Transcript

Jordan Wainer: Good afternoon. On behalf of the Federal Highway Administration's Innovative Program Delivery office, I'd like to welcome everyone to today's webinar, it's the second in the P3-VALUE 2.0 Webinar Series and it will focus on value for money analysis. My name is Jordan Wainer, I'm with the U.S. DOT's Volpe Center in Cambridge, Massachusetts and today I will be moderating the webinar and facilitating our Q&A period as well as providing technical assistance. Before we begin, I'd like to point out a few key features in the webinar room. On the top left side of your screen you will find the audio call in information. If you are disconnected from our webinar at any time, please use the call in information to reconnect to the audio. Below the audio information is a list of attendees, below the list of attendees is a box titled, "Materials for Download" where you may access a PDF copy of today's presentation as well as the homework for next week. Simply select the file that you want to download, click, "Download files" and follow the prompts on your screen. In the lower left corner is a chat box where you can submit questions to our presenters throughout the webinar. Our webinar is scheduled to run until 3:30 p.m. Eastern and we're recording today's webinar so that anyone unable to join us may review the material at a later time. All lines are muted but there will be a chance to ask questions over the phone at a later time. So with that, I will turn it over to Patrick DeCorla-Souza. Patrick?

Patrick DeCorla-Souza: Thanks Jordan. Again, my name is Patrick DeCorla-Souza, I'm the P3 Program Manager in the Center for Innovative Finance Support and I will be presenting part of this webinar. With me to present this webinar is Marcel Ham. And I have some nice pictures here for you to see so you can see what we look like. And Marcel is a finance expert, he's with IMG Rebel and that firm was responsible for developing the P3-VALUE tool. I have a planning and engineering background and so I hope we will make a good combination in conveying this material to you. So just to give some background, this is the second webinar of a series of five webinars that we have scheduled over the next six weeks. If you didn't attend the first webinar which was held on January 25th, there's a recording available and we will have some URLs available for you to access the recordings, but if you can't find the URL, just go to the P3 Toolkit portion of our website and you'll be able to find it. So by way of background, we are talking about public/private partnerships which are also called P3s and P3-VALUE 2.0 is an enhanced value for money analysis tool, it's an update to the prior version which was released about a couple of years ago and this one is new and improved and also does benefit cost analysis in addition to value for money analysis. So the webinars that are coming after this on a two week cycle are project delivery benefit cost analysis, risk valuation and financial viability assessment. For today's webinar, we have four parts, An Introduction and Developing the Public Sector comparator which I will present and then Marcel will present parts three and four on Developing the P3 Option and Comparing it to the Public Sector Comparator and he will introduce to you the Value for Money Spreadsheet tool.

The objectives of this webinar are -- hopefully at the end of this webinar you will be able to list the various components of the public sector comparator and the P3 option and you will be able to describe the methodologies used to estimate the public sector comparator and the P3 option. And with the introduction to the tool, hopefully you will be encouraged to perform high level screening analysis for any project that you may be interested in. So let's move right over into the introduction, part one.

As I had explained at the last webinar two weeks ago, value for money means a combination of costs and quality. So we are not only looking at life cycle costs but also trading off costs and quality. However, a lot of people focus only on the quantitative analysis which is expressed in dollar terms or the percent difference between conventional delivery and the P3 option. So hopefully through this webinar you will be alerted to the fact that there are other considerations that must go into evaluating value for money. The public sector comparator is another word for conventional delivery and is the baseline cost against which the P3 option is compared. The P3 option or P3 is sometimes erroneously referred to as the shadow bid, but in fact it is more than the shadow bid because the shadow bid you would think is only the bid of the developer, in other words, how much subsidy or availability payment that project developers from the private sector would require to undertake the project. However, the P3 option includes more than just the bid because it has to consider costs that are retained by the public sector as well as risks that are retained by the public sector in order to have a complete and fair comparison with the public sector comparator. Again, on this slide you saw at the last webinar, our focus is on the project development phase with the P3-VALUE tool, in other words, very early in the project development phase, you may be interested in seeing how a P3 option might fare against conventional delivery and the tool can help you do that. Now when you get to the procurement phase, you obviously need a lot more detailed analyses and you would need to hire financial advisors to do that detailed analysis. And finally, after the project is implemented you can also do value for money analysis to see whether the efficiencies that you were expecting really are achieved in the project as it is being implemented and operated. So this shows you the process of P3 evaluation, you identify the procurement options, both the conventional and the P3, then you identify, monetize and allocate risks for the project and then you get to the phase where you can do a value for money analysis which we are going to cover in this webinar, that is develop the PSC and then develop the P3 option. And finally, after you have those numbers you would need to consider the qualitative factors to see whether there are quality issues that might be needed to be traded off against the numbers that you get from value for money analysis. So I'll go through each of the steps. Step one is identifying procurement options both on the PSC side as well as the P3. Under the P3 there are just two options that the tool can address, the first is a toll concession, sometimes know as design-build-finance-operate-maintain, toll concession or DBFOM and another P3 option is DBFOM with availability payments. And the difference between the two is simply that the toll revenue risk is transferred to the concessionaire under a toll concession. With an availability payment concession, the agency keeps the toll revenue risk if there are tolls in the facility. Conventional delivery really can be any option that the agency would normally undertake if it did not do a P3. So there are several options listed there and so you would select whichever one is the option that the agency would use. The second step in the process of P3 evaluation is doing a thorough risk assessment. Now we will cover risk assessment in Webinar Four in about four weeks from now, but this is the process, you identify risks and quantify risks and in order to do that you need to have subject matter experts and you usually bring them together in a workshop to identify and quantify these risks. Now after that is done, you can do the valuation of risk based on the information you got from the subject matter experts and the P3-VALUE tool will help you do that risk valuation. You also do risk allocation and once you've figured out what risks you're going to transfer, the P3-VALUE tool can also value the risks that are transferred and the risks that are retained. The third step is developing the public sector comparator which is the conventional delivery option and here the important points are that it is a risk-adjusted cost estimate and also of course risk-adjusted revenues that have to be considered for the conventionally procured project. There are some assumptions made in developing the public sector comparator that are important to understand. The first is the scope is supposed to be exactly the same as under the P3 option, the quality standards are supposed to be the same as under P3 delivery and if these assumptions don't hold true, you have some issues in doing the comparison. Finally the timeframe needs to the same for the PSC as for the P3 delivery and again, you'll have very serious issues if the public sector comparator is for some reason going to be delayed because then you enter into issues where you can't really compare the costs of two delivery options if one is delayed and therefore the present value of those costs become lower in the base year. The fourth step in the P3 valuation process is developing the P3 option and we define it as the net cost to the public agency, so the components include not just the shadow bid or the P3 contract payment but also any revenues that come to the agency, for example, if it's an availability payment concession as well as any costs and risks that are retained by the agency. This shows you step five which is comparing the PSC with the P3. We will go into a lot more detail of the components of each of these options but the important thing here is to look at the big differences. The big differences you see are on the risk side, for example, if you look at the PSC here. But you see the big purple blob on the left hand side, on conventional delivery, and then on the right hand side, you see retained risks are much smaller so there's a big difference here because you're transferring a lot of the risks to the private sector. The base cost on the other hand, the big dark purple blob on the left hand side is much lower than on the P3 side and the important reason for the difference is that the P3 side, the bid includes the risks that are transferred over to the concession. And we'll get much more into the detail as we go along. So after you've made that comparison and you have measured the difference in dollar terms between the two options, you need to trade off that difference against other considerations, for example, additional user benefits; if the project is completed earlier under the P3, you would want to consider that. You would want to consider any quality of service improvements under a P3, and in value for money analysis, these are not quantified and so you just have to make a tradeoff evaluation. And with benefit cost analysis, as we will see in the next webinar, we actually can quantify these impacts and then we can simply add up these benefits to do a more complete comparison. Of course, there are still going to be other considerations that even benefit cost will not be able to address and those are listed there, contract related considerations basically, they are things that revolve around whether or not you can actually write an agreement that is enforceable and can get you all of the value for money reductions in risk and in cost efficiency that you were hoping to get based on your analysis. And those are things that you have to consider. So I turn it over to you Jordan for the test.

Jordan Wainer: Sure. Our question is value for money analysis requires that the PSC have the same scope as the P3 and be implemented in the same timeframe as the P3, true or false?

Jordan Wainer: Okay, I'll give everyone just another second to answer and I'll broadcast the results.

Patrick DeCorla-Souza: Okay. So most folks got it right, yes the PSC is assumed to have the same scope as the P3, so for example if a P3 developer proposes some improvement that was not in the original design, you have a problem in making the comparison because then you would have to again change the PSC after the fact in order to ensure that the scopes are the same, otherwise you would have different costs and an unfair comparison. And the reason the PSC has to be in the same timeframe as the P3 is related to discounting. So if the PSC is going to be built let's say ten years down the road and if you use discounting to discount those costs and you use let's say a five percent discount rate, roughly you would get somewhere around only 70 percent present value of those costs in present value terms. And so value for money analysis wouldn't work. All right, let's go on. Oh, do we have questions? I'm sorry.

Jordan Wainer: Yeah, there's one question. Ken Olsen asked, "Why don't you consider DBOM as one of the delivery options in your VFM analysis?"

Patrick DeCorla-Souza: We could do it, the P3-VALUE tool, right now has been designed to just handle these two options, that is toll concession and availability payment. There are ways we could use the current tool to do DBOM but since there's no financing involved, you do not use the value of the whole tool, which is that it brings in financing, and I'm sure as we go along, we'll develop ways that we can enhance the tool or at least suggest how you could use it to do DBOM analysis. But very good question, yes. Thank you.

Jordan Wainer: There are no other questions at this time.

Patrick DeCorla-Souza: All right, so let's move forward. Develop the public sector comparator is our part two. And as we indicated in the first section, these are very key assumptions about project scope, quality standards and timeframe being the same under P3 as for PSC. Now as you will see in the next webinar in two weeks, we can actually relax these assumptions if we do a benefit cost analysis and so that will actually be a benefit of doing a benefit cost analysis instead of value for money analysis. I said we'd discuss the various components of each of these options and so here you see on the right hand side the various components starting with base costs, and those are lifecycle costs, so they include both design-build phase as well as operations phase. Then you have financing fees which are only the cost to secure financing, for example bond issuance fees. They do not include principal and interest if you are taking a loan or issuing bonds because that would really be double counting, for example if you also counted principal. But also the issue of interest, we don't include interest because it's very easy to distort the results if you include interest but then use a discount rate that is not consistent with the interest rate of the bond. So in P3-VALUE we are not accounting for these financing costs other than financing fees. Risks, I indicated at the last webinar are of three types: base variability, pure risk and lifecycle performance risk. I'll go into them in a little detail on a later slide. And other costs, other project costs include monitoring cost, cost to develop agreements, hiring advisors, things of that type, and competitive neutrality also is something that I will discuss in a later slide. Base costs, I indicated would be either the upfront capital costs which are costs to design the project and construct the project or they can be operations costs and these include not just costs to operate the project but routine maintenance of the project and resurfacing, reconstruction and rehabilitation on a periodic basis. And what you see in that graphic is simply how the costs play out over the term of the concession or in this case, for conventional delivery, the period of analysis. As I indicated in the first webinar, base variability is simply something that you add on as a contingency to account for the fact that you have a lot of uncertainty in the volume or the amount or the width of facilities and things of that type and therefore your costs can be higher than you expected. Pure risks are also called event risks so they don't always happen, in other words, there's not 100 percent probability that they will happen as with base variability, but there's a probability that such an event might occur. And so when you estimate the value or a pure risk, you have to take the probability into account, an accident at a construction site for example. You may have no accidents or you may have several accidents and so you take that into consideration in estimating how that might delay the project or increase its cost. And in P3-VALUE, any delays are accounted for in the cost estimate itself. The last term, lifecycle performance risks are risks that are borne by a concessionaire as against base variability and pure risks which usually are borne by the subcontractor, so they are pushed down to the subcontractors by the concessionaire. However, whatever is left is lifecycle performance risk including things such as inflation, interest rates and supervening events that exceed liability caps, things of that type. We already talked about the fact that interest and principal are not accounted for on the PSC side of the equation simply because of the possibility of distortion of the net present value of the public sector comparator, however we do consider all of those fees that you see up on that slide. Other project costs include cost to procure the project. And in the case of a public sector comparator since the agency is quite familiar with how to procure conventional delivery projects, those costs are generally lower. Monitoring and oversight costs may be lower under a PSC, it just depends. I said I'd talk about competitive neutrality adjustment and this is kind of an optional item that you can add to the PSC side and the rationale for competitive neutrality is simply to level the playing field between the private sector and the public sector. An example is that the private sector may have to pay taxes, so the concessionaire may have to pay taxes but if the public agency is delivering the same project, they may not be paying taxes. Of course the taxes paid by the subcontractors are the same on both sides. But what's different is whereas the agency doesn't pay taxes because of course, it doesn't have any profits, the concessionaire does pay taxes and has to account for those tax liabilities in the bid that it presents. So the competitive neutrality primarily attempts to level the playing field to account for these taxes. So the big issue is, what taxes and adjustments should you consider in this adjustment. And the next slide suggests that it depends on your perspective. So if you're the agency such as the DOT and the concessionaire is paying state corporate income taxes, those corporate income taxes don't come to the agency, they go to the state treasury. So the question is, should you consider that amount of tax that the concessionaire is paying, and so it's something that you would have to decide whether or not you want to do that. At the state level, yeah, you might definitely say that the corporate tax, state corporate tax should be accounted for in the competitive neutrality adjustment but what about taxes that are paid by the concessionaire to the federal government. The state doesn't benefit from those taxes, they go somewhere else, to Washington and they may or may not get any benefit from those taxes. So the state might choose to ignore taxes paid to the federal government in its analysis. If analysis is being done at the national level or from society's viewpoint, we would of course need to consider all such taxes in order to have a competitive environment or at least account for the fact that we need to level the playing field between the private and public sectors. So once we have these five components, as you see on the left over there, we need to take those costs, which are all in today's dollars, base year dollars, and we need to spread them out as they might be incurred over the life of the project, which is what you see in that second step called Escalation, which simply takes those costs and allocates them over the different years. So you the see the construction costs being distributed over the first few years of the project and then you see a smaller bar later on showing the operations and maintenance costs. And then the slightly larger bar that you see over here, is the periodic rehabilitation and maintenance cost. To that, we now need to add toll revenues. What you see above the line now. Now the reason the costs are below the line, because they're negative. The revenues are above the line because they're positive, and we need to-- the important thing is you'll get a forecast from the modelers, the travel demand modelers, but those have some uncertainty attached to them, so those revenues that you get based on the modeled forecast need to be adjusted for uncertainty, and P3-VALUE has a method to adjust those revenues. I talked about discounting, and it's simply a way of getting the present value of some future expenditure or some future amount of revenue, and what you see in the denominator of that equation-- the denominator in parentheses there, 1 plus r raised to the power of n, is what you divide the future revenue or cost by, which is CF, meaning the cash flow. So as you can see, the exponent-- the exponent n is the number of years-- that value gets bigger and bigger the further out into the future you go, so you're dividing by a bigger and bigger number, and so the present value is going to be smaller and smaller the further out into the future that the cost is incurred or the revenue is received. So what happens is, first, you see-- on the left-hand side you see cost increasing because of inflation. On the right-hand side-- the screen isn't showing it, but discounting will lop off a lot of the extra costs, not just due to inflation but because of the present value of those costs being lower. So your actual PDF file should show you the proper graphic. It doesn't show up on the screen-- I apologize-- but basically what it's trying to show you is as you go further and further into the future, you're reducing your cost in present value terms. So basically when you add up all these future costs and you bring them to present value terms, a higher discount rate is going to lead to a lower present value. So that's what you see, on the screen there, and you get a much lower number if you apply, let's say, a discount rate of 7 percent relative to a discount rate of, let's say, 4 percent. So 7 percent is going to make your present value of cost look a lot lower. All right, Jordan.

Jordan Wainer: Okay, I'm pulling up the next poll question. The question is: Which of the following are components of a PSC cost estimate in P3-VALUE 2.0? And you can select construction costs, O&M costs, financing fees, and interest and principal payments. You can select more than one. I will give everyone just a couple more seconds to answer. And I'll broadcast the results. We have 16 people, or 100 percent of people, say construction costs; 87.5 percent of people say O&M costs; 100 percent of the people said financing fees; and 23 percent of the people said interest and principal payments.

Patrick DeCorla-Souza: Okay, so of course most of the folks were right on the construction, O&M and financing fees. Yes, they are all included in the P3-VALUE estimate of the PSC. Now, interest and principal payments are not included in the present value of the PSC, and the reason is-- first of all, if you were to include principal, you're actually double-counting construction costs and O&M costs. So that would be wrong, you would be double-counting the cost. But the reason you don't include interest is a little more difficult to understand. It is simply because the agency could do it with its current budget or it could do it taking a loan, and if it of course takes a loan or issues a bond, it pays interest. Now, the fact is that in discounting-- so if you take your principal and interest payments and you discount them at the same rate as the interest rate that you're paying on the bonds, you would get a net present value equal to the mount borrowed, with a difference of zero. All right? So you can do that and try that out and you will see that it really-- it doesn't make any difference. But on the other hand, if you use a different discount rate than the rate of interest, then you might either get a positive value-- that is, some kind of a surplus that the agency can benefit from-- or you would get a negative amount if you used a discount rate that's higher than the borrowing rate, and that would distort your results because it's an artifact of the discount rate that you chose. Generally speaking, to do a value for money analysis, you should choose as your discount rate the cost of borrowing to your agency. So basically P3-VALUE ignores interest and principal payments for that reason. Any other questions or do we have any?

Jordan Wainer: Again, if you'd like to ask a question over the phone, you can press star-six and speak. Otherwise there are no questions in the chat pod.

Patrick DeCorla-Souza: All right. So we can move over to Marcel and Part 3. Marcel?

Marcel Ham: Thank you. So in Part 3 we'll be discussing the P3 option, and then compare it to the public sector comparator, or the conventional option. In developing the P3 option, we are not starting from scratch. So we just discussed the public sector comparator, and what Patrick explained is that we basically start all the components, all the financial components of the public sector comparator. Now, one could argue that you would have to do the same for the P3 option. However, many of the components in the P3 option will be similar to the public sector comparator, which is why we use the public sector comparator as a starting point and then focus on the most important-- or no, actually, all the differences that are created by P3 delivery. So instead of building it up from scratch, we take the public sector comparator as a starting point and then ask ourselves the question: Where should we be expecting differences from P3 delivery when we compare with conventional delivery? Now we're going to talk about all the six components that we're showing on the slide right now, where we are expecting the differences in P3 delivery: private sector efficiencies, risk adjustments, potential higher toll revenues, higher transaction cost, differences in tax structures, and also differences in financing structure. And we're going to talk about all those components in more detail, and we're going to focus on the quantitative assessments of those differences. However, I also do want to point out that it's important in a value for money assessment to not only focus on the quantitative analysis but also think about the underlying drivers of those differences. So I think if we do that, if we ask ourselves the question, "Why is it that P3 can lead to private sector efficiencies, can lead to higher transaction cost?" then we're really helping and supporting decision-making. So I just wanted to bring that up because sometimes we tend to focus very much on the numbers and just the numbers, but we should always be able to bring it back to the discussion why should we be expecting that P3 leads to differences. Some are positive, some might be negative, but we're expecting all these differences. Differences in incentive mechanisms. We're expecting differences-- some of these differences will come from the governance structure. Some of the differences will come from the alternative risk allocation in the contract. And so in the value for money assessment guidebook that is available online, we expand on this topic, and I will also point out throughout this presentation what the underlying value drivers are that are going to support our assumptions underpinning the quantitative value for money assessment and also underpinning the quantitative estimation of differences.

The first component is private sector efficiencies, and there's two groups of efficiencies that we want to focus on. The first one is timing. So P3s are expected to, on the one hand, start a little later than conventional delivery, the reason being that the procurement of a P3 contract typically takes longer than the procurement of a conventional contract. That's both in the preparation of the tender and also in the tender execution. So that's what we refer to as delayed start. The other timing-related difference that we're expecting is accelerated construction. Now, many P3 contracts provide for incentives that are going to encourage the concessionaire to expedite construction, to complete the project earlier than would have been the case under conventional delivery. Under a toll revenue regime, obviously there is the incentive of getter earlier access to toll revenues. Under availability payments, there is the incentive to start collecting availability payments earlier, or even milestone payments, at substantial completion. So there are incentives in the contract that are going to make it likely that the completion of the project is going to be earlier than would be the case under conventional delivery. Now on the cost side, we are expecting differences too, and this is typically referred to as lifecycle costing. So now we are integrating the construction phase and regular maintenance and major maintenance into one contract. We are allowing the P3 concessionaire to optimize, to arrive at the optimum combination of all these components, and therefore -- and this is something we know from practical experience-- bidders will be able to effectively do lifecycle costing and arrive at an overall lower NPV of their cost, than in a structure in which we are potentially not even allowing for optimization between the different phases or, alternatively, we are not providing the incentive to optimize between the different stages of a project, and in that I'm referring to conventional delivery. So it is very likely that due to incentives in the contract, the P3 delivery leads to lifecycle costing, to cost efficiencies, not only in construction but potentially also in major maintenance and in maintenance. Sometimes we see that, for example, the investment cost can be a little higher, but then there's going to be more savings on the maintenance side. Sometimes it's the other way around. But the overall point is the overall net present value of all the costs combined is likely to be lower, and this is also something we're seeing in practice. So that's our first main difference that we are expecting from P3 delivery.

The second one is the cost of transferred risk. So we just discussed mainly the cost side. Now we're focusing on the risks. In a P3 contract, we are transferring many more risks than under conventional delivery to the concessionaire, and then we're providing the concessionaire with the incentives to really manage those risks in a more efficient way. And so we've been talking about the different categories of risks, and the expectation is-- and this is also something we see in practice-- that the P3 concessionaire will be able to more efficiently manage risks. That will therefore create additional efficiencies in the cash flows. This goes throughout the different buckets of risks that we've been discussing. So on the left-hand side we see coordination and long-term performance risk. Typically responsibility of the contracting authority under conventional delivery now are responsibility of the P3 concessionaire, and the expectation would be that the concessionaire can do this more efficiently. The same is true for the construction-related risk and the operations-related risk. Overall, this should be in our model, or in our value for money assessment. This should be reflected in lower assumptions regarding risk valuation on the P3 side than we're seeing under the public sector comparator.

The third component is toll revenue. So now we just discussed cost, we discussed risk, and now we're focusing on revenues. Under certain circumstances we could expect higher toll revenues than under conventional delivery. For example, what we've seen in projects is that P3 may lead to innovations that will result in additional revenues-- innovations, for example, in the design of a project. Now, the interesting thing of course is if we want to really do an apples-to-apples comparison then the scope should be very similar, which could bring us to the point, A, that's not fair. If we make changes to the design, we should also reflect it. That's one approach. The other approach is to say, "No, functionally speaking the specifications of the project are the same under conventional delivery and P3, so if the P3 concessionaire is able to, within those specifications, create innovations that lead to higher revenues, then that's still a very fair comparison. And we want to capture that innovation." That's one kind of difference we could be expecting on the revenue side. Another one is marketing. So what we're seeing in P3 concessions is that the concessionaire is more effective in marketing the project, could also be more aggressive, as this slide is saying, which could lead to a faster ramp-up of traffic. It's not expected that this is going to create a long-term effect, but of course-- mainly in the ramp-up phase-- but that's still very important because we're talking about early stage cash flows and in terms of the net present value, that may have important effects. So that's so much for toll revenue differences.

The fourth component is transaction cost-- the cost of preparing and tendering a P3 contract, but also to monitor and manage that P3 contract. That is on the public sector side, and what we are expecting to see-- and this is also proven by the many experiences that we do have with P3 delivery-- is that the public transaction costs are higher than they would be under conventional delivery. The private sector costs are higher too. Typically we are expecting much more from the P3 bidders in terms of their putting together a bid, not only on the technical side but also on the financial side. We are expecting that the bidder puts together a complete financing structure, and arranges the financing, but also puts together a financial model that reflects the complete bid. On the technical side, we're also expecting many, many deliverables that allow the contracting authority to do an assessment of the technical robustness and potentially technical quality of the bid. Also on the private transaction cost side, we are expecting to see higher transaction cost, mostly in the initial stages of the project, but in some projects we're also seeing higher oversight and monitoring cost in the longer run. So this is of course a very important point because it is a negative difference that is linked to P3 delivery, we cannot do without, and it means that we need to include it into our comparison, not only in the P3 bid but also in the retained cost, as Patrick explained before. So, again, sometimes the P3 delivery is referred to as shadow bids. Then in the shadow bid we would be capturing the private transaction cost, but of course we also need to-- if we want to make an apples-to-apples comparison, a fair comparison, then we should also consider public transaction cost and other retained cost by the public sector. And that's a negative here too. So we're expecting a negative difference from P3 delivery from transaction cost.

The fifth component is the difference in tax structure. Of course under conventional delivery there are tax obligations from all the contractors too, from the design and construction or maybe just a DBB contractor has tax obligations. Also the maintenance contractors have tax obligations. However, in a P3 structure it's likely that the tax implications are going to be higher, and different, and that is mainly because there is a whole new entity in the P3 structure. The new entity, the special purpose vehicle, the project entity that is responsible for entering into the contract and also executing the contract under a P3 structure is now a new entity that is also obliged to pay taxes. So there's going to be an additional tax component there, that wouldn't have been there under conventional delivery, and we need to take that into account, and in fact, this is of course something that is taken into account by real bidders. So if we want to mimic, to estimate what the P3 bids would be, then we need to take into account these differences in tax structure.

Finally, there are differences in the financing structure. Of course in the public sector comparator or under conventional delivery, there can be financing. The financing typically is very different from financing under a P3. Under a P3, we are expecting a financing structure that has equity and debt from potentially different sources in combination with a public subsidy that is going to reduce the financing need for the project. The most important thing is that we are adding the equity component here. So whereas maybe under a conventional delivery there would be debt taken out by the contracting authority, there would never be an equity portion, and in this case there is. Another very important distinction, of course, is that now we're talking about the financing of the project, a project finance structure. And so sometimes we are referring to this project finance structure as no recourse or limited recourse, and that means that the financiers of the project entity have nothing more than the contract as security. So there are no underlying additional securities for the financiers, whereas under many public financing structures that are applied under the conventional delivery, there's of course always the complete balance sheet of the contracting authority. Of course there are alternative structures, but I think it's important to acknowledge that under P3 delivery, the assumption is-- project finance-- the assumption is that it's no or limited recourse, and the assumption is also that the financing structure reflects the full risk profile of the project, and that means that there's going to be equity and debt and potentially other financing sources involved.

Now those are the six most important differences that we are expecting from P3 delivery, and now if we combine our initial public sector comparator cash flows with the differences that we just discussed, we will be able to determine what the expected bid plus additional costs is going to be. And so the P3-- we will try to estimate what the P3 bidder will come up with in terms of his bid, and the bid of course then includes all the base lifecycle costs. The bid also includes evaluation of all the transferred risk to the concessionaire, and the bid also includes potentially available subsidies and financing cost, and under a P3 revenue-based concession, there will be revenues too that are going to be considered. So of course here we will see the P3 bid is very different for an availability payment structure in comparison with a revenue-based toll concession because there will be the revenues that need to be considered in the latter and not in the first.

So on the basis of all the inputs that we gathered and an estimate of all the differences resulting from P3 delivery, we can come up with our shadow bid, our estimate of the P3 bid, and we're going to talk about the P3-VALUE 2.0 model in a minute, and what this model does for you is to determine what the bid is going to be on the basis of all the assumptions that we discussed just now. So the model will require from you assumptions on all the components, all the different building blocks; and then on the basis of macros, the model will calculate for you what the expected concession fee or availability payment is going to be, covering all the underlying costs, considering all the potential revenues, and satisfying all the financing requirements, both including debt and equity.

Now as we discussed several times, it's not just about the bid; it's also about public agency cost under a P3. We cannot just focus on the bid because then we're forgetting the other consequences of P3 delivery, other costs and other risks that the public sector will absorb. Now, the most-- from a public agency perspective, the cash flows under P3 delivery are, first of all, the payments to the P3 concessionaire, either in the form of milestone payments or availability payments, which we refer to as a shadow bid, but then also retained cost, some of the construction costs, or actually project preparation costs, may be retained by the public agency and need to be considered. They're not going to be included in the bid, meaning that they need to be reflected as an additional cash flow. The same is true for retained risk. In the bid we are valuing all the transferred risk to the concessionaire. However, the public agency will also retain some of the risk. That needs to be considered in the value for money assessment. And finally there can be other costs, other costs that we talked about before, and most importantly, the costs as they're related to monitoring and preparation of the project-- preparation of the project in terms of procurement cost, and monitoring and contract management. These costs are typically also referred to as transaction cost.

If we've done all of this and we develop all our assumptions for the differences from P3 delivery, we have gathered all the cash flows for the shadow bids and also the additional costs, we are ready to compare the public safety comparator with the P3 option. And we looked at this graph before. So on the left-hand side we see all the cash flows. In this case, the NPVs of the cash flows, the net present values of the cash flows, of conventional delivery. On the right-hand side, we see all the cash flows related to P3 delivery. And the first two building blocks, the base cost and risk transferred to the concessionaire, plus the financing fees are together the shadow bid or the value of the P3 bids. And on top of that there is, as we just discussed, the retained cost, the retained risk and the other costs. And if the net present value of P3 delivery is lower than the net present value of conventional delivery, then we qualify that as a positive value for money. Of course, it can also be the case that the sum of all the costs on the P3 side are going to be higher than conventional delivery. And in that case, there's a negative value for money. In other words, it is not attractive from a financial perspective to implement a P3 project. But in the example that is shown on the slide right now, we are seeing a positive value for money. I should say that this slide is presenting an availability payment structure. Of course their cash flows would look a little different under a toll concession. But the slide we're looking at right now is an availability payment. With that, I think we're ready for the multiple choice question.

Jordan Wainer: In an availability payment concession, which of the following are included in the calculation of the public agency's payments to the P3 concessionaire? Estimated base lifestyle cost of the concessionaire; cost of risk transferred to the concessionaire; and/or toll revenues? I will pull up the poll. And you choose which ones you think are part of it. Okay, I'll give everyone just another few seconds to answer. And I'll broadcast now. So we have 82 percent of people said estimated base lifecycle cost of the concessionaire are included. Seventy-six percent of people think that cost of the risk transferred to the concessionaire included. And 35 percent of people think toll revenues are included. And Marcel, do you want to unmute yourself now?

Marcel Ham: Yes. Okay. I think to a certain extent, this might have been a trick question. Because, so what we are talking about here is an availability payment concession. And so in an availability payment concession, we can still be talking about a toll road. Sometimes, availability to payment concessions are being applied to toll roads. For example, in Florida that's a very common model. However, in that model, the public agency retains the revenue risk and also retains all the revenues and basically pays an availability payment to the P3 concessionaire. So the availability payment to the concessionaire then covers number one, the base life cycle cost; number two, the cost of the transferred risks; but not number three. Number three is not included, because the public agency retains the toll revenue risk and also collects the tolls or potentially maybe the execution of the toll collection itself can be with the concessionaire. But the revenues go directly to the public agency. So many of you have answered that number one and number two are included in the availability payment, and that's absolutely correct. Toll revenues can be relevant, but are never included in the calculation of the public agency payment to the P3 concessionaire under an availability payment concession. However, if we are talking about a toll project for which an availability payment concession is being applied, then still, toll revenues per se are relevant to consider in comparing a P3 option to a conventional approach. Another way would be to completely leave out all the toll revenues. So I think that's pretty much it for the multiple choice. Are there any further questions on this section?

Jordan Wainer: There are no questions in the chat pod right now, but again, if you have any questions, you can type them in the chat pod or press *6 and ask them over the phone. Okay, I don't see anyone typing, so I would say we can move on.

Marcel Ham: Okay. So we move on to part number four, the final part of this webinar. And that is the value for money assessment in the P3-VALUE 2.0 model that has been recently developed and released. We're going to introduce you to this model. And before we actually show you the model, we first want to show you sort of a schematic overview of what we are talking about. So on the left-hand side, we see the value for money analysis that we are discussing in today's webinar. The value for money assessment is included in P3-VALUE 2.0. For those of you who are already familiar with the existing or the old P3-VALUE, the old P3-VALUE also had the value for money analysis. In order to do the value for money analysis, we need inputs. We need inputs on costs, on risks, on revenues and on financing and tax, the first four blocks. Now in addition to that, there is an additional input here, and that's benefits. And the reason that benefits is also depicted here is because we need benefits for the right-hand side of the P3-VALUE model, and that's the project delivery BCA, benefit cost analysis. The right-hand side analysis was not included in the old P3-VALUE model, and it was added to the P3-VALUE in the 2.0 version. Now the right-hand side is focusing on the economic perspective, whereas the left-hand side focuses on the financial perspective of the contracting authority, but both are using many of these same inputs, which is shown here. Now in addition to those inputs, we need inputs on P3 efficiencies, or, maybe we could refer to those as P3 differences. So we start with cost estimates, risk valuation, revenue projections for the conventional delivery. And then, as we just discussed, we need assumptions for the P3 differences or P3 efficiencies. So that is another section in the P3-VALUE model that we'll show you in a minute. The P3-VALUE model has two main sets of modules. One is the training. So we'll be using the training modules today. The P3-VALUE model also allows for high level screening of real life projects. The model is flexible enough to work for real life projects. However, we will be focusing on the training modules today and also in the next coming webinars. The four building blocks of the training side of the model are risk assessment, financial viability assessment, value for money analysis and project delivery BCA. And so today, we're covering value for money analysis, which is just the third building block. And in the next webinars, we'll be covering all the other elements. So with that, I would like to quickly introduce the model. But I think there's going to be a question that needs to be addressed first. But what we're going to do in a minute is share with you our screen with the Excel model, and show you at a very high level what the model looks like and how you can navigate the model when you're working with it, if you're going to be working on, for example, the homework exercises that we'll be sharing with you after this webinar.

Jordan Wainer: I don't think there are any other questions, Marcel.

Marcel Ham: Okay. Then maybe we should just move on. We're going to show this in the real model. So maybe we can share our screen now. And I'm going to turn it over to Wim Verdouw, who's been the lead modeler working on this model, and he will introduce the model to you.

Wim Verdouw: Good afternoon. So when you open the model, you may see directly what you're seeing on our screen right now, which is a "Welcome to P3-VALUE 2.0" message. Or you may be asked to enable macros. The model uses some macros for navigation and calculation purposes, and so -- if you don't automatically accept macros in your Excels, I think, then please accept or approve the macro settings so that you can get to this screen. And this screen does exactly what Marcel said earlier. It gives you the option between either going into the training navigators or the training modules, or alternatively, use the model as a transactional model where you could mimic your own transaction and analyze what the implications could be from a value for money perspective of a project that you may be working on. Today we're going to focus only on the training module. If you answered in the other, in the full model, if I can call it that way, you simply click here on model navigator. The difference is that under the model navigator, the entire model with all the input sheets and calculation sheets and output sheets are always available. Whereas in the training modules, we selected what input and output sheets to show, simply to limit the number of sheets that you have to deal with, while still focusing of course on those inputs and outputs that are most relevant to the module that is being considered. So I'm going to click on the training navigator button here on the right. And that's going to open the next window, which allows me to choose between four different modules. And so as Marcel was saying earlier, we have the four models: the value for money, the what we call the PDBCA, the project delivery benefit cost analysis. So the first one, the value for money, is about finance, financial implications, the PDBCA about economic implications. And feeding into both of these are the risk assessments, number three, and the financial viability assessment, number four. We could have started with perhaps the risk assessment, and then do the financial viability assessment before value for money. We'll get to that later in four weeks and six weeks from now, because we wanted to start with the core which is the value for money analysis, even though some of the elements covered in the risk assessment are, of course, already used in the value for money analysis. If at any point you want to switch to the full model, there's always this option to click on the go to model navigator button. And that takes you to the full model. It shows you all the input sheets, all the calculation sheets, all the output sheets. We're not going to do that today. We're going to stick to the value for money module. And I simply click on the button to open a set of input sheets here and a set of output sheets. So in total there are for the value for money analysis, there are four input sheets, and output there are five. So in total, we are considering nine sheets in the model. The model itself has many more sheets. Of course, many of them are calculation sheets. We are not going to bother with those today. We will simply focus on the inputs and on the outputs.

To access an input sheet, I can simply click in here for example on the timing and costs, which is the project timing and cost input sheets. So let's do that. I click on the sheet and then I click on the little "X" at the top of the menu to access the input sheet. And here as the title already indicates, you find all the timing inputs and the cost inputs. And as Marcel and Patrick both explained earlier, we start off with the conventional delivery or PSC, the public sector comparator. So the model is built in such a way that the PSC is the baseline, and we then consider changes to that baseline to determine what the P3 option would look like. So in terms of timing, if we look at column J, we see here the PSC starts, the preconstruction done in '15. It has a preconstruction duration of two years. And then the model, of course, automatically calculates when the construction actually starts, simply two years after the start of preconstruction. And then there's the input for the number of construction years, which in this case is four, which brings us to completion in 2021. You see there's yellow cells and non-yellow cells, either white or gray. In the model you're expected to only input values in the yellow cells. The tab color is also the same color. So you see that the input tabs have a light yellow shade, whereas the output tabs have a light blue shade, and you won't see them. Here the calculation sheets actually have a gray shade. So here, the last input here for the timing is the duration of the operations period. And that brings us to 2060 for the PSC. The next column is the delayed PSC. And we're not going to discuss that today. This is an alternative delivery of the PSC which is important for the PDBCA, the project delivery benefit cost analysis. For the value for money analysis, we can skip the delayed PSC. So everything in column K you can ignore for now. And now we get to P3. So P3, we can have a different or the same preconstruction start here. We can have a different or the same preconstruction duration, and we can have a different or the same construction period. Keeping in mind, of course, what Patrick explained earlier, that ultimately for a fair comparison of PSC in P3, the overall timelines should be similar or more or less the same. So for example, you could imagine that construction starts a year later, but operations would start at the same time. Or construction starts at the same time and operations starts slightly earlier, if P3 is to be built faster or slightly later, if ever P3 is slightly slower. Next are the cost inputs. And again, we start off with the PSC, PSC being the baseline, and then we look at how the baseline, the conventional delivery would be modified if ever it were to be a P3. Again, everything in yellow can be changed. So for example, here we have the preconstruction costs, number one. If you would like to call that monitoring costs-- or well, monitoring is a poor name. If you want to take a different name, you can just enter a different name here. And let's call it now instead of "1", we'll call it "A." That's no problem. You can use your own labels, and that propagates throughout that model. The same is true for the construction costs. Here we simply have listed the construction costs 1 to 7. Perhaps you have multiple EPC packages. Perhaps you have multiple physical components that you want to list. You can change those names as you wish. In column J, you are expected to input the construction costs in thousands. Which means that here, the preconstruction costs is $25 million. Next in column L and N, we can then determine what the P3 would look like. So the P3 would be perhaps 10 percent higher or lower than the PSC. In which case, you would enter a positive percentage if you think it's lower, or a negative percentage if it's higher. Or if instead I prefer to overwrite the PSC value directly without a percentage, I could, for example, enter "20,000" here, if I believe that the preconstruction cost is $20 million as opposed to $25 million. One more input column here is going to be the transferred, which is only relevant for P3. So under P3, you may transfer the full amount or only a part of the cost. If you think some of the costs are retained by the agency, for example 10 percent, you would enter 90 percent. As you can see here, in O37, there is 90 percent, which indicates that 90 percent of the cost will be transferred. And we have the same for the O and M cost as well. The only difference being here that these costs are per year as opposed to totals. And we also have a major maintenance cost here, which is the value listed in row 59. And lastly for this sheet, we have the inputs for inflation.

Next, we are in the traffic and revenue sheet. And in this sheet, we see the traffic under a No-build, which is column K. And under the Build, which could be either a managed lane or a tolled lane or a no tolled project. So if it's a managed lane, we have traffic both on the ML, managed lane, and the GPL, the general purpose lane. If it is a toll project, we only have traffic in column L and we put zeros in column M. And if it is a non-tolled project, we would only have traffic inputs in column M and no traffic in column L. And then lastly here, we have the toll inputs which in combination with the traffic, of course, generates the revenues. There's a number of inputs here that we won't be using today which are relevant for the PDBCA, the project delivery benefit cost analysis. The only elements that are relevant here is the share of peak, off-peak and weekend, as it determines the tolls. The tolls may not be equal in the peak and off-peak.

Next we go to the "time series" input sheet, which is very simply, if I have $100 million to spend, how is it spent over time? So in the preconstruction, we have two years to spread the cost. In the construction, we have four years. And so these are the costs for the PSC. Next we have the ramp up. So in 2021 in this case, the project is completed and ramp up can start. Ramp up applies to traffic above the No-build traffic, and it really shows how people are getting used to using the new facility and start using it. And again, these are all for the PSC. And lastly, we find here the milestone payment, which could be paid at once, for example, in year four, or it could be spread over multiple years. Below this we find the exact same inputs, so I won't repeat them all, for P3. And so I won't repeat those again, and you see they are exactly the same. The construction, preconstruction and the traffic ramp up, and also the milestone payment.

And lastly, there's the INP FIN sheet, which includes all the financial inputs for the project. And what is important here is that on cell F6, we can determine whether we're looking at a toll concession project or an AP project. So if you select the second one here, we're looking at the AP. And you see now that column J has the little stars. That means that all the inputs from column J are being used, which are the inputs for the availability payment. Right now we're looking at an AP, and we're going to look only at the inputs for column I. Initially, we have some inputs for the analysis and would show the tax rates being used and whether we apply competitive neutrality adjustments. And the next inputs are all the financing conditions for the PSC first. For example, is there a milestone payment? What is the interest on that? Et cetera, et cetera. And next on the P3. So those are all the financing conditions. Now for P3, of course, we don't only have debt, we also have equity. So here you would see the expected return on equity, and then the leverage, the debt to equity ratio. These are the inputs that are relevant for the value for money analysis.

Now if we wanted to get to the outputs, we could just simply scroll through the different tabs, but we can also go back to the navigator. As you saw, I clicked on the navigator button and then clicked on the value for money analysis. And I click on the first output sheet, which is called value for money output summary. Value for Money output summary, that's exactly what Marcel and Patrick explained earlier. It cuts the analysis into two. First, we look at what the net present value would be under conventional delivery. What would it cost to do this project if the government in the state were to hire a contractor to build it and then operate the project itself or hire a separate contractor to operate the project, while the revenues flow to the government? You see here, all the orange, which are revenues, flowing to the government. So these are costs and revenues to the agency on the conventional delivery. Next, we see the cost and revenues to the agency under P3. So here in blue, we see all the retained costs and risks, as well as any cost savings that may occur. And in red is the payment, the subsidy payment required to make the project feasible, from the public agency to the private sector. And lastly here, we see the output for the developers, or the costs and revenues to developers. And you will notice that the NPV here is zero, which means that the developer has optimized the bid in such a way that it just achieves its equity return, and so therefore, the NPV is zero.

The other output sheets, three of the other output sheets simply blow up the three sheets or the three graphs we've already seen. So I'm not going to discuss them in detail. So, first I showed you the cost and revenues under conventional delivery to the agency. Next, the cost and revenues to the agency under P3. And lastly, the cost and revenues to the developer under P3. And the last and perhaps ultimate comparison graph here is the graph where you've seen multiple times with slightly different colors in the presentation, where we compare the cost and risks and revenues to the agency under P3 and under conventional delivery. And here I should note, of course, that we are right now looking at a toll concession. So it looks a little different from what we saw earlier in the presentation. And according to the example that we are presenting here, the net value to the agency under a conventional delivery is slightly negative at minus $23 million. Whereas under the assumptions in the spreadsheet, right now we would have a positive net present value to the agency of $19 million. So that is the end, let's say, of this module. Very quickly, if you want to get back to the navigator, you click on navigator. We simply navigated by clicking on module one inputs and outputs.

Wim Verdouw: So for example, if you want to increase the construction costs to $200 million. Of course, the model is no longer optimized. You see up here some errors and alerts. If you want to know what they mean, you can just double click on them and it takes you to a sheet that shows what those are. But we need to re-optimize the model, and I'm going to click on that and then I'm going to pass it back to Patrick, because it takes a few minutes to optimize. But so once we click on this, the model starts optimizing, making sure that P3 bid satisfies all the financier's requirements. Patrick, that was it for me, or for us.

Patrick DeCorla-Souza: All right. Thank you, Wim. Excellent presentation. And let's go back to the slides, Jordan, so I can wrap it up. While we're getting to the slides-- okay, here we are-- just a reminder that the tool is now available on the P3 toolkit part of our website. And I'll have the URL in one of the later slides. There's also a quick start guide, which is only about three pages long, but there's also a longer version. If you are interested in reading, we can provide that to you. And finally, the-- more detailed and primers and guidebooks, all available under P3 toolkit website for your reading pleasure. So I just want to summarize here what we've covered, the four parts in today's webinar. And this will be-- has been recorded, so if you missed anything, you can listen to it again from our website. I just want to alert you to the fact, we mentioned this earlier, there's a homework assignment which will help you get hands-on experience with the tool. And you can download it from that box on your left-hand side. And we will award certificates to those who complete the homework assignment and send it to us by noon on Tuesday, February 16th. So if you can get that to us, then we'll go over the answers at 2:00 P.M. at a webinar that has already been scheduled. We will send you the URL. You know, all of this information on the slide, you will get it in an email so that you can-- so that you can sign in on February 16th. And I see there are some questions in the chat box, but we-- I have reached our 3:30 quitting time, so we will cover all of your questions as well as any questions you have on the homework webinar, on the 16th of February at 2:00, so please be sure to attend. Here again is the URL for our website. And please download this presentation so you have it available. And I don't think we have time for questions, Jordan, so we have to leave it there. I should have provided my information. I think you should all have my email address. Feel free to send me any questions that you have, in trying to do the homework assignment, as well as if you have urgent questions from this webinar that you really need to be answered. Feel free to send them to me by email. So with that, Jordan, I turn it back to you, and for the wrap up.

Jordan Wainer: All right. Thank you, everyone, for joining us today. That concludes our P3-VALUE 2.0 webinar on Value for Money Analysis. Thanks, everyone, and have a great afternoon.