TRANSACTION ADVISORY SERVICES
Financial Appraisal Projects and
Capital Acquisitions
Presented by Andre Walcott of
Ernst & Young Caribbean
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Agenda
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Introduction
The Dilemma
Options Analysis
Options Analysis Methodology
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Introduction
Regional Port Authorities are faced with
the ever present dilemma of efficiently and
effectively utilising the limited financial and
natural resources to fulfill the economic
and social obligations of the primary
shareholder, usually Government.
How do you manage this dilemma?
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The Dilemma
With limited financial resources, the
resistance of Government to guarantee
financing obligations, and a country of
expectations, how do you know which
projects to undertake and which capital
acquisitions to make at which time?
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Options Analysis
Options analysis:
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examines the economic benefits
examines the costs
examines the non-financial benefits
identifies the risks and their impact on the
investment
• accounts for other qualitative supporting
information
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Policy
Options
Analysis
Methodology
Risk
Internal
Value
Economic
Score
External
Qualitative
Economic
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Approach to Options Analysis
There are seven tasks in detailed option analysis:
• Identify and categorise the benefits
• Identify and categorise the costs
• Develop a basis for the estimation of costs and
benefits
• Information gathering
• Estimation of costs and benefits
– Cash Flow
– Financing Mechanisms
• Risk analysis
• Assembling the analysis in a business case
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Identify and Categorise
Benefits
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Sub-category Level
Category
Level
BENEFITS CATEGORISATION
Internal Economic
External Economic
Value Score
Qualitative
Increased
Revenue
Cruise line
Savings/ Revenue
Policy
(procurement/tender
guidelines)
Value Score
Supporting
Information
Economies of
Scale
Other Agency
Savings/ Revenue
Social/ Service
Delivery
Comparable
Projects
Employee
Productivity
Savings
Other Indirect
Savings/ Revenue
Governance
(transparency)
Stakeholder
Support
Strategic
(Port specific)
Strategic
Alignment
(Country specific)
Environmental
The Acquisition/
Construction
process
Other
utilisation
Savings
Other
Relevant Measures
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Identify and Categorise Costs
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Cost Categorisation
Cost categorisation involves more than
examining the capital costs but also the
operating costs associated with the
acquisition or project.
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Operating Costs
Admin & Management
Insurance
Legal fees
Consultants
Contractors
Interest costs and debt service
Personnel/Staff Expenses
Salaries
Overtime
Training
Facilities Expense
Repairs and Maintenance
Other Expenses
Market research
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Capital Costs
Market Planning
Definition of requirement
Business Planning Costs
Options Analysis
Other
Asset Cost
Other Asset Costs
Assembly and training
Procurement Charges/Contractor’s fees
Financing Charges
Consultancy Fees
Other Expenses
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Information Gathering
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Information Gathering
Information gathering should commence
as soon as possible to ensure that the
most reliable data available is collected
and collated to facilitate estimates and
projections of costs and benefits.
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Information Gathering
Some of the challenges that may be
encountered are:
– Inability to locate data
– Collection of unreliable data
– Changes in project requirements
– Changes in alternative options for analysis
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Estimating Costs and Benefits
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Estimating Costs and Benefits
• Identify and categorise future internal
economic benefits
• Identify and categorise future costs
• Select the cost assumption basis
• Identify the cost benefit influences
• Identify the volume basis for each cost and
benefit
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Basis for Estimating Costs
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Cash Flow Impact
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Cash Flow Impact
In assessing the cash flow impact we not
only examine the costs associated with the
project but also the timing of the projected
cash flows.
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Cash Flow Impact
Scenario 1 – Benefits begin accruing in Year 2:
Yr 0
Yr 1 Yr 2 Yr 3
Total Benefits ($m)
20 80
Total Costs ($m)
-150 -150 -100 -60
Net Benefits ($m)
-150 -150 -80 20
NPV ($m)
$43.57
Discount Rate
11%
Yr 4
170
-60
110
Yr 5
170
-60
110
Yr 6
170
-60
110
Yr 7
170
-60
110
Yr 8
170
-60
110
Yr 9 Yr 10 Total
170 170 1290
-60 -60
-880
110 110
410
Scenario 2 – Benefits begin accruing in Year 3:
Yr 0
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Total
Total Benefits ($m)
20 80 170 170 170 170 170 170 1120
Total Costs ($m)
-150 -150 -100 -60 -60 -60 -60 -60 -60 -60 -60 -880
Net Benefits ($m)
-150 -150 -100 -40 20 110 110 110 110 110 110
240
NPV ($m)
-$75.82
Discount Rate
11%
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Financing Mechanisms
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Financing Mechanisms
Financing
Method
1. Internal Sources
2. Government
Funding
3. Asset-Backed
Financing
Options
Merits
Level of
Applicability
Demerits
Operating Cash
Flow
Cash Reserves
-Less burdensome on
Government
-Insufficient cash flows
generated by the
Ports under current
operating conditions
Government
Bond Issue
-Consistent with
Government’s current
savings initiative
-Overall cost of borrowing
lower with tax-exempt
bonds
-Attractive to investors with
a long-term investment
horizon
-Can be used in conjunction
with other financing
methods
-Tax exempt bonds,
eliminate potential
source of revenue
-Increases Gov. debt
position
-Require Gov. guarantees
which can strain
current borrowing
limits
-Preserve cash & working
capital
-Lower debt ratios
-Applicable mainly to
equipment purchases
Operating
Leases
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HIGH
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Financing Mechanisms
Financing
Method
4. Capital
Markets
Options
Merits
Level of
Applicability
Demerits
Loans from
International
Funding
Institutions
(IFI)
-Preferential interest
rates
-Long repayment
periods
-Onerous terms and
conditions
-Long turnaround times
-Require Gov. guarantees
which can strain current
borrowing limits
-Increase Gov. debt position
HIGH
Loans from
Local/
International
Banks
-Quicker
disbursement times
than IFIs
-Syndicated loans are
available
-Can be expensive
-Require default assurance
from Gov. and can strain
current borrowing limits
-Typically shorter maturities
-Increase debt position on
balance sheet, make
performance ratios less
attractive
-If size of financing is
significant, lending institution
may require head office
approval, resulting in delays,
increased due diligence etc.
HIGH
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Financing Mechanisms
Financing
Method
Options
Bonds
Sinking Fund
Level of
Applicability
Merits
Demerits
-Funds disbursed in
tranches to match
commitments
-Attractive to investors
with a long-term
investment horizon
-High transaction costs
-Require Gov. guarantees
which can strain current
borrowing limits
-Increase Gov. debt position
-For foreign currency
denominated bonds,
repayments may strain
foreign reserves
-Balloon payment due at
time of maturity
-Funds disbursed in
tranches to match
commitments
-Attractive to investors
with a long-term
investment horizon
-Balloon payment
financed at start
-Capital costs are tax
deductible
-High transaction costs
-Require Gov. guarantees
which can strain current
borrowing limits
-Increase Gov. debt position
-For foreign currency
denominated financing,
repayments may strain
foreign reserves
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Financing Mechanisms
Financing
Method
6. Pooled
Investments
Level of
Applicability
Options
Merits
Demerits
Offshore Real
Estate Fund
-Lower transaction
& overall costs
-Quicker turnaround
times
-Unlimited pool of
investment capital
-Investors require
higher rates of return
due to mandated hurdle
rates
-Investor returns paid
in foreign currency will
strain foreign reserves
-Extensive marketing
effort required to
attract international
investors
MODERATE/
HIGH
-Cash inflow
upfront
-Foreign currency
exposure minimised
-Investor require higher
return rates
-Insufficient capital
pool available locally/
regionally
MODERATE
Real Estate
Investment
Trust (REIT)
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Financing Mechanisms
Financing
Method
7. Private
Public
Partnerships
Level of
Applicability
Options
Merits
Demerits
PPP’s
(BOLT,
BLT,
BOOT, etc.)
-Debt burden appears
less in the short term
-Some risk-sharing
with the private sector
-Government retains
ultimate control of the
facility
-Off balance sheet
financing
-Relatively new to
Barbados
-Complex, require finance
expertise to ensure adequate
structuring
-Higher financing costs due
to private investor hurdle
rates added to financing
costs
-Clearly defined project
terms and responsibilities
required
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Risk Analysis
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Risk Analysis
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Risk analysis is about developing an
understanding of the risk. Some of the major risk
factors for Port projects are:
They require major political involvement
The project budget is overrun
The project completion time is overrun
There is a failure to achieve anticipated benefits
Cruise ship boycott
Natural disasters
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Risk Analysis
The main risk factors that are focused on
in options analysis are consequence and
likelihood.
Consequence x likelihood = risk rating
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Risk Analysis
Consequences
Likelihood
Insignificant
Minor
Moderate
Major
Severe
Almost Certain
Medium
High
High
Extreme
Extreme
Likely
Medium
Medium
High
High
Extreme
Possible
Low
Medium
Medium
High
Extreme
Unlikely
Low
Medium
Medium
Medium
High
Rare
Low
Low
Medium
Medium
High
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Options Analysis Summary
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