Transcript

Michael Kay: Welcome to our P3-VALUE 2.0 webinar, Value For Money Analysis. Today is our homework review, our exercise review. My name is Michael Kay. I'll be helping to moderate and addressing any technical problems you might have or any questions you may have throughout. Just to orient you quickly to the web room, on the top left side is the audio call-in information, below that the attendee list, and a download of the presentation for today. Simply click on the file name, click "download files" and follow the prompts on your screen; and then a chat box at bottom left that you can use to ask questions of our presenters throughout. We have all the lines open, so please do mute your phone locally and we will be able to take phone questions later as well. With that, I'd like to turn it over to Patrick DeCorla-Souza. Patrick?

Patrick DeCorla-Souza: Thanks, Michael, and there's very few of us here, so feel free to use the phone to ask your questions and of course, if you wish to use the chat box, please go ahead and do that so that we can have your questions in advance. So just as a reminder, this is a follow up to the Value For Money presentation that we did a week ago and we introduced the P3-VALUE 2.0 module on Value For Money Analysis at that point and issued this exercise for you to try out the tool on your own, so today we are going to go over the results of the tool and answer any questions you might have. With me to help present this exercise is Wim Verdouw. He's a modeler and the person who developed the tool for us, for FHWA, and so we're very pleased that he's able to join us today. So just to give you an overview, we are currently reviewing the exercise. As you see in the red font there, this is a follow up to the Value For Money Analysis webinar we held last week. Following this webinar, next week we will have a project delivery benefit cost analysis webinar and two weeks after that, risk valuation and two weeks after that, financial viability assessment. So the objective of this webinar today is to demonstrate to you how P3-VALUE 2.0 performs value for money analysis, so we will show you how to provide inputs to the tool and how to interpret the outputs from the tool. We will also go through a methodology to show you how you can identify key drivers in value for money analysis. The overall outline here, we will lead you through the background of the project. Then we will do parts A and B from the exercise, which is on a toll concession. Parts C and D are on an availability payment concession and that will follow, and finally of course, we will summarize the webinar.

So project background -- by way of background, the tool itself includes an example and the example is value for money analysis that was done by a state DOT for a highway project, and it has the various inputs that were included in that value for money analysis. The project information is shown here. It's a managed lane project and it includes a 20 mile highway expansion from three lanes to five lanes. There are three general purpose lanes and two managed lanes per direction. The costs that are included in this tool include pre-construction and construction costs totaling 425,000,000 so there's 25,000,000 in pre-construction costs, 400,000,000 in construction costs, routine maintenance cost of 4,000,000 dollars a year and major maintenance, 10,000,000 dollars every eight years. The start date for pre-construction is 2015; it goes on for two years and that's basically development of the project, preliminary design, et cetera. The construction start date is two years later and it will go on for four years and this is under the public sector comparator. After four years of construction, we have operations starting and that goes on for 40 years. So let me stop here and see if there are any questions on the project background or the tool itself.

Michael Kay: And contrary to what you see on the screen, you don't need to press *6. You just need to come off mute on your phone.

Patrick DeCorla-Souza: So if there are no questions, we can go forward. Michael, is that okay?

Michael Kay: Sure, Patrick, go ahead.

Patrick DeCorla-Souza: All right, okay, so we had some follow up questions from February 8th that we didn't have time to answer and these are the three questions, the first one from Kent Olson: why don't you consider design build operate maintain as one of the delivery options in your value for money analysis. And as I'd indicated very briefly, the tool can handle just DBFOM type projects, either toll concession or availability payment concessions, and one of the key characteristics of this tool is that it uses financing conditions to estimate a life cycle performance risk and revenue risk uncertainty, and so that financing component is extremely important for doing that calculation. Now, if of course you can come up with estimates of these risks or the impacts of these risks from using other methodologies, you could use the tool to do a DBOM analysis. You know, you simply use the public sector comparator portion of the tool with Design Build and O and M costs as per your estimates and then if you can create a life cycle performance risk estimate, you would add that in and then come up with a DBOM estimate.

The second question from HPTE: how do you define the input benefit as opposed to the P3 efficiencies inputs, and my understanding of this question is that the questioner is asking about the input for benefit cost analysis and how that defers from P3 efficiencies. P3 efficiencies, of course, are used in benefit cost analysis. The additional input that you need for benefit cost analysis relates to the quality improvement side of the picture; that is, service improvements to users and those types of inputs, inputs required to estimate benefits relating to ride quality improvements or reductions in delay due to better incident response, for example. All of these are calculated using inputs in the input benefit cost analysis module, and we will cover that in the next webinar actually, which is a week from now.

Karen Holmes asked at what point do variances in project start and completion dates make the data incomparable? Now, this again I assume relates to the fact that the PSC needs to be in the same timeframe as the P3 and there might be some small variations. Now, of course as we had indicated when you discount costs that are in a future year, they appear much smaller in the base year and therefore it is extremely important to have both the PSC and the P3 in the same timeframe, but we understand that there might be some small differences in start date and completion date, and if you want to evaluate the impacts of these small differences, you can just assume that the start date of the PSC is the same as-- exactly the same as the P3 and run a scenario with that just to look at what the difference might be and what the impact on your value for money analysis results might be with that small change in input-- in start date, so those are the quick answers to the questions, and of course, we will entertain further questions later on.

So let me move on to the exercise that we issued last week and we'll do parts A and B first on a toll concession. In part A, we will simply use the value for money analysis module to review how to input data into the public sector comparator, how to input data into the P3 option, and then we will look at the output for the public sector comparator and the P3 option and look at what the results show and what they mean. In part B, we will look at how an alternative discount rate might affect those value for money results. So in part A, I will go through three steps, the first step is the PSC, second step P3 option. The third step would be the comparison between the two. And as we indicated on the webinar, the components of the PSC are what you see here: costs, risks, financing fees, and competitive neutrality adjustment and that is on the cost side of the picture, so these are negative cash flows and in the positive side, you have the revenues. When you look at the P3 option, you start with the PSC and you adjust all of those inputs to account for any differences in the P3, so you would do that for all of the costs. You would do that for the risks. Now, there will be a separate webinar on risks and how those are estimated and that will be following the benefit cost webinar, so it will be three weeks from today, and finally, very important in the P3 option, which is different from the PSC, is that financing conditions are considered. For example, in the PSC, all we were concerned about is financing fees. In the P3 situation, we are interested not just in the financing fees, but the percentage of equity, the percentage of debt, and the rates of return on equity, rates of interest in debt because all of these help us evaluate the life cycle performance risk for not just the P3, but also for the PSC. In step 3, we would then do the comparison of the P3 with the PSC and we will show you how to do that with two different discount rates. So now we are ready to go into the Excel file and Wim will show you how to put the inputs into the PSC and the P3.

Wim Verdouw: Right, thank you, Patrick. So Patrick, can you quickly just confirm that you can see the Excel sheet now?

Patrick DeCorla-Souza: I can.

Wim Verdouw: Great, I assume everybody can. So if you open the Excel sheet, you would've been asked to accept macros if you have some security installed on your Excel version. If not, you may have directly ended up on this user form. This user form is to let you choose between the training navigator, which is what we will use today, and the model navigator, which gives you access to the full model. Today we'll focus on the value for money, which means that we'll only look at those input and output sheets that are available for value for money, so to get there I click on the training navigator and on the value for money analysis. So in the top part of the lower part of the user form, you'll see the inputs, and the lower part you'll see the outputs, and so as Patrick just mentioned, we were asked to review the revenues, the costs, the risk, the financing fees, and the competitive neutrality of the PSC and for the P3, we're asked to review the revenues, the costs, the risk, and the financing conditions, so we're just going to briefly do that to confirm the project inputs that we were given earlier.

So we start off with the project cost. As you may remember, Patrick mentioned that it was 25,000,000 dollars in pre-construction costs and 400,000,000 in construction costs, and you can see here in cell J-37 to J-39 those are the construction costs. They add up to 400, whereas J-26 contains the pre-construction costs. Another input that Patrick mentioned earlier was the O&M, so I scroll down a little bit and you'll see that the O&M cost is 4,000,000 dollars per year, as Patrick mentioned, and then the major maintenance is listed here in row 59 as 10,000,000. The schedule-- so this sheet is called the "input in timing and costs" sheet and so that contains both costs and timing components, and so here the schedule is the very top. For the PSC, the project starts in 2015 with two years of pre-construction, which means that the construction actually starts in 2017. Assuming four years of construction period, that means that the project's operational in 2021. With a 40 year operations period, we get to 2060. The P3 runs in a very similar time schedule. The only difference here is that it has a three year construction period, we assume, so that means the construction period's a little bit shorter, meaning that the project will start operations one year earlier. Furthermore, we can see here that the project cost for the P3 is slightly lower. As you can see in the column L, there's the cost difference as a percentage, and for example on L-26, you see 10 percent, which means that we assume that the P3 cost is 10 percent lower than the PSC cost, which in this case means that the cost for pre-construction is 22 ½ million dollars. I won't walk you through all of them, but you see that also for the other cost components, we assume that there's a 10 percent cost difference between the P3 and the PSC. Of course this difference can be both positive or negative, so if we believe that the cost is actually higher on the P3, we would enter a negative percentage and then the P3 cost will be higher. One other element that was given was the eight year major maintenance which we find here in row 65, so both under PSC and under P3, we have the eight year period, so these are the costs and the timing.

For the revenues, we're going into the INP traffic and toll, where at the very top you see the traffic projections and next you see the toll projections, so in this case it's a managed lane facility, which means there's both traffic on the managed lanes and on the general purpose lanes, ML/TL stands for managed lane or tolled lane, and the GPL stands for General Purpose Lane, and as you can see-- in cell L-21 to L-26, there's also tolls included for the managed lane, which means here that the GPL tolls are zero. People can use the GPL for free, whereas they're expected to pay a toll on the managed lanes. This combined with the traffic inputs that you see above will generate the revenues and one thing we need more for that is the traffic ramp-up. The traffic ramp-up is a time series which can be found in the INP series. In the INP series, you also see how the construction cost is spread out over time. For example, here we see the PSC pre-construction cost, which is, as we know, two years, and according to these inputs, each year adds 50 percent of the expenses, and the construction cost over four years, has 25 percent in each year, and here we get to the traffic ramp-up and here we see that in the first year of operations (that's 2021) we expect traffic ramp-up to be 50 percent, which means 50 percent of the additional traffic above the No-Build, so the No-Build traffic we assume was always there and once the facility is available, the ramp-up will allow the No-Build traffic to build up to the Build traffic and so in year 5, in 2025, we see that the facility has achieved a hundred percent, in other words, the full traffic as per the traffic estimates using the facility. So this traffic, this ramp-up, combining this traffic and the tolls gives us the revenues. This one is for PSC and as you'll see a little bit lower, we have the exact same inputs there for the P3, as well as the traffic ramp-up here in row 80.

The next thing are the financing inputs, so in the PSC, we are mainly concerned with the financing fees and the financing fees are input here in row 40, which it says is one percent of the total debt amount. We're also interested in whether or not to include the competitive neutrality adjustment, which. The competitive neutrality adjustments allows us to determine whether we want to take into consideration federal taxes or state tax and whether or not to take them into consideration depends on our perspective, so if we take the perspective of the state agency, you can argue that the federal tax is not so relevant. If we take the perspective of the federal government, then both may be relevant, and so you are free to either switch them on and off. In the current example, we have set the tax rate to zero. One reason is that the optimization will be quite a bit slower if tax is considered (as it creates additional circularity) and the second reason is that the actual tax treatment of a P3 concessionaire depends on the structure of the P3, and so either the P3 concessionaire may be taxed directly or its investors are taxed. And lastly, what we wanted to look at was the financing conditions under P3 and so part of the financing condition here is the cost of equity, which in this case is 12 percent and the gearing at 75 percent. The other important element here, of course, is the debt under P3, as well as the minimum debt service coverage ratio of 1.3, so these are all the key elements that we wanted to look at as inputs before we start comparing the two. Patrick.

Patrick DeCorla-Souza: All right, let's get the presentation back, Michael. Okay, so now we are going to move on and look at the model output and the first thing is, what does the PSC look like? This is the first table on your output summary sheet. What you see here-- first I want to draw your attention to this number here, four percent, and that is the discount rate that is being used to discount all of the nominal costs which are costs for each year right up to the end of the concession. So here you see, for example, two-- I guess it's in millions, so that is 2 billion nominal dollars in revenue. That is only 756,000,000 dollars in present work simply because so much of the revenue is occurring far into the future. Now, the next line, this revenue uncertainty adjustment, is an input. We told the model what percentage of a risk premium would be the value of toll revenue risks. It has calculated 377,000,000 as being the value of the reduction in revenue that might be attributable to that uncertainty and the present value of that, again, is about one third, which is a hundred and thirty million dollars, so that is a negative amount. Everything else is negative because they are costs, so pre-construction and construction cost of 454,000,000. You recall it was 400 million plus 25,000,000, but these are now nominal dollars, so they are indexed for inflation. That's why they're a little bit higher. However, the present value uses this four percent discount rate and it actually is reduced to below 400,000,000 dollars in present value terms, year 2015 dollars. O&M costs similarly, this is throughout the life of the project, so they are much smaller, since much of these costs are far into the future. These costs-- No-Build O&M cost savings is something that you may not see in a normal value for money analysis, but it is something that has a financial impact on the agency's budget because now if they build the new project and they're spending O&M costs on this new project, they won't have to spend O&M costs on the No-build because it doesn't exist anymore, and so that is a cost saving of 680,000,000 dollars way into the future till the end of the concession and that present value is 250,000,000 dollars.

Now, base variability and pure risk are things we will cover in the risk webinar, but as I'd indicated in the very first webinar, base variability is simply an adjustment for estimation error. Pure risks are so-called event risks, which have a probability of occurring, and all of those we will cover-- how we got to these numbers will be covered in webinar 4, which is three weeks from today, so stay tuned. Life cycle performance risk likewise, we will be covering in that risk webinar, but just to show you here, this is something that occurs over the entire life of the project and the present values is a bit lower due to the discount rate and again, to refresh your memory, life cycle performance risk is related to interest rates going up and down, integration risk among contractors, things of that type, and we will cover that later on, but this is important to understand. This is actually something we calculate in the model based on financing conditions of the P3. The P3 has a risk premium. That risk premium is used to calculate both this life cycle performance risk, as well as the toll revenue uncertainty adjustment.

Finally, the financing fees, we indicated there was an input of one percent of the borrowed amount, and so this works out to be 3,000,000 dollars. Now, you add up all these nominal costs, you get 873,000,000 dollars. It's a positive value simply because the revenues are so high. However, when you look at everything in present value terms, you see that the revenues drop considerably because they're so much further out into the future, so we end up with a negative value on the total impact on the budget of the agency. So let me move on to the next item now, so that was the PSC or conventional delivery.

Now we have to first figure out what would a concessionaire or potential concessionaire bid on this project in terms of whether it needs a subsidy and again, depending on the structure of the transaction, if it's a toll concession, so we would be calculating a subsidy. That would be the bid of the concessionaire you would want to know. This is normally what occurs simply because revenues are normally not adequate to pay for both the construction and operations of the project, so the concessionaire might bid a subsidy, but in some cases-- for example, if a lot of the facility already exists, then there might be more revenues than costs and then the concessionaire might come up with a bid that is an amount that they are willing to pay to the public agency called a concession fee.

Now, if it were an availability payment concession, then instead of a subsidy or concession fee, we would be calculating an availability payment. So let's see what the model-- with the inputs we provided, what did the model calculate? You can see (very interesting) that the revenues appear to have gone up and if you think about it, as we mentioned, the operation of the facility starts a year earlier, so instead of a four year construction period under the PSC, we have only a three year construction period under the P3, and that results in more revenue. But why does more revenue not result in more present value of revenue, and the key is the discount rate. We didn't show it here, but the model calculated 8.84 percent as being the net present value, which is a lot higher than the four percent we used for the agency's discount rate, so why are we using such a high discount rate to calculate our net present value, that the developer's going to use, and the reason is twofold. First, if you look at this list here, there is no line item for revenue risk uncertainty or the premium for toll revenue risk. If you recall, we had calculated that in the PSC. We don't have one here and that has to be accounted for somehow. The other thing we don't have is related to risk-- we've got some risks. We've got the base variability like we did in the PSC. We've got the pure risk. We don't have a line item for life cycle performance risk, and again, that's a risk that is included in the discount rate that we are using, so where are we getting this discount rate is the question. How did we arrive at this high discount rate that accounts for toll revenue risk, as well as for life cycle performance risk, and the important thing to understand is that the discount rate is really comprised of two components. One is the risk-free rate which was the four percent rate, and everything above that is a risk premium, so the 4.4 percent-- 8.84 minus the four percent, that's the value of the risk premium that is incorporated in the discount rate. And so how did we arrive at 8.84 percent? The important thing is to consider how the concessionaire is developing its bid and it's looking at the equity rate of return that it needs, looking at how much interest it needs to pay the debt providers and the combination of the two is called the weighted average cost of capital, so that weighted average cost of capital is what the developer needs to use in determining the net present value so that they can be sure that they can provide the returns to equity investors and to debt providers. So if you use the 8.84 discount rate, you see you end up with a net present value of zero, and this indicates that with all of these cash flows here, we would just meet the needs of equity investors, the 12 percent rate of return that we saw earlier or equity rate of return, as well as the interest on debt, which is six percent. So how were we able to magically achieve that? All of the costs, as you can see, are pretty much the same except for the reduction due to efficiencies, right, so we have the construction costs. We've got the O&M costs. We've got these risk values. They're just slightly lower too. How were we able to come up with zero? The key is, there is a subsidy that is included in these cash flows, so the agency provides the developer 205,000,000 dollars and that's a present value of a hundred and forty-six million and that is its bid. It would require a hundred and forty-six million in order to ensure that this number here is zero. If you didn't have this, there would be a negative 146,000,000 which would mean that it was making a loss of a hundred and forty-six million and of course, no investor would want to make a loss of a hundred and forty-six million dollars, so this is how-- this is just to show you how the bid is calculated. It's simply something that ensures that the return required by investors and debt providers is in fact achieved.

So that was the bid. We've figured out how the bid is calculated. We still need to figure out what is the total cost to the agency itself, and we know that the bid or the subsidy it provides is only part of the cost. There are other costs that need to be accounted for. And so the middle table on that output summary sheet has this information. And this is the agency's perspective. So the difference between the previous table and this table is, this is also P3, but it is the P3 from looking at the budget or the financial position of the agency, the agency's balance sheet. So for example, you see there are no toll revenues. The agency is not getting any toll revenues because it has basically signed over the right to those revenues to the concessionaire. And of course, there's no toll revenue uncertainty adjustment. And if you look at these construction and pre-construction costs, they're much lower because most of the costs have been transferred over to the concessionaire. The O&M cost, likewise, a few small costs, but most of them have been transferred. Of course the O&M cost savings from No-build are actually higher in this case, you see, because we've got one extra year of savings. The project itself is completed a year ahead of the PSC. So we have one extra year of O&M costs that wouldn't need to be spent on the No-build, since it would be no longer in operation. So you have a little more in No-build cost savings. The base variability and the pure risks are smaller simply because the costs that are retained are smaller. And here you see the $205 million. And then you look at the net present value, and it's $175 million. So previously, we said it was something like $146 million. So why is this present value higher for the same subsidy of $205 million in nominal dollars? And the key again is you're using the 4 percent discount rate, because we are looking at the balance sheet or financial impact on the agency, and so we're using their discount rate of 4 percent, which is the project risk-free discount rate. There are no project risks in this value. It simply represents the borrowing rate that the agency would be faced with if it were to go out and issue, for example, general obligation bonds. And those bonds, you know, are issued on the full faith and credit of the agency and might, of course, include only as a factor the credit worthiness of the agency or the state itself, but not any project risks. And so that is why we call this the project risk free rate. And in comparison with the weighted average cost of capital, the difference is what we call the risk premium attributable to project risk.

Patrick DeCorla-Souza: Now the net, of course, going down you see the net costs to the agency is actually a positive. So it's not a cost, but it is a surplus that the agency gets, of $19 million dollars. And if you look at even though they are paying $175 million in subsidy in present value, you see that they have saved. The reason for it is not because they're getting any revenue, but because they've saved $259 million value from not having to pay for No-build O&M costs. So they end up with a surplus of $19 million. So that needs to be compared now, and so we can go to the comparison. That surplus needs to be compared with the cost that we calculated under the PSC or conventional delivery, if you recall we calculated $29 million. You see this number here. It's the cost. Now because it's in parentheses, it means it's a cost to the agency. Now we just said in the P3 option it has a surplus of $19 million. So the value of the money is calculated by looking at the difference between these two. And so that's $29 plus $19, because of course, that's a negative and this is a positive. So the difference between these two is $48 million. And so that is the value of the money that is estimated as long as we use the borrowing rate of 4 percent. But if you have an agency whose borrowing rate is 5 percent, you know, maybe it's not as credit worthy as this other agency that has a 4 percent borrowing rate, then we would use a 5 percent discount rate. And what you see is comparing the $29 million with the 5 percent discount rate, that turns out to be $63 million. So it's even more negative than before, because of the higher discount rate. The P3 option, the agency's financial position now turns from positive to negative. So it's negative just like the PSC. And the difference is the difference between 63 and 18, which comes out to be $45 million dollars. So looking at the comparison with the 4 percent discount rate, we see that isn't much difference. However, for those who are not sure what discount rate use. It is well worth testing out the option with whatever alternative discount rates you think might be plausible. So that really is, I think, the conclusion of this part A and B. And let's stop and see if there are questions. And feel free, I think your lines are all open, so feel free to ask questions over the phone. There's no need to use the Chat Box.

Michael Kay: Again, if there are any questions, feel free to just unmute your line and shout them out.

Patrick DeCorla-Souza: So Wim, do you have any comments or further thoughts on part A and B?

Wim Verdouw: What we may want to do is quickly show where these outputs are in the model. The three tables you have just presented, perhaps it makes sense to quickly show where they are.

Patrick DeCorla-Souza: Okay.

Wim Verdouw: So let me just do that now. So we were in the input FIN sheet, and all I do now is use the navigator. We're in the value for money analysis, and go to the first output sheet. I could have also just clicked on the output sheet directly, but this way you see how the navigator works. And so here on the left top, you find the cost and revenues under B and C, or under the conventional delivery. Those two terms are used interchangeably. And then you see here the minus 29 that Patrick mentioned. The next is the agency's perspective, where you see here again the net subsidy and then the total cost, or in this case, revenue to the agency. And lastly, you see here the P3 cost, which I explained is NPV of zero, based on the WACC which here is calculated at 8.84 percent. And in the same screen you see the cash flows over time. So these are all NPVs, but of course it may be interesting to see in detail where these NPVs come from. And so in small, you can see the three graphs, and if you want to zoom in a little bit, you can look at either the very funny PSC graph or the conventional delivery graph, the P3 public perspective or the P3 private perspective. So those are the output sheets and those are the numbers that Patrick just discussed.

Patrick DeCorla-Souza: Great. Thanks, Wim. So let's go back to the PowerPoint now, Michael. Okay. So we are now going to do the availability payment concession, which is part C and D. And this is very similar to what you saw under the toll concession. There are some slight differences which I'm going to point out. So we will go through the same process of showing you the inputs to the public sector comparator, the inputs to the P3 and comparison in the outputs. We will also in part D do a little bit of a sensitivity testing of our assumptions about P3 efficiency. So we assumed, if you recall, that costs would be 10 percent lower under the P3 option. We are going to see what effect it would have if we assume that there were zero cost differences. In other words, that the P3 would not be able to build a project or operate the project any more efficiently than under conventional delivery. Just to check on how much a value for money we are getting from those efficiencies. We will also look at how much benefit we get in terms of value for money from early completion of the project. So these are just the three items we are going to look at. Now later on, three weeks from now, we'll look at the risk assessment and test the risk assumptions which are included in our totals. But we are not going to deal with them in this particular exercise. So as before, you know, we have the same inputs. The only thing that's going to be different is that since this is an availability payment, all the toll revenues that are retained by the agency under the PSC are also retained by the agency under the P3 option. The as we indicated, under the P3 option, the main difference between PSC and P3 with regard to what inputs we need are the financing conditions, and that's down at the bottom there, the equity and debt. Now the key difference between an availability payment and toll concession is that toll revenue risk is not transferred over to the private sector. Because of that, the risk premium that is required by the investors is going to be lower. So what you will see is, in the availability payment concession, the equity rate of return that we are going to use is going to be lower than what we used for the toll concession. We'll do the same kind of comparison using a 4 percent discount rate. And then in part D, we will go ahead and test the P3 efficiency of construction timing, construction costs and operations costs. We will make them the same as under the PSC to see what the effect is on value for money. So let's go to the model. Wim?

Wim Verdouw: Yes. So I'm opening the model. Can you see them?

Patrick DeCorla-Souza: Yes.

Wim Verdouw: Great. Okay. So as Patrick explained, effectively, there's very little difference between the toll concession and the AP. The road is still being tolled. The only difference is now that under the P3, the toll revenue flows through the agency, and no longer through the concessionaire. And instead, the concessionaire receives an availability payment. Now what has changed mainly are many of the financing conditions for the P3. And so we're going to look at the input FIN sheet. And you'll see in cell F6, we have three choices. We could either look at a toll concession. We can look at a project that's tolled under the PSC, and also a toll concession under P3. The second option is a project that is tolled under PSC also tolled under the P3, but as a AP concession. And thirdly, a project that's not tolled at all and in the case of P3, it will be an availability payment. We're going to look at option 2. And as a result, we will be looking at the second column. So the first column was the toll concession. The second column is the availability payment concession. And we'll look mainly at the P3 inputs, because for the PSC nothing changed. So it's really all about the P3 inputs. So the first change that we see, is that the cost of equity has reduced. And according to the assumption in the sheet, the equity investor was expecting 12 percent under a toll concession. But given that the cash flows under an availability payment are much more stable, the investors may accept a lower return. Second, is the debt to equity ratio. So if in total there's 100 dollars to be financed, under a toll concession, we said 75 percent of that would come from debt and 25 percent would come from equity. For the same reasons that the cost of equity came down, the leverage can be higher. Banks are willing to accept a higher leverage, in other words, they are contributing more to the financing of the project, if they know that the project's cash flows come mainly out of availability payments. Another two changes that we could see, one is that we could see that the interest rates are lower. In this case, we don't see the interest rates being lowered. They're actually the same. And we could see that the DSCR, the debt service coverage ratio, required by the banks is lower. And here again, we have assumed, indeed, that the DSCR is a little bit lower than under the toll concession. Under the toll concession, we said 1.3. Whereas here, under the availability payment, we say 1.1. So these are really the main and only differences between the toll concession and the availability payments. While I hand it back to Patrick, I'm going to click on the optimizer. It takes a little while. And Patrick can in the meantime present the results.

Patrick DeCorla-Souza: All right, all right. And so and let's look at the outputs now. So the first output is again the conventional delivery or PSC output. Just looking at the total revenues, they haven't changed. It's basically the same. The revenue uncertainty adjustment is the same. The costs are the same as before. The $454 million with the $397 in NPV. O&M costs are the same. No build cost savings are the same. These, of course, we'll discuss later, but I'm quite sure these are the same as we had before. Life cycle performance risk also is the same as what we had before. Financing fees are the same as we had before. So what changed? Well, nothing changed. Because the only change we made was on the P3 financing conditions. If you look at the inputs, we didn't change anything on the PSC side. So, you know, there's no reason for anything to change with regard to the PSC. And no inputs were changed on the PSC side.

So let's see what might have changed on the P3 side. So as before, with the toll concession, the concessionaire or potential concessionaire develops a bid. And it looks at all its cash flows, revenues and costs, and tries to come up with an amount of payment or contribution from the public agency that it would need to build and operate the project. Remember, it's not getting any toll revenues, so it needs to get revenue from somewhere, and that revenue is from the agency in the form of an availability payment. So we are going to look at the balance sheet of the concessionaire. So there are the summary nominal costs. Again, as before, you see these costs are the same, $390 million there, with the 10 percent reduction. Same thing with O&M costs, same thing with these risks. What has changed is, first, of course, up here, there are no toll revenues, right, because we are looking at the concessionaire's perspective. Instead of revenues, though, we have availability payments. A possible $1,837,000,000 dollars. You know, this is a lot of money, but these are nominal dollars. You think relative to the cost of construction that's a lot, but some of these dollars are way out into the future, you know, as much as 45 years into the future. And so they have a relatively low present value of just $479 million dollars. So that's what the concessionaire is receiving. That's the cash inflow. It has all of these outflows. $318 million for construction costs, et cetera, and financing fees. So in order to get to an NPV of zero, it has to get $479 million in a contribution. Now all of these present values are calculated based on the 7.24 percent discount rate. And if you recall, we previously had under the toll concession, a discount rate of 8.84 percent. So that was about 1.6 percent higher. And why was that higher? Well, if you recall, the toll concessionaire is taking toll revenue risks. And the value of that risk is 1.6 percent on the risk premium. So it makes sense that the WACC and the discount rate for the concessionaire under an availability payment, which doesn't have that toll revenue risk, will be 1.6 percent lower, and that's the 7.24 percent. So it's lower and it was calculated based on, as Wim showed you, the equity rate of return of 10 percent, interest rate of 6 percent and the debt to equity ratio of something like 90-10. So that's why, since there's a higher proportion of debt here, we were able to bring the weighted average cost of capital down. And so we see now the contribution of the agency is $479 million, a lot higher than the contribution under the toll concession. But that's because the agency is getting all the revenues.

Patrick DeCorla-Souza: So now look at the agency's perspective in the agency's balance sheet. So what you see here is total revenues are up again, and this is simply because they have an extra year of revenue. Because we have more revenue and more years of revenue, the uncertainty adjustment is a little higher, because we have more years of uncertainty. And then the rest is pretty much the same as we had before. The retained risks are about the same. Retained costs as well as risks. And then we have this big amount, the availability payment, which of course is now an amount being paid, so it's negative for the agency. So it's going from the agency to the P3 concessionaire, so it's negative on the agency's balance sheet. So fortunately, the agency has revenues. It has toll revenues of $777 million, but there is an adjustment for uncertainty, so that brings that down to something like $640 million or thereabouts. And so that revenue needs to be balanced against all these costs. But then there is a savings here of the No Build O&M, so this is another positive cash flow. But all of these other negatives have to be balanced out, including this availability payment. Fortunately, the combination of the savings from O&M as well as the toll revenues exceed all of these costs and so the agency ends up with a surplus of $45 million in net present value.

Patrick DeCorla-Souza: So now let's look at a comparison. So in part C, we are going to compare the costs to the agency. So we still have the $29 million under PSC as before, but now we have a $45 million surplus under the P3, so that gives us $74 million in value for money. So what we are basically seeing here is that we have a little more value for money under the AP concession. But of course, all of that depends on what we assumed as being the value for uncertainty. You know, we are using the risk premiums for revenue uncertainty required by the market. But that may not necessarily be how the agency values that uncertainty. So it could value that uncertainty more or less. So the bottom line is, whereas this number is helpful to you, it's not something that you can take to the bank. Because the estimate you made on the toll revenue uncertainty is something that reflects the valuation of the market. But the agency itself may have a different valuation of risk. It could value risk more or value it less. And that's something really that it's up to the agency to decide how much of a premium or how much of a value it puts on the uncertainty in revenue. And it could be higher. So basically, this is not a number that you can simply take and compare to the number you got out of the toll concession. It is simply a base case that you can take forward for discussion. So now we can go to the last part--

Wim Verdouw: Patrick, before you do that, I would like to quickly show something on the model. Is that possible?

Patrick DeCorla-Souza: Yeah.

Wim Verdouw: So as I said earlier, while Patrick was presenting the results, I clicked on the optimizer. And once the optimization process is finished, you will see this little box. And this box confirms that the model has found a solution, which means it has structured the P3 bid in such a way that all the finance conditions are satisfied. So in this case, the first financing condition that must be satisfied is that the DSCR, the minimum DSCR calculated by the model is at least as high, or a little bit higher than the required minimum DSCR. And we see that the calculated minimum DSCR is 1.11. The required was 1.1. So that is satisfied. The second requirement was that the equity return meets the target equity return, which is the 10 percent required equity return versus the calculated equity return, so also 10 percent. And combining the equity return with the leverage or the debt to equity ratio, as well as the debt interest rate, we can calculate the WACC, and this is the WACC that Patrick mentioned earlier that's 7.24. So given that both conditions, the equity return is very close to its target, and the DSCR is very close to its target, we are more or less seeing this is an optimized solution, but also a very efficient solution where both conditions are met at the same time. What I want to show you next is, as you see now, the graphs. So we're not going to go through the numbers again. But the difference in graphs now is that before, of course, the revenues under the P3 went to the concessionaire, whereas now on the second graph, you can see the orange revenues that go directly to the agency. All right, Patrick, back to you.

Patrick DeCorla-Souza: All right. So let's go to part C again, and what I want to show you, something a little interesting in the AP concession, the PSC now is showing as $32 million negative. So there's a cost to the agency of $32 million. It went up a little bit from the base case, and-- Wim, you haven't shown them the how you actually changed the completion date. It's basically going into that input where you have the schedule and changing it from three years to four years. So the construction, for the PSC is currently four years. It's really also four years for the P3. An interesting thing that happens is when you change timing of any of these cash flows, you affect the WACC. Because the WACC is calculated based on each year. It's not just one year, the first year, but it is calculated for each year, and if you have a slightly changed cash flow in any particular year, that's going to change the calculation of the WACC. And so because of that change in the WACC, under "no early completion", what we have is a situation where that change in the WACC caused the life cycle performance risk to change. In this case, it actually increases by $3 million dollars. And that resulted in this higher present value of costs to the agency under the PSC. With regard to the P3, we had $45 million surplus in the base condition. Now with no early completion, the net cash flow to the agency drops to negative $22 million. I think that should be a positive. That's a mistake. It's not negative, it's positive. So that's a surplus of $22 million. The PowerPoint is wrong. So when you take $32 plus $22, you get a value for money of $54 million dollars.

Patrick DeCorla-Souza: So now we look at the next case where we have not just no early completion, but we eliminate the cost efficiency, the 10 percent cost reduction under the build scenario.

Wim Verdouw: Patrick, would it make sense to quickly show how we do this?

Patrick DeCorla-Souza: Okay, go ahead.

Wim Verdouw: Yeah. So we go back to the first input and cost sheet, and the first change that we made here was that we made the construction period equal, so we put this to 4 years. And now we are going to eliminate the differences in cost during construction and preconstruction. In other words, we had this 10 percent cost difference, which we're now going to set to zero, both for the preconstruction costs and the construction costs. So that's all we're doing here. And really what we're saying is we have no reason to believe in this particular case that the P3 is any cheaper than the PSC. In fact, there are still some costs on the procurement side that we think make the P3 more expensive. We won't talk about that right now. But so the cost efficiencies that we were assuming earlier are going to be ignored. Patrick.

Patrick DeCorla-Souza: All right. Let's go back to the PowerPoint. Okay. So as I was saying, in this case there are no P3 cost efficiencies, so we see a big drop this time. So from $22 million surplus under just with the "no early completion", when we add the zero percent cost efficiencies in there, that drops to $39 million negative. So a drop of something like $22 plus $39, so about $60 million dollars in value for money drop. And so now we go from $54 million plus, positive value for money, to a negative value for money. So basically what this is saying is, if we thought that the design build portion of the contract would not bring us any efficiencies relative to conventional delivery, so in other words, if you could do the same thing under conventional delivery, really, the P3 option wouldn't bring us any benefit. In fact, the value for money would be negative. So it is saying basically that construction cost efficiency that we assume was a major assumption that is driving our value for money. Then we go to the next run, and it's basically the same thing as Wim was showing you, the you go down to instead of construction, you go a little further down in that spreadsheet and you would see that there is an operation P3 cost efficiency of about 10 percent again. You make that zero percent, not just for the O&M costs, but also the major maintenance cost which occurs every 8 years. You zero that efficiency. And what we then end up with is a further drop from $39 million under the no efficiencies in the build phase, to if you add the no efficiencies under O&M, you now have a further drop in value for money of another $13 million dollars. So it's not showing up here on this slide. I apologize for that. But the PDF file should show it to you, that the net present value is negative $20 million of value for money. So basically, from negative value of money of $7 million, we drop to a negative value for money of $20 million. So it's a further drop of $13 million dollars.

Wim Verdouw: Patrick, it may be insightful to point out where the $20 million comes from, and they are effectively the additional procurement costs that we expect to incur because of the P3.

Patrick DeCorla-Souza: Exactly, exactly. And you can show them in the spreadsheet where that occurs, because we may not have pointed that out. So I think that basically concludes this exercise. So at this point, if there are any questions. Feel free to ask, the phone line is open. Please just unmute your phone and give us a call.

Wim Verdouw: In the meantime, in row 28 and 29, you will see the public procurement cost and the private procurement cost, the first one being the compensation of losing bids, so the agency may agree to pay for losing bids. Whereas the private procurement costs is the cost of winning bids, and those in this particular example are $10 million each. And they help explain why we're seeing a $20 million negative value for money even though the other costs are effectively the same between the P3 and the PSC.

Patrick DeCorla-Souza: Basically, because you are incurring so much extra cost, you need to balance that out with efficiencies. And if you don't have those efficiencies all you end up with is cost. And then there is no value for money in doing a P3.

Patrick DeCorla-Souza: Alright so let's go back to the PowerPoint. OK, so feel free to interrupt me at any point. I'll just conclude this thing with the summary and we'll stop again for questions. So we've covered the exercise parts A&B which covered the toll concession, and in parts C&D we covered availability payment as you saw. We divided the costs into various components so you can see where all of the benefits of P3 can come from and the one thing that Value for Money does not cover is quality improvements and things such as benefits to travelers. All we are dealing with in Value for Money, as we indicated previously, is cost and cashflows and revenues. We are not dealing with how a P3 or acceleration of a project using a P3 might have broader benefits to society. So next week, next Monday, we will do the webinar in project delivery benefit cost analysis where we will introduce the concepts behind project delivery benefit cost analysis, which helps us capture all of these user benefits that we really don't capture in value for money analysis, so join us on February 22. As I mentioned there were 3 risks, base variability, pure risks, and lifecycle performance risk that we just showed you in the tables today but we didn't explain how they were calculated. We will go into much more detail on that on March 7th again using the P3 VALUE tool. Finally, we've talked a lot about weighted average cost of capital, financing conditions, all of these things, optimizing the model, and DSCR, things of that type, which we haven't covered really in our prior presentations; we saved that for the very end. We will cover that in financial viability assessment which will be the very last webinar on March 21st. So feel free to join us. And in the meantime, please feel free to continue to use the tool and experiment with it. It's downloadable from the website, the P3 toolkit website. And to complement it, we have a user guide, we have primers and guidebooks that go into much deeper detail on the concepts behind the tool.

Patrick DeCorla-Souza: So here is the URL for our website and the P3 Toolkit website in particular. And again, another opportunity, if you have any questions, feel free to ask at this time. If not, of course, I'm always accessible by email or by phone. So there's my contact information. And I believe the presentation is downloadable from the website here and the answers to the homework or the exercise, there were several questions we posed in the exercise, and we are making available the word file with the answers to those questions. And you can download them again from the webroom here. I think momentarily Michael Kay will be putting them up so you can download them. If not, of course, we will have them available on the website under the webinars, or past webinars section.

Michael Kay: And Patrick, I've just added the answers to the download box. So at center left of your screen if you want to click on the exercise files, click Download Files, and follow the prompts on your screen and you can download that file.

Patrick DeCorla-Souza: Excellent. So hearing no questions, I would like to thank Wim Verdouw for his contributions to this presentation and of course our moderator Michael Kay. And with that, thank you all for your participation in the webinar and I hope to see you next Monday for the webinar on project delivery benefit cost analysis. Goodbye.