traffic demand management. The outcomes from the T&R studies provide the basis for the tolling and revenue assumptions in a Viability Assessment:

• The "Toll Revenue Leakage" assumption reflects a set percentage of revenue that is not collected each year (i.e., due to unpaid toll violations). "Toll Revenue Leakage" is expressed as a percentage deducted from annual gross revenues and is entered as a negative value.
• The "Toll Revenue Ramp-Up" period reflects the period after the road opens where initial traffic volumes increase to a steady state. The ramp-up period may be up to six years long. Users can enter a negative percentage value per year. It is important to review the traffic assumptions to assess if the ramp-up period has already been factored into the traffic volumes. If so, leaving the ramp-up period assumptions out will avoid double counting the impact of the ramp-up period. Similarly, if toll revenue values are inputs to the Financial Assessment Tool, it is important to consider whether toll leakage has already been accounted for in these values prior to including this assumption.
• "Annual Non-Road Pricing Revenue" covers a wide landscape of strategies that may be employed to generate value from the project. Depending on the project, non-road pricing strategies may involve the sharing of costs, revenues or financial risk between public and private partners, or may impose fees or taxes on defined groups expected to benefit from the project. For example, value capture strategies can be applied to roads to take advantage of the increased property values and other economic benefits produced by such improvements as in the case of the San Joaquin Toll Road in California and E-470 in Colorado. Non-road pricing strategies can be accounted for as project revenues.

Funding

The "Funding" assumptions reflect the amount of any grant or subsidy that the agency may receive during the construction phase of a project. The assumption can be provided as an amount of total funding or it can be set as a percent of the construction costs.

Inflation

There are four inflation factors provided as assumptions in the Viability Assessment. Users may input those assumptions as percentages for the following indices:

• Consumer Price Index (CPI) - Applies to all costs during the operations period as well as any non-road pricing revenue.
• An index for construction phase costs - Applies to construction costs if the field has a value greater than zero.
• An index for operations phase costs - Applies to operations period costs if the field is greater than zero (if zero, the CPI will be used).
• An index for toll rates (if the project delivery structure includes toll collection) - Applies to Toll Revenue.

Risk Values

The risk value assumptions are calculated in the Risk Assessment Tool. The Risk Assessment Tool also calculates risk allocations to the public and private partners as percentages, but those outputs do not become inputs to the Viability Assessment because only the total risk value is relevant for viability assessment. For the Viability Assessment, the key inputs from the Risk Assessment Tool are the 10th percentile, 70th percentile, and 90th percentile values for cost and schedule delays for the project's construction and operations phases in real dollars.

Table 4-1 below specifies where users may locate the applicable risk outputs and where they should enter those values into the Viability Assessment section of the Financial Assessment Tool. It is important to note that users should use the risk values that result from completing the Risk Assessment Tool from the public perspective.

Table 1. Integrating Risk Assessment Outputs in the Financial Assessment Tool

OUTPUTS			INPUTS
Risk Assessment Tool			Financial Assessment Tool
Worksheet	Field	Cell	Worksheet		Cell
Table 5 - Cost Impact Outputs	P10 DB Subtotal	F26	Viability Assessment - Assumption	P10 Design Build Cost Impact	E78
Table 5 - Cost Impact Outputs	P70 DB Subtotal	G26	Viability Assessment - Assumption	P70 Design Build Cost Impact	F78
Table 5 - Cost Impact Outputs	P90 DB Subtotal	H26	Viability Assessment - Assumption	P90 Design Build Cost Impact	G78
Table 5 - Cost Impact Outputs	P10 Oper. Subtotal	F27	Viability Assessment - Assumption	P10 Operations Cost Impact	E79
Table 5 - Cost Impact Outputs	P70 Oper. Subtotal	G27	Viability Assessment - Assumption	P70 Operations Cost Impact	F79
Table 5 - Cost Impact Outputs	P90 Oper. Subtotal	H27	Viability Assessment - Assumption	P90 Operations Cost Impact	G79
Table 7-Schedule Impact Output	P10 DB Subtotal	F38	Viability Assessment - Assumption	P10 Design Build Schedule Impact	E80
Table 7-Schedule Impact Output	P70 DB Subtotal	G38	Viability Assessment - Assumption	P70 Design Build Schedule Impact	F80
Table 7-Schedule Impact Output	P90 DB Subtotal	H38	Viability Assessment - Assumption	P90 Design Build Schedule Impact	G80
Table 7-Schedule Impact Output	P10 Oper. Subtotal	F39	Viability Assessment - Assumption	P10 Operations Schedule Impact	E81
Table 7-Schedule Impact Output	P70 Oper. Subtotal	G39	Viability Assessment - Assumption	P70 Operations Schedule Impact	F81
Table 7-Schedule Impact Output	P90 Oper. Subtotal	H39	Viability Assessment - Assumption	P90 Operations Schedule Impact	G81

Discount Rate

Users may manually enter the discount rate as a percentage value in the "Rate" field. The discount rate is the factor applied to the cash flows to generate the project's NPV or NPC. With a discounted cash flow analysis, all cash flows are discounted to their present value using the discount rate established by the public agency. The discount rate is the rate at which the cash flows occurring at different times in the future are brought to a base period.

A discounted cash flow analysis may utilize either a real or a nominal discount rate. The selection of a nominal or real discount rate should be consistent with the use of nominal or real project cash flows. The pre-populated "Example Scenario" includes inflation assumptions that are applied to the project cash flows. The Example Scenario's nominal discount rate accounts for the effect of inflation and is therefore consistent with the cash flows being discounted. If users wish to apply a real discount rate, they should input inflation assumptions. Users should refer to the Shadow Bid Tool User Manual for additional information about discount rates.

Reviewing the Cash Flow Sheets

The project's nominal cash flows are based on the assumptions entered in the "Assumptions" sheet. The cash flow sheets display the cash flows for the project assumptions, which are brought together in the Cash Flow Summary Sheet. The notional example provided in the "Viability Assessment" section generates the following cash flow sheets:

• Project Cash Flow - Includes flags and factors based on the timing and inflation assumptions that are needed to generate the project cash flows.
• Construction - Construction phase cash flows.
• Operations and Maintenance - Operations and maintenance cash flows.
• Other Project Costs - Nominal cash flows for other project costs.
• Traffic Scenario - If tolling is included, this sheet reflects the raw traffic and toll rates based on the Traffic Scenario selected on the "Assumptions" sheet.
• Revenue CF - Provides the gross annual revenues per vehicle classification.
• Toll and Other Revenue - Applies any revenue leakage and ramp-up assumptions to the gross toll revenues and calculates any non-road revenues.
• Project Subsidy - Cash flow for any funding provided to the project.
• Risk - Calculates the total risk values for cost and schedule delays.
• Cash Flow Summary - Summarizes the project's cash flows.

Viability Outputs

The "Viability Disclaimer" must be accepted for the "Viability Output" sheet to be displayed. This sheet provides the net cost of the project cash flows in NPC terms. The "NPC Results" displayed on the "Viability Output" sheet are based on DCF analysis. This type of analysis involves forecasting all revenue and cost cash streams (including capital expenditure) for a project into the future. The streams of cash flows to and from the public agency are discounted to estimate the value of the project in today's dollars. The user's discount rate assumption is converted into a discount factor for each cash flow period and is applied to the following cash flows throughout the concession period:

• Costs - Construction, operation, routine maintenance, periodic maintenance and other project costs;
• Revenues - Toll and other revenue, as well as project subsidy; and
• Risks - Transferable and retained

The present values of these cash flows are contained in the "Cash Flow Viability - NPC Summary" table, which provides the total NPC to the agency of delivering the project. The results are provided for:

• The initial project estimate, which excludes the risk adjustments provided from the risk assessment process; and
• The risk-adjusted project cash flows at the 10th percentile, 70th percentile, and 90th percentile values.

Figure 11. Viability - NPC Summary Output Table

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The value of each cost or revenue as shown in the "NPC Results" table is also depicted in a bar graph, as shown in Figure 4-2. Note that the second line from the bottom, "Cost of Financing" only populates with data if the user turns the financing assumptions "on" in the Scenario Analysis (see Figure 4-4).

Figure 12. NPC Results Bar Graph

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Sensitivity Analysis

A sensitivity analysis is provided on the "Viability Output" sheet to illustrate the sensitivity of the NPC results to changes in assumptions. To run the sensitivity analysis, the risk percentile can be selected from the drop-down menu in the top left hand corner. Users can choose whether to view the sensitivity analysis results as percentage changes or as dollar values by making the appropriate selection in the top left-hand corner via a drop-down menu, as shown in Figure 4-3. Once users make their selections, they may click the "Run Sensitivity" button to the right.

Figure 13. Sensitivity Analysis

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Scenario Analysis

The scenario analysis displays the key project assumptions, their current values based on inputs provided on the 'Assumptions' sheet, and arrows to adjust the assumption values. After making changes to any of the assumptions, pressing F9 will update the "NPC Results" table, and pressing the "Reset" button will revert to the "Example Scenario" project assumptions.

As shown in Figure 4-4, the scenario analysis also provides the user with the option to assess the financing costs associated with financing the net project costs. To complete this scenario analysis, the user can select the following assumptions from the drop-down menus and arrows provided:

• Scenario Type: Select 'Cash Flow Viability' from the drop-down menu.
• Financing Assumptions: Select 'On' from the drop-down menu to view the additional assumptions required to complete the scenario analysis (this action will populate the "Cost of Financing" row of the NPC Summary Output Table).
  • Facility Type: Select 'bond' (financing is provided at the start of the project) or 'draw' (financing is drawn down as needed throughout the project).
  • Maturity Period: Insert the length of the maturity period in months.
  • Interest Rate: Insert the interest rate as an annual percentage.
  • Facility Fees: Insert the cost of facility fees as a percentage.
  • Grace Period: Insert the length of the grace period in months.

The NPC Results table can be updated by pressing the "Run Financing" button to include the cost of finance in the Results table.

Figure 14. Scenario Analysis

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In addition to providing a scenario analysis on the project cash flow viability as a conventional procurement, users can also conduct a separate scenario analysis to assess the costs of delivering the project as a P3. To conduct this scenario analysis, users can:

1. Select "VfM Viability" from the "Scenario Type" drop-down menu and press "Load Scenario" to update the "NPC Results" table with the net cost of delivering the project as a P3. These values are drawn from the "VfM Cash Flow Summary" sheet in the "VfM Analysis" section of the Financial Assessment Tool (which in reality provides Shadow Bid cash flows). The values displayed in the "NPC Results" table include the payment, other project costs, and retained risks.
2. Complete the financing assumptions as described for the cash flow viability scenario analysis and press the "Run Financing" button to include financing in the costs shown in the "NPC Results" table.

The sensitivity analysis chart will be shaded when the "NPC Results" table is displaying the "VfM Viability" scenario, as the assumptions listed in the sensitivity analysis table (such as construction costs and operation costs) are not costs that are incurred by the agency when delivering the project as P3.

 

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