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Innovative Finance Support
FHWA Office of Innovative Program Delivery
Center for Innovative Finance Support
U.S. DOT Build America Bureau

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P3 VALUE 2.0 Webinars
Session 4a: P3 Project Risk Assessment Exercise Review

March 14, 2016
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Related Materials
  • Presentation: PDF  |  HTML
  • Transcript: HTML
  • Exercise Assignment Answers: Word
  • Webinar Recording: Audio

Instructors

Patrick DeCorla-Souza

Patrick DeCorla-Souza
P3 Program Manager
Center for Innovative Finance Support

Wim Verdouw

Wim Verdouw
Financial Modeler IMG/Rebel

P3-VALUE 2.0 Webinars

  • This is one of a series of webinars to introduce P3- VALUE
    • P3 Evaluation Overview (January 25, 2016)
    • Value for Money Analysis (February 8, 2016)
      • Value for Money Exercise Review (February 16, 2016)
    • Project Delivery Benefit-Cost Analysis (Feb 22, 2016)
      • PDBCA Exercise Review (Feb 29, 2016)
    • Risk Assessment (March 7, 2016)
      • Risk Exercise Review (today)
    • Financial Viability Assessment (March 21)
      • Financial Viability Exercise Review (March 28)

Exercise Objective

  • Learn how to estimate, for use in VfM analysis, the cost impacts of risks, as well as the value of risks retained by the public agency and those transferred to the concessionaire under a P3.
  • Learn how to estimate the value of risks for use in benefit-cost analysis.
  • Be able to explain the role of financial conditions in developing a market-based estimate of the costs of lifecycle performance risks and revenue uncertainty.

Webinar Outline

Intro - Project Background
Part A - Risk Valuation for use in VfM Analysis
Part B - Risk Valuation for use in BCA Analysis
Part C - Valuation of Lifecycle Performance Risk and Revenue Uncertainty
Recap - Summary of Webinar

Introduction - Project Background

Study Background

A study was done previously by a state DOT to estimate VfM and net social benefits of P3 delivery for a highway project. The various inputs required for the analysis are included in the P3-VALUE 2.0 spreadsheet model.

Project Information

  • 20 miles highway expansion
  • From 3 lanes to 5 lanes in each direction
    • 3 General Purpose Lanes (GPL)
    • 2 Managed Lanes (ML)
  • Costs (excluding risks and financing):
    • Pre-construction & construction: $425M
    • Routine O&M: $4M per year
    • Major maintenance: $10M (every 8 years)
  • Preconstruction start: 2015 (2 years)
  • Construction start: 2017 (4 years)
  • Operations start: 2021 (40 years)

Base Cost Variability

  PSC
Base variability on pre-construction costs 10.00%
Base variability on construction costs 17.00%
Base variability on O&M costs 10.00%

Construction Phase "Pure" Risks

  • Risk label
    • Design risk
    • Engineering & construction risk
    • Planning & approval risk
    • Environmental risk
    • Right of way/utilities risk
    • Commercial/procurement risk
    • Latent defect
    • Force majeure
    • Political risk
    • Insurance risk
    • Public sentiment risk
    • Changes in law & policy

Operations Phase "Pure" Risks

  • Risk label
    • Latent defect
    • Operations risk
    • Maintenance risk
    • Force majeure
    • Insurance risk
    • Changes in law & policy

P3 Financing Conditions

Cost of equity 12.00% % p.a.
Gearing (debt-to-equity ratio) 75.00% %
Debt maturity 30 years
Debt interest rate 6.00% % p.a.
Equity bridge loan interest rate 6.00% % p.a.
-
Difference between Availability Payment WACC & Toll Concession WACC* 1.60% %

Part A - Risk Valuation for Use in VfM Analysis

PSC Risks

  • PSC risks include:
    1. Base variability;
    2. Pure risks;
    3. Lifecycle performance risks; and
    4. Revenue uncertainty.

P3 Option

Differences between P3 and Conventional Delivery that could affect P3 risk values may include:

  • P3 differences with regard to risk management, potentially leading to a reduction in risk valuation
  • Share of pure risks transferred to the concessionaire

Review of Model Inputs

Please stand by as we open the Excel file

  • Conventional Delivery (PSC)
  • P3 Option:
    • Retained risks
    • Transferred risks

Conventional Delivery Risk Values

Item Risks under Conventional Delivery
NPV risk values
($M, Column G)		 Nominal risk values
($M, Column H)
Total Pure risks (row 28) 69 121
Total Base variability (row 34) 79 112
Lifecycle performance risk premium (row 36) 228 574
Revenue uncertainty adjustment (row 38) 130 377
Total risks under Conventional Delivery (row 45) 505 1,184

P3 Risk Values - Retained Risks

Item Risk Retained by Agency under P3
NPV risk values
($M, Column J)		 Nominal risk values
($M, Column K)
Pure risks (row 28) 6 11
Base variability (row 34) 7 10
Lifecycle performance risk premium (row 36) - -
Revenue uncertainty adjustment (row 38) - -
Total risks retained under P3 (row 45) 13 21

P3 Risk Values - Transferred Risks

  Risk Transferred to P3 Developer
Item NPV risk values
($M, Column M)		 Nominal risk values
($M, Column N)
Pure risks (row 28) 40 98
Base variability (row 34) 54 94
Lifecycle performance risk premium (row 36) 93 515
Revenue uncertainty adjustment (row 38) 51 382
Total risks transferred under P3 (row 45) 238 1,089

Nominal Values - PSC vs. P3

  Nominal values
Item PSC ($M,
Column H)		 P3 ($M,
Column K + Column N)
Pure risks (row 28) 121 109
Base variability (row 34) 112 104
Lifecycle performance risk premium (row 36) 574 515
Revenue uncertainty adjustment (row 38) 377 382
Total risks transferred under P3 (row 45) 1,184 1,110

Benefits from Risk Transfer

  • Nominal value of all risks retained by Agency under PSC
    = $1,184 M
  • Nominal value of all retained + transferred risks under P3
    = $1,110 M
  • Nominal value of difference
    = $74 M

Questions?

Submit a question using the chat box

Part B - Risk Valuation for Use in BCA Analysis

Risks in Project Delivery BCA

  • Project Delivery BCA (PDBCA) considers the following risks for the Delayed Conventional Delivery, Conventional Delivery and P3 Options:
    1. Base cost variability;
    2. Pure risks;
    3. Lifecycle performance risks
  • Discount rate is the social discount rate, assumed to be 3%

P3 Option

Differences between P3 and Conventional Delivery that could affect P3 risk values may include:

  • P3 differences with regard to risk management, potentially leading to a reduction in risk valuation

Review of Model Inputs

Please stand by as we open the Excel file

  • Delayed Conventional Delivery
  • Conventional Delivery
  • P3 Option

Delayed Conventional Delivery vs. PSC

Item Delayed Conventional Delivery Risk values NPV
@ 3.00% ($M)
for PDBCA (Column G)		 Conventional Delivery Risk values NPV @ 3.00% ($M) for PDBCA
(Column J)
Pure risks (row 28) 52 62
Base variability (row 34) 63 74
Lifecycle performance risk premium (row 36) 147 185
Total risks (row 38) 262 321

Conventional Delivery (PSC) vs. P3

Item Conventional Delivery Risk values NPV
@ 3.00%
($M) for PDBCA
(Column J)		 P3 Risk values NPV
@ 3.00%
($M) for PDBCA
(Column M)
Pure risks (row 28) 62 57
Base variability (row 34) 74 71
Lifecycle performance risk premium (row 36) 185 171
Total risks (row 38) 321 299

Questions?

Submit a question using the chat box

Part C - Valuation of Lifecycle Performance Risks and Revenue Uncertainty

Alternative Revenue Scenario

  • Due to new information on revenue uncertainty, project financiers perceive much higher revenue risk.
  • Financing conditions will change.
    • increase in the cost of equity by 2%
    • Increase in interest rates by 2%

WACC Changes

  • Prior WACC = 8.84%
  • Revised WACC = 10.70%
  • Increase in WACC = 1.86%
  • Use the model to calculate the new value of revenue uncertainty by adding the increase in WACC to the existing revenue uncertainty adjustment input
    • Difference between Availability Payment WACC and Toll Concession WACC:
      = 1.6% + Increase in WACC of 1.86%
      =  3.46%

Review of Model Inputs

Please stand by as we open the Excel file

  • VfM risk values

Conventional Delivery Risk Values

Item Nominal value
Base Case (from Part A) Revised Scenario ($M, Column H)
Total Pure risks (row 28) 121 121
Total Base variability (row 34) 112 112
Lifecycle performance risk premium (row 36) 574 575
Revenue uncertainty adjustment (row 38) 377 579
Total risks under Conventional Delivery (row 45) 1,184 1,387

P3 Risk Values

  Nominal values
Item Base Case (from Part A) P3 ($M,
Column K + Column N)
Pure risks (row 28) 109 109
Base variability (row 34) 104 104
Lifecycle performance risk premium (row 36) 515 517
Revenue uncertainty adjustment (row 38) 382 586
Total risks transferred under P3 (row 45) 1,110 1,316

Revised Comparison - PSC vs. P3

  Nominal values
Item PSC ($M,
Column H)		 P3 ($M,
Column K + Column N)
Pure risks (row 28) 121 109
Base variability (row 34) 112 104
Lifecycle performance risk premium (row 36) 575 517
Revenue uncertainty adjustment (row 38) 579 586
Total risks transferred under P3 (row 45) 1,387 1,316

Benefits from Risk Transfer

  • Nominal value of all risks retained by Agency under PSC
    = $1,387 M
  • Nominal value of all retained + transferred risks under P3
    = $1,316 M
  • Nominal value of difference
    = $71 M

Questions?

Submit a question using the chat box

Webinar Summary

Webinar Recap

Intro Project Background
Part A Risk Valuation for use in VfM Analysis
Part B Risk Valuation for use in BCA Analysis
Part C Valuation of Lifecycle Performance Risk and Revenue Uncertainty

Tool and References

Upcoming P3-VALUE Training

  • March 21 Financial Viability Assessment (2pm)
  • March 28 Exercise Review on Financial Viability Assessment (12:30pm)

Resources

FHWA's Center for Innovative Finance Support Website:
https://www.fhwa.dot.gov/ipd/
P3 Website:
https://www.fhwa.dot.gov/ipd/p3/

Questions?

Submit a question using the chat box

Contact Information

Patrick DeCorla-Souza
Center for Innovative Finance Support
Federal Highway Administration (202) 366-4076
Patrick.DeCorla-Souza@dot.gov