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Homework Assignment 2: Value for Money Analysis for a Toll Concession Project
P3-VALUE Webinar - July 19, 2013
P3 Program Manager
Office of Innovative Program Delivery
Aaron Jette, Volpe Center
Qingbin Cui, University of Maryland
Aaron Jette: On behalf of the Federal Highway Administration's Office of Innovative Program Delivery I would like to welcome everyone to today's IPD Academy Webinar Value for Money Homework Assignment Review. My name's Aaron Jette and I'm with the U.S. DOT's Volpe Center and I will be facilitating today's webinar and presenting for part of it. We have two other presenters with us today. Our primary presenter is Patrick DeCorla-Souza. Patrick is the program manager for the public private partnerships in the Office of Innovative Program Delivery. Qingbin Cui is also presenting today briefly. He is a professor at the University of Maryland. Before we begin I would like to point out a couple of key features of our webinar room. On the top left side of your screen you'll find the audio call in information as well as a list of attendees. On the bottom left is a chat box that you can use to submit questions to our presenters throughout the webinar. You can also ask questions by phone by pressing star one on your telephone. We will be pausing throughout this presentation to ask for questions and respond to those. If you are having any technical difficulties, please use the chat box to send me, Aaron Jette or Michael Kay, a message regarding any technical difficulties that you are having and we will do our best to address those. Our goal today is to review the homework assignment associated with last week's Value for Money Analysis Public Sector Comparator and Shadow Bid webinar presentation. Hopefully you've had some time to work through the homework using the P3-VALUE tools and we will review how to use those tools today and the outputs from those tools and try to use those tools to explain value for money analysis. So we welcome any questions regarding the homework assignment and like I said we'll be pausing throughout to solicit your questions and respond to any questions you might have. So with that, I'd like to turn it over to Patrick DeCorla-Souza. Just briefly let me just note that we are recording the session so we can post it to our Staffnet archive so that those who cannot attend today's session can listen if they wish.
And one other quick thing before I hand it over to Patrick, we're going to run a few polls, you'll see them on your screen right now and then just ask for you to just take a few seconds and fill those four polls out. You'll see we're asking, what is your affiliation, how many people are participating along with you today, what is your current level of knowledge and experience with value for money analysis and what parts of the homework assignment did you complete. And this will just help us tailor our presentation to meet your needs and experience. Thank you for taking part in these polls. I see that there's sort of a diverse range, a number of you haven't completed the assignment, that's fine, we'll be walking through it today. And some of you have completed parts of the assignment or all of the assignment. So again, that's fine; we'll be walking through the entire assignment today. So with that I'd like to turn it over to Patrick to go through the first part of our presentation.
Patrick DeCorla-Souza: Okay. Thanks Aaron. What I will do is before we actually get into the spreadsheet give you a little bit of an overview and a refresher on the homework assignment. As Aaron mentioned, this is a follow up to the webinar on Value for Money Analysis that we had on July 11th, so if you haven't participated in that webinar you can listen to the recording and on this slide we provide the URL. You can of course download this presentation later on and you will get instructions on how to do so.
So we have two parts to this presentation webinar here today. First we will review the assigned homework, the Homework Assignment One which involved value for money analysis for a project without tolls and just an availability payment for the P3. And in the second part I will introduce you to Homework Assignment Two where you will be able to perform an analysis for a project with tolls.
So the objectives of this webinar, we call it an office hours webinar because we are more free in this webinar to listen to your questions over the phone, something we normally don't have time during our normal webinars. So feel free to use the phone, to ask questions and of course also you may continue to use the chat box which is available to you at all times. So hopefully after this webinar you will be able to explain value for money and analysis results from the P3-VALUE tools. The three tools we will cover are the PSC Tool, the Shadow Bid Tool and the Financial Assessment Tool. We will also demonstrate to you how to undertake sensitivity analysis for key assumptions in your project and finally we will introduce you to an assignment that will help you understand how to do a value for money analysis for a Hypothetical toll based project. And we will have another webinar later on to explain the results of that assignment.
So part one is the homework assignment that we assigned on July 11th that we will be going over today.
And just to refresh your memory we had a conventional delivery option for a project that was going to be a design bid build project with a total construction cost of $100 million, $30 million of which would be expended in year one, $70 million in year two. We assumed $10 million per year in O&M cost for 28 years which would be the remaining years of a 30 year concession. And then we assumed several different risk cost estimates based on how much confidence we wanted to have in our cost estimate. So for a ten percent level of confidence we said the risk cost would be ten million, we wanted 90 percent, that is we wanted to be pretty confident that whatever money we had set aside for the project would be adequate then we would have to set aside $30 million and some point in between is the 70 percent confidence level which is the one that FHWA recommends and we assume that would be $20 million. And this was for the design build phase. In the operations phase, we likewise had one million, two million and three million in operations risk costs. And we assumed that all other project costs would be zero. Again, we've chosen round number for simplicity so you can do the math in your head and look at the results and see whether they make sense.
The financing that we assumed for the conventional delivery was 100 percent of construction cost would be financed with debt. At least in this assignment we assumed it would be a draw which means a bank loan which is a lot more flexible than a bond type of financing and we assumed five percent interest with a 30 year maturity. We assumed that it would cost us $2 million to get that loan, that's what the bank would charge us. There would be no grace period which means that we would have to A, start paying the interest and debt service right away after year one and we assumed that annual debt service coverage ratio and this is something we will cover in the next webinar on August 7th but very simply it's a ratio of the cash available for debt service from the project revenues and divided into the amount of debt service to be paid in that particular year. Inflation, we assumed three percent annually and that's a rate of inflation we assumed for both. The operations phase cost, that's for operations and maintenance and also we assumed that the three percent would be the consumer price index that we would use to estimate the availability payment. And finally we decided to use a discount rate of five percent, the rationale being that would be similar to the public sector borrowing rate. And also this is because we have already accounted for project risks in the cash flows.
The Shadow Bid which is the P3 option would be what we call a DBFOM, design build finance operate maintenance with availability payments over a 30 year period, two of which would be spend in building the project. We assume that the private sector would be able to build the project with ten percent less cost. So capital cost would be ten percent less, we also assume that the private sector would be able to do the operations and maintenance at five percent lower cost. We also assumed that in the design build phase, 50 percent of the risks would be transferred over to the private sector. And in the operations phase we assumed that 100 percent of the risk would be transferred and we assumed that the private sector would be able to reduce all of the risk transferred to it by 25 percent.
The financing assumptions in the Shadow Bid were a little different from the PSC, instead of 100 percent financed by debt we had 80 percent financed by debt with the remaining 20 percent by equity. We assumed that the debt interest rate would be six percent versus five percent for the public sector comparator and we assumed that equity would demand a 12 percent rate of return. And to make things simple again we assumed that there would be no taxes paid by the concessionaire. Inflation assumptions were the same, discount rate assumptions were the same.
So now what we will do is show you how these assumptions are incorporated into the P3-VALUE tools and we will show you the results and help explain those results. So I turn it over to Aaron Jette to introduce you to the assumptions in the PSC Tool and the Shadow Bid Tool. Aaron?
Aaron Jette: Great. Thanks Patrick. So what you should see on your screen right now is I've opened up the PSC Tool and I am sharing my screen with you all. I've got it open to when you open your tool; this is the first thing you'll see. You may need to enable content to get things to start. I've already done that. Now I'll click, I accept, and that'll open up the tool, it'll go to the PSC Tool index and from there I can either click on assumptions up here or I can go down to the tabs and navigate this way like you would in a normal Excel spreadsheet.
I'm going to click assumptions and here we are on the assumptions tab. And you'll see that we've begun by we're just starting with the example scenario. We're not looking at a toll scenario so it doesn't matter what traffic scenario we have inputted. And now we're looking at a non-toll facility and we're comparing a design build finance operation and maintain PFC to a similar structure Shadow Bid. So I've checked off the first four options in the project delivery structure. In terms of timing, I've enter a base year of this year, 2013, estimated construction period of two years starting in 2014. The construction end, these white cells are automatically populated; the blue cells are input cells so 2015 is automatically calculated. Enter an operations period of 28 years starting in 2016. And again, that updated automatically because I've updated assumptions, I get an operations end 2043 and a concession period of two plus 28 or 30 years. As Patrick noted, other project costs we've zeroed out all of these other project costs just to give you a simple example.
We've entered the construction costs here on row 38; we've just entered a road, any sort of description of an asset will work here at total cost 100,000, 30 percent in year one and 70 percent in year two. These other cells here are grayed out because we've only selected two years of construction period. And you'll see at the far right here there's a check sum so if you enter values in this row that do not total 100 percent you'll get an error message. So I've entered 30 percent and 70 percent here and now I've also, if we go down to rows 50 and 52 you'll see I have my operating costs of $5 million and you can enter these at - these are our annual operating costs, this is the period of years, it's five million per year in operating costs and five million in routine maintenance costs. We've simplified this, you could in a more complicated model also enter a periodic maintenance cost if you're anticipating reconstruction or rehabilitation costs but we have not done so here. In which case you could set a period of every ten years, say $10 million or something like that.
These other cells are blacked out here in terms of toll and other revenue because we have not checked this toll collection box here. If I were to check this, you'll see that those cells turn on but right now we're just looking at a non-toll facility and so we don't need to enter any toll assumptions. Funding assumptions, we aren't assuming any project subsidies so those are zeroed out. We're assuming 100 percent project financing and we've entered in our assumptions about that project financing starting at the beginning of construction, maturity of 30 years, issuance fee of two percent, interest rate of five percent, semiannual payment schedule, the draw, you could also select a bond, but we selected a draw. Debt service coverage ratio of 1.2 and zero years for the grace period. You see we've entered an inflation index of three percent for our operations phase and zero percent during construction. We've got our risk allocation entered here, as Patrick said, 50 percent during the design build phase, 50 percent to the public sector, 50 percent to the private sector and cost allocation in the operations phase of zero percent to the public sector and 100 percent to the private sector. As well as our risk cost here for the P10, P70 and P90 value scenarios. Now if you were to use the risk assessment tool which we aren't reviewing today but as another component of the P3-VALUE tool suite, you can generate these inputs, the risk allocation and risk value input by entering values for individual risks using that risk assessment tool, it'll generate outputs that service inputs to the PSC and Shadow Bid Tool for the risk allocation value and risk values. Finally I'll go down here to row 96, this is the discount rate, we've entered a discount rate of five percent equal to the interest rate on debt, and again this is for simplicity. And finally the PSC adjustments, this is where you might enter annual adjustments for competitive neutrality and for simplicity's sake we've zeroed out these values. So those are the basic assumptions that we've entered.
Now you'll notice that are a number of other tabs in this spreadsheet. Most of these tabs are not input tabs, there are a series of three blue tolling tabs you can adjust tolling values if we were to consider a toll scenario but here we are not considering a toll scenario. So in the homework assignment we'll ask you to fill out this toll scenario template with a simple toll lane example. But here we have this blank and we are not using this, we're not pulling any values from these toll scenarios. And the project cash flows, this just sort of shows how - this is a sheet that helps the tool calculate the cash flow values. You'll see here they have this index, indices for various inflation indices, et cetera. I won't spend much time on these. This construction cost work sheet shows the construction cash flows. You'll see these are all semiannual cash flow period. O&M is the same; you'll see these are being inflated by our three percent. Other project costs, these are all zeroed out. These are just results based on our assumptions. So they're allocating our assumptions for the semiannual cash flow period. Risks for these vary based on whether or not we're looking at a P10, P70 or P90. Traffic scenario, like I said we're not using traffic scenario for this example. Revenues, there are no revenues in this example. PSC adjustments, we aren't using any PSC adjustments but again, if you were to enter assumptions here you'd see the cash flows arrayed on these various tabs. The purpose of having all these tabs is not to make the tool more complicated but rather to make it more transparent so that you can see how these cash flows are working. There are no subsidies.
And finally, here, this is the - well, not finally, but this is the financing spreadsheet, so again here you'll see the financing cash flows, borrowing, payment on this borrowing, borrowing for reserves, payment on those reserves and additional borrowing to cover the risks under the P10, P70 and P90 scenarios. Finally there are tabs for transferable risks and retained risks that show those risks under the P10 and P70, P70 and P90 scenarios and then a summary of all the basic cash flow which summarizes all the cash flows that are used for calculating the output that Patrick will explain to you in one second.
So to see the outputs, go to the disclaimer here. So we have another disclaimer here. And the reason why we have all these disclaimers is that these tools are not intended for use in determining the value for money of actual projects, we want to make that perfectly clear. These are for demonstrating value for money analysis using Hypothetical values; they're not to be used to determine the value for money for an actual project. So you accept that and that gets us to our output screen which Patrick will explain to you. But we'll pause first. If there are any questions, you can press star one on your phone or enter them into the chat box. Please let us know if you any questions about - I know I went through that rather questions, but if you have any questions about this assumption sheet or any of the cash flow sheets that I just walked through. And we'll stop at any time to see if you have any questions but we'll move on right now and let Patrick go over the output screen for you.
Patrick DeCorla-Souza: All right. Thanks Aaron. So here is the reason we've been doing all of these various inputs and all of the different sheets that Aaron showed you finally lead up to the numbers in this table. So let me explain what's in this table. If you look at the rows now, and I'm looking at the first column that describes each row. The first item there in row six is design and construction after subsidy and then you've got construction phase, transferable risk and construction phase retained risks. And none of these rows have any numbers in them so you might wonder, you know, you had these $100 million cost and you had transferable risk and you had retained risk, the $20 million, $30 million, et cetera. And they don't show up here so what happened? Well, remember we said that 100 percent of the costs are going to be financed, financed meaning through debt, 100 percent debt. So where you see those numbers is down in row 16 way about where it says principle debt payments, there's $100 million there and that is exactly what we said the construction cost was going to be and that's the principle that we need to borrow to build the project. Now the next line, interest in fee payments, it looks like a lot of interest, $132 million, more than twice you borrowed but it's very much like your mortgage and if you see how much you're paying on your mortgage at five percent interest, you will see a similar proportion. So you pay a lot more interest than what you borrowed over the life of the loan. And as Aaron was saying, some of the $132 million is actually the issuance fee which is counted as a debt cost as well as you having to put aside reserves, the bank requires you to put aside reserves to make sure they get paid. And so those reserves accumulate interest and all of those are reflected in the $132 million in interest. So those last two lines account for the construction cost, that is the design build cost.
So now we have to worry about O&M cost. So if you look at row nine where it says operations, we've got, again, these nominal dollars, $239 million and another $239 million. You recall we said there was going to be $5 million a year in real dollars but they are inflated so it's not $5 million dollars per year for 28 years and, you know, that would be I guess somewhere about $140 million. So why do you have $239 million? Well, again, that accounts for the inflation, these are nominal cash flows. Since the routine maintenance cost was equal to the operations cost, again, just for convenience we said each of them was going to be five million and so likewise you see that the total over a 28 year period is also $239 million. So you want to know what is it in real dollars, these are all in nominal dollars, inflated dollars and we know that a dollar spent 30 years from now is not worth the same in present value as a dollar spent today. So we look at then what it actually costs us and the next column is the present value of those operations cost over the 28 year period and they have been discounted at a five percent rate. Remember we said inflation was at a three percent rate but the discounting is occurring at a five percent rate so you're going to get less. You remember, doing the math in my head, I said, 28 years times $5 million is about $140 million. Well why isn't the $140 million showing up in this column as the present value, you're just taking out inflation there? Well you're discounting it by two percent more and that discount rate accounts for not just inflation but also other things and one of the things that is considered is the fact that people value consumption today more than they value consumption two or three years or 28 years in the future and so that extra two percent accounts for that. So you get $101 million for each routine maintenance and operations for a total of about $202 million. And then you look at the principle debt payments down at the row 16 and you see the $100 million is only worth $38 million at present value. And again that is because the $100 million is the payment that is made over the 30 year period. So let's say you divide that $100 million into 28 parts and so that's roughly three million a year. Well three million paid in year 28 is not worth three million today, something less. And so that's why after you discount all of these future payments you get only $38 million as what you are really paying back in real dollars in terms of principle but obviously the bank is not making a loss, it's getting all this interest. And the next row there, row 17 shows you the interest that the bank is getting, about $70 million and so if you add the two numbers, the $38 million and the $70.2 million, you should get roughly $108 million in present value. We said the interest was at five percent, we have discounting at five percent so you would have thought that if you inflate something, the interest is at five percent and you're discounting at five percent so you would have thought that you should get the same $100 million as a total, so why are we getting $108 million? Well if you recall we said there would be a two percent or $2 million issuance charge from the bank. Well that accounts for two million of the $108 million. So what about the remaining $6 million? As we indicated previously there's some reserves being borrowed and those reserves you have to pay interest on them so the six million or the extra amount is the value of the present value of the interest paid over 28 years over the extra amount you're expected to keep in reserve. So that accounts for the extra amount over and above what you actually borrowed. So let's go to the next column. Now we are looking at risk, the ten percent confidence level. You see the operations and maintenance costs do not change but you have transferable risks of $20 million. Now we said that the risk cost is $1 million a year for P10, so 28 years should be 28 million. Well, why are we seeing only 20 million here? Again, the power of discounting. Some of the one million even though we are inflating it at three percent per year, the one million was in real dollars so you would be inflating it but we are also discounting it and we are discounting it at a higher rate. So if you had discounted it at three percent, we would have got $28 million but we are discounting it at five percent. So that's why you have $20 million instead of $28 million. Now in the case of the remaining numbers at the bottom, row 16 and 17 you see the debt and the interest. And as we said earlier those numbers are going to be a little more than what you might have borrowed. And in this case we would have borrowed, let's say 100 million and $10 million in risk cost, that's what our assumption said. And if you add 41 and 76 you get close to $118 million and so that's more than the $100 million. And you do the P70 so the 70 percent confidence level, likewise the 45 and $82 million, you add those up and you get roughly 128 million, much more than the 100 plus 20 million that we actually would have borrowed. And finally in the highest confidence level, the P90 we have roughly 49.6, let's say $50 million, you add that to $88 million and you get $138 million which is again more than the 100 plus $30 million of risk that this project would have needed to spend at a 90 percent confidence level. So the row 18 which is in bold is the total of all of what we calculated earlier. You see the nominal values in the first row there are 712 million but present value is much lower in the range of 311 or zero risk to 402 million for 90 percent confidence level. So these are the types of analyses you would be doing looking at ranges instead of a single number. If you're doing an analysis for FHWA you would use the P70 level which is the 372 million.
So we can then go down to the next table which shows the sensitivity analysis and this has been done for P70. So what I want you to do is look at row 31 which is zero percent and what that number there is showing you, 372 million exactly matches the 372 million in the P70 column up above. So what this table is doing is telling you how that $372 million would change if your construction costs or operating costs or maintenance costs were off by a certain factor. So if you were off by 30 percent in your construction cost, that total instead of $372 million it would be only $343 million. So if you had overestimated your costs. So if your costs were underestimated and the cost really turned out to be 30 percent higher, instead of $372 million, you would pay $401 million. So this helps you test the impact of you being off by a certain amount. It's sometimes called stress testing; you want to see whether under very extreme scenarios you would still be able to pay for the project. And so that's why you do this type of testing, especially on estimates that you're not very confident about. So if you are not confident about your construction costs, you would play close attention to that first column. If you thought you weren't very confident on your routine maintenance costs, you would look at the third column. Now, the toll revenue column, you will see, has the same number all through, and that's because we didn't have any toll revenue. So the $372 million total is unaffected by revenue. You're getting zero revenue, no matter what happens - 30 percent lower than zero is still zero, and 30 percent higher than zero is still zero. So you still get only $372 million. It has no impact on that last column.
All right, so let's go to the bar. And you should look at this at your leisure, but this is simply a way to graphically see how the various risk scenarios - and you see the P10, P70, P90 - how they affect the present value. So the first bar is if you had zero risk, then the second bar is 10 percent risk, then the third bar is 70 percent confidence level and the final bar is with your 90 percent confidence level. So depending on how confident you wanted to be, you would pick the appropriate bar, and it gives you the breakdown of all of these various costs. We didn't have all of the adjustments and subsidies, and also you don't see a lot of colors. So the only five colors represented are the different costs we accounted for and assumed in our project. So let's go down now to the assumptions, and what you see there is if you want to test out different scenarios; let's say instead of two years, your construction might take three years. Well, you can hit the arrows up there and you can see when you did that, some of you may have noticed your concession length increased by one year, and that is because the concessionaire still needs to recover their investment and the model assumes that the 28 years would be fixed, a fixed period of time to collect repayment. So if you look - and you can still see it on the top left hand - you can see those numbers changing. As you can see, from $372 million it went up to $373 million. So increasing the length of the construction has an impact on our cost. It increases the cost by about a million bucks. Again, that has to do with the inflation and the extra time that the project might take to construct. So you can do similar analyses for any other estimate that you are not confident about. We already showed that the construction cost and the annual operating costs have already been done for you, on that left-hand side in that table, so you really don't need to do this unless you have a value like 25 percent or something that's not represented in the table to the left; you can do your own analysis here. The other thing it allows you to do is change the interest rate on your debt. So we had 5 percent, so you could change it and look at what kind of impact it has. And Aaron will do that, and raise it of course by very small amounts. You have to raise it by quite a bit to have a significant effect. Now, you can see he raised it by 0.04 and we see some impacts there in the cost because the interest now is increasing but the 5 percent discount rate is staying the same. So, on the other hand, if you increased - it's at 5.05 now, and Aaron, let's see what happens when you raise the discount rate to 5.05. As you can see, the numbers are coming down, and of course that discount rate is affecting not just your debt but it's also affecting your O&M costs. So these are the kinds of analyses and tests you can do, especially on estimates that you're not confident of. So that's the explanation of the outputs. Let me see how we are doing on time. Do we have time for questions?
Andrea: Certainly, ladies and gentlemen. If you'd like to ask a question, please press star then one on your touchtone phone. You will hear a tone indicating you have been placed in queue. A voice prompt on your phone line will indicate when your line has been opened. You may remove yourself from queue at any time by pressing the star key, followed by the digit two. If you are using a speakerphone, please pick up the handset before pressing your corresponding digits. Once again, press star-one to ask a question.
Aaron Jette: Thanks, Andrea. And you can also ask questions via the chat box as well. We'll just give a few seconds and see if anyone has any questions and if not we'll move on to the Shadow Bid Tool.
Andrea: There are no questions on the phone line.
Aaron Jette: Okay, thanks Andrea. All right, Patrick. So I'm going to move on to the Shadow Bid Tool, if that's all right.
Patrick DeCorla-Souza: Yes.
Aaron Jette: So I'm going to close out this tool and open up the Shadow Bid Tool. So when you open up the Shadow Bid Tool - we've already opened them up prior to beginning this webinar because it does - it will take a few seconds. These are large files. It may take a few seconds on your computer to open. You may have to enable content, like I said, and then you'll have this disclaimer here, as well as some instructions for how to use the tool. So, to begin using the tool, you need to click "I Accept" and accept this disclaimer. And again, similar to the PSC tool, you'll have this navigation sheet, this index. You can also navigate using these tabs below here. So I'll begin by clicking
Assumptions, and you'll see here - this is the Assumptions tab. It looks very similar to the PSC tab. So I'm going to just zoom in so you all can see a little better. Very similar to the PSC. We've set up all of our same timing, project delivery structure, assumptions as in the PSC, the same timing assumptions. So this allows us to compare these two projects. We have the same timing and same structure - that's really critical. Same construction costs - at least same base construction costs over the same time period, 30 and 70 percent, years one and two. Same five million dollars a year operating costs, as well as five million dollars a year in maintenance costs. Let's see, we have a couple extra lines in here, rows 42 and 43. You can enter in other project costs. Let's say you want to factor in, for example, the transaction costs of developing a bid. Let's say you want to factor that in because you want to have a better understanding of the private concessionaire's cost. You could add in an "other" cost in one of these lines and put in a total cost and the start date and end date. So we've entered in annual maintenance costs. We have not entered in any periodic maintenance costs. We have not checked out the toll revenue box - this is not a toll facility - so these are all blacked off, these Toll Revenue Leakage, Toll Revenue Ramp-up, Non-Toll Revenue - these are all darkened out. No project subsidy whatsoever. So here, this is where you start to see some slight differences, some other differences between the PSC assumptions and the Shadow Bid Tool assumptions. Here you'll see, in terms of project financing, we're looking for an entry here, the percent of project finance sourced from debt, and the remainder will be sourced from equity. So we're looking at a debt structure that's 80 percent debt, and the remaining 20 percent is financed through equity. So we enter our debt assumptions here, similar set of assumptions to the PSC, except here we have zero percent issuance fees but a higher rate, a 6 percent rate. We're also looking at a semiannual payment schedule draw of 1.2 debt service coverage ratio in a zero year rate period. What you don't see in the PSC tool; you do see it here as an assumed rate of equity return. So this is sort of the hurdle rate for the private sector. This is what you anticipate the private sector demanding in terms of return on equity investment. We've put in a rate of return here of 12 percent. In terms of inflation, we've entered a CPI of 3 percent and an operations phase inflation rate of 3 percent. The CPI will affect - if you enter zero for operations phase, the CPI affects inflation during the operations phase, but it also affects the calculation of availability payments. So this 3 percent per year inflation rate will be applied to the availability payments as well, if you enter in a value here. Discount rate is the same as the PSC of 5 percent. Now here, these are also some additional assumptions that you can enter in the Shadow Bid Tool. You can enter assumptions about efficiency, both cost and schedule efficiencies. We even entered some assumptions here in terms of 10 percent construction cost efficiency, so this will reduce the 100 million dollars in construction costs to 90 million dollars in the Shadow Bid, and then 5 percent operating efficiency and 5 percent maintenance efficiency. So this is applied to the 5 million dollars in annual operating costs and the 5 million dollars in annual maintenance costs. This is a 5 percent efficiency factor that we're assuming that through this delivery method will be generated. Keep it simple. We're not assuming any federal or state taxes, so we have a zero percent here. We're not factoring that into our analysis. We have a working capital period of six months and we have some depreciation assumptions. But this set of assumptions is only factored in if you're considering taxes in your analysis. So again, depreciation would factor in if you were to consider any federal or state taxes. We've entered in assumptions in terms of risk allocation and risk values. The reason why you see this slightly different allocation of public and private risk in the design-build phase is because we're correcting for a feature of the tool, the way the tool calculates risks. It aggregates both retained and transferred risks, and then applies any efficiencies to both the retained and transferrable risks. So we only want the efficiencies applied to the private sector transferrable risks. So that's why you see this slight difference. We've tried to correct for that by changing the allocation in risks here. And we've also changed the risk values slightly, again, to account for the way that the tool is calculating and allocating those risk values. So we've done that here. The remaining fields - other project costs - like for the PSC tool, we've zeroed those out. And then in terms of any additional funding for agency costs, we've also zeroed that out. So that's our primary input worksheet. We aren't using the toll worksheets; this is the same as the PSC tool. Almost all these worksheets are the exact same as the PSC tool, with the exception that you do have a sheet to show asset depreciation as well as a sheet that shows instead of a - there's the same cash flow summary, but now this is looking at cash flows from the private sector perspective. So here you see revenues, these revenues are generated based on availability payments that the public sector is making to the private concessionaire. So the rest of the cash flow sheets are the same as what I showed you in the PSC tool. Then to get to the output sheet, again you have to click "I Accept," and that will open up the output sheet, which I will let Patrick explain. But first I'll ask if there are any questions. You can either press star-one on your phone or use the chat box. Patrick, I think you can just go ahead, and if there are any questions that come in, we'll field them as they come in. We'll let you know.
Patrick DeCorla-Souza: All right, thanks, Aaron. So here we are on the output sheet, and the first thing you have to identify is what type of payment or what type of concession the DBFOM will be, and there are three options. In other words, how are you going to pay the concessionaire? You can pay the concessionaire through an availability payment or a real toll, or a shadow toll. And the shadow toll is really another kind of availability payment, but instead of being a fixed payment, the payment depends on the volume of traffic that uses the facility. So we want to do an availability payment concession, so we chose availability payment. We then hit the payment calculation button, and what we got was the annual nominal payment amount that you see, those four boxes with numbers in them, starting from $15 million right up to $18 million. So some of you may recall in the webinar, we calculated an availability payment of something like $25 million. And the reason that was 25 million is we assumed that you would pay a uniform availability payment throughout the 28 years of the operations phase. Well, in reality, if you did that, the concessionaire would really get too much money in the early years - the operations and maintenance cost was only around 10 million dollars - and you were going to pay the concessionaire 25 million dollars. So you would be stacking all of the payments up front, and towards the end, as the O&M costs get inflated, the $25 million may not be enough to pay the O&M costs. So what you really want to do is make the payments sort of at least be similar to the rate of inflation or the rate at which the O&M costs increase. And so the Shadow Bid Tool allows you to do that. As Aaron pointed out, all you have to do is put in the inflation rate in the CPI, in that box up in the assumptions, and it will use that CPI to calculate the availability payment for the several years of the concession. So what you're seeing here is the availability payment for the first year. And so for P70, it translates to about 17 million dollars. Later on, when we go to sensitivity analysis, I'll show you how you can change the CPI to zero percent and you will come up with roughly the 25.6 million dollars or so that we estimated in the webinar.
So, let's go down now to the table - there's a table which is kind of similar to the table you saw that came out of the public sector comparator tool, and the only difference here is you don't have the breakdown of all the construction costs and the risks - at least the transferrable risks and things like that. All you have is a line that says Availability Payment, which would include the cost for construction, the cost for operation and maintenance, and any risks that were transferred to the concessionaire, because that's what the concessionaire is getting paid for. So it's a lump sum amount that is being calculated by the model, and that's the amount if you look at the second to last column, which has 355 million dollars, and that is for a P70 estimate - that 70 percent confidence - and that 355 million relates to the availability payment we saw above of about 17 million dollars for the first year. So the 17 million dollars of course was in nominal dollars; that gets inflated. And over a period of 28 years, that might be a lot of money. But what you see here is only $355 million because we have taken those future payments and discounted them by 5 percent per year. So what we end up with is only 355 million dollars. And likely, we have availability payments calculated - and the actual nominal values of availability payments, without the risks, you would see in that second column that says Nominal Value of Initial Project - of course that initial project cost does not include risk. So over the period of the concession, that's how much you would be paying the concessionaire in nominal dollars. So you'd pay 17 million dollars in the first year, perhaps 18 in the next, 19 in the following year, etcetera, and you add up all of those and you come up with 732 million dollars. But of course in present value, that is only worth - and in the next column you see - it's only worth 310 million dollars. So that's the availability payments that you're making to the contractor or the concessionaire, but there are other costs that the public agency has to bear. And those are the retained risks. We said that all of the risks we're going to be transferred to the concessionaire in the operations and maintenance phase, but we said that only half, 50 percent, of the risks would be transferred to the concessionaire in the design-build phase. So that means that the remaining 50 percent stays with the public agency, and you need to set aside some funds to pay for those retained risks. So you see no numbers in the first two columns there; they are blank because there are no risks. Now, if you remember in the P10 scenario, we assumed 10 million dollars in total risk. Half of that is transferred, so we are left with 5 million dollars, and then the present value of these - remember, they're occurring over a two-year period, distributed 30 percent in the first year, 70 percent in the second year - so you discount those to Year Zero - that is the present - and you get 4.4 million dollars. Similarly, the P70 is 8.8 or thereabouts, and then the P90 is 13 million, which is the discounted value of something like 15 million, which is half of the 30 million under P90. So the next lines - the operations phase retained risks - we said we were going to transfer all the risks over to the concessionaire so the public sector doesn't have to worry. Zero is set aside. Zero dollars is set aside for retained risk in the operations phase. Other project costs we assume to be zero, so the next line is also zero. And the line below that is the total. So, we see a range again in present values from 310 million all the way up to 391 million as being the potential cost to the public sector. Now, the next line below that is toll and other revenue, and that would have numbers if you had a toll facility. Now, remember with the toll facility you could still have an availability payment, but the toll revenues would go to the public sector. So if you had clicked on toll collection up in the assumptions sheet, and if you had put numbers into the various boxes requiring toll data in the assumptions sheet and also filled out one of the toll scenario sheets with the data on traffic and toll rates, then you would have gotten some numbers there because the toll revenue would be coming to the public sector, because you are paying the concessionaire 355 million dollars - for example, in the P70 scenario - however, they are not collecting the revenue. Even though it's a toll facility, it's coming to the public sector. So what you would do is put - let's say you had 300 million dollars in toll revenue. You would take that, put it in that line - and the model will do that for you; it'll put in the 300 million dollars in that line - and take the 364 million, which was the total, subtract the 300 million in revenue, and tell you that you as the public sector still have to worry about the balance, which would be about 64 million dollars that you would have to figure out where you're going to get that money to pay for the costs. So that is the present value of the Shadow Bid estimation.
You similarly have a sensitivity analysis, and let's move down to the sensitivity analysis. And again, looking at that line with the zero percent, you see the 364 million. Again, we did the P70, so you see 364 million when you have zero percent change in any of the parameters up at the top, which is you have zero percent change in construction, zero percent in operations, etcetera, so you get the same 364 million. If you have 30 percent change in construction costs, keeping everything else the same, you would get a total cost of $329 million instead of $364 million. So this is very similar to what we already saw in PSC. So let's move on to the bar chart. So, this is very similar, again, but because all of those construction and operations costs, maintenance costs, etcetera, are all lumped together in one number called the availability payment - you see this big bar with a blue color in it, and that is the availability payment. The balance, the yellow that you see, is the risks retained by the public sector that they still have to come up with. So the total of the availability payments and the amounts retained - the cost of retained risk - is the total cost of the project under the Shadow Bid. And again, under various risk scenarios, you have various costs to the public sector. And then you can go down and do a scenario analysis again, and it's very similar to what we saw earlier where, again, you can change construction length, you can change construction, operating costs, interest rate - that's something you definitely - because market situations can change, and you need to test out what might happen if Ben Bernanke decides to raise interest rates and then you might have to pay a lot more a year from now. So you might want to test that out with a higher cost for financing. What happens - you want to know what would happen to your comparison. So the CPI - I promised to test out the CPI with zero percent, so let's see if we can bring that CPI down to zero percent and then recalculate the availability payment. This takes a while because it does it a hundredth of a percent at a time, but what we are doing is trying to see what the availability - what difference it would make to all of our analyses if we had a uniform availability payment. Feel free to hit star-one and ask questions if you have any. So we are almost there, and we have zero percent. So now let's go up to the availability - and we have to hit Payment Calculation. So those numbers are exactly what we had before, and they're not going to change unless we hit the button that says Payment Calculation. You can see the model is pretty efficient. It's doing all these calculations, and it came up with a P70 of 26.2 million. And let's go down and look at the present values. So you can see here, in the availability payments of a P70, you had $355 million and it actually came down. We reduced our total availability payment simply by making it a uniform payment. This is the present value. So think about it. I mean, you're basically simply changing the structure of - the concessionaire is still getting the same rate of return. So why is the present value so much lower? Remember, we said that we are giving the concessionaire a lot more money than they need for O&M in the first year. So we said like $26 million; they pay only somewhere around 10 million dollars for O&M per year; with risk maybe 11 million dollars. And they have all this extra money. Well, what they are going to do with that is retire some of the debt, or pay off some of the equity. Equity is high cost. So once they do that, they retire the debt, they have less interest to pay over the remaining 28 years of the concession. So that's going to bring down the financing costs. So basically the cost is lower in present value simply because the public sector is making payments earlier, and of course when the public sector makes payments earlier, it's not at zero cost to the public sector; it is - I mean, if it has to borrow money to make those payments, then the public sector's financing costs would be higher. So you have to be very careful to understand the impacts of these different assumptions on your results and remember that this is not a free lunch. You're not just getting lower availability payments just for free. The public sector has to come up with that extra money in the earlier years. If it's got money in its budget, fine. You're lowering the overall cost of the project, and that's good. But if it has to borrow that extra money to pay the concessionaire, they may not be anywhere better off than they started with. So you can do other sensitivity analyses and you do that for extra credit for your homework, and I guess we are ready for questions. Aaron?
Aaron Jette: Right. So, we'll have a chance for questions now in terms of the outputs for the VFM analysis or any other questions that might have occurred to you. Now is a good time to ask them, before we hand it over to Qingbin Cui to walk us the through the private sector's financial cash flow sheet. So again, I'll just remind you, you can press star-one or you can ask questions via the chat box.
Andrea: And we have no questions on the phone line.
Aaron Jette: Okay, thank you. So we've asked Qingbin to provide an explanation of the financial statement that accompanies the VFM tool, and as one of the outputs of the VFM. It's a little more difficult to understand, but if you really want to understand how the cash flows work in this model, it's really helpful to look at this last sheet in the tool, the Financial Statement sheet. So Qingbin, I'll hand this over to you.
Qingbin Cui: So this is a financial statement spreadsheet - that's Table 21 - and it's pretty structured, in fact. You can see that you have basically a balance sheet and income statement and also a statement of cash flow and statement of equity, and then at the bottom would be something like the cash flow to the equity investors. So it's more like for the concessionaire and this company. So from concessionaire's standpoint, how do you prepare your financial statement - those are all on one worksheet here. And on the top of this worksheet - Aaron, can you pull up, on the top - yeah. There's one input basically - it's P90 - you can see that. It's basically you select what is the risk confidence level you want to consider. So we have a base - I think we have the base - that's zero percent risk there - or we can select P10, P70, or P90. Its better you always come back to consider P70 whenever you run an availability payment calculation, and sometimes it will probably randomly change to another P10 or P90. So it's better to come back and select P70 whenever you run availability payment calculation. And you can see that still, so we can quickly discuss the whole spreadsheet here. So on the top, there's the assets and also liability, equity. That's the balance sheet of a company. And assets - here's its row 7 to row 10 - and you have that asset. Fixed assets basically are the road asset there. And also the cash in hand. Under liability side, you have the borrowings and also the equity investment, and also returned earning from all the operations there. This is the balance sheet. And then from row 26 to 46, which is the income statement for a company - so in this way this is the concessionaire - you have a revenue side from income stance starting from the revenue, minus cost, and you add to the gross profit. And also there are some others, like a transfer risks, which is also considered as a cost to the concessionaire. And you have some maintenance cost, periodical depreciation. So depreciation now will be added back; basically it's not cash outflow, but it's considered as a cost item. So that's used, the tax of depreciation, and pay less tax for the private company. So you have the interest expenses there. And then income before tax - that's the result you can calculate. And if you have a loss at the beginning of the year - since sometimes at the beginning that your operation of traffic volume is low, so you cannot generate enough revenue, so you have some loss, and you can carry over the loss for the next three years or maybe - depending on the tax code there. And then you have the federal tax and the state tax, so you can calculate based on the certain percentage there. And then the final would be the net income from the whole project. So that's the income statement. And then you go down, you go to the Statement of Cash Flow. So if you know the Statement of Cash Flow, we typically divide a cash flow statement into three parts - one is from the operations, so it starts from net income; and then you have - so net income would be part of that we will calculate. And this way you have operating cash flow, investment cash flow, financing cash flow. So that's three types of cash flow activity, we call it. This is a starting point that we can calculate the cash flow for the whole project. And then the next statement would be the equity statement, starting from row 57 to row 67, which basically shows the whole equity - the change in equity for the concessionaire. So you start with net income; that's part of the equity. And if you have some subsidies which can add into your equity, there's equity investment, which basically the concessionaire or equity investor spent money, invested into this project. There are others, like reserved account you could consider, which is also part of the equity statement here. And then when you have all the equity in your hand, basically cash in hand, and you spend money and pay the equity investor - we call it the dividend - that dividend becomes a cash outflow for the project. Then that's the whole base to calculate the rate of return for equity holder. And so you add the equity investment and plus the dividend for the equity holder, so that's the whole cash flow for equity investors. That's line 70, and that's after tax cash flow for private company. So another name could be just the cash flow to equity investor. And this is the baseline that we calculate what the rate of return is for equity investor, and you can see that we have that 12 percent as input from the assumption sheet, and this 12 percent serves as a base to calculate how we should pay equity investors. So there's a button that optimize dividend. Basically you click that button, and then the dividend will be changed based on the 12 percent rate of return to achieve that, basically. That's pretty much all of this financial statement. I will turn back to Aaron.
Aaron Jette: Thank you, Qingbin. Does anyone have any questions for Qingbin regarding the financial statement? This is probably one of the most complex components of the tool if you're not used to looking at financial statements, or even if you are. There are a lot of components to it, so if you have any questions they are welcome. You can hit star-one or enter questions through the chat box.
So I'm going to move on to our final tool, the Financial Assessment Tool. So I'll close up this Shadow Bid Tool and I have here opened the Financial Assessment Tool. So when you open this tool, you'll have an option to either enter the VFM analysis or the viability assessment. And the part of the tool that we'll be working with today is the VFM analysis. So I'm going to click on this VFM Analysis button, and that brings me to this navigation bar, and where I'm going to go first is this source data, and I'm going to show you how you load data into the tool. Because here we're not entering assumptions; we're importing the assumptions and the result of our work in the previous tool.
Patrick DeCorla-Souza: Aaron?
Aaron Jette: Yeah?
Patrick DeCorla-Souza: If we change the information in the Shadow Bid, I don't think you want to import cash flows. Remember, we changed the availability payment.
Aaron Jette: Right. And I won't actually press the buttons here. Thanks for the warning, Patrick. Yeah. So however you save the tool, whatever the last - particularly in the Shadow Bid, whatever the last run you've done in that Shadow Bid and then you've saved that tool, those are the cash flows that you'll be importing. So that's why Patrick was warning me here. So we've already imported these results. You've browsed for the tool; you select your tool, whatever file name you've saved it under. Same for the Shadow Bid Tool, you do the same thing. And then once you have both of those selected, you can then import MPC results and import cash flows. So these are both buttons that you would then press. Once you have those imported, it populates the following tabs: a cash flow summary for the PSC - this is the same cash flows that you saw in your PSC tool; just they've been imported into this financial assessment tool now. Same with the value for money. These are the exact same - I know it's hard to read this small font, but these are the exact same cash flows that we were just looking at in the Shadow Bid Tool that are now in this VFM Cash Flow Summary tab. I'm going to skip over to the NPC result, and we'll take a look at these results, and Patrick will explain them to you.
Patrick DeCorla-Souza: All right. Thanks, Aaron. So this is simply compiling the results from the Shadow Bid and the PSC tools, and looking at them side-by-side. So we've got here - just like in the other tools - we've got the nominal payments, and then we've got the P10, the P70 and the P90. So for the nominal payments, we are looking at no risk. So this is a zero-risk situation. So if you look at the first column, the PSC column, you'll remember the operations and maintenance costs, those 239 million dollars each. It's the same numbers. As we said earlier, the design and construction costs appear down in the financing with principal and debt payments and interest and fee. And you'll recognize those numbers; they're the same numbers. So on the other side, we have all of those ones in the boxes, or in the cells, for Shadow Bid. And the reason you don't really have numbers, if you read the footnote it says, "Included in availability payment." So all of the costs incurred by the concessionaire, operations, construction, routine maintenance, etcetera, are included in the availability payment line, row 17. Down there you see the availability payment line, and then for the nominal, its 732 million dollars, and then you look at the present values, you get lesser amounts. So that explains the numbers right up - the project payments. Now let's look at risk adjustments, which is a second batch of cells from row 13 to 16. And again, you don't see any numbers in the PSC side for transferrable risk because obviously that is transferred. But why don't we have numbers for construction retained risk? So think about that. All right? So this is for the PSC. And that column, it is no risk. We are saying that's the zero risk situation. And if you go to the next - the P10 risk - now you start seeing numbers. And we are seeing in row 15, we see 20 million dollars - again, that's the $28 million that is discounted to $20 million - and we are calling it transferrable risk because, remember, in the Shadow Bid Tool all of that risk, what is transferred to the private sector - and you see a one on the other side in the Shadow Bid. So the $20 million risk is all - in the operations phase - all of it is transferred. In the construction phase, half of it, which was the 10 million, and half of - 10 million was the total for the P10. Half of that was $5 million, and the present value was 4.4 million, and you see that number in row 14 in the Shadow Bid column. So basically the risk columns, again, are simply a replication of what you saw earlier, and the reason you do it separately is because, in the case of retained risk, that is actually borne by the public sector, so you need to pull that out separately and add it to the availability payment, which is the line below that. So the availability payment is added to the retained risk, so that's what you get, right at the bottom in the Shadow Bid. If you look at row 30, you get $337 million for P10, and for the PSC side, you're getting $341 million. So we do a simple arithmetic computation, $341 million minus $337 million, and we come up with 4.7 million dollars, which is 1 percent, and we therefore say that it's value for money of 1 percent, under the P10. When we go to the P70, we have higher risks and the risk costs go up, the total costs go up. But what happens is since the private sector is better able to manage risks, you have a little greater advantage to the private - I mean, to the cost, from the cost standpoint. And the private sector is able to reduce the cost by a greater amount simply because the value of the risk is higher. So the comparison now, instead of being $4.7 million, you get $8.1 million value for money, which turns out to be 2 percent. And similarly, at the P90 level, you again have the risks go up further, which means the concessionaire can reduce risks by a greater amount than the P70, so a total of 11.5 million dollars in savings that transpire with the P90 comparison, which is 3 percent. So what level of risk you are assuming can greatly impact your comparison. So, interestingly, when you look at the nominal values, you have actually negative value for money. So the public sector comparator in nominal terms actually is lower - costs less than the Shadow Bid. So this shows you the importance of discounting. It's very important to know when those costs are occurring. So in the case of the PSC, you have higher nominal costs, but they may be occurring earlier or later in the process, and if they are occurring later in the process, the value is less; if they're occurring earlier in the process, the present value will be higher. This just simply points out the importance of discount rates and how it can simply turn the tables on you depending on - so the nominal comparison simply is a comparison with a zero percent discount rate. So that's - you're assuming a zero percent discount and you're getting the public sector comparator being a better deal than the Shadow Bid. But the higher you go with the discount rate, the more you're going to turn the tables and make the Shadow Bid look better than the public sector comparator. So this really points out the importance of first thoroughly exploring all the considerations in choosing your discount rate, and then after you've done that, choose different discount rates and do a sensitivity analysis with different discount rates to see how they affect your results. So that is the comparison of the present values. If we have time, Aaron, can we go to the nominal cash flow comparison?
Aaron Jette: Sure. I think we have a couple of minutes, if we can be - do this quickly. Here - so this table here is a comparison of nominal costs, which I will let Patrick explain.
Patrick DeCorla-Souza: All right. So it's one of the outputs. The one that we just showed you previously was present values for different risk scenarios. For example, the P70, you saw that the numbers only under present value scenario. But if you're wondering what the nominal costs of that comparison might be - this is an interesting table to look at because it helps you understand all of the numbers, and also make sure that whatever you input into the model is being properly evaluated by the model. And so I'll go through each of these, and so you can at least understand what the model is doing. So, for design construction, it's straightforward. We said 100 million dollars, nominal dollars. For the PSC, we set a 10 percent reduction for the Shadow Bid, and so we see $90 million in the Shadow Bid column. The operations cost - $239 million - and those of course in nominal dollars, so inflated. And if you go to the Shadow Bid side, we said there was going to be a 5 percent reduction, and so you see that $227 million, if you do the math, it should be right about 5 percent reduction. Of course, there's no discounting here, so it should be exactly a 5 percent reduction. The routine maintenance is the same, so exactly the same situation. So, the bold line which is row 7, Baseline Lifecycle Costs, is the first big component of a value for money analysis. And so what we've done here is simply added up the lifecycle costs, which are the construction and operations and maintenance cost to show you the comparison. So in nominal dollars, the baseline cost, the Shadow Bid looks good. So now let's look at retained risks. So we said retained risks is another component we need to look at, and then we need to look at transferrable risk. So under the PSC, we had 10 million; if you recall, a total of 20 million is what we assumed, 50 percent going to the private sector, 50 percent to the public sector. So under the Shadow Bid, we get only $9.9 million in retained construction risk cost. Again, that's a function of the reduction in - we said we were going to reduce those costs by 25 percent, and so rightfully they should be $7.5 million. So why is it $9.9 million? That's a good question, and we'll ask that of Qingbin. But here, again, you have the impact of risk reserves, and the model is trying to address risk reserves in that computation. Wait a second - so this was retained risk - I'm sorry, I have to go back and correct myself. This is actually retained risk and that is not going to change. It's the amount that is borne by the public sector. So the transferrable risk was lower down in the row 11, and that's the $10 million, and there you see the $7.5 million, and you see the $7.5 million is raised a little bit. Again, it is issue relating to reserves that is affecting this, and you have to look at the cash flow sheets to understand that. So then we go down to total of transferrable risks, which is both the cost of the risk and the O&M - this is both the construction risk, and the O&M risks. So total transferrable risks are 105 million for the PSC and only $79 million for the Shadow Bid. Again, that is because of the 25 percent reduction that we assumed, both in the construction phase as well as the operations phase. So we see, on a nominal basis, the Shadow Bid is doing quite well. So let's see what else is happening. Now, we eliminated taxes to make everything simple, so let's look at financing. So, amount borrowed - amount borrowed for construction, in row 17, for construction interest reserve - you see, instead of $100 million, you see $137 million under the PSC, and only $72 million, which is the 80 percent that we had assumed - 80 percent of $90 million - that's what we assumed would be the debt, and that's showing up quite fine. So why are we getting $137 million when all we wanted to borrow was $100 million for construction cost? So that's a good question to ask yourself. And if you look at the model, the model is actually assuming - well, it assumes that you have a revenue stream. And in the case of the Shadow Bid, you have a revenue stream in the form of availability payments. However, on the conventional delivery side, the PSC side, the model doesn't know where your money is coming from. I mean, you haven't told it. So it will set aside or reserve in order to pay for debt service and O&M at the beginning of each year. So it is incurring additional borrowing because it thinks that you don't have the money. In the availability payment, there's a revenue stream. In the case of the PSC, there is no revenue stream. So the model is trying to create a reserve and borrow money to create this revenue stream to pay off O&M and debt, which means that if you want to be - the model was really designed to be used with a revenue stream, and this is why you really need to do Homework Assignment 2 to really get full value for your - from your study of this model. This is really not a very realistic assumption; the model was built for a toll revenue situation, so you need to use it with a toll revenue situation. So of course this extra $37 million that you are borrowing is having an impact on interest that you have to pay, so you have higher interest payments, and so your total debt cost now, $132 million - this is, again, all nominal dollars - versus only $80 million for the Shadow Bid. And then you go into the risk - so far we've only looked at the base cost; now you have to look at risk cost, and we said 20 million dollars in risk cost in the design-build phase, and that is showing up as $22 million - again, extra borrowing for reserves. That also happens on the Shadow Bid side. Of course when you borrow money, you have to pay interest on it, and that's what the next line - row 21 - is, for debt cost. And so you subtract the interest that you pay, interest to debt service. You take that and you subtract the amount you borrowed and you cost the cost of debt, which is the bold line 6, or row 22. So now you see the comparison of the finance cost, both for the debt - base debt cost in 5, bold 5, and risk cost in bold row 6. So, of course in the case of equity investment, going down, we see that there is no equity required for the conventional delivery. We had 100 percent financing from debt. The equity is showing a $21.5 million investment. That is, if you recall, the balance of the 80 percent. So it's the 20 percent of 90 million, plus an amount to fund the equity portion of risk reserves. And so that's what that number is supposed to be - the amount that equity puts in, and it gets lots of money in return - 148 million dollars - and that's, of course, over a long period of time, 30 years, and it's a 12 percent rate of return, so you see that the equity seems to cost a lot. But remember, this is nominal dollars. Equity is usually being paid much, much later, and so those dollars are less valuable and you need to keep that in mind. So the total finance cost now, just because of all of these different computations in real dollars - line 8 bold - shows you that the Shadow Bid, or the P3 option, is much more expensive in financing cost. The total costs are very close in cash, in nominal dollars, and then the line 14, which is row 33, shows the total amount. That's the total cost that is incurred by the private partner, and that is what is used to calculate the availability payment as we showed you in the webinar. That's exactly the total cost, which included financing - is what the private partner needs compensation for. So that's how - that number is a very important number in calculating the availability payment. So, to calculate the total cost in nominal dollars to the public agency, you add in the retained risks, and so you get 847 million dollars. So the retained risk amounted to something like I guess 6 or 7 million dollars, and so that's in cash amount. So that's how you come up with these numbers. It's interesting to look at the details. Look under the hood, in other words. So I guess I turn it over now for questions, and then we can do a final wrap-up.
Aaron Jette: Great. We have five minutes left, and we want to get through this. So why don't we go through this presentation. We'll take questions at the end for anybody who can stay on past three thirty.
Patrick DeCorla-Souza: So I just want to introduce you to the homework assignment, which is very important for you to do. It's a toll concession; that's what the model was designed for. So it's the same - exactly the same project, and if you've done the availability payment assignment, this should be a breeze - all of the same assumptions on construction costs, O&M costs, inflation, discount rate.
The new thing is the revenues. So you've got some toll assumptions, so you have to put in information on the toll scenario sheet that Aaron showed you, and you have to put in some assumptions on ramp-up period, etcetera, in the assumptions sheet, and revenue leakage. And all of that is explained to you in the instructions.
So run a value for money analysis using the tools, with the data, and the homework assignment gives you detailed instructions, and if you have any questions send them to P3-Value. We will be in touch with you with answers or we'll call you. And we will go over the answers at the special August 16 webinar, another Office Hours webinar that we will be having.
So with that, I guess I'll present the schedule for the next few webinars. You see the one on August 16 there that I just mentioned, and the August 7 will get you into more detail on some of these financial metrics that I've been talking about, like debt service coverage ratio. We'll go more into rate of return and that type of thing. And then we are going to repeat - if you missed any of our prior webinars, we are going to repeat them, starting August 23. So you can take them if you missed them, or if you wanted remedial instruction, you can get them by taking the course again.
So there's my contact information, and I now open it up to questions.
Andrea: And once again, ladies and gentlemen, on the phone line that is star-one to ask a question.
Aaron Jette: Thanks, Patrick. And we did get a question through the chat box, and we're going to just - so everybody understands - your screen will change now and you'll see an evaluation pod on the right-hand side of your screen. We'll be taking questions, and if you want to download the presentation or the homework assignment, as well as prepopulated versions of the tool, you may, and that's in the middle left-hand. You'll see there's a pod in the middle of the left-hand side of your screen called "Presentation Download," and you can do so there. So we'll take questions for anybody who wants to stay on the line with us. We've got one from Richard Davies. He asks: Should the value for money be judged over a range of assumptions for all the variables rather than a single-point value, especially if the difference is marginal? So would it be judged on the majority of the range?
Patrick DeCorla-Souza: Good question. I mean, as you saw, there are very difficult assumptions that you have to make, such as discount rates, value of risk, etcetera, and it behooves you to do an analysis over a range of credible assumptions and look at the answers over this range and see - well, once you have the range, you can probably look at - of course the conventional method is to do a Monte Carlo simulation. I wouldn't suggest you do that many runs of your P3 value, but you could do some extremes and then look at - credible extremes - and then look at what the range is and look at the likelihood of those different assumptions, and present the information based on what assumptions you think are most likely. But it's always a good idea to present a range. And of course, as we said in the webinar, these numbers are only one part of a much bigger evaluation where you look at broader impacts, impacts on user benefits, on other external costs and benefits that you are not accounting for in valuable for money analysis, as well as other qualitative benefits relating to whether or not you can actually get these benefits by structuring your contract in a way that you actually transfer all these risks, etcetera. So it's a much bigger issue than just cranking out the numbers here, and the tool simply helps you understand the complexity of the assumptions and the effect that these assumptions can have on your evaluation. Qingbin, do you have any other comments you'd like to make?
Qingbin Cui: I think you make very good comments here. Probably you want to also mention that Federal Highway and also Volpe Center have that effort to enhance value for money analysis.
Patrick DeCorla-Souza: Yes, yes. And we are doing - thanks, Qingbin - we are undertaking several efforts to enhance value for money analysis, to use benefit cost analysis to account for all of these other benefits, in a quantitative fashion, so that you can do a more comprehensive analysis. And also we are developing guidebooks that will help you decide on how to use discount rates, and what discount rate to choose, and if you choose a certain discount rate, how should you handle risks so that you don't double-down. So a lot of these issues are very difficult issues, and we will have future webinars to go into greater detail, but very, very good question, Richard.
Aaron Jette: Are there any other questions in the queue, Andrea?
Andrea: We have no questions on the phone line.
Aaron Jette: Well, I think that should do it for us then. Patrick and Qingbin, thank you very much. Hopefully those of you still on the line can take the time to look at the tools that we've put up for you to download as well as the next homework assignment, and can join us for our next webinar, where we go through that homework assignment as well as our financial assessment webinar. So with that, any other final comments, Patrick, before we close?
Patrick DeCorla-Souza: No, and I encourage you to do the assignment and do - you can give me a call or send a question to P3tkhelp. And make sure you do the assignment because that's the only way to get maximum benefit from all of these webinars.
Aaron Jette: And that next homework assignment webinar will be on August 16. So thank you very much everyone.
Patrick DeCorla-Souza: Thanks Aaron and Qingbin, and we'll see you all on August 16, or maybe August 7.
Aaron Jette: Right.
Qingbin Cui: Thank you, Aaron.
Aaron Jette: Thank you.