June 16, 2014
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:
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.
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)
- Construction Costs
- Operating & Maintenance Costs
- Toll & Other Revenue
- 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.
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).
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 the 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:
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:
Users can manually input data for the following "Timing" assumptions:
Based on the inputs to these "Timing" assumptions, the following fields will be calculated:
The "Timing" assumptions are used to support the project delivery structure selected in the Financial Assessment Tool. For example, a design-build-operate-maintain delivery structure can be shown by checking the Design Build, Operation and Maintenance check boxes. The "Timing" assumptions and other assumptions fields that relate to this structure, such as "Construction Start," are then visible and can be completed.
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.
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.
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.
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:
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.
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 "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.
There are four inflation factors provided as assumptions in the Viability Assessment. Users may input those assumptions as percentages for the following indices:
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 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
|Risk Assessment Tool||Financial Assessment Tool|
|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|
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.
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:
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:
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:
Figure 11: Viability - NPC Summary Output Table
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 12. 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 and clicks "Run Financing" (see Figure 14).
Figure 12: NPC Results Bar Graph
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, users must first ensure that the "Scenario Type" in cell I53 is set to "Cash Flow Viability" (if it is set to "VfM Viability," then the Scenario Analysis will black out because construction and operation costs are not incurred by the public agency under P3 delivery). Users may then select the risk percentile from the drop-down menu in the top left hand corner as well as select to view the sensitivity analysis results either as percentage changes or as dollar values (see Figure 13). Once users make their selections, they may click the "Run Sensitivity" button to the right.
Figure 13. Sensitivity Analysis
As shown in Figure 14, 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.
Figure 14. Scenario Analysis