April 19, 2013
As with the "Introduction" sheet, users must accept the disclaimer on the "VfM Disclaimer" sheet to access the Shadow Bid Tool's Output sheets. The Shadow Bid Tool is structured to provide an illustration of three different P3 delivery structures. There are various P3 delivery structures that can be identified by an agency and explored as potential P3 delivery structures for a particular project. The Shadow Bid Tool demonstrates the following P3 delivery structures:
The light-blue drop-down box in Figure 3 indicates that the Shadow Bid Tool is set to calculate an availability payment. Pressing the "Payment Calculation" button will solve for the payment amount for each of the risk-adjusted project cash flows.
The annual nominal payment is calculated in the Shadow Bid Tool by a goal seek function. A goal seek is a 'what-if' analysis tool that calculates the input values needed to achieve a goal or objective. The goal or objective of the "Payment Calculation" is to identify the funds required to meet the required equity rate of return given the project cash flows. The "Payment Calculation" goal seek solves for this amount by selecting different payment amounts and checking if this amount is sufficient to meet the targeted equity return. The goal seek function solves the payment amount that enables the concessionaire to fund the project and provide the required return to investors. When an amount is detected that provides an after-tax cash flow equal to the required level of return, the availability payment is solved and the amount of the first annual payment is shown for the P10, P70, and P90 risk-adjusted project cash flows. Note that the availability payment is assumed to increase at the rate of inflation through the life of the concession.
If changes are made to the project assumptions after the payment has been solved, the availability payment needs to be solved again by pressing the "Payment Calculation" button.
The "Availability Payment Analysis" section of the "Output" sheet indicates the first annual payment, while the nominal cash flow payments are provided in the "Toll and Other Revenue" sheet. The NPC of the payment amount and the costs incurred by the agency in delivering the P3 project are shown in the "Present Value Results" and "Value for Money Analysis Results" sections of the "Output" sheet.
The following results can be seen in the Shadow Bid Tool when "Toll Collection" is selected as part of the Project Delivery structure:
The "Real Toll" goal seek function for a Real Toll scenario solves a payment amount that reflects the funds that the private entity requires to deliver the project and pay its debt and equity obligations, taking into account the toll revenues it collects. The "Real Toll" goal seek function calculates this payment as one annual payment provided at the end of the construction phase. Note that the Shadow Bid tool does not address "brownfield" or hybrid brownfield/greenfield projects where here might be surplus revenues and the concessionaire may make payments to the procuring agency for the right to keep the surplus revenues.
Using the Shadow Bid Tool – Real Toll Analysis
To run a scenario where the Shadow Bid Tool provides an output for a notional real toll project, the following steps can be taken:
- Check "Toll Collection" under the "Project Delivery Structure" on the "Assumptions" sheet so that the tolling and revenue assumptions are included in the project cash flows.
- As a real toll delivery structure requires the private sector to accept demand risk and generate its revenues directly from users of the highway, the key assumptions provided in the Shadow Bid Tool need to be reviewed and updated. For example, the private sector may take a different view on the project's financing assumptions and project costs (design, construction, operations, maintenance and other project costs) to reflect its different responsibilities and also the different risk profile of its investment. The risk values will also need to be updated, along with the revenue and tolling assumptions, the project financing assumptions (to reflect the increased risk that investors are now accepting), depreciation (as the project structure has changed), the discount rate and the VfM efficiency assumptions
- Once the "Assumptions" sheet has been updated, press the F9 key to accept these changes and return to the Output sheet. Select "Real Toll" from the drop-down menu in cell B22 (refer to Figure 3).
- Press the "Real Toll" button under the "Payment Scenario Analysis" section of the "Output" sheet, as shown in Figure 4. The tool will then solve for the notional payment required by the private sector to make its investment in the real toll P3 project viable. This payment is in addition to the toll and other revenue collected by the private sector and it is estimated to be paid at the end of the construction period.
- When an amount is detected that provides an after-tax cash flow equal to the required level of return, the payment for the real toll scenario is solved and the amount of this payment is shown for the P10, P70, and P90 risk-adjusted project cash flows. The "Payment Scenario Analysis" section of the "Output" sheet indicates the total payment amount. The nominal cash flows of the payment are provided in the "Toll and Other Revenue" sheet. The NPC of the payment amount, and the costs incurred by the agency in delivering the P3 project are shown in the "NPC Results" and "Value for Money Analysis" sections of the "Output" sheet.
The Shadow Toll presents the payment as a price per vehicle, which is calculated by dividing the payment by the traffic volumes and relative toll rates for each vehicle classification. The payment amount is solved by selecting "Shadow Toll" in cell B22 and then pressing the "Shadow Toll" button in the "Payment Scenario Analysis" table. The Shadow Toll calculation is a goal seek function that works in the same way as the availability payment to identify the payments needed for the private entity to fund the project and provide the required return to investors. Toll revenues are retained by the public entity and subtracted from the total payment amount in the "NPC Results" and "Value for Money Analysis Results." The Example Scenario is designed to model an Availability Payment and users would have to update their assumptions to reflect the additional risk the private sector would accept in linking its payment to traffic volume before running the Shadow Toll Scenario Analysis.
If the discount rate on the "Assumptions" sheet is set to "Project IRR," the "Project IRR Analysis" is required to generate the discount rate to calculate the NPC Results (discussed below). The Project IRR for the payment analysis output selected from the drop-down menu in cell B22 (refer to Figure 3) can be calculated by pressing the "Calculate IRR" button. Once the Project IRR is calculated, the NPC Results will be generated.
The Shadow Bid Tool calculates the "Project IRR" using a goal seek function. For this function, the goal or objective is to identify the discount rate at which the net present value of the project cash flows equals zero. The goal seek function solves for this value by selecting different rates and checking if the value is sufficient to return this result. When the appropriate percentage is detected, it is shown under the "VfM Project IRR Analysis" section of the "Output" sheet and applied to the NPC Results table:
The project IRR reflects risks in project delivery as well as revenue risks. Therefore, use of project IRR as the discount rate may not be appropriate for a scenario that already accounts for all the additional risk costs in project delivery and where revenue risk from tolling is not expected to be borne by the concessionaire (e.g., in an Availability Payment concession). For example, for the baseline cost scenario with a toll concession, the project IRR might be an appropriate discount rate, but for a P90 cost scenario with an Availability Payment concession, a risk-free discount rate or the procuring agency's borrowing rate might be more appropriate. The Example Scenario's discount rate is the public agency's borrowing rate. Since the P3-VALUE tools do not allow the discount rate to vary by these parameters, it may be necessary to run the tools with different discount rates and financing assumptions (including equity and debt rates of return) in order to make appropriate comparisons.
If the Nominal Discount Rate is set to "Manual Input" and an input is provided, the VfM Project IRR Analysis is not required and the NPC Results will be calculated after the payment amount is solved and will be based on the discount rate provided on the Assumptions sheet.
The NPC Results are based on a DCF analysis of the net project costs. A DCF involves forecasting all revenue and cost cash streams (including capital expenditure) for a project into the future. The stream of free cash flow or net operating cash flow is discounted to estimate the value of the project in today's dollars. The discount rate assumption in the Shadow Bid Tool is calculated as a discount factor for each cash flow period and is applied uniformly to all cash flows throughout the concession period. The tool does not have the ability to use different discount rates for different cash flows based on their riskiness. The following cash flows are discounted:
These costs are presented in the "NPC Results" table and reflect the total NPC to the agency of delivering the project. The NPC Results are calculated by applying the discount rate to the payment amount, which is solved on the "Output" sheet, as well as to the retained risks and other project costs that the agency incurs in delivering the project.
The results are presented as a table of results as shown in Figure 7 and a bar graph as shown in Figure 8. The table of results presents the project costs in the first section to indicate the "Total Payments Before Revenue." Any revenues generated by the project, such as toll revenues that are passed to the agency in an Availability Payment concession, can be reflected in the "Toll and Other Revenue" line and subtracted from the NPC to Agency to present the "Total Payments After Toll Revenue." Note that because the Example Scenario's Project Delivery Structure does not include toll collection, the "Toll and Other Revenue" line is blank in the screenshot below. The NPC Results are provided for:
As noted earlier, the tool uses the same discount rate irrespective of the risk level already reflected in the project cost estimates. The NPC Results Chart indicates the discount rate type and percentage, as selected and entered in the "Assumptions" sheet, in the top left corner for reference.
The NPC Results are notional examples provided for educational purposes only. When constructing a P3 estimate for a specific project, the output requirements will reflect the needs of the agency and the project being analyzed.
The value of each cost or revenue item as shown in the table of results is also depicted in a bar graph, as shown in Figure 8. The bar graph presents the NPC to agency values:
Sensitivity analysis is a key tool to assess how different values of one assumption can impact the overall NPC of the P3 Estimate. The Shadow Bid Tool provides a sensitivity analysis to illustrate the sensitivity of the NPC Results to changes in one key assumption. To run the sensitivity analysis in the Shadow Bid Tool, the risk percentile can be selected from the drop-down menu in the top left-hand corner. The results of the sensitivity analysis can be presented as percentage changes or dollar values by also making the appropriate selection in the top left-hand corner, as shown in Figure 9. Once these selections have been made, the sensitivity analysis will be displayed when the "Run Sensitivity" button in the top right-hand corner is pressed. The sensitivity analysis can be run after the payment analysis outputs and NPC Results have been generated.
Users are also encouraged to run several versions of both the PSC and Shadow Bid Tools with different assumptions and to analyze how sensitive the outcomes are to changes in key assumptions. In evaluating a "real-world" project, the PSC and P3 Estimate outcomes would be displayed as a range of outcomes rather than as point estimates, as demonstrated in the P3-VALUE tools, to reflect the risks inherent in estimates.
Note that the scenario analysis solves the payment amount a number of times to generate the sensitivity analysis results, and therefore it may take several minutes for the sensitivity analysis to update.
Scenario analysis can also be an important tool in interpreting the P3 Estimate results and assessing the impact that individual assumptions have on these results. The Shadow Bid Tool provides a scenario analysis capability that enables changes to be made to key project assumptions from the "VfM Output" sheet. The scenario analysis displays the key project assumptions, their current values based on inputs provided on the "Assumptions" sheet, and arrows to adjust the value of the current assumption, as shown in Figure 10.
For an Availability Payment concession, after making changes to any of the key assumptions, users need to solve again for the payment amount by pressing the "Payment Calculation" button. Likewise, users will need to solve again for the payments amounts for the real toll and shadow toll options. Under the pre-populated Example Scenario, the lower half the table should automatically be blacked out, as should the "Toll Inflation" row because the Example Scenario's Project Delivery Structure does not include toll collection. Figure 10 displays the Scenario Analysis table as if toll collection was selected, however, to demonstrate the full functionality of the table.
Under the P3 delivery structure, the private sector utilizes project financing and establishes a special purpose vehicle (SPV) that is responsible for delivering the project and securing the project finance. Project financing can be limited or non-recourse to the project shareholders. In the case of non-recourse financing, a lenders' recourse is limited primarily or entirely to the project assets (including completion and performance guarantees and bonds) in the case of default of the SPV. 
The SPV's only business activity is to deliver the project, and a notional financial statement for the SPV is provided as an additional output sheet in the Shadow Bid Tool. The "Financial Statement" sheet provides the following financial information from the perspective of the SPV:
The financial statement is based on several of the private sector cash flow sheets and supports the payment calculation by estimating the payment level needed by the private sector to achieve the expected level of equity return for its shareholders (shown in the VfM Cash Flow section). It also presents the payment as revenue under the Income Statement, and indicates the SPV's tax obligations based on the VfM Tax Options and Depreciation Assumptions.
As part of the "Financial Statement" the Shadow Bid Tool provides a notional example of the SPV's income tax liability. Actual tax liabilities will vary depending on many factors including concessionaire legal structure, P3 agreements, tax jurisdictions, financing structure, tax policy and many others. The income statement provided as part of the Shadow Bid Tool's Financial Statement demonstrates the key components in estimating the notional income tax liability.
The income statement, also known as a profit and loss statement, measures financial performance over a specific accounting period, which is the concession period in the Shadow Bid Tool. It provides a summary of revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over the period.
The "Financial Statement" serves an important purpose in the Shadow Bid Tool as it supports the calculation of the Cash Flow Waterfall, which illustrates the allocation of a project's cash flows. See the graphic representation of the waterfall. In the Shadow Bid Tool, the project's revenues commence during operations and can include toll revenue, non-road pricing revenue and any payments from the public agency. During construction, the private entity utilizes debt and equity to fund the risk-adjusted construction phase costs, including establishing reserve facilities.
During the operations phase, the concessionaire applies the project revenues towards the risk-adjusted project operations and maintenance costs. It then pays its debt service requirements which can include both principal and interest payments depending on the project's financing structure. The remaining funds are available for any corporate income tax or other reserves that may require additional funds.
The funds remaining are available to provide dividends to the project's equity investors. The Shadow Bid Tool optimizes the dividend payment and takes into account the working capital assumption to allocate the optimal cash flow for distribution purposes. For example, if the working capital assumption is six months, dividends are paid if the funds available for equity are greater than six months of working capital. The dividends are 'optimized' as they are paid out throughout the concession period to make the most efficient use of the project cash flows, rather than being paid out regularly during the concession period.
Using the Shadow Bid Tool
A financial statement for each risk percentile can be generated in the "Financial Statement" tab.
Select the risk percentile from the drop-down menu in cell F4.
Observe changes in the field highlighted in blue, such as the value of assets, liabilities and equity, net income, cash flows, etc.
Click "Optimize Dividend" at the bottom-left of the sheet to recalculate the after-tax cash flow required by the SPV to provide the required equity return to its shareholders.
The Shadow Bid Tool outputs represent the cost to the agency of the preferred P3 delivery structure. The P3 Estimate results and PSC results are incorporated into the Financial Assessment Tool for a comparative analysis between the delivery structures.
 National Conference of State Legislators, Public Private Partnerships for Transportation - A Toolkit for Legislators
 FHWA, Office of Innovative Program Delivery website
 The World Bank, PPPs in Infrastructure Resource Center, Project Finance - Key Concepts