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The Last Element: Looking For Tomorrow Download... [HOT]

Patrick DeCorla-Souza: Thanks, Michael. And just to give you a brief review of where we've been so far, this is a continuation of a series of webinars on P3 Value and the concepts that underlie the P3 Value tool. And we've had several webinars so far, including exercise review webinars. Today we are going to review the exercise on risk assessment that was provided on March 7 at the Risk Assessment Webinar. Just a reminder that there will be two more webinars, one on financial viability assessment. That is scheduled a week from today on March 21, Monday. And the exercise review relating to financial viability will be held on March 28, which is also a Monday. So the purpose of the exercise that was assigned last Monday was to provide a familiarity with the tool and understand how the tool undertakes risk evaluation. And, actually, there is a difference between how risks are evaluated for value for money analysis versus for benefit/cost analysis. So we will be showing you, through this exercise, how the two methodologies defer and another objective of this exercise is to explain how the lifecycle performance risk and revenue uncertainty risk can be affected by financial conditions. Actually, it is the other way about because the financial conditions are a response to perceived risks in a project and investors increase their interest rates or equity rate of return in response to the risks that they see in a project. And that's what we take advantage of, this information on the financial conditions that investors require because they perceive these risks. And we are using those financial conditions to estimate the value of the risks perceived by investors. The exercise is divided into basically three parts, A, B, and C. In the first part, we will talk about risk valuation for BFM analysis. In part B, we will talk about risk valuation for benefit cost analysis. And finally we will, in part C, show how financial conditions may be used to assess lifecycle performance risk and revenue uncertainty risk. So just a brief background, we have been using the same project for all of the other exercises so we will go through this really quickly. As we said, a state DOT has already performed value for money analysis and benefit/cost analysis, and all of the inputs that the state used are in the P3 Value 2.0 spreadsheet that you would've downloaded from our website. Again, very briefly, it is six lane facility that is existing, that is being expanded to five lanes in each direction by adding two managed lanes in each direction. And the costs of the project are $425 million for construction, routine maintenance of $4 million per year. Major maintenance $10 million occurred every eight years and then you have the project start date of 2015, construction start in 2017, and operations start 4 years later in 2021 and continuing for 40 years. And this would be under the conventional delivery option. P3 may introduce efficiencies in the schedule that we will talk about. So the types of risks, as we mentioned in the last webinar on risk assessment, include first base variability or variability in base cost. And, of course, those can be plus or minus, depending on market conditions, depending on how good our estimates of volumes, of different materials, might have been. However, since we want to be sure that we will have sufficient funds should the costs go up, we actually, in P3 Value, use a factor for base cost variability which is always positive. In other words, the base variability is always a plus cost, so it increases the base cost by a certain percentage. And those, we assume, are what the state would have calculated based on its desire for confidence that the cost wouldn't exceed the budgets. And these are usually set at what is called the P70 level. That is a confidence level of 70 percent that the cost will not exceed the 10 percent factor in the case of preconstruction costs. 17 percent in the case of construction costs and, again, 10 percent in the case of O&M costs. These are costs that are budgeted into the cost estimates. Now, we also have what we call pure risks or event risks and these are risks that may or may not occur. So there's some probability that they will occur. The probability may be high or low or medium. And, if the risk does occur, there will be some kind of impact on cost or schedule. And the risk-- the impact may actually have a most likely value but usually you don't know exactly what that value might be. It could be above or below so there is a range of cost impacts. And so that is what we need information on and what the state would do is have some type of a workshop where it would bring in experts on the different subject matters pertaining to each of these risks. And use their best judgment to estimate what the most likely value might be, what the range might be. Whether it might be a uniform distribution or a triangular distribution of the impact and also whether the probability is low, medium or high. So this type of information would be obtained by the state and input into P3 Value to undertake the valuation. The same type of situation would occur with regard to risks in the operation space. And similarly, the types of risks shown here would have a probability of occurring, a most likely impact, a range, should the risk occur and a assumed distribution of impact of that risk. Now, as I said earlier, financing conditions are what we use to try and estimate what the value of risks might be in the long-term. These are risks that are borne by the financiers and these are the lifecycle performance risks and the revenue uncertainty risks. And what you see here is that the cost of equity or the equity rate of return is affected by the amount of risk that the equity investors feel there is in the project, both revenue and lifecycle performance risk. The debt providers also set their interest rates based on the type of risks they see but also by setting what are called gearing ratios, which is the debt to equity ratio. So they will not allow more than 75 percent debt in this case because of the amount of risk they see. In other words, that 25 percent is the cushion they are looking for and that cushion is-- the 25 percent is what would be provided by equity investors. Of course, when you combine the 75 percent with the 6 percent interest rate and the 25 percent with the 12 percent rate of return, you get the weighted average cost of capital. And, since this is a toll project, a toll concession project, that weighted average cost of capital represents a toll concession project. Now, since we want to separately identify the value of revenue uncertainty risk, we need to figure out what portion of that weighted average cost of capital, or the risk included in the weighted average cost of capital, is due to toll revenue risk versus what is due to the lifecycle performance risk. And based on calculations that we have already done or the state has already done, they determined that the weighted average cost of capital based on all of these factors for the toll concession was something like 8.86. And then the availability payment would be the same project but without the tolls going to the private sector. In other words, the tolls would be retained by the public agency, so the risk would be retained by the public agency and that would allow the investors to reduce their weighted average cost of capital and all of these interest rates and equity rates of return. And gearing would be more favorable and the weighted average cost of capital would drop. And what the state has determined is that lower weighted average cost of capital is 1.6 percent lower than the weighted average cost of capital for the toll concession. So this basically represents the proportion of the weighted average cost of capital that is due to revenue uncertainty risk. So now let's look at how we would do a value for money analysis risk valuation. And, as we indicated, there are four types of risks that we are going to evaluate. The base variability, the pure risks, lifecycle performance risk, and revenue uncertainty risk. And we're gonna use the information that we have on the PSC, or conventional delivery, to estimate the impact on the value of these risks if a P3 concessionaire takes over the management of the project. And, again, that would be something that would be obtained either from subject matter experts or by looking at similar projects that have been implemented and what the reduction in risk might have been in those situations. And the share of risks also is important because some of those risks would be retained by the public agency. But the vast majority of risks are transferred to the concessionaires. So that's other information that we would need and we will show you how that is included in P3 value to calculate the risk value. So now Wim Verdouw will show you how this is done in P3 Value. Wim.

The Last Element: Looking For Tomorrow Download...

Wim Verdouw: Thank you. All right, so as I share my screen with you-- all right, as before, when you open the model you can choose between the model navigator which gives you access to the full model, and you can access the training navigator, which gives you access to the four modules that we have been discussing so far. And today we're doing the risk assessment. Again, as before, under the inputs you can find those various input sheets. In the risk assessments, the most important risk input sheet is the IMP risk as well as the IMPfin that I will get to in a second. Let's start with input risk sheets. Here you find the various inputs that we've used for this example project. And we discussed them in the last webinar so I will not go through them again. And so, first, we start off with the probability level, then we describe the pure risks. So it's in the row 13 to row 39 we are looking at the pure risks, the parameters for the different pure risks and at the base variability from row 45 to 47, and then the lifecycle performance risk and the revenue uncertainty adjustment below here. And then the other parameter that Patrick mentioned earlier was the difference between the work between the availability payment and the toll concession, which is here listed in row 71. So here we are saying that a toll concession, according to this input, is 1.6 percent higher, has 1.6 percent higher WACC than an availability payment. And this reflects, of course, the fact that under toll concession, the concessionaire takes on both all long-term lifecycle projects but also the revenue risk, whereas under an unavailability payment, they would only have to take on the lifecycle performance risk. Based on these inputs, we have the various outputs, which I will show you very briefly and Patrick will show them in more detail. So here are the outputs for the value for money, again, value for money taking the financial perspective of the agency. Three columns: conventional delivery, retained risks under P3, and transferred risks under P3. You see here that we're not talking about the delayed conventional delivery or the delayed PSC because we don't consider that in our analysis. We're assuming that the product is delivered in the same timeframe. Whereas, for the benefit/cost analysis, we take the economic perspective and here we show the three delivery models: the delayed conventional, the conventional delivery, and P3. Patrick, do you want to present the results? 041b061a72


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