# P3 Toolkit

## Webinar - Value for Money Analysis: Homework Assignment Review

Presentation: PDF
Transcript: HTML
Webinar recording: Audio
Q&A: HTML
Homework Assignment 2: Value for Money Analysis for a Toll Concession Project

P3-VALUE Webinar - July 19, 2013

Patrick DeCorla-Souza
P3 Program Manager
Office of Innovative Program Delivery

Co-Instructors:
Aaron Jette, Volpe Center
Qingbin Cui, University of Maryland

### Webinar Outline

Part 1 - Review of assigned homework on Value for Money Analysis for Project with No Tolls

Part 2 - Assignment of Homework 2 on Value for Money Analysis for Project with Tolls

### Webinar Objectives

After participating in this "office hours" webinar you should be able to:

• Explain the value for money analysis results from runs of the P3-VALUE PSC Tool, Shadow Bid Tool, and Financial Assessment Tool
• Undertake sensitivity tests of various assumptions made in conducting a value for money analysis
• Undertake a value for money analysis for a hypothetical toll-based project and explain its results

### Part 1 - Value for Money Analysis for a Non-tolled Project: Homework Assignment 1

#### Hypothetical PSC Cost Data

• Design-Bid-Build (or Design-Build)
• Base design/construction costs of \$30M in Year 1 and \$70M in year 2 - in nominal dollars
• \$10 million (real dollars) per year O&M costs over 28 years
• Risk cost estimates for design-build phase:
• 10% probability (P10) that they will be at or below \$10 M
• 70% probability (P70) that they will be at or below \$20 M
• 90% probability (P90) that they will be at or below \$30 M
• Risk cost estimates for operations phase:
• 10% probability (P10) that they will be at or below \$1 M
• 70% probability (P70) that they will be at or below \$2 M
• 90% probability (P90) that they will be at or below \$3 M
• Other project costs are assumed to be zero for simplicity

#### Hypothetical PSC Assumptions

• Financing:
• Debt financing for 100% of construction costs, at 5% interest and 30-year maturity
• \$2 M in debt issuance costs are financed as part of the debt
• No grace period
• Annual debt service coverage ratio of 1.2 (i.e., cash available for debt service must be at least 1.2 times the annual debt service payment)
• Inflation = 3% annually
• Discount rate = 5%
• This rate is the same as the public sector borrowing rate
• It assumes that all project risks are accounted for in the cash flows

• DBFOM with "availability payments" made by public agency over a 28-year operations period of a 30-year concession term, contingent on meeting performance standards; no toll revenue
• 10% DB cost reduction relative to PSC
• 5% O&M cost reduction relative to PSC
• Risk management efficiency
• 50% of design-build phase risk costs are transferred
• 100% of operations phase risk costs are transferred
• 25% lower risk costs for all transferred risks

• Financing costs
• Project funded 80% by debt and 20% by equity
• Average debt interest rate is 6.0% (vs. 5% for PSC)
• Required return on equity is 12% ("hurdle" rate)
• No consideration of taxes paid by concessionaire
• Inflation = 3% annually
• Discount rate = 5%
• This rate is the same as the public sector borrowing rate
• It assumes that all project risks are accounted for in the cash flows, e.g., through contingencies and risk premiums in financing costs

#### P3-VALUE Demonstration

• We will now transition to the P3-VALUE tools and review the inputs and outputs of:
• PSC Tool
• Financial Assessment Tool (VfM Analysis only)

#### PSC Results from P3-VALUE

Nominal Discount Rate Results - Risk Adjusted Payments (\$)
5.00% PV of Payments with P10 Risk Adjustment PV of Payments with P70 Risk Adjustment PV of Payments with P90 Risk Adjustment
Payment Item
Design and Construction After Subsidy * - - -
Construction Phase Transferrable Risks * - - -
Construction Phase Retained Risks * - - -
Operations 101,692,152 101,692,152 101,692,152
Routine Maintenance 101,692,152 101,692,152 101,692,152
Periodic Maintenance - - -
Operations Phase Transferrable Risks 20,338,430 40,676,861 61,015,291
Operations Phase Retained Risks - - -
Other Project Costs (ROW etc) - - -
Principal Debt Payments 41,890,908 45,768,288 49,645,668
Interest & Fee Payments 76,377,465 82,473,436 88,569,408
Total Payments \$341,991,107 \$372,302,889 \$402,614,671
Toll and Other Revenue - - -
Total Payments After Toll and Other Revenue \$341,991,107 \$372,302,889 \$402,614,671

#### Shadow Bid Costs (from P3-VALUE)

• Note: Procurement costs are not included; they may be higher for a P3 and would be included in "Other Project Costs (for Agency)"
Value for Money Analysis Results
Manual Input Risk Adjusted Payments (\$)
5.00% PV of Payments with P10 Risk Adjustment PV of Payments with P70 Risk Adjustment PV of Payments with P90 Risk Adjustment
Payment Item
Availability Payments \$332,769,407 \$355,241,557 377,713,707
Construction Phase Retained Risks \$4,434,779 \$8,869,557 13,304,336
Operations Phase Retained Risks \$ - \$ - -
Other Project Costs (For Agency) \$ - \$ - -
Total Payments Before Toll Revenue \$337,204,186 \$364,111,114 391,018,042
Toll and Other Revenue \$ - \$ - -
Total Payments After Toll Revenue \$337,204,186 \$364,111,114 391,018,042

#### P3-VALUE Availability Payment Results

• With P3-VALUE, the availability payment is inflated over the term of the concession, rather than being uniform throughout - that is why the first year availability payment is lower than we calculated with our simple model

(figure text)

Availability Payment - Payment Calculation

Annual Nominal Payment Amount

• P10 - \$16,361,607
• P70 - \$17,466,518
• P90 - \$18,571,429

#### P3-VALUE Present Value Comparison (P70)

PSC Discount Rate: 5% PV of Payment with P70 Risk Adjustment
VfM Discount Rate: 5% PSC SB
Project Payments
Design Construction After Subsidy* \$ - -1
Operations \$101,692,152 -1
Routine Maintenance \$101,692,152 -1
Periodic Maintenance \$ - -1
Construction Transferrable Risk* \$ - -1
Construction Retained Risk* \$ - \$8,869,557
Operations & Maintenance Transferable Risk \$40,676,861 -1
Operations & Maintenance Retained Risk \$ - \$ -
Availability Payment   \$355,241,557
Payment Type
Financing
Principal Debt Payments \$45,768,288 -1
Interest & Fee Payments \$82,473,436 -1
Other Project Costs \$ - \$ -
Toll + Other Revenues \$ - \$ -
Total Payments \$372,302,889 \$364,111,114
Notional Value For Money (\$) \$8,191,775
Notional Value For Money (% of PSC) 2%

(1) Included in the Availability Payment

#### P3-VALUE Comparison: P10, P70, P90

• With the higher risk scenario, the difference is larger due to the more efficient risk management assumed in the P3 option. Likewise, difference is lower in the lower risk scenario.
PSC Discount Rate: 5% PV of Payment with P10 Risk Adjustment PV of Payment with P70 Risk Adjustment PV of Payment with P90 Risk Adjustment
VfM Discount Rate: 5% PSC SB PSC SB PSC SB
Project Payments
Design Construction After Subsidy * \$ - -1 \$ - -1 \$ - -1
Operations \$101,692,152 -1 \$101,692,152 -1 \$101,692,152 -1
Routine Maintenance \$101,692,152 -1 \$101,692,152 -1 \$101,692,152 -1
Periodic Maintenance \$ - -1 \$ - -1 \$ - -1
Construction Transferrable Risk# \$ - -1 \$ - -1 \$ - -1
Construction Retained Risk# \$ - \$4,434,779 \$ - \$8,869,557 \$ - \$13,304,336
Operations & Maintenance Transferable Risk \$20,338,430 -1 \$40,676,861 -1 \$61,015,291 -1
Operations & Maintenance Retained Risk \$ - \$ - \$ - \$ - \$ - \$ -
Availability Payment   \$332,769,407   \$355,241,557   \$377,713,707
Payment Type
PSC Adjustments \$ - N\A \$ - N\A \$ - N\A
Financing
Principal Debt Payments \$41,890,908 -1 \$45,768,288 -1 \$49,645,668 -1
Interest & Fee Payments \$76,377,465 -1 \$82,473,436 -1 \$88,569,408 -1
Other Project Costs \$ - \$ - \$ - \$ - \$ - \$ -
Toll + Other Revenues \$ - \$ - \$ - \$ - \$ - \$ -
Total Payments \$341,991,107 \$337,204,186 \$372,302,889 \$364,111,114 \$402,614,671 \$391,018,042
Notional Value For Money (\$) \$4,786,921 \$8,191,775 \$11,596,628
(1) Included in the Availability Payment

#### Questions?

Submit a question using the chat box Or Dial *1 to call in your question by phone

### Part 2 - Value for Money Analysis of a Tolled Project: Homework Assignment 2

#### Illustrative Hypothetical Tolled Project

• Project life = 30 years (includes D-B phase)
• Design and Construction Costs
• Base = \$100 M (\$30 M in Year 1; \$70 M in Year 2)
• Risks: P10 = \$10 M; P70 = \$20 M; P90 = \$30 M
• Operations and Maintenance Costs
• \$10 M/year (real dollars, i.e., Year 0 dollars)
• Risks: P10 = \$1 M; P70 = \$2 M; P90 = \$3 M (real dollars)
• Inflation Rate = 3%
• Nominal discount rate = 5% (i.e., borrowing rate of public agency)

#### Illustrative Hypothetical Project Revenues

• Inputs for revenue estimation:
• Average Annual Daily Traffic (AADT) in Year 3 = 21,600 vehicles, no growth over project life (for simplicity)
• Average toll rate = \$2.00 in Year 0 dollars (increases with inflation)
• Year 3 Traffic = 21,600 X 365 days = 7,884,000 annual
• Ramp up period (Year 3 and Year 4):
• Year 3 = 67% reduction
• Year 4 = 33% reduction
• Adjustment for revenue leakage = 5% reduction

### Upcoming P3-VALUE Training

• Aug. 7: P3 Financial Assessment 201
• Aug. 16: Review of P3 Homework Assignments for Value for Money and Financial Viability Analysis
• Aug. 23: P3 101
• Sep. 5: P3 Evaluation Overview
• Sep. 20: P3 Project Risk Assessment 201
• Oct. 3: Value for Money 201
• Oct. 18: P3 Financial Assessment 201

### Contact Information

Patrick DeCorla-Souza
P3 Program Manager
Office of Innovative Program Delivery
(202) 366-4076
Patrick.DeCorla-Souza@dot.gov

Thay N. Bishop, CPA, CTP