PFI PPP Financial Modelling and Analysis - A Practical Guide [1st ed.] 1843747545, 9781843747543

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PFI PPP FINANCIAL MODELLING AND ANALYSIS A Practical Guide

David Whittaker

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ACKNOWLEDGEMENTS The author would like to thank his family, Katerina and Daniella, for their support and all the professional people that have positively contributed to his skills, experience and knowledge over the years.

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CONTENTS Introduction

vii

Section 1. Public Sector Financial Modelling and Analysis

1

Section 2. Bid or Financial Close Modelling

5

Financial modelling best practice Scope Layout Timeline Construction Financing Unitary charge Operating costs Working capital Accounting Financial asset accounting Taxation Dividends Proit & loss account Cash low Balance sheet Sensitivities Checks IRRs Lenders’ ratios Summary Finalising the bid or inancial close model Optimising the unitary charge Sensitivity logic Debt sculpting Sources of error Self testing the model Limited scope inancial model reviews Using the model Financial model audits – inancial close model

5 7 10 12 13 13 18 18 19 22 25 26 27 28 29 30 30 33 33 35 36 36 46 48 50 55 55 56 60 60

iii

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Con t en t s

Disclaimers User and technical documentation Data book

Section 3. The Post Financial Close (“Operating Model”) Introduction Scope Designing the inancial model Layout Timeline Main differences to a bid or inancial close model Process for building a post-inancial close model Actual inputs and actual logic Funding Unitary charge Operating costs Working capital Accounting Dividends P&L summary – reforecast Cash low – reforecast Balance sheet – reforecast Cash low – full contract P&L summary – actual and reforecast Cash low – actual and reforecast Balance sheet – actual and reforecast P&L summary – inancial close Cash low summary – inancial close Balance sheet – inancial close Shareholder actual calculations Shareholder analysis Lenders actual cash lows Lenders’ ratios Summary Historic debt statement Historic debt statement exercise Sensitivities Actuals – for management reporting Budget – for management reporting Checks Finalising the operating inancial model

72 73 77

87

87 88 88 89 91 92 94 96 99 103 104 105 108 115 116 116 118 119 120 120 121 121 122 122 122 123 124 124 126 126 126 126 129 129 129 130

iv

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Con t en t s

Disclaimers User and technical documentation

139 139

Section 4. The Post Financial Close (“Management Reporting Model”) 147 Model layout Timeline Imports and inputs P&L account management reporting – reforecast calculation P&L actual management reporting calculation Cash low management reporting – monthly calculation Balance sheet management reporting – monthly calculation Detailed P&L Cashlow statement detailed Balance sheet Summary P&L P&L account management reporting – monthly Cashlow management reporting – monthly Balance sheet management reporting – monthly Checks User and technical documentation – management reporting model Finalising the management reporting model Using the model and the control process Sources of error Self or internal testing the management reporting model

147 148 149 149 149 150 150 150 151 151 152 152 152 153 153 153 156 168 168 169

Section 5. Other Areas for Financial Modelling and Analysis

171

Glossary

179

Contract renegotiations Reinancing Restructuring Secondary markets Project managing inancial modelling projects The use of generic and template inancial models Conclusion

171 171 173 174 176 177 178

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Introduction This book has been written speciically to address the inancial modelling and analysis needs for PFI and PPP projects both at the bid, inancial close and post-inancial close stages. It will be useful for those who are required to enhance their skills in this area, whether at the beginner or intermediate level. However, it will also be useful for managers who require a further understanding of the process without having to become hands on. The main areas that require analysis are examined through extracts from a demonstration inancial model that serves as a working example. The reader will be able to work through the process of building the inancial models on a step-by-step basis, with reference to sample exercises, at their own pace, to help them build up their skills in this area. PFI stands for the private inance initiative, the UK government’s initiative to use private sector inance for government sector projects. It is a method that provides private inance for “public private partnerships” (PPP) between the public and the private sector. It is worth noting that this is book is not intended or suitable for only UK readers, as the PFI and PPP concepts have been adopted almost on a worldwide basis, with further adoption likely to follow by other nations. It makes good sense to outline how typical PFI PPP arrangements actually work, before examining inancial modelling and analysis of PFI PPP in detail, which is the main objective of this book. A typical PFI PPP structure can be seen in Illustration 1. A typical project structure is comprised of a consortium of project sponsors from private sector companies, who provide equity in the form of ordinary shares and subordinated debt or a shareholder loan to the special purpose company (SPC). A syndicate of senior lenders led by a lead arranger provide senior debt to the SPC in return for its principal repayment, interest and fees. The SPC then contracts with the public sector body, such as a local council, hospital trust, etc, for the provision of the service through a project or concession agreement. The SPC receives a unitary payment in return for providing the services to the public sector body. The SPC contracts with the design and build contractor for the construction of the asset, and with the facilities management contractor for the provision of the ongoing services, such as catering and maintenance. In order to facilitate such a project structure, the following typical contracts are drawn up and signed before inancial close: • • • • •

project or concession agreement; design and build agreement; lender’s facility agreement; facilities management agreement; and shareholders’ agreement.

The inancial and contractual arrangements are relected in a inancial model that will forecast results over the life of the concession at the bid and inancial close stage. There should be the ability to measure the impact of risk upon these results through sensitivity analysis prior to inancially closing the contract. Once the PFI PPP concession is underway there is the need to vii

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PFI PPP Fin an cial Mod ellin g an d An alysis

Illustration 1 A typical design, build, inance and operational PFI PPP structure Sub debt and equity

Consortium

Blended returns

Debt

Project agreement

Special purpose company (SPC)

Senior lenders syndicate

Public sector body Unitary payment

Debt servicing

Design and build contractors Construction

Facilities management contractors Services

Source: Modelling Solutions

regularly monitor the project performance by updating the actual inancial results to date and changing any necessary input assumptions, as well as helping to identify any likely problems as soon as possible, so that corrective action can be taken as appropriate. In summary, the inancial model will produce essential outputs, including proit and loss (P&L), balance sheets, cash lows, and shareholders’ returns and lenders’ ratios. This book, being a practical guide, will demonstrate and provide skills transfer in both PFI / PPP bid and post-inancial close (operational modelling) and analysis, thus providing inancial management skills enhancement over the life of the concession. PFI PPP Financial Modelling and Analysis includes numerous examples of numbers, calculations and code for speciic areas of modelling and analysis. There are also practical viii

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In t rod u ct ion

exercises for the reader to complete in order to reine their skill and understand key issues. The book has been broken down into appropriate sections, which allows readers to focus on the areas of more interest to them. I hope that you gain great beneit from the reading and use of this book. It is important to note that the igures or the Excel example logic used in this book do not represent any past, current or, indeed, future PFI PPP bids, special purpose company or, indeed, actual inancial evaluation of any kind. The numbers and results contained herein are purely ictional.

ix

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Section 1

Public Sector Financial Modelling and Analysis

Although the vast majority of this book is aimed at private sector involvement in private inance initiative (PFI) and public private partnerships (PPP) inancial modelling and analysis, it is useful to devote a section on how the public sector actually undertakes its inancial modelling and analysis. This should prove particularly interesting for those considering undertaking inancial modelling projects with the public sector or for those who remain in the private sector and who wish to understand how the public sector – which is obviously an important stakeholder in PPP – evaluates PFI projects. Essentially, the UK Treasury provides guidance on assessing the value for money (VfM) of procuring a given service requirement through PFI compared with conventional funding. The process includes the: • • •

undertaking of a VfM assessment at both the full business case (FBC) and outline business case (OBC) stages; qualitative VfM assessment as well as a quantitative assessment; and use of a Treasury standardised template inancial model for assessment purposes.

This approach is concerned with the value for money of procurement routes. • •

The main aims of the value for money assessment at OBC stage are to: provide an assessment of whether procurement through PFI is likely to provide value for money compared with conventional procurement; test the competitive interest in the project, and the market capacity to bid and deliver the project effectively.

During the qualitative assessment at OBC stage, the public sector body needs to assess the viability, desirability and achievability of PFI when assessed against alternative procurement routes. These characteristics can be summarised as follows: •

• •

Viability: can the service requirements be stated in clear output based terms, and can the effectiveness of service delivery be measured and monitored? Can operational lexibility be maintained over the lifetime of the contract at an acceptable cost? Desirability: is PFI likely to involve better risk management, signiicant risk transfer and better incentives for delivery on time and to cost? Is PFI likely to involve greater innovation? Achievability: is there evidence that the private sector is capable of delivering the required outcome? Is there likely to be suficient market appetite for the project? Is there/will there be suficient client-side capability to manage the procurement process and appraise ongoing performance against agreed outputs? 1

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PFI PPP Fin an cial Mod ellin g an d An alysis

The qualitative assessment involves answering each of a series of set questions that address viability, desirability and achievability, and also an extended set of questions about the VfM regarding whether or not to include soft services such as facilities management. In undertaking the quantitative assessment at OBC stage, public sector bodies needs to populate and run the VfM model in Excel that has been developed by the Treasury and Partnerships UK. The outputs from the VfM model provide a comparison between the risk-adjusted net present cost (NPC) of the public sector comparator (PSC) and the risk-adjusted NPC of the PFI option, as estimated at OBC stage. The outcome of the comparison is shown in the model as the percentage difference between the PFI NPC and PSC NPC. A positive percentage means PFI has a lower NPC and is thus VfM, as long as the qualitative assessment and sensitivity tests are also favourable to PFI. A negative percentage means, on the basis of the quantitative assessment, PFI is not likely to be value for money. The VfM model involves a number of simpliications, relecting the inherent uncertainty surrounding some of the input values, and therefore does not include some aspects one would normally expect to see in a public sector comparator or PFI deal. Nor is it likely that the model will be able to be ine tuned to relect every detailed circumstance of each individual scheme. The model is intended to provide a good, high-level estimate of the relative value for money of PFI versus conventional procurement. In order to produce the estimated NPCs, public sector bodies are required to enter, into the “input assumptions” sheet of the model, estimates of: • • • • • •

the whole life costs of the PSC, including capital, lifecycle and operating costs; the whole life costs that would be borne by a PFI provider, including capital, lifecycle and operating costs; the interest rates, bank margins, etc, that impact on the PFI company’s funding costs; optimism bias; risk transfer; and transaction costs.

The estimated net present cost for the PFI option is derived within the model from the PSC costs, risk transfer and PFI funding costs. As noted above, the new value for money assessment is focussed on the value for money of the PFI procurement route. It is the VfM of procuring the preferred estates option through PFI that is tested through the new VfM model. An overall assessment is made by combining the qualitative and quantitative assessments. The assessment of the value for money of PFI cannot normally be relected in a single quantiied igure. The qualitative assessment should thus inform the conidence placed on the quantitative results. A positive qualitative assessment is also required. It is also important that the outputs from the quantitative and qualitative assessments should not be considered in isolation, but taken in conjunction in making the overall assessment. There is a need to report the outcome of the value for money assessment in the OBC. The outcomes from both the qualitative and quantitative value for money assessments must be reported in the OBC, along with the conclusions from combining the qualitative and quantitative assessments. The OBC must include reports of:

2

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Pu b lic Sect or Fin an cial Mod ellin g an d An alysis

• • • •

the assessments of viability, desirability and achievability from the qualitative assessment; the qualitative assessment of the VfM of including soft services; a full, working copy of the Excel quantitative model, along with the source and justiication for the chosen input values; and a summary of the results from the quantitative assessment, including the results of the sensitivity analyses carried out using the VfM model.

The emphasis of the VfM assessment between the OBC stage and through to inancial close is on demonstrating that a competitive price has been achieved from the preferred PFI bidder selected. This assessment is more continuous and needs to be undertaken at key stages as the project develops, including: • • • • •

pre-Oficial Journal of the European Union (OJEU) notice; pre-qualiication; invitation to participate in a competitive dialogue (ITPD); invitation to submit inal bids (ITFB); and selection of preferred bidder.

The assessment should focus on: • •

there being a competitive procurement for the scheme – avoiding a lack of competition as a result of a single bidder, or perhaps two bidders where only one is credible; the bid offered – eg, after the selection of preferred bidder, in broad terms not being substantially above that for other similar PFI projects nor the risk proile substantially worse.

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Section 2

Bid or Financial Close Modelling

Financial modelling best practice A structured approach that should ideally be adopted is often referred to as inancial modelling best practice (FMBP). This is because the inancial modelling for PFI PPP projects is high risk, and the millions of pounds involved, as well as the number of complex calculations and arrangements necessary, make a structured approach desirable. I would propose that a FMBP approach is applied to all inancial modelling projects, not just PFI PPP ones. A recommended approach to inancial modelling best practice is shown in Illustration 2. Illustration 2 Financial modelling best practice SCOPE

• Purpose • Key outputs

SPECIFY

m • Specification • document

DESIGN

m • Excel?

BUILD

• Sensitivities • Functionality

• Timescales • Periodicity

• Sponsors • buy in

• Workbooks?

m • Inputs/calcs/outputs • Simple formula

• Modularisation

• Unique formula • Check sums

m

DOCUMENT

• User and technical

• Data book

m

Version control TEST

• Analytical review • Sensitivities

USE

m • Handover session

Change control

• Key outputs • review

In the past I have often been asked, “Isn’t FMBP too rigid?” My answer is always that, ideally, a balance should be struck, especially as an organisation is bidding or trying to close a transaction over a reasonably tight timescale. In fact, the vast majority of inancial close models are not particularly well designed to deal with this factor. Looking at Illustration 2, let us now examine how FMBP relates to the need to build and rely upon the results derived from our bid or inancial close model. In the scoping stage, we need to irstly discuss the actual purpose of the model. The purpose here is to prepare forecasts to produce shareholder returns, lender ratios over the life of the concession, and a unitary charge to the public sector body based upon all the assumptions 5

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required to produce the proit and loss, cash low and balance sheet over the concession. There is a requirement to ensure that a balanced and attractive stakeholder position is achieved. In terms of the key output schedules that would be required, these are proit and loss, cash low and balance sheet over the concession, usually on a six-monthly basis if the senior lender is likely to ask for its ratios to be measured semi-annually, thus addressing periodicity. Lenders’ ratios and shareholders’ internal rate of return (IRR), and the unitary payment at base year prices, are likely to be key outputs. Sensitivities – that is, the ability to lex the projects assumptions and observe the impact upon the results in the base case – should be derived from the project’s risk assessment process. Major risks should always be deined as sensitivity cases and the impact measured and mitigated accordingly. The timescale for your bid or for closing your project is critical, due to the size of the scope or type of resource required. For example, if time is tight you may want to limit the outputs of your model to a bare minimum and ensure that you use an experience modeller on the project, one that is able to close out the work quickly and eficiently. Functionality refers to the need to have special facilities in the model over and above the basic calculations. For instance, important functionalities in bid modelling are the ability to optimise the unitary charge for a given shareholder blended return and the facility to sculpt the senior debt principal proile given the lenders’ target cover ratios. At the speciication stage, it is advisable to prepare a document that considers the purpose of the model, key outputs, material calculations and assumptions as highlighted in the scoping stage. An example of a template for scoping the inancial model at a high level before committing to a more detailed speciication can be seen in Illustration 3. Illustration 3 Scoping template OBJECTIVE OF THE MODEL

USERS OF THE MODEL

OUTPUT SCHEDULES REQUIRED

MATERIAL CALCULATIONS

INPUT DATA

FUNCTIONALITY REQUIRED

Moving on to the design stage, its often important to consider whether Excel is the best platform for this modelling; given the nature of PFI PPP bid projects, the answer to this is almost always a yes. You should consider how many Excel workbooks are required. My experience of inancial close or bid inancial modelling is that the single Excel workbook will normally sufice. 6

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Bid or Fin an cial Close Mod ellin g

However, a very important consideration is the model’s structure and layout. Personally, I prefer to adopt a modular approach with sheets that are labelled with commonsense names. Also from experience, I have often witnessed inancial staff and modellers jump straight into the build stage, and indeed many best practice methodologies ignore the other processes or stages associated with FMBP outlined in this book. I recommend adopting the following simple principles when using Excel. •

•

•

•

Keep a clear separation of inputs, calculations and outputs. More simply, try to design the model so that it reads like a book from left to right. Where you cannot avoid including calculations with your inputs, please ensure that you protect the calculation cells appropriately. Only use one unique formula per row. This means that the logic placed in the irst column should be copied across all columns of a timeline, making it easier for you and others to review your formulae. To ensure logical accuracy, ensure as many cross checks and audit checks as possible are placed in the model. Some obvious ones are balance sheets balancing, cash lows equalling the movement in the balance sheet, and net proits equalling the movement in the balance sheet retained earnings. Try to keep your formula as simple as possible and your labels as clear as possible. However, it is understood that it is often dificult to have very simplistic formulae when a inancial model builder is trying to gain lexibility in respect of the calculations and assumptions in the inancial model. Again, a balanced approach should be adopted.

The need to produce user and technical documentation and a data book, and the testing and the use of the model, will be discussed in more detail later in this section. A further recommendation is that both version and change control logs are kept in your model: •

•

to ensure that each model version has a sequentially numbered sufix at the end of the Excel ilename (eg, inancialmodelV1.xls) and, where timing permits, log the differences between each model version in the models version control sheet (see Illustration 4. Version control). so that you can use the model’s change request log for changes requested or work outstanding and their status (see Illustration 5. Change control).

I will now take you through the process of building the bid or inancial close inancial model. The approach taken is a step-by-step one, using Excel inancial model extracts, and will often use Excel Visual Basic for Applications (VBA) logic or macros (please note that the basics of Excel VBA and macros are considered beyond the scope of this book, and reference should be made to appropriate text or training in this rather complex area). Those with limited knowledge of Excel VBA will ind this preparation a prerequisite for understanding some of the more advanced techniques used, which are essential for our inancial modelling and analysis requirements.

Scope Obviously, given the discussions regarding FMBP outlined above, our starting point here is to deine the scope of our PFI PPP inancial model build project. 7

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PFI PPP Fin an cial Mod ellin g an d An alysis

Illustration 4 Version control Number

File name

Date

Changes / comments

Modeller’s name

1

FinancialModel.xls

December 24 2007

Include interest on DSRA & MRA

David Whittaker

2 3 4 5 6 7 Illustration 5 Change control Number File name

Date

Change request details

Modeller’s name

Status

1

August 12 2009

Incorporate cash sweep logic

John Hargreaves

Outstanding

FinancialModel2.xls

2 3 4 5 6 7 8 9 10 First, the purpose of the inancial model is to provide inancial projections or forecasts for an infrastructure project, whether a road, school or a hospital, through the use of a typical design, build inance and operate PFI PPP structure. Second, given the nature of this type of project and its key stakeholders, we consider what the key output schedules are. We will start by considering the stakeholders who are likely to be involved: we have the project’s sponsors who typically provide the equity and subordinated debt, the lenders who typically provide the senior debt and the public sector body who will typically pay the unitary charge to the private sector service provider. Given the nature of our stakeholders and the requirements of the special purpose company (SPC), the following key requirements can be summarised: •

To prepare a proit and loss account, balance sheet and cash low over the life of the concession.

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Bid or Fin an cial Close Mod ellin g

• • •

To evaluate and measure the shareholder’s returns. To evaluate and measure the senior lenders’ debt cover. To provide a unitary charge or bid price to the government over the life of the concession.

Third, when considering the periodicity of our inancial modelling, it is fairly normal that the timeline is on a monthly basis during the construction phase and thereafter is every six months. The six-monthly timeline relects the semi-annual requirement to service the senior lenders’ debt requirements. Fourth, we need the ability to sculpt our senior debt repayment proile to it the projects cash low proile. Lastly, after the completion of the bid teams risk assessment, we can identify a number of sensitivity cases that require our analysis. For the purpose of this book, we will restrict our analysis to two simple cases – changes in the retail price index and changes in the lenders’ base rates. Illustration 6 Speciication template Speciication V1. The inancial model for the project XXXXXXXXXX XXXXXXXXXX Forecasting purposes CONTENTS Objective of the model ............................................... Page x Users of the model .................................................... Page x Output schedules required ........................................ Page x Material calculations ................................................. Page x Input data .................................................................. Page x Functionality required................................................ Page x Appendices ................................................................ Page x 1. Objective of the model The model will be used for xxxxxxxxxxxxxx purposes. The objective of the model is to provide x years inancial forecasts on a (monthly/yearly basis). Cash low ; Proit and loss account ; Balance sheet ; Key ratios Appendix A shows the outputs outlined above. 2. Users of the model The model will be owned and used by xxxxx xxxs and their team. The model will be made available to bank. 3. Output schedule required The output schedule formats are outlined in Appendix A. 4. Material calculations a.

continued

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b. c. d. 5. Input data The inputs are as required to be derived from the models outputs and calculations, and MS will deine these. More speciically . 7. i. ii. iii. iv.

Functionality required

Appendix A Output schedules • Cash low format

• Proit and loss account

• Balance sheer

• Key output summary

APPENDIX B Input schedules The inputs are as required from the models outputs and calculations, and modelling solutions will deine these where they haven’t been outlined.

Designing the inancial model Again, given the discussions regarding FMBP outlined above, our next stage is to deine the design for our PFI PPP inancial model. It’s obvious to us that our inancial model can and will be built in Excel. Any version from Excel 2002 onwards will be suitable for our requirements. One workbook is all that is required and we will design our model on a modular basis, breaking down the key areas of the logic.

Layout The next stage is to deine the structure of the inancial model in Excel for our PFI PPP inancial model, so that we can complete the logic and deine the inputs and collect them. The example outlined in Illustration 7 (see Illustration 7.xls) shows a layout of the inancial model that will allow us to complete our inancial model. 10

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Bid or Fin an cial Close Mod ellin g

The inancial model layout includes administration sheets at the front, followed by yellow sheets for inputs, the intermediate calculations sheets are in green, and the output sheets are in blue. The colour scheme adopted visually presents us with an increase of colour shading from left to right in the form of white, yellow, green and blue. This is a standardised model layout that I adopt for all my inancial model build projects. You will notice that the sheets are organised on a modular basis given the scope and purpose of the inancial model. The sheet names are clear and self-explanatory. Where there is an exception to this rule, please refer to the model layout listing below, which explains the purpose of each sheet. Essentially, the input and calculations are in worksheets where you would logically expect to ind them. You will notice that the output schedules are already included as it is standard to have agreed these with the end client by such a stage in the inancial model build project. We have a format for the P&L, cash low, balance sheet, summary, sensitivities and the check sheet. Box 1 Worksheet name

Description

COVER

This represents the cover with the disclaimer

VERSION CONTROL

This represents the version control log

CHANGE CONTROL

This represents the change control log

INPUTS

The inputs section starts here

General inputs

The general inputs are entered here, ie, inputs that do not it into any of the other input sheets

Sensitivity inputs

The sensitivity inputs are entered here

Time-based inputs

The operating, development and construction costs are entered here over the life of the concession in real terms

Financing inputs

The inancing assumptions are entered here

Accounting inputs

The accounting assumptions are entered here

Taxation inputs

The taxation assumptions are entered here.

CALCULATIONS

The inputs section starts here

Construction

This represents the construction and the development cost calculations

Financing

This represents the inancing calculations

Revenue

This represents the unitary charge calculations

Operating costs

This represents the operating costs calculations

Working capital

This represents the working capital calculations

Dividends

This represents the dividends calculations

Accounting

This represents the accounting calculations

Taxation

This represents the taxation calculations

GRAPH – DATA

This represents the data summarised for graphing purposes

Sensitivity calcs 1

This represents the holding area for sensitivity calculations continued 11

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Sensitivity calcs 2

This represents the holding area for sensitivity calculations

Sensitivity calcs 3

This represents the holding area for sensitivity calculations

Sensitivity calcs 4

This represents the holding area for sensitivity calculations

Sensitivity calcs 5

This represents the holding area for sensitivity calculations

Sensitivity calcs 6

This represents the holding area for sensitivity calculations

OUTPUTS

The outputs section starts here

P&L – semi-annual summary

This represents the P&L over the life of the concession

CASHFLOW – semi-annual

This represents the cash low over the life of the concession

BALANCE SHEET – semi-annual

This represents the balance sheet over the life of the concession

IRRS & NPVS

This represents the shareholders’ rate of returns over the life the concession

LENDERS’ ratios

This represents the lenders’ ratios, such as average debt service coverage ratio and loan life coverage ratio

SUMMARY

This is a summary sheet for the project

SENSITIVITIES

This is the summary of each of the sensitivity results against the base case result

CHECKS

This is the check sheet which ensures that the calculations in the model cross check

As with the bid or inancial close model, when you cross reference the narrative about the illustration it is plain that the names used in our layout are relatively commonsense and straightforward. This is what one would expect to ind from such an approach.

Layout exercise You are just about ready to start to build your bid inancial model in your copy of Excel. Please prepare the model layout by using the same sheet layout and output schedules as used in the example.

Timeline We will now compute the timeline for the inancial module. I will take you through the logic of this module with reference to Illustration 8 (see Illustration 8.xls). In the construction sheet we have introduced a monthly timeline at the top of the sheet for both the month commencing and the month ending, by using the eomonth formula and stepping up the previous month end date by a month. In most of the green calculation sheets and the blue output sheets we have used identical logic that adopts the year and month formula to calculate a six-monthly timeline. Alternatively, this could be achieved by the use of the eomonth formula.

Timeline exercise For the inancial model that you have built to date please add the following logic to compute the logic for the model’s timeline. Use the eomonth formula to automate the monthly timeline 12

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for the construction module. Use the eomonth formula to automate the six-monthly timeline for the green calculation modules and the blue calculation modules.

Construction We will discuss the logic for the building of the construction module as appropriate. Illustration 9 (see Illustration 9.xls) shows the logic behind the construction module. The capital costs are sourced from the time-based inputs sheet, together with the inlation indexation bases speciied from the general input assumptions. From row 36 onwards the projected index numbers are calculated. The logic is as follows: (previous index number) * monthly decompounded inlation rate for a month. From row 56 onwards the selected index is multiplied by the real capital costs to ind the value in nominal terms, ie, money of the day that is used for the integrated inancial statement forecasts. From row 69 onwards the upfront costs are sourced from the time-based inputs and inlation is sourced from the general inputs sheet. From row 131 onwards the index is applied to the real costs in order to derive upfront costs in nominal terms.

Construction cost exercise Build a construction cost module using the construction and upfront costs included in the example, ie, in the time-based inputs sheet. Using a 3% retail price index (RPI), calculate the nominal terms construction and upfront cost on a monthly basis. Calculate the cash low, proit and loss and any balance sheet results that will be linked to the summary inancial statements.

Financing We will discuss the logic for the building of the inancing module as appropriate. Illustration 10 (see Illustration 10.xls) shows the logic behind the inancing module. The Excel VBA routine shown below describes how to calculate the funding requirement by breaking the inherent circularity that is involved in calculating the funding requirement by worksheet-based code alone. Essentially, the funding requirement macro simply takes all the sources for the funding cash low and places these in the summary format for funding purposes. The code below is simply a series of cut and pastes from a number of range names to a number of range names. Please refer to each range name in the formula and select f5 on your keyboard to go to each range name, and ensure that you fully understand the macro or VBA logic. Box 2 Sub FundingRequirement() ‘ ‘ calculate funding requirement and ‘cut and pastes the funding requirement Application.ScreenUpdating = False Application.DisplayAlerts = False ‘

continued 13

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UnProtectEachSheet ‘============================ ‘PLACE FINANCING REQUIREMENT LOGIC HERE ‘============================ Sheets(“CASHFLOW - Semi Annual”).Select Range(“UnitaryChargeCashlow”).Select Selection.Copy Sheets(“Financing”).Select Range(“UnitaryChargeFinancing”).Select Selection.PasteSpecial Paste:=xlPasteValues, Operation:=xlNone, SkipBlanks _ :=False, Transpose:=False Application.CutCopyMode = False Calculate

Sheets(“CASHFLOW - Semi Annual”).Select Range(“OperatingCostsCashlow”).Select Selection.Copy Sheets(“Financing”).Select Range(“OperatingCostsFinancing”).Select Selection.PasteSpecial Paste:=xlPasteValues, Operation:=xlNone, SkipBlanks _ :=False, Transpose:=False Application.CutCopyMode = False Calculate Sheets(“CASHFLOW - Semi Annual”).Select Range(“WorkingCapitalCashlow”).Select Selection.Copy Sheets(“Financing”).Select Range(“WorkingCapitalFinancing”).Select Selection.PasteSpecial Paste:=xlPasteValues, Operation:=xlNone, SkipBlanks _ :=False, Transpose:=False Application.CutCopyMode = False Calculate Sheets(“CASHFLOW - Semi Annual”).Select Range(“BidCostsCashlow”).Select Selection.Copy Sheets(“Financing”).Select Range(“BidCostsFinancing”).Select Selection.PasteSpecial Paste:=xlPasteValues, Operation:=xlNone, SkipBlanks _ :=False, Transpose:=False Application.CutCopyMode = False Calculate Sheets(“CASHFLOW - Semi Annual”).Select continued

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Range(“LifecycleCostsCashlow”).Select Selection.Copy Sheets(“Financing”).Select Range(“LifecycleCostsFinancing”).Select Selection.PasteSpecial Paste:=xlPasteValues, Operation:=xlNone, SkipBlanks _ :=False, Transpose:=False Application.CutCopyMode = False Calculate Sheets(“CASHFLOW - Semi Annual”).Select Range(“CapexCashlow”).Select Selection.Copy Sheets(“Financing”).Select Range(“CapexFinancing”).Select Selection.PasteSpecial Paste:=xlPasteValues, Operation:=xlNone, SkipBlanks _ :=False, Transpose:=False Application.CutCopyMode = False Calculate Sheets(“CASHFLOW - Semi Annual”).Select Range(“VATCashlow”).Select Selection.Copy Sheets(“Financing”).Select Range(“VATFinancing”).Select Selection.PasteSpecial Paste:=xlPasteValues, Operation:=xlNone, SkipBlanks _ :=False, Transpose:=False Application.CutCopyMode = False Calculate Sheets(“CASHFLOW - Semi Annual”).Select Range(“taxCashlow”).Select Selection.Copy Sheets(“Financing”).Select Range(“taxFinancing”).Select Selection.PasteSpecial Paste:=xlPasteValues, Operation:=xlNone, SkipBlanks _ :=False, Transpose:=False Application.CutCopyMode = False Calculate Sheets(“CASHFLOW - Semi Annual”).Select Range(“interestCashlow”).Select Selection.Copy Sheets(“Financing”).Select Range(“interestFinancing”).Select Selection.PasteSpecial Paste:=xlPasteValues, Operation:=xlNone, SkipBlanks _ :=False, Transpose:=False Application.CutCopyMode = False Calculate continued

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Sheets(“CASHFLOW - Semi Annual”).Select Range(“IDCCashlow”).Select Selection.Copy Sheets(“Financing”).Select Range(“IDCFinancing”).Select Selection.PasteSpecial Paste:=xlPasteValues, Operation:=xlNone, SkipBlanks _ :=False, Transpose:=False Application.CutCopyMode = False Calculate Sheets(“CASHFLOW - Semi Annual”).Select Range(“BankfeesCashlow”).Select Selection.Copy Sheets(“Financing”).Select Range(“BankfeesFinancing”).Select Selection.PasteSpecial Paste:=xlPasteValues, Operation:=xlNone, SkipBlanks _ :=False, Transpose:=False Application.CutCopyMode = False Calculate Sheets(“CASHFLOW - Semi Annual”).Select Range(“DSRACashlow”).Select Selection.Copy Sheets(“Financing”).Select Range(“DSRAFinancing”).Select Selection.PasteSpecial Paste:=xlPasteValues, Operation:=xlNone, SkipBlanks _ :=False, Transpose:=False Application.CutCopyMode = False Calculate Sheets(“CASHFLOW - Semi Annual”).Select Range(“MRACashlow”).Select Selection.Copy Sheets(“Financing”).Select Range(“MRAFinancing”).Select Selection.PasteSpecial Paste:=xlPasteValues, Operation:=xlNone, SkipBlanks _ :=False, Transpose:=False Application.CutCopyMode = False Calculate Application.ScreenUpdating = True Application.DisplayAlerts = True End Sub Turning to the inancing example, rows 11 to 26 represent the cut and paste to calculate the funding requirement based upon the pre-inancing cash lows included in the CASHFLOW – Semi Annual sheet. The negative cash low during operations represents the amount that 16

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requires funding for the construction or pre-operations phase of the project, as per row 26 “cashlow before funding.” In row 27 the sign is simply reversed to the same amount of funding required. In rows 30–31 we can see the drawdowns of the required funding sources used to inance the funding requirement. For simplicity, we have assumed that the drawdown timing is equal for equity, subordinated debt and senior debt. It may be necessary to draw the equity irst, followed by debt or another pre-deined drawdown order. Quite simply, during “pre operations” we multiply the funding requirement by the percentage provided by each funding source. In rows 38–1247 we can see the debt schedule logic for all of the debt sources, ie, senior and subordinated debt is calculated for annuity, straight line and bullet principal amortisation. It is important to notice that, in practice, the vast majority of PFI PPP projects have a sculpted senior debt proile because the project cash lows do not usually cover most standard debt amortisation proiles. It is thus normal practice to adopt a sculpted debt principal that its the shape of the cash available for debt servicing, and meets the minimum debt cover ratios that are speciied by the senior lender. However, for reference purposes, you should become familiar with the logic outlined in the debt schedules. Rows 1254–1274 takes each of the senior debt schedules and converts them to the sixmonthly timeline basis. Rows 1280–1298 show the debt schedules for the sculpted principal amortisation for both the loan life coverage ratio (LLCR) and the historic average debt service coverage ratio (ADSCR). The yellow highlighted rows represent the principal proile that is calculated to meet the target ratios. We will discuss later in the book the two different alternative methods for sculpting debt – algebraic or worksheet code based on the VBA or macro approach, and when to adopt either method. Rows 1280–1298 takes each of the subordinated debt schedules and converts them to the six-monthly timeline basis. However, looking at rows 1292–1298, we can see that the principal has been proiled to meet a minimum historic ADSCR of 1.15 and is therefore repaid by September 30 2023. The ratios and target ratios are shown. The hard numbers highlighted in yellow are the principal amounts that are calculated to meet the target minimum debt cover ratios. The lenders’ fees are shown in rows 1328–1350. The commitment fees for both the senior and subordinated debt is calculated as a percentage of the undrawn facility amount. The arrangement fee is paid as a one-off fee as a percentage of the facility size. Turning to the reserve calculations, the debt service reserve account (DSRA) calculates the required account balance at the end of each of the six months as per row 1367. This typically represents six-months worth of the senior debt servicing requirements for the next period. The difference between the opening and closing balance is transferred from or to the cash account to meet the requirement. The maintenance reserve account (MRA) calculates the required account balance at the end of each of the six months as per row 1383. This typically represents six-months worth of the next period’s lifecycle requirements. Again, the difference between the opening and closing balance is transferred from or to the cash account to meet the requirement. Rows 1389–1418 show the summary information to be transferred to the inancial statement forecasts. 17

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Financing exercise From the inancial model built to date, please add to the inancing module as follows: compute the funding requirement, the drawdowns for each source of inancing (senior debt, subordinated debt and equity); include a debt schedule for computing the principal repayment for the minimum forward ADSCR debt sculpting method. Note that you will compute the logic for debt sculpting later. For now leave the principal payments as hard-coded zeros. Calculate the cash low, proit and loss and any balance sheet results that will be linked to the summary inancial statements.

Unitary charge I will discuss the logic for the building of the unitary charge module as appropriate. I refer you to our illustration model extract in Illustration 11 (see Illustration 11.xls). We start at rows 8 and 9 by bringing in the proportion of indexed and non-indexed proportions of the payment mechanism. Cell B11 brings in the base date for the indexation of the unitary charge. Cell B12 brings in the real unitary charge at base date price levels. In row 16 the real unitary charge is brought in for each six-monthly period for calculation purposes. In row 15 the percentage unitary charge proile lag schedules in the receipt of the unitary charge. This is achieved by using an if statement, which places a 1 if the timeline date is greater than the projects operations start date. The real unitary charge is multiplied by the lag to give the real unitary charge receipt. From row 18 the indexes are calculated. Each of the indexes in rows 20–26 shows the same method, ie, the previous index at one plus the inlation rate to the power six divided by 12 to relect the six-monthly compounding required. In row 28 the unitary charge index to be applied is brought in. In row 30 the index to be applied to the real unitary charge is brought into the calculation, and in row 31 is applied to the real unitary charge and a nominal unitary charge cash low is calculated for each six-monthly period. Row 32 relates to the residual value for the asset that is paid by the public sector body at the end of the contract.

Unitary charge exercise Based upon the inancial model built to date, add a unitary charge module that has a 50% indexed and 50% unindexed basis. There is a real unitary charge at January 1 2007 price levels of £15,000 per annum and annual inlation of 2.5% per annum, and no residual value. Ensure that you refer to the example provided for further guidance. Calculate the cash low, proit and loss and any balance sheet results that will be linked to the summary inancial statements.

Operating costs We will discuss the logic for the building of the operating costs module as appropriate. Illustration 12 (see Illustration 12.xls) shows the logic behind the operating costs module. The operating costs, ie, special purpose company, facilities management and lifecycle costs are sourced from the time-based inputs sheet, together with the inlation indexation bases speciied from the general input assumptions. 18

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From row 38 onwards the projected index numbers are calculated. The logic is as follows: (previous index number) * semi-annual decompounded inlation rate for a six-monthly period. From row 60 onwards the selected index is multiplied by the real operating costs to ind the value in nominal terms, ie, money of the day, which is used for the integrated inancial statement forecasts. From row 38 onwards the projected index numbers are calculated. The logic is as follows: (previous index number) * semi-annual decompounded inlation rate for a six-monthly period. From row 124 onwards the lifecycle costs are sourced from the time-based inputs and inlation is sourced from the general inputs sheet. From row 131 onwards the index is applied to the real costs in order to calculate lifecycle costs in nominal terms.

Operating costs exercise Based upon the inancial model built to date, add an operating cost module using the operating costs (facilities management and SPC costs) and lifecycle costs included in the example, ie, in the time-based inputs sheet. Using a 3% RPI calculate the nominal terms construction and upfront cost on a monthly basis. Calculate the cash low, proit and loss and any balance sheet results that will be linked to the summary inancial statements.

Working capital We will discuss the logic for the building of the working capital module as appropriate. Illustration 13 (see Illustration 13.xls) shows the logic behind the working capital module. Rows 12 and 14 link the unitary charge as the cash low is already calculated and the balance on receivable will simply be zero. Rows 17 and 18 link the operating costs from the proit and loss account and applies the payables days as follows: (Total invoiced for a year) @ (payables days / 365). From row 23 the interest receivable is calculated. Many readers may be aware that calculating interest on cash is indeed a circular calculation that will cause problems in Excel in the way of a circular reference. In order to work around this potential circular calculation, many inancial modellers use cut and paste macro logic in order to adequately calculate interest receivable. Illustration 14 shows some macro code that is used to get around the interest receivable circularity problem. Illustration 14 Interest receivable macros Sub InterestReceivableCircularity() ‘============================ ‘BREAKS INTEREST RECEIVABLE CIRCULARITY ‘============================ ‘WRITTEN BY DAVID WHITTAKER ‘============================ Application.ScreenUpdating = False

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Application.Calculation = xlCalculationManual ‘============================== ‘ Write LOGIC FOR THE OPENING BALANCE ‘============================== LogicOpeningBalance ‘=============================== ‘LOGIC FOR CASH GENERATED DURING THE YEAR ‘=============================== LogicCashGenerated ‘=============================== ‘PASTE The Results To The Interest Receivable Calc ‘=============================== PasteToInterestReceivable ‘=============================== Application.ScreenUpdating = True Application.Calculation = xlCalculationAutomatic ‘=============================== End Sub Sub LogicOpeningBalance() Application.Calculation = xlCalculationManual Application.ScreenUpdating = False ‘================================= ‘WRITES THE OPENING LOGIC TO BREAK CIRCULARITY ‘================================= UnProtectEachSheet Sheets(“BALANCE SHEET - Semi Annual”).Select Range(“Cash_at_bank”).Select Selection.Copy Sheets(“Working Capital”).Select Range(“OpeningBalanceCash”).Select Selection.PasteSpecial Paste:=xlPasteValues, Operation:=xlNone, SkipBlanks _ :=False, Transpose:=False ProtectEachSheet End Sub Sub LogicCashGenerated() Application.ScreenUpdating = False Application.Calculation = xlCalculationManual ‘================================== ‘LOGIC FOR CASH GENERATED TO BREAK CIRCULARITY ‘==================================

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Application.ScreenUpdating = False UnProtectEachSheet Sheets(“CASHFLOW - Semi Annual”).Select Range(“CashGeneratedBeforeInterest”).Select Range(“CashGeneratedBeforeInterest”).ClearContents For Each Cell In Range(“CashGeneratedBeforeInterest”).Cells Cell.Select ‘Calculate range excluding interest receivable Cell.FormulaR1C1 = “=R[-197]C-R[-194]C+SUM(R[-189]C:R[-187]C)-SUM(R[-183]C:R[-181] C)+SUM(R[-178]C:R[-177]C)-SUM(R[-172]C:R[-170]C)-R[-167]C” ActiveCell.Select Selection.Copy Selection.PasteSpecial Paste:=xlPasteValues, Operation:=xlNone, SkipBlanks _ :=False, Transpose:=False Next Cell ProtectEachSheet End Sub Sub PasteToInterestReceivable() ‘============================================= ‘LOGIC FOR INTEREST RECEIVABLE TO BREAK CIRCULARITY ‘============================================= UnProtectEachSheet Application.ScreenUpdating = False Sheets(“CASHFLOW - Semi Annual”).Select Range(“CashGeneratedBeforeInterest”).Select Selection.Copy Sheets(“Working Capital”).Select Range(“CashGenerated”).Select Selection.PasteSpecial Paste:=xlPasteValues, Operation:=xlNone, SkipBlanks _ :=False, Transpose:=False ProtectEachSheet End Sub

The Excel macro shown in Illustration 14 is explainable as follows. Rows 25 and Rows 26 are the opening balance and the cash generated during the period for the purpose of calculating the interest on surplus cash. In terms of the macro or VBA code above, the interest receivable circularity macro runs the whole of the interest receivable logic. It calls the other three routines. The LogicOpeningBalance routine selects the opening cash balance from the balance sheet reforecast and copies it to the calculation in the working capital sheet. 21

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The LogicCashGenerated routine calculates the cash before interest and cut and pastes this number. The PastetoInterestReceivable tasks the CashGeneratedBeforeInterest and copies it to the working capital sheet. Please ensure that you walk through the code on a line-by-line basis, and fully understand the principles and selecting f5 to select the appropriate range names. In rows 27 and 28 the six-monthly interest rates are calculated for both the interest on deposit and any overdraft interest. This is achieved by taking the opening cash balance and the cash generated during the period and dividing it by two, multiplying this by either decompounded six-monthly interest rate for deposits or overdrafts. There is also interest calculated on cash accounts that is required to be maintained for reserve purposes, ie, the debt service reserve account and the maintenance reserve account. These are simply a similar calculation to that of the interest on the net operating cash, without the need to break any circular logic. In practice, there may be additional reserve accounts, such as the change in laws reserve account. The summary information that links to the proit and loss, balance sheet and cash low is at the foot of the working capital sheet as appropriate.

Working capital exercise Based upon the inancial model built to date, link in both the operating costs and the unitary charge receipts from the other modules. Link in 0 days receivables and 30 days payables. Write a macro to break the circular reference problem and calculate the interest receivable and any interest payable on the unreserved cash balance as appropriate. Calculate the cash low, proit and loss and any balance sheet results that will be linked to the summary inancial statements.

Accounting We will discuss the logic for the building of the accounting module as appropriate. We irst outline the main areas affecting the accounting.

Financial asset accounting An important starting point is to determine whether the private sector operator has an asset of the property used to provide the contracted services, or alternatively a inancial asset, being a debt due from the public sector body for the fair value of the property. This asset should be recorded at the outset and reduced in subsequent years as payments are received from the purchaser. Finance income on this inancial asset should be recorded in subsequent years using a property speciic rate. The remainder of the PFI payments (ie, the full payments, less the capital repayment and the imputed inancial charge) should be recorded as operating proit. Just how this is translated into numbers and code will be demonstrated in Illustration 15 (see Illustration 15.xls). Under International Financial Reporting Standards (IFRS) – IFRIC 12 – there is an initial assessment of who has the beneits and risks of the property, taking into account the potential variations in property proits. The type of areas that will help to lead to the conclusion that the property is the asset of the private sector operator is detailed below. However, it should be noted that the general accounting treatment adopted for the special purpose company is that of “inancial asset accounting”. 22

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The following characteristics are usually evident where the private sector operator recognises the property as a ixed asset in their books. This will help demonstrate why the vast majority of UK PFIs are being accounted for as a inancial asset. • • • •

There are often potential penalties for underperformance of the property that can be signiicant and have a reasonable possibility of occurring. Relevant costs are both signiicant and highly uncertain, and all potential material cost variations will be borne by the private sector operator. Obsolescence or changes in technology are signiicant, and the public sector contractor will bear the costs and any associated risks. Where the residual risk is signiicant and borne by the private sector operator; also where the years of the PFI contract are materially less than the useful economic life of the property. In most UK design, build, inance and operate (DBFO) type contractual arrangements, such conditions do not generally hold true, therefore inancial asset accounting is usually adopted.

However, we know from our inancial close position that we need to account for a inancial asset. We will now outline the logic and numbers behind inancial asset with reference to Illustration 15. In row 13 a “FDEndOfContract” lag is used to identify the period for inancial asset balance to equal to zero. The logic places this lag if both the current periods and the period commencing date is less than the concession end date and the current periods month ending date is greater than or equal to the concession end date, otherwise a blank is entered. The inancial asset closing balance is shown in row 18. This comprises of the opening balance plus revenue at fair value plus the inance income less the unitary charge receipts. The inance income is calculated in row 21 and is equal to the inancial asset opening balance at the six-monthly interest rate. The revenue to be recognised in the P&L account is shown in rows 25–31. Here all the costs are shown that add a mark up to derive the revenue at fair value. The “FinancialAssetAmortisation” macro is for goal seeking the fair value margin. The counter variable is deined and then sets the counter to zero. Target A deines the variable and sets the inancial asset balance to zero. Target B deines the variable that inds the mark up. The logic for inding the inancial asset is nested in the “do loop” condition. The counter increases by one with each iteration until either 100 iterations are made. The standard goal-seek logic that you could record through Excel has been substituted with the range names for the inancial asset and the mark up. The subroutine “FINANCIALASSET” is the main routine that you would have to run to ind the margin that amortises the inancial asset balance to zero at the end of the concession. It calls the three subroutines that are required to run the full process, ie, deleting the old range name, inserting the end of concession marker and running the inancial asset amortisation goal-seek logic. The routine “PrepareRangeName” simply deletes the previous “FDEndOf Contract” so that a current open can be added. The routine “InsertRangeNameEndOfConcession” inserts the FDEndOfContract range name in the column where the end of the contract date is. Essentially, A for next loop is used to go through each date in the timeline which is deined as the range name “ConcessionPeriodEnd,” 23

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and inserts the “FDEndOfContract” name where the date is equal offsetting ive rows down from the date timeline. Illustration 16 Financial asset amortisation macro/VBA code Sub FinancialAssetAmortisation() ‘============================================================ ============================================ ‘ FinancialAssetAmortisation Macro ‘ Written by David Whittaker ‘ www.modellingsolutions.co.uk ‘============================================================ ============================================ ‘ Application.ScreenUpdating = False Dim Counter Counter = 0 On Error Resume Next ‘Result = Financial Asset Balance Equals Zero A = Sheets(“Accounting”).Range(“FDEndOfContract”).Value ‘Target = Operating Cost Margin B = Sheets(“Accounting Inputs”).Range(“Mark_Up___Fair_Value”).Value Sheets(“Accounting”).Select Do ‘(Start Loop) Counter = Counter + 1 Application.StatusBar = “Please Wait Finding The Turnover Asset Mark Up - Iteration “ & Counter Range(“FDEndOfContract”).GoalSeek Goal:=0, ChangingCell:=Range(“Mark_Up___Fair_Value”) ‘set fd balance at end of contract ‘to zero balance by changing the fd interest rate Loop Until A = B Or Counter = 200 Application.ScreenUpdating = True Application.StatusBar = Ready End Sub Sub PrepareRangeName() ‘============================================================ ============================================ ‘ resets last inance debtor balance ‘ Written by David Whittaker ‘ www.modellingsolutions.co.uk ‘============================================================ ============================================ continued

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‘============================================================ ============================================ ActiveWorkbook.Names(“FDEndOfContract”).Delete End Sub Sub FINANCIALASSET() PrepareRangeName InsertRangeNameEndOfConcession FinancialAssetAmortisation Sheets(“Cover”).Select End Sub Sub InsertRangeNameEndOfConcession() ‘Finds Date for Final amortisation Application.ScreenUpdating = False Dim Cell As Range Calculate Sheets(“Accounting”).Select For Each Cell In Range(“ConcessionPeriodEnd”).Cells Cell.Select If Cell.Value = “FDEndOfContract” Then Cell.Offset(5, 0).Select ‘Inserts Range Name A = ActiveCell.Row B = ActiveCell.Column ActiveWorkbook.Names.Add Name:=”FDEndOfContract”, RefersToR1C1:= _ “=’Accounting’!R” & A & “C” & B Else End If Next Cell End Sub

Fixed asset accounting Again under IFRIC 12 (IFRS), there is an initial assessment of who has the beneits and risks of the property, taking into account the potential variations in property proits. The points that are considered above will again be relevant. Where it is concluded that the operator has an asset of the property, it should record this asset in its balance sheet; this asset should be recorded at its cost and then depreciated to its expected residual value over its economic useful life.

Revenue recognition Revenue is recognised in line with the operating costs charged to the P&L account; that is, we simply apply the mark up to the costs as per our assumptions. The inancial asset interest is also a source of revenue, the logic for which has already been outlined above. 25

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Borrowing costs Illustration 17 (see Illustration 17.xls) shows the accounting treatment for the lenders’ fees. The lenders’ fees (ie, the arrangement fees), paid as one-offs upfront, and the commitment fees paid as a percentage of the undrawn debt facility, are referenced in rows 108 and 109. The accounting policy here is to capitalise the fees and write-off over the life of the debt. The senior and subordinated debts lives are referenced in rows 114 and 115. Rows 124–130 show both the senior debt and the subordinated debt balances. The fees are added to the balance and amortised as appropriately. The fees are amortised using the following calculation – (the additions to date plus average additions during the current period)/(divided by the debt life multiplied by the 2 to relect the semi-annual timeline). The alternative allows for the immediate write-off of the fees to the P&L account. However, this would not currently be acceptable under IFRS.

Borrowing costs exercise Based upon the inancial model built to date, amortise the lenders’ fees over the life of the debt. Calculate the cash low, proit and loss and any balance sheet results that will be linked to the summary inancial statements.

Deferred tax Deferred tax provisions are made to account for corporation tax that is expected to be payable or receivable on the differences between the carrying amounts of the assets and the liabilities in the inancial statements and corresponding tax bases used in the computation of taxable proit. In summary, there is a need to make a balance sheet entry and a P&L account entry for such timing differences. A deferred tax liability may arise due to the difference in accounting for depreciation and the treatment for capital allowances or tax depreciation in the tax computation. A deferred tax asset may arise due to the difference in accounting for the tax charge and the tax loss treatment for the tax computation. An example of this accounting treatment has been outlined in Illustration 18 (see Illustration 18.xls). In rows 99–104 of the accounting module the deferred tax logic is calculated to relect the deferred tax asset arising from the tax loss position. The closing tax loss position is multiplied at the corporation tax rate to compute the deferred tax asset per the balance sheet in row 104. Row 101 shows the movement taken to the P&L account.

Accounting exercise For your inancial model built to date, please add the accounting module as follows. Provide for the deferred tax treatment as appropriate for the tax loss position; calculate the cash low, proit and loss and any balance sheet results that will be linked to the summary inancial statements.

Taxation We will discuss the logic for the building of the taxation module as appropriate. Illustration 19 (see Illustration 19.xls) shows the logic behind the taxation module. 26

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Rows 12–15 show the tax loss memorandum. This shows the position of the used and unused tax losses for relief purposes. The taxable loss for each period is added to the opening balance and losses carried forward are offset against taxable proits for the year. The loss available is offset against a taxable proit in the year it is deducted from the tax loss memorandum balance. Rows 94–104 show the corporation tax computation. The proit as per the P&L account is referenced. Any disallowable expenditure is added back for tax purposes. In this case, depreciation is added back but the numbers are zero values because the inancial asset is off balance sheet, ie, the asset is not considered to be the property of the special purpose company. Once disallowable expenditure is added back we arrive at Schedule D Case I. Once the interest receivable is added to this igure we derive the proits before relief. Again capital allowances are zero value because the project is considered to be off balance sheet. After deducting capital allowances, we arrive at proits chargeable to corporation tax before loss relief. The project losses utilised from the loss relief memorandum are deducted from the proits chargeable to corporation tax to the extent there is adequate positive taxable proits. The charge to the P&L account is made by multiplying the proits chargeable to corporation tax at the corporation tax rate. The cash low for corporation tax purposes is paid 12 months in arrears. The balance sheet liability is equal to the opening balance plus the P&L charge less the cash payment. The valued added tax (VAT) logic requires explanation. In row 111 the sales are charged at the relevant VAT rate to form the output tax for VAT purposes. In row 112 the purchases, being the service costs, the capital expenditure and the development costs, are charged at the relevant VAT rate to form the input tax for VAT purposes. In terms of the VAT control accounts, the VAT payable represents the opening balance plus VAT collected from sales less the VAT paid to the HM Revenue & Customs (HRMC) quarterly. The VAT receivable represents the opening balance plus VAT paid from purchases less the VAT received from the HMRC quarterly. The VAT cash low represents the VAT collected at source on invoices, VAT paid at source on invoices less VAT paid to HMRC quarterly plus VAT received from HMRC.

Taxation exercise Based upon the inancial model that you have built to date, please build the logic for the taxation module. Your taxation model requires a tax computation with a 30% corporation tax rate. You are also required to build the logic for a loss relief memorandum. Calculate VAT logic at a 15% tax rate. Calculate the cash low, proit and loss and any balance sheet results that will be linked to the summary inancial statements.

Dividends We will discuss the logic for the building of the dividends module as appropriate. Illustration 20 (see Illustration 20.xls) shows the logic behind the dividends module. Prior to distribution of any dividend, there are the restrictions that are placed on the special purpose company in terms of the dividend lock ups that may be triggered by virtue of the restrictive covenants that may be found in the lenders’ agreement and the facility agreement. 27

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There are often minimum ADSCR and LLCR levels that must be met in the six-monthly period, and perhaps the need to meet the maintenance reserve requirements. In rows 11–13 the minimum ADSCR and LLCR ratios before dividend lock up are referenced, together with the indicator stating whether the maintenance reserve account requirements are met. The forecast position for the six-monthly ADSCR, LLCR and maintenance reserve accounts are linked into rows 18–20. From rows 24–27 the distribution test is applied. The trigger will count the number of OKs by using Excel’s count if function. The distribution logic will pay out all the available cash at the end of the concession date. If, before the end of the concession, the number calculated by the trigger is equal to the number of distribution tests, the overall condition will be OK. In rows 31–33 the amount of cash available for dividend is calculated. The cash available for dividends is calculated as follows: Opening cash balance (per the balance sheet) plus Cash low generated in the period prior to dividends (per the cash low) In rows 37–39 the amount of retained earnings available for dividend is calculated. The earnings available for dividends is calculated as follows: Opening retained earnings (per the balance sheet) plus Proit before dividends (per the proit and loss account) The dividend declared per the P&L account ensures that the cash available is paid out to the extent that there are suficient distributable reserves (ie, retained earnings) available. For simplicity terms, given that we are working at a six-monthly level, the P&L account and cash low entries are amended to be the same.

Dividends exercise For the inancial model that you have built to date, please add the following logic to the dividends module. Use the LLCR and ADSCR minimum targets for lock-up purposes of 1.10. Add cash and proit position logic before distribution. Calculate the cash low, proit and loss and any balance sheet results that will be linked to the summary inancial statements.

Proit & loss account This module computes the P&L account for the inancial model. I will now take you through the logic of this module with reference to Illustration 21 (see Illustration 21.xls). Most readers will be aware that a P&L account represents the proits arising over the speciic period, ie, that accrued to the particular period is distinct from the cash low that arises at 28

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a certain point in time but often relates to activity from another period. More speciically, the P&L semi-annual summary module shows the proits that are forecasted over the life of the PFI PPP contract or concession. Starting from the revenue in rows 10–11, these are linked from the calculation of the revenue recognition calculation in the accounting module. More speciically, these represent the P&L expense items for FM, SPC and lifecycle with the mark-up applied to each. In rows 14–15 the operating costs are referenced from the operating costs module. The depreciation, amortisation and bank fees are then referenced. The proit before interest and tax is calculated. The interest receivable and payable is inked into rows 22 and 23. In rows 26 and 27 the current and deferred tax charge is linked from the tax and actual sheets. You will notice that the appropriate charge or credit represents 30% of the proit before tax. We then calculate the proit after tax. The dividends for the period are sourced from the dividends module. The increase in retained earnings simply represents the proit after tax (PAT) after deducting the dividends declared.

Proit & loss exercise For the inancial model that you have built to date, please add the following logic to the P&L – semi-annual summary module. Link in the P&L account component to the relevant modules as previously calculated and calculate the resulting increase in retained proit for the period.

Cash low This module computes the cash low for the forecast. I will now take you through the logic of this module with reference to Illustration 22 (see Illustration 22.xls). Most readers will be aware that a cash low forecast represents net of receipts over payments arising through the special purpose company’s bank account. More speciically, the cash low – semi-annual module shows the cash lows that are forecasted to the end of the PFI PPP contract or concession. The cash low is calculated on a semi-annual basis. We start from the cash low generated from operations, ie, the unitary charge receipts, operating costs, etc, are linked from other modules as appropriate. The drawdowns of funding sources are shown in rows 27–29. The senior debt interest and principal repayments are shown in rows 32–33. Any transfers to or from the cash reserves are shown in rows 37 and 38. The subordinated debt interest and principal repayments are shown in rows 42–43. In row 47 the dividends are paid and the net cash carried forward or the net cash low for the period is calculated.

Cashlow reforecast exercise For the inancial model that you have built to date, please add the following logic to the cashlow – semi-annual module. Link in the cash low components to the relevant modules as previously calculated and calculate the resulting net cash increase for each period. 29

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Balance sheet This module computes the balance sheet for the forecast. I will now take you through the logic of this module with reference to Illustration 23 (see Illustration 23.xls). Most readers will be aware that a balance sheet represents a statement of assets and liabilities and shows the net worth of the special purpose company. More speciically, the balance sheet reforecast module shows the balances that are forecasted to the end of the PFI PPP contract or concession. In the balance sheet – semi-annual module the ixed assets are linked in from the accounting module. The current assets are linked to all the relevant modules. The current liabilities are linked to all the relevant modules. The senior and subordinated debt is linked in from the inancing module. All these areas bring us to the net assets. The net assets are equal to the share capital and reserves, which are linked from the inancing and P&L account.

Balance sheet reforecast exercise For the inancial model that you have built to date, please add the following logic to the balance sheet – semi-annual module. Link in the balance sheet components from the relevant modules as previously calculated and calculate the resulting net assets and equity and liabilities. Some inancial modellers, particularly at the beginner or intermediate levels, have problems reconciling the balance sheet over the life of the PFI PPP concession. Those accountants amongst our readers will understand the concept of double entry and the link between the cash low, proit and loss and balance sheet accordingly. However, for those less familiar with producing integrated inancial statements, I will outline some basic guidance on this matter. Once you have linked the logic from the detailed modules to the cash low, P&L and balance sheet and you ind that your balance sheet doesn’t balance in one or more periods, the following advice may help: • • • • •

Take the period where the balance sheet reconciles as the clean starting position. Take the P&L account and balance sheet from the next period. Tick each P&L account and balance sheet item and ensure that they are relected in the relevant balance sheet movement to calculate the next period’s sheet balance. Ensure that the movement on the retained earnings is equal to the retained earnings for the period. Likewise, ensure that the movement on the cash at the bank is equal to the net cash low for the period.

Sensitivities Sensitivity analysis is deined as “The lexing of key assumptions to investigate the impact upon the project’s inancial projections.The method for producing sensitivities is where the key output measures are compared against the base case results, ie, maintaining the base case results. Readers may be aware that most inancial models they have encountered cannot maintain the base case results, and to activate the sensitivity case it is necessary to change 30

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the input assumptions and save another version of the Excel workbook and compare it to the base case. In the methodology that follows we can change the input assumptions for a deined sensitivity case and observe the effect upon the key outputs. The deined sensitivity case shown is “percentage change in RPI per annum.” The sensitivity input is a 10% increase from the base case in the sensitivity input sheet. The macro routine is run and the speciic sensitivity number is placed in the sensitivity number box, which triggers the worksheet code in the speciic areas in the “construction,” “revenue,” and “operating costs” sheets. For example, you will see this at construction sheet cell C36. “*IF(SENSITIVITY_NUMBER=1,(1+RPISensitivity),1))^(1/12) extra inlation effects the RPI calculations for sensitivity 1. The results from the model’s key outputs, ie, IRRs and lender ratios are cut and paste into the sensitivity calcs 1 worksheet. The base case is reset after running sensitivity 1 in the sensitivities by placing a blank in the sensitivity number box in the sensitivity inputs sheet. The sensitivities sheet presents the base case and sensitivity case results side by side, the sensitivity cases simply reference the results that have been cut and paste into the sensitivity calc sheets. The following macro/VBA code outlines the code for sensitivities. Please walk through the code with reference to the examples and inancial models built to date. Illustration 24: Runs sensitivity 1% change in RPI PA Sub SENSITIVITYCALC() 1 Application.ScreenUpdating = False (Switches the screen updating off) 2 Application.Calculation = xlCalculationManual (Switches calculation to manual) 3 Application.StatusBar = “Please Wait Currently Preparing the Sensitivity 1” (displays message) 4 UnProtectEachSheet (Calls routine to Unprotect Sheets) ‘============================================================ ============== ‘RESET EXISTING SENSITIVITY CALC SHEETS ‘============================================================ ============== 5 Sheets(“Sensitivity Calcs 1”).Select (Selects the sheet) 6 Cells.Select (selects all cells) 7 Selection.Clear (clears all) ‘============================================================ ============== ‘SELECT CASE ‘============================================================ ============== 8 Sheets(“Sensitivity Inputs”).Select (selects the sheet) 9 Range(“SENSITIVITY_NUMBER”).Select (selects the range name) 10 Range(“SENSITIVITY_NUMBER”).Value = 1 (sets to 1) 11 Calculate (Calculates) continued 31

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12 InterestReceivableCircularity (call routine to break interest circularity) 13 Calculate (Calculates) ‘============================================================ ============== ‘COPY & PASTE KEY OUTPUTS IRRS & NPVS , LENDERS’ Ratios ‘============================================================ ============== ‘----------------------------------------------------------‘IRRS & NPVS ‘=========================================================== 14 UnProtectEachSheet (Calls routine to unprotect sheets) 15 Sheets(“IRRS & NPVS”).Select (selects the sheet) 16 Application.Goto Reference:=”IRRSandNPVS” (goes to the range name) 17 Selection.Copy (selects area to copy) 18 Sheets(“Sensitivity Calcs 1”).Select (select the sheet) 19 Range(“A5”).Select (selects start of range for pasting) 20 Selection.PasteSpecial Paste:=xlPasteValues, Operation:=xlNone, SkipBlanks _ :=False, Transpose:=False (Pastes the results as values) Selection.Columns.AutoFit (auto its the column width) ‘=========================================================== ===== ‘LENDERS’ RATIOS ‘=========================================================== ===== 21 Sheets(“LENDERS’ Ratios”).Select (selects the sheet) 22 Application.Goto Reference:=”Lenders’Ratios” (selects the range name) 23 Selection.Copy (selects the area for copying) 24 Sheets(“Sensitivity Calcs 1”).Select (selects the sheet) 25 Range(“A110”).Select (selects area to start pasting) 26 Selection.PasteSpecial Paste:=xlPasteValues, Operation:=xlNone, SkipBlanks _ :=False, Transpose:=False (Pastes the results as values) 27 Selection.Columns.AutoFit (auto its the column widths) ‘Runs the other routines required FundingRequirement InterestReceivableCircularity SculptHistoricADSCR UnProtectEachSheet FINANCIALASSET InterestReceivableCircularity 28 Sheets(“SUMMARY”).Select (selects the sheet) 29 ProtectEachSheet (calls a routine to protect the sheets) continued

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‘============================================================ ============== ‘RESET EXCEL ENVIRONMENT ‘============================================================ ============== 30 Application.ScreenUpdating = True (switches on the screen updating) 31 Application.Calculation = xlCalculationAutomatic (switches the calculation to automatic) 32 Application.StatusBar = “Ready” (switches the status bar to normal) End Sub

After incorporating the logic outline above, please refer to Illustration 25 (see Illustration 25.xls). In the sensitivity module you can see the target minimum lenders’ ratios linked in. The base case results are also linked in. Each of the sensitivities are linked to the sensitivity calcs sheets, which are derived from the macro/VBA routine.

Sensitivity exercise Based upon the inputs and logic in your inancial model, build the logic for a sensitivity case which calculates a 30% increase in the general inlation or RPI from the base case assumptions. Ensure that you compare the effect upon the lenders’ ratios and shareholder returns on a single worksheet. After completing this sensitivity compute another scenario in a similar manner.

Checks This module calculates the checks for the inancial model. I will now take you through the logic of this module with reference to Illustration 26 (see Illustration 26.xls). Where the results from the checks equal zero, the check conditions are OK. A number highlights the difference. In row 6 we check whether the balance sheet reconciles over the forecast period. In row 8 we check whether the cash movement in the balance sheet over the life equals the sum of the net cash low over the life of the forecast. In row 10 we check whether the retained earnings movement in the balance sheet over the life equals the sum of the retained earnings for each period over the life of the forecast. In rows 14–24 we check whether the source of funds equals the uses of funds. In row 26 we check whether the inancial asset is amortised. In this area it is good practice to include as many cross-checks or check sums that are created along the inancial model build process.

Checks exercise For the inancial model that you have built to date, please add the following logic to the checks module. Please add all the checks outlined above plus any additional cross-checks that you have created during the model build exercise that can be linked to this sheet.

Internal rates of return There are several rates of return that can be calculated from a PFI PPP project. These include: 33

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• • • •

the project rate of return; the equity rate of return; the shareholders’ debt rate of return; and the shareholders’ blended rate of return.

The shareholders’ blended rate of return represents the returns from both the ordinary shares and subordinated debt invested in the project company. All of the different types of internal rate of return can be calculated pre or post tax or in real or nominal terms. Real considers the effect of inlation on the returns and nominal includes the cash lows in today’s money. Many readers will understand the concept of an internal rate of return. However, I will now outline the concept of IRR. An IRR can be deined as the discount rate where the net present value is equal to zero. An IRR is based upon the time value of money concept known as discounted cash low (DCF) analysis. DCF analysis works on the concept that a pound today is worth more than a pound next year or the year after. Illustration 27 (see Illustration 27.xls) outlines the calculation logic required to calculate each of the rates of return outlined above. First, the project returns are calculated in rows 14–20. The project returns represent the pre-inancing cash lows, ie, the cash low before funding is sourced directly from the cash low statement forecast. Note that the project cash lows are stated pre and post tax. The taxation cash lows included corporation tax and VAT. The project returns are also stated as real and nominal terms. Nominal represents the money of the day and the real return considers the effect of general inlation and thus divides the cash low by the inlation index in each six-monthly period. Second, the equity returns are calculated in rows 24–39. The equity return represents the equity invested in the form of ordinary shares and the dividend receipts cash lows received by the investor over the life of the concession, and the receipt of the original shares invested at the end of the concession. Note that the equity cash lows are stated pre and post tax. The taxation cash lows included corporation tax and VAT. The equity returns are also stated as real and nominal terms. Nominal represents the money of the day and the real return considers the effect of general inlation and thus divides the cash low by the inlation index in each six-monthly period. Third, the shareholders’ blended returns are calculated in rows 41–44. These represent the cash lows that arise through the investment in ordinary shares and the subordinated debt (sometimes referred to as a shareholder loan). We have already outlined the basis of the return on equity cash lows above. The shareholders’ blended returns represent the sum of both the ordinary shares and the subordinated debt cash lows. The subordinated debt cash lows in terms of the shareholder represent the amount invested and the receipts to the shareholder from the subordinated debt in the form of the principal repayments, the interest and fees paid. Note that the shareholders’ blended cash lows are stated pre- and post-tax. The taxation cash lows included corporation tax and VAT. The shareholders’ returns are also stated as real and nominal terms. Nominal represents the money of the day and the real return considers the effect of general inlation, and thus divides the cash low by the inlation index in each six-monthly period. The Excel function that is calculating the resulting IRR after deining the cash lows to each return type is XIRR. Although the XIRR calculation can be speciically used for cash low 34

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timing that is not periodic, in this case we could alternatively use the IRR function in Excel to give the same result. Essentially, the syntax of both functions asks for the stream of cash lows, the dates of the cash lows and a guess discount rate. The XIRR function is nested within a IF(ISERROR) condition returning zero where an Excel error that arises from the series of cash lows.

Internal rates of return exercise From the logic and the inputs already included in the inancial model that you have built to date, calculate the project, equity and blended internal rates of return on a real, nominal, pre and post tax basis.

Lenders’ ratios We will discuss the logic for the building of the lenders’ ratios module as appropriate. Illustration 28 (see Illustration 28.xls) shows the logic behind this module. It is important to note that lenders’ ratios deinitions can differ from lender to lender. Consequently, what is really important is the deinition outlined in the lenders’ facility agreement. However, for the purpose of this book we have used a fairly standard deinition for illustrative purposes. In the lenders’ ratios module shown in Illustration 28, we start by linking in the key components, for the basis of our ratio deinitions, at rows 9–16. The opening senior debt balance per the balance sheet is referenced into the lenders’ ratio module. The deinition of the cash available for debt servicing is referenced. This area represents the numerator or top part of our lenders’ ratios. The deinition used here references the project cash low, interest on cash, debt service reserve accounts movements and the maintenance reserve account movements. The deinition of the senior debt servicing is referenced. This area represents the denominator or bottom part of our lenders’ ratios. The deinition used here references the senior principal repayment, the senior interest repayment. Looking at the calculations for the historic ADSCR, this takes the cash lows from above the sheet for both the numerator and the denominator. Over the life of the debt service for the senior debt, the numerator is divided by the denominator by referencing the current periods and the previous six-monthly period. Looking at the calculations for the forward ADSCR, this takes the cash lows from above the sheet for both the numerator and the denominator. Over the life of the debt service for the senior debt, the numerator is divided by the denominator by referencing the current period and the next six monthly period. Both the historic ADSCR and the forward ADSCR have minimum ratios, year of the minimums and average ratios calculated. It important to note that when calculating the six-monthly ratios it is necessary to place a “N/A” in periods where the ratio should not be calculated – this then allows the correct calculation of the minimum and average ratios as appropriate. The minimum ratios can simply be calculated by referencing the range of ratios by the use of Excel’s minimum function (=MIN). 35

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The average ratios can simply be calculated by referencing the range of ratios by the use of Excel’s minimum function (=AVERAGE). The year of the minimum ratios can be calculated by using a nested =INDEX and =MATCH and, more speciically, by looking at the year that matches the minimum ratio. The syntax can be further understood referencing the calculation for the minimum historic ADSCR by selecting the f5 button and selecting the range name “MinimumHistoricADSCR”. Look now at the loan life cover ratio. We have entered some logic in row 51 which inserts a one or a zero dependent upon whether the six-monthly period is deined as within the loan life for each six-monthly period. The cash available for debt servicing is discounted for each six-monthly period to ind the net present value using the senior debt interest rate as a discount rate. =XNPV($B$49,C57:$CX$57,C5:$CX$5) For the irst six-monthly period, Excels XNPV function uses the senior debt interest rate as the discount rate, then references the CAFDS range and then references the date range. It is important to note that XNPV is often used for unequal cash low timing and, in this case, it wouldn’t matter whether we used XNPV or NPV, as the same result would be achieved.

Lenders’ ratio exercise From the logic and the inputs already included in the inancial model that you have built to date, calculate the historic ADSCR, the forward ADSCR, the loan life cover ratio and the project life cover ratios. For each of the ratios calculate the minimums, averages and the date of the minimum ratios.

Summary As identiied in the scoping stage, the summary sheet should present the results in an uncluttered and clear manner. Illustration 29 (see Illustration 29.xls) shows the logic behind the summary module. In order to complete the logic for the summary sheet, we have to simply link from other worksheets in the inancial model.

Summary exercise Link all parts of your inancial model to the summary page as appropriate. Review the reasonableness of the results as you do so.

Finalising the bid or inancial close model During the bid or inancial model build stage we have built a number of speciic modules. However, there are a number of processes and menu designs that will ideally make your operating inancial model easier to update and more secure. These points are more useful if the model that you are building is a template or reuseable PFI PPP bid or inancial close model. These are running the model, sculpting the debt and optimising the unitary charge and the protection of the worksheets and workbook as appropriate. First, let us consider the automation of running the model. Illustration 30 shows the code for loading the menu bars. In the Loadmenus subroutine, we deine each of the menu bars to 36

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use in our inancial model. The lines that start with “dim” are deining each of the variables necessary to set up the menu bar controls in the Excel environment and the “set” function deines the set up of each of the menu bars. Essentially, muCustom1 is the top-level menu bar that you see at the Excel menu bar level, ie, it provides the run model results option. The muCustom1 starts with and ends with and nests all the speciic functions in between. Each option uses identical logic to access and run the required function as follows: With.Controls.Add(Type:=msoControlButton) .Caption=”&” .OnAction= “& ” End With There are other top-level menus that all have the muCustom1, muCustom2, muCustom3 and muCustom, which are for navigating the inputs and outputs of the model. This is useful for modular designs that are adopted. The routines accessed by these top-level menus all simply select the speciic worksheet by the use of “Sheets (WorksheetName).select” logic. For example, to select the sensitivity inputs, you use the following code: a) Within the menu bar structure With .Controls.Add(Type:=msoControlButton) .Caption = “&Sensitivity Inputs” .OnAction = “SENSITIVITYINPUTS” End With b) As a separate routine Sub SENSITIVITYINPUTS() Sheets(“Sensitivity Inputs”).Select End Sub The same logic should be used for all the muCustom1, muCustom2, muCustom3 and muCustom menu bars which are for navigating the inputs and outputs of the model. Illustration 30 Loading the inancial close or bid model menu bars Sub LoadMenus() ‘============================================================ ======================= ‘THIS PROCEDURE LOADS UP THE MENU BARS ‘============================================================ ======================= Application.ScreenUpdating = False Application.Calculation = xlCalculationManual Dim cbWSMenubar As CommandBar Dim muCustom As CommandBarControl Dim iHelpIndex As Integer Dim muCustom1 As CommandBarControl

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Dim muCustom2 As CommandBarControl Dim muCustom3 As CommandBarControl Dim iWindowIndex As Integer Set cbWSMenubar = CommandBars(“Worksheet Menu Bar”) iHelpIndex = cbWSMenubar.Controls(“Help”).Index iWindowIndex = cbWSMenubar.Controls(“Window”).Index Set muCustom = cbWSMenubar.Controls.Add(Type:=msoControlPopup, Before:=iHelpIndex) Set muCustom1 = cbWSMenubar.Controls.Add(Type:=msoControlPopup, Before:=iHelpIndex) Set muCustom2 = cbWSMenubar.Controls.Add(Type:=msoControlPopup, Before:=iHelpIndex) Set muCustom3 = cbWSMenubar.Controls.Add(Type:=msoControlPopup, Before:=iHelpIndex) Set muCustom4 = cbWSMenubar.Controls.Add(Type:=msoControlPopup, Before:=iHelpIndex) ‘============================================================ ======================= ‘ ‘============================================================ ======================= ‘============================================================ ====================== ‘MODEL INPUTS ‘============================================================ ====================== With muCustom1 .Caption = “&Model Inputs” .TooltipText = “Locates Model Input Sheets” With .Controls.Add(Type:=msoControlButton) .Caption = “&Sensitivity Inputs” .OnAction = “SENSITIVITYINPUTS” End With With .Controls.Add(Type:=msoControlButton) .Caption = “&General Inputs” .OnAction = “GENERALINPUTS” End With With .Controls.Add(Type:=msoControlButton) .Caption = “&Financing Inputs” .OnAction = “FINANCINGINPUTS” End With With .Controls.Add(Type:=msoControlButton) .Caption = “&Taxation Inputs” .OnAction = “TAXATIONINPUTS”

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End With With .Controls.Add(Type:=msoControlButton) .Caption = “&Accounting Inputs” .OnAction = “ACCOUNTINGINPUTS” End With ‘=============================================== ‘MODEL RUN ‘=============================================== With muCustom2 .Caption = “&Run Model Results” .TooltipText = “Runs Models Cases And Sensitivities” With .Controls.Add(Type:=msoControlButton) .Caption = “&RUN ALL CASES” .OnAction = “RUNSENSITIVITIES” End With With .Controls.Add(Type:=msoControlButton) .Caption = “&Base Case” .OnAction = “RUN” End With With .Controls.Add(Type:=msoControlButton) .Caption = “&Sensitivity 1” .OnAction = “SENSITIVITYCALC1” End With With .Controls.Add(Type:=msoControlButton) .Caption = “&Sensitivity 2” .OnAction = “SENSITIVITYCALC2” End With With .Controls.Add(Type:=msoControlButton) .Caption = “&Sensitivity 3” .OnAction = “SENSITIVITYCALC3” End With With .Controls.Add(Type:=msoControlButton) .Caption = “&Sensitivity 4” .OnAction = “SENSITIVITYCALC4” End With With .Controls.Add(Type:=msoControlButton) .Caption = “&Sensitivity 5” .OnAction = “SENSITIVITYCALC5”

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End With With .Controls.Add(Type:=msoControlButton) .Caption = “&Sensitivity 6” .OnAction = “SENSITIVITYCALC6” End With ‘================================================= ‘UNITARY CHARGE OPTIMISATION ‘================================================= With muCustom3 .Caption = “&Optimise UC” .TooltipText = “Optimises The UC By targeting certain key outputs” With .Controls.Add(Type:=msoControlButton) .Caption = “&Target Nominal Blended IRR” .OnAction = “UnitaryChargeOptimisation” End With With .Controls.Add(Type:=msoControlButton) .Caption = “&Forward ADCSR Minimum” .OnAction = “OptimisationADSCRforward” End With With .Controls.Add(Type:=msoControlButton) .Caption = “&Historic ADCSR Minimum” .OnAction = “OptimisationADSCRhistoric” End With With .Controls.Add(Type:=msoControlButton) .Caption = “&LLCR Minimum” .OnAction = “OptimisationLLCR” End With With .Controls.Add(Type:=msoControlButton) .Caption = “&PLCR Minimum” .OnAction = “OptimisationPLCR” End With With .Controls.Add(Type:=msoControlButton) .Caption = “&All Minimum” .OnAction = “OptimisationALL” End With ‘================================================ ‘SCULPT SENIOR DEBT ‘================================================

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With muCustom4 .Caption = “&Sculpt Debt” .TooltipText = “Sculpts Senior Debt Principal Repayments” With .Controls.Add(Type:=msoControlButton) .Caption = “&ADSCR Historic” .OnAction = “SculptHistoricADSCR” End With With .Controls.Add(Type:=msoControlButton) .Caption = “&Clear Sculpting” .OnAction = “ClearAllSculpting” End With ‘================================================ ‘MODEL OUTPUTS ‘================================================ With muCustom .Caption = “&Model Outputs” .TooltipText = “Locates Model’s Output Sheets” With .Controls.Add(Type:=msoControlButton) .Caption = “&P and L Semi Annual Summary” .OnAction = “PANDLSEMIANNUALSUMMARY” End With With .Controls.Add(Type:=msoControlButton) .Caption = “&Cashlow Semi Annual” .OnAction = “CASHFLOWSEMIANNUAL” End With With .Controls.Add(Type:=msoControlButton) .Caption = “&Balance Sheet Semi Annual” .OnAction = “BALANCESHEETSEMIANNUAL” End With With .Controls.Add(Type:=msoControlButton) .Caption = “&Summary” .OnAction = “SUMMARY” End With With .Controls.Add(Type:=msoControlButton) .Caption = “&Sensitivities” .OnAction = “SENSITIVITIES” End With With .Controls.Add(Type:=msoControlButton) continued

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.Caption = “&Checks” .OnAction = “CHECKS” End With End With End With End With End With End With ‘============================================================ ============================ ‘ ‘============================================================ ============================ Application.ScreenUpdating = True ‘Application.Calculation = xlCalculationAutomatic End Sub Source: Modelling Solutions

Once you have built a reusable inancial model such as this, it is good practice to protect it accordingly. The starting point would be to ensure that all yellow input cells are unprotected as appropriate. This could be done by manual means, but this is often more error prone. I recommend the use of similar VBA logic as outlined in Illustration 31. The important part of the code for doing this is where the code starts with “For each sheet in activeworkbook.sheets” and ends with “next sheet.” Here the code is going through each sheet in the workbook and each cell in the sheet; if the cell’s colour index is six, ie, yellow, the cell is unlocked. Illustration 31 Unprotecting the yellow input cells in the bid inancial or inancial close model Sub UnProtectEachYellowInputCell() ‘================================================== ‘UNPROTECTS EACH YELLOW INPUT CELL IN THE MODEL ‘USEFUL FOR USER PROTECTION OF CALCS ‘AND UNPROTECTION OF INPUT CELLS ‘www.modellingsolutions.co.uk ‘================================================== Application.ScreenUpdating = False Dim Sheet As Worksheet

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Dim Cell As Range On Error Resume Next UnProtectEachSheet For Each Sheet In ActiveWorkbook.Sheets Sheet.Select For Each Cell In ActiveSheet.UsedRange.Cells Application.ScreenUpdating = False Cell.Select ‘If Cell is yellow then unprotect If Selection.Interior.ColorIndex = 6 Then Selection.Locked = False Else End If Next Cell Application.StatusBar = “Now Working On Sheet : “ & ActiveSheet.Name Next Sheet ProtectEachSheet Application.ScreenUpdating = True Application.StatusBar = Ready End Sub After unprotecting the speciic cells, I recommend protecting the workbook and sheets accordingly. Again this can be done manually, but if this is used a number of times, it is better automated. We will turn our attention to Illustration 32. In the subroutine ProtectEachSheet we can see the workbook is being protected by the use of Activeworkbook.protect (Password). Each sheet in the inancial model is protected by the use of the code embedded in the “for each sheet in activeworkbook.sheets” and ending with “next sheet”. The subroutine UnprotectEachSheet uses similar logic as the protection routine above, with the exception of the use of unprotect for both the worksheet and workbooks.

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Illustration 32: Workbook and worksheet protection Sub ProtectEachSheet() Application.ScreenUpdating = False Dim Sheet As Worksheet On Error Resume Next ActiveWorkbook.Protect (“xxxxxxx “) For Each Sheet In ActiveWorkbook.Sheets Sheet.Select Sheet.Protect (“xxxxxxx”) Next Sheet Application.ScreenUpdating = True End Sub Sub UnProtectEachSheet() Application.ScreenUpdating = False Dim Sheet As Worksheet On Error Resume Next ActiveWorkbook.Protect (“xxxxxxx”) For Each Sheet In ActiveWorkbook.Sheets Sheet.Select Sheet.Unprotect (“xxxxxxx “) Next Sheet Application.ScreenUpdating = True End Sub Source: Modelling Solutions

We will now turn our attention to Illustration 33, which demonstrates how to automatically undertake certain things upon the opening and closing of the inancial model. The Auto_Open routine calls the LoadMenus and selects the cover to show the disclaimer. The Auto_Close deletes the import data menu bar upon closing the inancial model. It is in a loop to ensure that all duplicate named menu bars are removed in the event of having multiple workbooks open.

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Illustration 33 Auto_Open and Auto_Close to remove bid or FC models the menu bars Sub Auto_Open() LoadMenus Sheets(“COVER”).Select End Sub Sub Auto_Close() ‘=========================================================== ==== ‘THIS ROUTINE REMOVES THE MENUS BARS WHEN THE WORKBOOK IS CLOSED ‘=========================================================== ==== Dim cbWSMenubar As CommandBar On Error Resume Next Set cbWSMenubar = CommandBars(“Worksheet Menu Bar”) I=0 For I = I To 10 I=I+1 cbWSMenubar.Controls(“MODEL Inputs”).Delete cbWSMenubar.Controls(“MODEL Outputs”).Delete cbWSMenubar.Controls(“Run Model Results”).Delete cbWSMenubar.Controls(“Optimise UC”).Delete cbWSMenubar.Controls(“Sculpt Debt”).Delete Next I End Sub Source: Modelling Solutions

The macro VBA code below in Illustration 34 shows the code to be added to the menu bar to run the model for the base case. Essentially, the funding requirement is calculated, the interest is calculated, the debt is sculpted and the inancial asset is amortised. Illustration 34 Running the bid or FC model Sub RUN() Application.ScreenUpdating = False Application.Calculation = xlCalculationManual Application.StatusBar = “Please Wait Running Model” ‘============================================================ ================================ ‘RUNS AND OPTIMISES the funding requirement , sculpts the debt and breaks int rec circularity ‘============================================================ ================================ UnProtectEachSheet continued 45

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Calculate FundingRequirement ‘calls the funding routine InterestReceivableCircularity ‘ calls the interest routine SculptHistoricADSCR ‘ calls the historic ADSCR sculpting InterestReceivableCircularity ‘ calls the interest routine UnProtectEachSheet ‘ calls the unprotect sheets routines FINANCIALASSET ‘calls the inancial asset amortisation schedule Range(“SENSITIVITY_NUMBER”).Value = “” Calculate Sheets(“SUMMARY”).Select

ProtectEachSheet ‘============================================ ‘=============================================== Application.ScreenUpdating = True Application.Calculation = xlCalculationAutomatic ‘=============================================== Application.StatusBar = Ready End Sub

Exercise inalising the bid or inancial close model Based upon the bid or inancial close model that you have built to date, please add the inal touches. Unprotect the entire operating model’s input cells and protect all the worksheets. Add the menu bars to the Excel environment for running the model, sculpting the debt and optimising the unitary charge. Add menu bars for navigating the model’s inputs and outputs.

Optimising the unitary charge The term “optimising the unitary charge” normally refers to the need to ind the unitary charge that meets a target key inancial output. Such key inancial outputs can include the nominal blended IRR, forward or historic ADSCR minimums, the LLCR minimum or the project life cover ratio (PLCR) minimum amongst others. Illustration 35 shows the macro or VBA code that can be used to ind the nominal blended IRR. Row 3 sets the counter variable to zero. Row 5 deines the target result, ie, the target equity return. Row 6 deines the unitary charge. Row 8 shows the step up of the counter until it is met in row 11, ie, until the target equals the result or 200 iterations are met. Row 10 represents the goal-seek logic, ie, target equity return, and the unitary charge in real terms is used to ind the target blended IRR. This logic can be used to optimise the unitary charge to ind a target key inancial output by making the appropriate adaptation.

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Illustration 35 Optimising the unitary charge targeting the IRR Sub UnitaryChargeOptimisation() ‘==================================================== ‘FINDS THE TARGET NOMINAL BLENDED IRR ‘BY SETTING THE UNITARY CHARGE IN REAL TERMS ‘Written By Modelling Solutions Limited ‘===================================================== 1 Application.ScreenUpdating = False (Switches the screen updating off) 2 Dim Counter ‘deine counter for iterations (Deines a variable called counter) 3 Counter = 0 (Sets The Counter to zero) 4 On Error Resume Next (If an error occurs go to the next line) ‘Results 5 A = Sheets(“IRRS & NPVS”).Range(“TargetEquityReturn”).Value (sets the result to the target equity return) ‘ Targets 6 E = Sheets(“General Inputs”).Range(“TargetIRRUnitaryCharge”).Value (sets the target to the unitary charge) 7 Do (Starts the loop) 8 Counter = Counter + 1 (Steps up the iteration number by 1) 9 Application.StatusBar = “Please Wait Finding The Unitary Charge - Iteration “ & Counter (displays the iteration number) 10 Range(“TargetEquityReturn”).GoalSeek Goal:=E, ChangingCell:=Range(“UnitaryChargeRealTerms”) (Changes the unitary charge to equal the target equity return) 11 Loop Until A = E Or Counter = 200 (Loop until the target equals the result or 200 iterations are met) 12 Application.ScreenUpdating = True (Switches the screen updating back on) 13 Application.StatusBar = Ready (sets the status bar back to normal) End Sub

Unitary charge optimisation exercise Based upon the inputs and logic in your inancial model, optimise the unitary charge to ind a 20% real blended shareholders’ IRR – ie, what is the real unitary charge to the public sector body before any indexation is applied? 47

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A second exercise, based upon the inputs and the logic in your inancial model, is to optimise the unitary charge to ind a minimum LLCR of 1.25, ie, what is the real unitary charge to be charged to the public sector body before any indexation is applied?

Sensitivity logic Sensitivity analysis is deined as “the lexing of key assumptions to investigate the impact upon the project’s inancial projections”. The method for producing sensitivities is where the key output measures are compared against the base case results, ie, maintaining the base case results. Readers may be aware that most inancial models that they have encountered cannot maintain the base case results, and to activate the sensitivity case it is necessary to change the input assumptions and save another version of the Excel workbook and compare it to the base case. In the methodology that follows we can change the input assumptions for a deined sensitivity case and observe the effect upon the key outputs. The deined sensitivity case that we will explain is “percentage change in RPI per annum”. The sensitivity input is a 10% increase from the base case in the sensitivity input sheet. The macro routine is run and the speciic sensitivity number is placed in the sensitivity number box, which triggers the worksheet code in the speciic areas in the construction, revenue and operating costs sheets. For example, if you look at the “construction” sheet cell C30 you will notice that “*IF(SENSITIVITY_NUMBER =1,(1+RPISensitivity),1))^(1/12) extra inlation effects the RPI calculations for sensitivity 1. The results from the model’s key outputs, ie, IRRs and lender ratios, are cut and paste into the sensitivity calcs 1 worksheet. The base case is reset after running sensitivity 1 and any other sensitivities by placing a blank in the sensitivity number box in the sensitivity inputs sheet. The sensitivities sheet presents the base case and sensitivity case results side by side; the sensitivity cases simply reference the results that have been cut and paste into the sensitivity calc sheets. Illustration 36 Runs sensitivity 1% change in RPI PA Sub SENSITIVITYCALC1() 1 Application.ScreenUpdating = False (Switches the screen updating off) 2 Application.Calculation = xlCalculationManual (Switches calculation to manual) 3 Application.StatusBar = “Please Wait Currently Preparing the Sensitivity 1” (displays message) 4 UnProtectEachSheet (Calls routine to Unprotect Sheets) ‘============================================================ ============== ‘RESET EXISTING SENSITIVITY CALC SHEETS ‘============================================================ ============== 5 Sheets(“Sensitivity Calcs 1”).Select (Selects the sheet) 6 Cells.Select (selects all cells) 7 Selection.Clear (clears all) continued

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‘============================================================ ============== ‘SELECT CASE ‘============================================================ ============== 8 Sheets(“Sensitivity Inputs”).Select (selects the sheet) 9 Range(“SENSITIVITY_NUMBER”).Select (selects the range name) 10 Range(“SENSITIVITY_NUMBER”).Value = 1 (sets to 1) 11 Calculate (Calculates) 12 InterestReceivableCircularity (call routine to break interest circularity) 13 Calculate (Calculates) ‘============================================================ ============== ‘COPY & PASTE KEY OUTPUTS IRRS & NPVS , LENDERS’ Ratios ‘============================================================ ============== ‘----------------------------------------------------------‘IRRS & NPVS ‘=========================================================== 14 UnProtectEachSheet (Calls routine to unprotect sheets) 15 Sheets(“IRRS & NPVS”).Select (selects the sheet) 16 Application.Goto Reference:=”IRRSandNPVS” (goes to the range name) 17 Selection.Copy (selects area to copy) 18 Sheets(“Sensitivity Calcs 1”).Select (select the sheet) 19 Range(“A5”).Select (selects start of range for pasting) 20 Selection.PasteSpecial Paste:=xlPasteValues, Operation:=xlNone, SkipBlanks _ :=False, Transpose:=False (Pastes the results as values) Selection.Columns.AutoFit (autoits the column width) ‘=========================================================== ===== ‘LENDERS’ RATIOS ‘=========================================================== ===== 21 Sheets(“LENDERS’ Ratios”).Select (selects the sheet) 22 Application.Goto Reference:=”Lenders’Ratios” (selects the range name) 23 Selection.Copy (selects the area for copying) 24 Sheets(“Sensitivity Calcs 1”).Select (selects the sheet) 25 Range(“A110”).Select (selects area to start pasting) 26 Selection.PasteSpecial Paste:=xlPasteValues, Operation:=xlNone, SkipBlanks _ :=False, Transpose:=False (Pastes the results as values) 27 Selection.Columns.AutoFit (autoits the column widths) 28 Sheets(“SUMMARY”).Select (selects the sheet) 29 ProtectEachSheet (calls a routine to protect the sheets) continued

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‘============================================================ ============== ‘RESET EXCEL ENVIRONMENT ‘============================================================ ============== 30 Application.ScreenUpdating = True (switches on the screen updating) 31 Application.Calculation = xlCalculationAutomatic (switches the calculation to automatic) 32 Application.StatusBar = “Ready” (switches the status bar to normal) End Sub

Sensitivity exercise Based upon the inputs and logic in your inancial model, build the logic for a sensitivity case that calculates a 50% increase in the general inlation or RPI from the base case assumptions. Ensure that you compare the effect upon the lenders’ ratios and shareholder returns on a single worksheet.

Debt sculpting Many readers will have heard of the concept of debt sculpting. This relates to the need for proiling the senior debt principal to meet the lenders’ debt cover ratios. It is due to the fact that the lifecycle costs often associated with PFI projects are cyclical in nature and have peaks and troughs that such a process is required – ie, sculpting the principal to the cash available for debt servicing. As with most things, there are several ways to achieve an end goal; in terms of debt sculpting there is the Excel worksheet algebraic method and the Excel VBA or macro approach. However, as with most things, it is always best to use the easiest and simplest method, which is a rule that I always adopt for all inancial modelling tasks. So, in terms of debt sculpting, the rule is always to try and solve the numbers using the worksheet based or the algebraic method irst. We can see the algebraic method applied in an example in Illustration 37 (see Illustration 37.xls). For this example, our PFI PPP special purpose company has entered the debt service period in terms of our forecasting. In rows 5–9 we have linked in certain assumptions and results from other parts of the inancial model. These are the semi-annual equivalents for the interest rate, the cash lows available for debt service and the target minimum ADSCR required from our lender agreements. In rows 11–15 we can see our semi-annual debt schedule. This comprises of the opening balance, drawdowns, principal and the closing balance. Based upon the cash lows available for debt service, interest and target debt cover ratios, we have derived a principal proile in row 14 that amortises the senior debt by September 30 2017. In rows 17–23 we can see the calculation of the ADSCR. We have simply started with the cash available for debt service (CAFDS) and divided this by the target ADSCR to arrive at the debt service supportable for the six-monthly periods. The interest is a simple calculation based upon the opening balance. The principal is the balance of the debt service requirement that is restricted to the minimum of this and the opening debt balance.

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We calculate the ratio that meets the 1.15 target in row 23. An important question here is when is the simple algebraic method not suitable for debt sculpting and when should a inancial modeller adopt a macro or VBA approach. Essentially, the adoption of the algebraic approach is suitable when the deinition of the ratio calculations is simple and can irstly be solved by this method. However, there are occasions where circularities can be introduced as part of the ratio deinition for either the CAFDS or the debt servicing as part of the ratio deinition. So, if the simple approach cannot achieve our debtsculpting goal, we have to ind a basis that achieves our objective and, indeed, the VBA or macro approach has to be the next favoured alternative. However, the VBA coding approach will be dificult for beginners to pick up – the art of debt sculpting through VBA is probably one of the most skilled inancial modelling tasks that I have come across. In Illustration 38 (see Illustration 38.xls) you will see the detailed worksheet calculations that are behind the debt sculpting calculation logic. In the inancing inputs worksheet you will notice that the senior debt repayment proile has been set to “sculpted historic ADSCR” and the target historic minimum has been set to 1.10. The core calculations are made in the inancing worksheet in rows 1291 to 1297. Here you will notice that the debt is repaid with a 1.1 ratio achieved for each six-monthly period. The principal proile is shown in row 1293, with a 1.10 target ratio and the closing balance fully amortised by December 31 2022. In the balance sheet – semi-annual worksheet you will see that the senior debt is also fully amortised. In the “lenders’ ratios” worksheet you can see the detailed calculation for the historic ADSCR and that it is met for each of the target six-monthly periods. The target is also met in the summary worksheet. Let us now move to the technical area of the Excel VBA code logic that helps optimise and sculpt the senior debt repayment proile. Illustration 39 Sculpt the senior debt principal repayments to equal the minimum historic ASDCR Sub SculptHistoricADSCR() ‘ ‘ Sculpts the Senior Principal Repayments to Equal the Minimum Historic ADSCR ‘ Written By Modelling Solutions Limited ‘ 1 Application.ScreenUpdating = False (Switches screen updating off) ‘============================================================ =================== ‘Resets All Principals to Zero Prior To Sculpting ‘============================================================ =================== 2 Sheets(“Financing”).Select (Selects the sheet) 3 If Range(“SeniorDebtRepaymentProile”).Value = “Sculpted Historic ADSCR” Then (if Sculpted Historic ADSCR is run then) 4 For Each Cell In Range(“SculptedPrincipal”).Cells (go through each cell in llcr sculpted principal range) continued 51

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5 Cell.Select (select cell) 6 Cell.Value = 0 (set cell to zero) 7 Next Cell (go to next cell) 8 Calculate (calculate) 9 Else (if not) 10 End If (end condition) 11 For Each Cell In Range(“SculptedPrincipalADSCR”).Cells 12 Cell.Select 13 Cell.Value = 0 (Resets each principal to zero) 14 Next Cell 15 Calculate ‘============================================================ ================== 16 Dim Counter (deines the variable counter) 17 On Error Resume Next (on error process next) 18 Counter = -1 (deines the counter start point) 19 Do (starts the loop) ‘goal seek sculpted principal 20 Application.StatusBar = “Please Wait Sculpting The Principal For The Historic ADSCR - Iteration “ & Counter (shows the iteration number on the status bar) 21 Counter = Counter + 1 (step up counter by 1 iteration) 22 B = Sheets(“Financing Inputs”).Range(“ADSCRTargetHistoricMin”).Value (Deines the target) 23 If Range(“HistoricADSCRatio”).Offset(0, Counter).Value Cell.Offset(-2, 0).Value Then (if the principal is greater than the opening balance) 34 Cell.Value = Cell.Offset(1, -1).Value (limit principal to the opening balance) 35 Calculate 36 Else 37 End If 38 If Cell.Offset(-2, 0).Value = 0 Then (if the opening balance is zero) 39 Cell.Value = 0 (Set the principal to zero) 40 Calculate 41 Else 42 End If 43 Next Cell (look at next principal) ‘pay debt before end of contract 44 RepayEndOfContract (call routine to repay debt by end of contract) 45 Application.ScreenUpdating = True (switch screen updating back on) 46 Application.StatusBar = Ready (switch status bar to normal) End Sub Sub RepayEndOfContract() ‘pay debt before end of contract 1 Dim C (deine a variable c) 2 Sheets(“Financing”).Select (select the sheet) 3 For Each Cell In Range(“MonthEndingADSCR”).Cells (go through each date) 4 Cell.Select (select each cell) 5 If Cell.Value = Range(“ConcessionEndDate”).Value Then (if concession date then) ‘enter opening balance 6 C = Cell.Offset(4, 0).Value (set c to opening balance number) continued

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7 Cell.Offset(6, 0).Value = C (set principal at end of contract to opening balance) 8 Calculate 9 Else 10 End If 11 Next Cell (select the next month ending period) End Sub

The sculpted historic ADSCR Excel VBA code above will be explained accordingly. In row 2 of the VBA logic we simply select the inancing worksheet. In row 3 if the senior debt repayment proile in the inancing inputs sheet is equal to sculpted historic ADSCR, then in row 4 go through each cell in the LLCR sculpted principal range. Reset each cell in the principal range to zero. In summary, rows 2–10 reset all the senior debt principals to zero before starting the debtsculpting routine for LLCR. We simply do not need to populate this area with numbers, as we want to sculpt the sculpted historic ADSCR. In rows 11–15 the sculpted historic ADSCR is reset to zero. The VBA logic involves stepping through each cell in the sculpted principal range entering a zero as appropriate. In rows 16–28 we can see the use of goal seek logic based on a do loop condition to sculpt the senior debt proile. Row 20 simply displays the status bar showing the iteration number. Row 22 deines the target ADSCR target historic minimum from the inancing inputs sheet. Row 23 checks to see if the calculated ratio is less than the target and row 24 sets the target to zero. Otherwise, we calculate the target ratio by changing the principal amount. The routine continues through the process until all the principals are sculpted. In rows 29–43 we incorporate logic that ensures that the inal principal payment always equals the opening balance. The logic goes through each cell in the sculpted historic ADSCR principal range and if the principal is greater than the opening balance the principal becomes limited to the opening balance, as per rows 33 and 34. Rows 38–42 ensure that when the opening balance is zero the principal is also zero. Row 44 calls a routine called Sub RepayEndOfContract that will always ensure that the debt is repaid before the end of the contract. The next loop goes through each cell in the month end dates and looks for the contract end date. Variable C sets the principal at the end of the contract to the opening balance. Now take the time to cross-reference the code to the model in conjunction to my narrative of the logic above.

Debt-sculpting exercise Based upon the inputs and logic in your inancial model, sculpt or proile the senior debt servicing to ind a 1.17 historic ADSCR. 54

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Sources of error Given the discussions outlined in this book and the nature of PFI PPP inancial models, there are several potential sources of errors. These can be summarised as follows. • • • • • •

Logic error: a logic error arises due a calculation error in the formula, ie summing the wrong range, etc. Assumption / input error: if an input assumption is not as per the inancial case, then an error occurs (eg, the discount rate should be 12%, not 10%!). Documentation error: the unitary charge mechanism may not comply with the basis outlined in the relevant legal documentation. Data book error: the unitary charge mechanism may not comply with the basis outlined in the data book. Taxation compliance: if the tax treatment for certain expense in not tax deductible and is subtracted from the taxable proit, then we have a tax compliance issue of one sort. Accounting compliance: if a certain item has been capitalised but under the relevant accounting treatment (UK GAAP, IFRS, etc), immediate write off is required, then we have an accounting compliance issue of one sort.

Self-testing the model Once the model builder has completed a draft model they should stand off and undertake some self-review. I recommend that the minimum amount of self-review of self-testing should include the following methods.

Top-level analytical review This technique involves reviewing the big picture. It is good for detecting potentially large errors for one model run for the base case or speciic sensitivity cases. This is a similar technique to the review of inancial statements in a inancial audit. The approach may involve the computation of key ratios over the forecast period – look at revenue, cost and inancing structures. Where possible you should correlate back to the inputs. Some examples of correlating the inputs with the outputs would be trade debtor assumptions, trade creditor assumptions, interest rate assumptions and any other assumptions in the model that you could relate to the models outputs. Remember that key areas can be graphed – this helps to review the trends and highlight any blips. You should look for any obvious irregularities such as balance sheets not balancing, cash lows for the period not equalling the movement in cash balance for the balance sheet, any negative debt balances and any other basic checks.

Key output review The key outputs ratios (LLCRs, IRRs, etc) are likely to produce material errors where an error exists, as they are at the highest level. It is recommended that the results and the logic behind the key outputs are reviewed as appropriate. 55

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Flex and sensitivity review Flex testing is a valuable technique for inding potentially large errors in a model. It involves the variation of inputs and the observation of the effect on the outputs. It is important to concentrate on key risk areas. A sensitivity can be reviewed by changing inputs required for the designated sensitivity case and reviewing the results. However, its better to use a sensitivity comparison to the base case, ie, tracking changes between the outputs and assessing whether the model changes in areas as expected. Both lex testing and sensitivity review should use this approach and should collaborate each sensitivity with a high-level analytical review. The inal part would be to rank each result in order and assess the relative ranking given your knowledge of the case.

Limited-scope inancial model reviews There will be certain circumstances when a limited review of the inancial model is necessary. This could be in times when there isn’t time for a full audit or, indeed, a full model audit is not necessary. I often hear people confusing a limited review or a quick look at a inancial model as an audit. An audit is more deinitive and takes a much fuller scope, and it is important for a reviewer to make this point clear. A limited-scope review can be undertaken by either an individual or a professional irm. However, due to its limited nature it is recommended that an opinion letter is not presented regarding this type of review. It is apparent that the scope will be so limited that it will be dificult to conclude whether the inancial model materially meets its objective. Indeed, it is normal practice to simply report a list of indings and discuss these with the model developer based upon the agreed limited scope. A very important caveat to use at the start of the exercise and at the reporting stage is wording such as “You have asked us to undertake a limited review of the inancial model, accordingly our work is limited and there may be errors that exist that are beyond the scope of our review.” Getting a grip on a large and complex inancial model is a real challenge, particularly when time is of the essence. When under pressure, the techniques which I will illustrate here can swiftly reduce, although not fully eliminate, modelling risk. However, being focused on what is important and being creative with your testing techniques can ensure that the greatest value is obtained from the time spent reviewing the inancial model. It is useful to understand the structure and low of the inancial model through a discussion with the modeller. This can be supplemented by the use of a spreadsheet audit tool such as Spreadsheet Professional. Agree with the modeller what the key outputs of the model are and whether any areas are low risk or could even be ignored. Consequently, it is important to reach an agreement on potential risks with the model builder / decision maker before commencing the review. It may be that certain components of the model carry a higher risk in terms of making or breaking the deal or, indeed, complexity or risk of calculation. Other areas could be low risk or could even be ignored. It is from such discussions that a risk based testing plan could be structured. The following outlines the available tools and techniques that could be potentially used when less time is available or a full inancial model audit is not appropriate. 56

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Design review It is necessary to make a quick assessment of whether the model appears to be it for the purpose and is built to an adequate standard. A model design review is useful for a quick it-for-purpose test, and this should be done before addressing any other areas. The reason is that, if the model is poorly designed, it will need signiicant rework – in other words, spot the dogs quickly! The approach that I would suggest involves a number of tasks intended to provide a basis for comparison with good practice build standards. A spreadsheet auditor tool such as Spreadsheet Professional or OAK can help to identify certain potential design issues. • • • •

The irst check is the degree of hard coded cells, ie, those which represent mere numerical inputs – obviously, these will also not change when the assumptions are changed. The second check is the degree of separation of inputs, calculations and outputs. The third check is the degree of inconsistency in formula copying. The fourth is the degree of embedded assumptions within formulae. It is important to distinguish between constants and embedded assumptions. Constants are required in order to perform the calculations from the input assumptions, for example, dividing annual cash lows by 52 in order to calculate a weekly result. A risk exists with embedded assumptions because they will not be updated as the model’s inputs or the scenarios change.

The results from the key design tests can be assigned risk ratings in terms of high, medium and low design risks. A summary risk categorisation can be made regarding the overall design or build quality of the model.

Analytical review This technique involves reviewing the model’s “big picture”. It is good for detecting potentially large errors for one model run, typically the base case, but can also be used when reviewing sensitivity cases. Key areas should be graphed as this facilitates interpretation and shows patterns and “blips” not visible from the numbers alone, and could also indicate errors.

Degree of integration and reconciliation of inancial statement forecasts This issue is important because the failure to properly integrate proit and loss, balance sheet and cash low is a common error. Financial statement forecasts should follow double entry principles and reconciliation in terms of the cash balance in the balance sheet and cash low movement over the forecast period from the cash low. I recommend a walkthrough review of the inancial statement forecasts code, checking where the balance sheet cash igure comes from. If it’s not from the cash low, be on guard for a fudged balance sheet. While varying the model’s input assumptions and checking that the balance sheet still balances and cash balance reconciles to the cash low, any difference arising from the comparison should be rationalised and investigated as appropriate.

Flex testing and sensitivity review This is a technique that is used for reviewing the reasonableness of the model’s sensitivity runs. It is important at this stage to differentiate lex testing from sensitivity testing. Sensitivity testing is where a stated sensitivity is reviewed, such as a 10% increase in general inlation per 57

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annum. However, there are occasions where there’s a requirement to test whether the model’s logical integrity is capable of stress testing. This will involve the lexing of the key input drivers in the model and the risk areas which are likely to be varied by the user. Consequently, in the case of lex testing, it will not be known what exactly the values of the inputs values are likely to be at the review or testing stage. I would therefore recommend the following approach is taken: •

• •

• •

There is the need for a transparent audit trail to be created from the inancial model’s inputs to the inancial model’s outputs. This will help to remove the black box risk and spot potential errors more easily. This can be achieved by freezing the speciic inancial models worksheets in a reference sheet and extracting the variance and percentage variance between the test case and the model’s current results. The input assumptions should be varied for each lex or sensitivity case to be tested. The effect on the calculations and results of each test should be reviewed for reasonableness given the scenario. Here we are looking for reasonable changes where we expect to see them and no changes where we do not expect to see them. It is recommended that the variances or percentage variances that do not appear logical given the test case are investigated. It is advisable that the review of the change in the results is collaborated with the analytical review of the inancial statements from a high level together, with the ranking of the shareholder returns and lenders’ ratios and investigations made where the expected conditions do not hold.

Illustration 40 (See Illustration 40.xls; Source: Modelling Solutions) shows an example of how to set up a lex test template for review. The sheets as per the illustration should be inserted in a test copy of the existing inancial model in the key outputs schedules, ie, typically the P&L account, cash low, balance sheets, lenders’ ratios and shareholder returns. Essentially, the original logic sheet requires freezing through the use of a copy and paste. The original logic will have to be kept unchanged and a variance between the original and frozen sheet extracted. A inal sheet should be inserted into the template which compares the variance as a percentage of the frozen sheet. Illustration 40 also depicts the effect of a 50% increase on the senior lenders’ base interest rates. The P&L, cash low, balance sheet and summary sheets are all analysed by the use of a frozen, a variance and a percentage variance sheet. Each line item should be reviewed and commented upon in terms of the variance and percentage variance to ensure that changes are made where they are expected and to the magnitude expected. This analysis should be supported by an analytical review of the reasonableness of the inancial statements and the summary. Looking at the sensitivity inputs sheet, we can see a 50% increase in senior debt rates has been selected. Turning to the P&L variance and percentage variances, there appears to be changes only as expected, ie, the interest payable has increased, the corporation tax has increased and there has been a reduction in dividends. Looking at the cash low variance and percentage variance, there appears to be changes only as expected, ie, the interest payable has increased, the corporation tax has increased and 58

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there has been a reduction in dividends. The senior debt interest has increased by exactly the 50% assumption. Looking at the balance sheet variance and percentage variance, an impact can be observed on the overdraft, retained proit reduction and corporation tax reduction as expected. The summary shows a relatively marginal impact on the IRRs and a drop in the lenders’ ratios at a reasonable level as expected, but the minimums cannot be met due to the overdraft. From an analytical review perspective the projections look reasonable from a top level.

Parallel or shadow modelling Parallel or shadow modelling is a reperformance technique which can be used either for the model as whole, which I believe is an audit approach for certain professional irms, or for the areas that are perceived as the key risk areas either due to materiality of an output area or, indeed, due to the complexity behind the calculation. The following approach is recommended: • • •

the rebuild of the area under review; the comparison of the key results derived from the reperformance to the original model, given the input assumptions are the same; and the differences which arise from the comparison should be rationalised and investigated as appropriate.

Macro review This technique is useful when the models’ key calculations are reliant on macro code. Modellers are increasingly using complex macros, largely because of Excel’s increased programmability through VBA. We need to differentiate between low- and high-risk macros. Low risks typically describes a macro or piece of Excel VBA code that is non-complex, relatively small with no program control structure and probably recorded with the objective of undertaking negative key strokes. At the other end of the spectrum lies the high-risk case, which typically describes a piece of Excel VBA code that is complex, relatively large and includes program control structures, eg, if then, do until and for next. We are primarily concerned with high-risk VBA code that is complex and derives numbers. A good practice approach to reviewing VBA macro code is as follows. First, understand the purpose of the VBA routine or macro. Second, perform a walk through of the code, auditing against the documented purpose. Third, the code should be annotated at every two or three lines by placing an apostrophe at the end of the relevant line to record your interpretation of the code as appropriate. Where the actual logic differs from the documentation, clearly this will need investigating. And, inally, once the intentions and actual operations are understood, test runs should be designed, the macro run and the results reviewed by reference to the test data. This is important because the review of the macro’s code in isolation may not be completely reliable, and so collaboration with test data provides additional assurance. 59

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Exercise self-testing your inancial close or bid inancial model If you have followed this book from the start you should have a version of a inancial close or bid inancial model to which you will want to apply some self tests and checks, and debug any errors as appropriate. Please undertake the following self-test plan for your bid or inancial close model: • • • • • • •

undertake an analytical review of the statement forecasts; undertake a key outputs review of the lenders’ ratios and shareholders’ returns; ensure that each menu bar operates as intended; ensure that each check included in the “checks” module is zero; ensure that each of the cross-checks built into the blue outputs modules are equal to zero; colour code the inancial model using a colour coding tool, ensure adequate formula copying and inputs are only included in the yellow modules; and undertake a coding review of key unique formula, looking for any potential problems, especially those that form the key outputs or are particularly complex in nature.

Please reference the guidance on review techniques in other sections of this book.

Using the model From the inancial model that you have built you should now have the capability to prepare a inancially viable bid from all stakeholder viewpoints. The project company will provide adequate returns to its shareholders, suficient debt service to its lenders and an affordable unitary charge to the public sector body. We have the capability to sculpt the senior debt to it our cash low proile and the ability to optimise the unitary charge to meet shareholders’ or lenders’ targets.

Financial model audits: inancial close model1 When the project is at the preferred bidder stage and prior to inancial close (ie, at the point at which all contracts are signed by all parties involved in a project), the lenders and often the projects sponsors providing the equity will require a full-scope inancial model audit. Illustration 41 shows a typical specimen inancial model audit opinion letter from a professional services irm. A typical full scope for a inancial model audit includes the wording “That within the bounds of materiality that the model meets its objective.” The objective for a inancial close model is typically to produce six-monthly P&L accounts, cash lows and balance sheets, lenders’ ratios and shareholder returns over the life of the concession or project. Materiality is a concept adopted in an audit that considers whether the errors inherent will greatly change the decision, ie, where there are lenders’ ratios targets of 1.15, does a known error, given that we are calculating a result of 1.18, change the lending decision? In basic terms, a inancial model is not perfect but should give materially accurate calculations.

It is important to note that this section is based upon the views of the author only and not those of Navigant Consulting. 1

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Certain things can be included or excluded from the scope of the audit, as the case may be. First, the compliance of the appropriate accounting treatment can be included in or outside of the scope. However, it is important to understand why the adoption of the appropriate accounting treatment should be included. Accounting treatment is what usually drives the taxation and dividend distributions for the company or project. The speciic accounting treatment for a project can be UK GAAP, IFRS or the local accounting treatment, depending upon the circumstances. Obviously, from a sponsors’ point of view, the accounting and taxation treatment is important is respect of their IRR. From a lenders’ point of view, the accounting treatment is also important as the lender needs to safeguard against any potential overdistribution of dividends and ensure that the dividend is only paid in the six-monthly debt service periods. Obviously, the taxation cash low will impact upon the lenders’ ratios. There is also the consideration of whether the data book is included within the scope of the model audit. This involves the review of the data book into the inancial model. The book of assumptions outlines the projects input and logic assumptions and is often the basis for the key outputs. It is recommended that, where the data book is included in the scope, that it is comprehensively prepared in terms of the assumption and material logic. The projects’ legal agreements can be deined as within the scope of the inancial model audit. Here, similar to the data book review, this involves the review of the various projects agreements, such as the credit agreement, the project agreement, etc. These are very lengthy documents and it is often recommended that speciic sections are included within the scope as necessary, or critical parts are included in the data book. We often see a section on undocumented assumptions in an opinion letter – this relates to the assumptions or logic in the inancial model that are not included in the data book or legal documentation. Illustration 41 Specimen model audit opinion [Funder(s)] Address Street City Postcode [Sponsor(s)] Address Street City Postcode

Date Our ref: xxxxxx Project [Name]

[email protected] Direct: 020 7015 2333 Mobile: 07876 753960

Dear Sirs Financial model audit: The project (the “Project”) INTRODUCTION This report (the “Report”) is addressed to the funder(s) (the “Funder(s)”) and the sponsor(s) (the “Sponsor(s)”), (together the “Client”, the “Addressee” or “you”), and its contents will be solely for continued 61

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your use and may not be disclosed to any other parties except in accordance with the terms of our engagement and as noted in this Report. In accordance with the scope of professional services, as detailed in Appendix A of our engagement letter (“Engagement Letter”) dated [the date], we have completed a review of the Project’s inancial model (the “Model”) that was prepared using Excel spreadsheets. Models Following initial review of the Model, an updated version relecting agreed changes to the Model was reviewed. The inal version of the Model (the “Final Model”) was updated for inputs at inancial close (the “Financial Close Model”). The Financial Close Model, on which our Report is based, is identiied below: Description Initial model Final model Financial close model

File name [File name] [File name] [If applicable]

File size (kb) X,xxx X,xxx X,xxx

Date and time saved [Date and time] [Date and time] [Date and time]

Documentation We were provided with the following of the project’s inancing documentation in the course of our work: Description Credit agreement Project agreement Payment mechanism

File name [File name] [File name] [File name]

File size (kb) x,xxx x,xxx x,xxx

Date and time saved [Date and time] [Date and time] [Date and time]

MODEL AUDIT OBjECTIVES The objective of the model audit was to assist you in conirming, within the bounds of materiality: (a) That the calculations in the model are arithmetically correct and that the results are materially reliable, accurate, complete and consistent with the assumptions contained in the model; (b) That the debt service cover ratio (“DSCR”), loan life cover ratio (“LLCR”), cash low available for debt service (“CFADS”) are calculated correctly and in line with the deinitions from the credit agreement; (c) That the accounting treatments and assumptions applied within the Model are consistent with current [LOCAL] GAAP [or IFRS] and with key provisions of the Project’s inancing documentation as provided; (d) That the tax assumptions applied within the Model are consistent with current [LOCAL] tax legislation and with key provisions of the Project’s inancing documentation as provided; (e) That any unexplained trends or variations in key inancial and banking indicators in Model outputs are identiied through analytical review; and (f) That any unexplained inconsistent or unintuitive cash-low trends (including revenues, costs, taxes, depreciation) or variations in key inancial indicators based on the inputs and the Project’s commercial structure are identiied through analytical review of Model outputs; and (g) That the results produced from changes to underlying assumptions accurately and completely relect the potential impact of those changes; continued 62

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(h) [FOR OPERATIONAL MODEL AUDITS] That the model is consistent is with latest statutory and management accounts. FINDINgS Based on our review of the Models we raised issues for all exceptions that came to our attention with regards to the objectives set out above and discussed these issues with you. We note the following matters: •

[Matters that require documenting in the report].

A summary of the undocumented assumptions noted and representations received during the review are included in Appendix A. A full list of issues raised during the course of our review is available upon request as an Annex to this report. It should be noted that: •

• •

it is not practicable to test a computer model to an extent whereby it can be guaranteed that all errors have been detected and, accordingly, we can only give assurance on the Model within the bounds of materiality and for deined scenarios; our work did not include any work in the nature of a inancial audit and we did not verify any of the assets or liabilities of the companies involved in the Project; and We make no comment on the validity of the assumptions, and express no opinion as to how closely the results actually achieved will compare with the Model’s projections.

CONCLUSION On the basis of the work performed [subject to the matters noted in paragraph 3], the model audit objectives referred to in paragraph X have been met. DISTRIBUTION Unless expressly agreed the reports are intended for the exclusive use by you unless speciied in the terms of our engagement. Yours faithfully,

[Signatory] For and on behalf of Navigant Consulting (Europe) Limited APPENDIX A: UNDOCUMENTED ASSUMPTIONS AND REPRESENTATIONS We note the following undocumented assumptions and representations received: •

[Note undocumented assumptions and representations received].

Source: Navigant Consulting

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I assume that most lenders and shareholders will only care that they get an opinion letter to their required scope in respect to their PFI PPP project. However, there will be others who will really want to know how exactly does a inancial model auditor form the opinion such as that outlined in Illustration 41. What type of work are they carrying out to get here? Based upon my knowledge and experience of inancial model audits, the following type of approach is typically taken.

Scoping When a professional irm receives a inancial model from a bank or a sponsor for PFI PPP inancial close it will have to go through a scoping exercise. This typically involves a relatively quick inspection of the inancial model. The scoping inspection will involve a high-level look at the model, in a similar way to a shorter version of an analytical review. A review of the models’ design may also be undertaken, which may be similar to the design review outlined in the earlier discussion of limited scope inancial model reviews. I would also expect that the model auditor will run their spreadsheet audit software (Spreadsheet Professional, OAK, etc) to help identify the models’ formula size and complexity, amongst other things. Based upon the inancial close model that we have built, I will take you through a typical inancial model auditors’ scoping exercise, with reference to some outputs generated by the Spreadsheet Professional spreadsheet audit add-in and the use of my in-house built colourcoding tool. Formula complexity is a key area when considering the size of a model audit task facing a model auditor. It is pretty obvious that the more complex a formula the longer it will take to understand. The recommended approach for this task is to use a similar tool, such as Spreadsheet Professional, to provide a listing of the entire inancial model’s unique formulae on a sheet-by-sheet basis and make an assessment of the average degree of formulae complexity for each worksheet. An example of such a formula listing obtained from the Spreadsheet Professional software is shown in Illustration 42. Based upon the type of output you can very quickly assess the complexity of each worksheet. Illustration 42 Formula complexity Ref

Label

Calculation

D4

Period Number

=C4+1 =Period Number+1 =Ge0eral+1

C5

Period Commencing

=EOMONTH(C6,-1)+1 =EOMONTH(Month Ending,-1)+1 =EOMONTH(31/01/2007,-1)+1

Month Ending

=IF(B5=””,EOMONTH(ModelStartDate,0),EOMONTH(B6,1)) =IF(Period Commencing=””,EOMONTH(ModelStartDate,0),EOMONTH( Month Ending,1)) =IF(undeined=””,EOMONTH(ModelStartDate,0),EOMONTH(undein ed,1))

C6

continued 64

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Ref

Label

Calculation

D7

Six Monthly Period

=IF(OR(MONTH(D5)=7,MONTH(D5)=1),C7+1,C7) =IF(OR(MONTH(Period Commencing)=7,MONTH(Period Commencing)=1),Six Monthly Period+1,Six Monthly Period) =IF(OR(MONTH(01/02/2007)=7,MONTH(01/02/2007)=1),Ge0eral+1 ,Ge0eral)

C11

Monthly At Todays Prices £000s

=’Time Based Inputs’!C23 =Monthly At Todays Prices £000s =undeined

C23

Capital Costs Category 1

=’General Inputs’!$C$60 =Index 1 =Index 1

C24

Capital Costs Category 2

=’General Inputs’!$C$61 =Index 2 =Index 2

C25

Capital Costs Category 3

=’General Inputs’!$C$62 =Index 3 =Index 3

C26

Capital Costs Category 4

=’General Inputs’!$C$63 =Index 4 =Index 4

C27

Capital Costs Category 5

=’General Inputs’!$C$64 =Index 1 =Index 1

C28

Capital Costs Category 6

=’General Inputs’!$C$65 =Index 2 =Index 2

C29

Capital Costs Category 7

=’General Inputs’!$C$66 =Index 3 =Index 3

C30

Capital Costs Category 8

=’General Inputs’!$C$67 =Index 4 =Index 4 continued

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Ref

Label

Calculation

C31

Capital Costs Category 9

=’General Inputs’!$C$68 =Index 5 =Index 5

C32

Capital Costs Category 10

=’General Inputs’!$C$69 =Index 6 =Index 6

Source: Spreadsheet Professional Software

The number of unique formulae is a key area when considering the size of a model audit task facing a model auditor. It’s pretty obvious that the more formulae that a model has the longer it will take to understand. A unique formula is deined as an Excel formula which is copied across the columns and rows and has consistent logic. In terms of the need to understand the inancial model, other things being equal the more unique formula a model has the longer it will take to understand. The recommended approach for this task is to use a similar tool, such as Spreadsheet Professional, to provide a count of all the inancial model’s unique formula on a sheet-by-sheet basis (see Illustration 43). Illustration 43 Unique formula count Summary statistics Range analysed

A1:CX37

Number of numeric inputs

8

Number of formulas

1902

Number of unique formulae

16

Unique cells are those that are not copies of the cell to the left or above. Percentage of unique formulae

1%

Number of labels

24

Potential errors summary Possible error condition

Frequency

Blank cells referenced

2

Non numeric cells referenced

1

Forward row reference

7

Forward column reference

2

IF function

6

Double IF function

1 continued

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Numeric rule

8

Complex calculation

2

Date reference

6

Source: Spreadsheet Professional Software



You can see from Illustration 43 that, although the speciic worksheet has 1,902 formulae, only 16 are unique. •

It is also normal to a get a listing of the sheets by name so that you can collate your scoping on a sheet-by-sheet basis. The recommended approach for this task is to use a similar tool, such as Spreadsheet Professional, to provide a sheet listing (see Illustration 44).

Illustration 44 Worksheet listing Filename

FinancialCloseModelExample.xls

Last modiied at

07/08/2009 15:17:58

Author

WHITT1D

Title Subject Comments Instructions for use List of sheets Worksheet name

Description

COVER VERSION CONTROL CHANGE CONTROL INPUTS General inputs Sensitivity inputs Time-based inputs Financing inputs Accounting inputs Taxation inputs CALCULATIONS Construction Financing continued 67

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Revenue Operating costs Working capital Dividends Accounting Taxation GRAPH – DATA Sensitivity calcs 1 Sensitivity calcs 2 Sensitivity calcs 3 Sensitivity calcs 4 Sensitivity calcs 5 Sensitivity calcs 6 OUTPUTS P&L – Semi-annual summary CASHFLOW – Semi-annual BALANCE SHEET – Semi-annual IRRS & NPVS LENDERS’ RATIOS SUMMARY SENSITIVITIES CHECKS Source: Spreadsheet Professional Software

•

The auditor would review the size, complexity and general nature of any macros or VBA code included in the inancial model. Of particular interest will be those that drive the numbers and not those that change the model’s presentation, unless the client has a particular need to place emphasis upon presentational macros. The auditor will then discuss the scope of work and the type of opinion ideally required with the lender and/or the sponsor.

Work plan Based upon the required scope for the inancial model audit, the auditor will prepare a work plan. The work will relect the hours required for each activity and the staff allocated to the tasks. The plan and the resources required to deliver this will obviously be tied in to the overall deliverables of the opinion letter. The recommended approach for preparing a work plan for a inancial model audit is shown in Illustration 45.

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Illustration 45 Financial model audit work plan List of sheets

Average complexity

Mins per UF

Man hours

Worksheet name

No. of unique formula

COVER

0

Low

0.5

0.0

TIMELINE & BUDGET

0

Low

0.5

0.0

VERSION CONTROL

1

Low

0.5

0.1

CHANGE CONTROL

1

Low

0.5

0.1

INPUTS

0

Low

0.5

0.0

General inputs

14

Low

0.5

1.2

Sensitivity inputs

0

Low

0.5

0.0

Time-based inputs

23

Low

0.5

1.9

Financing inputs

1

Low

0.5

0.1

Accounting inputs

1

Low

0.5

0.1

Taxation inputs

1

Low

0.5

0.1

CALCULATIONS

0

Low

0.5

0.0

Construction

53

Low

0.5

4.4

Financing

1

High

2.5

0.4

Revenue

16

Medium

1.5

4.0

Operating costs

49

Medium

1.5

12.3

Working capital

36

Medium

1.5

9.0

Dividends

13

Medium

1.5

3.3

Accounting

129

Medium

1.5

32.3

Taxation

81

Medium

1.5

20.3

GRAPH – DATA

25

Low

0.5

2.1

Sensitivity calcs 1

0

Low

0.5

0.0

Sensitivity calcs 2

0

Low

0.5

0.0

Sensitivity calcs 3

0

Low

0.5

0.0

Sensitivity calcs 4

0

Low

0.5

0.0

Sensitivity calcs 5

0

Low

0.5

0.0

Sensitivity calcs 6

0

Low

0.5

0.0

OUTPUTS

0

Low

0.5

0.0

P&L – Semi-annual summary

20

Medium

1.5

5.0

CASHFLOW – Semi-annual

57

Medium

1.5

14.3

BALANCE SHEET – Semi-annual

30

Medium

1.5

7.5

IRRS & NPVS

30

High

2.5

12.5 continued 69

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LENDERS’ RATIOS

44

High

2.5

18.3

SUMMARY

36

Medium

1.5

9.0

SENSITIVITIES

53

Medium

1.5

13.3

CHECKS

15

Medium

1.5

3.8 175.0

Total coding review Analytical review Sensitivity review

7 5

3

Hours Each

15

Databook & legal agreements

25

Tax review

7

Accounting review

7

Senior review

14

Partner review

7

Total planned hours

257.0

We can see from this illustration that the information drawn out from the discussion with the sponsor or the lenders, and the inspection of the inancial model provided for scoping purposes, that we have been able to work the number of man hours required to complete the inancial model audit task. In this particular case, the bulk of the 257 man hours are spent on the coding review; this has been calculated by taking into account the size and complexity of the inancial model. More speciically, we have taken account of the number of unique formulae, the complexity of these and using a number of minutes per unique formula computes the man hours for the coding review. You will also notice that the man hours to complete the other tasks have also been estimated. These include the review of the data book and legal agreements, tax and accounting, sensitivity review and other senior review time. The above plan will typically be used to allocate the grade and specialism to the model audit project, given the agreed timescales and for general project management purposes. It will also be used as a basis for setting the fee quote with the client.

Coding review A coding review is the process of reviewing every unique formula in terms of the underlying logic. You can either use the maps or the colour coding of the model derived by spreadsheet audit software. A section of the inancial close model is shown in Illustration 46.

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Illustration 46 Coding review Opening – cash balance Cash low generated in the period prior to dividend declared Cash available for distribution

£0

£0

£0

£0

£0

£0

£0

£0

£0

£0

£0

£0

£0

£0

£0

£0

£6

£6

£7

£28

£6

£0

£1

£21

£41

£6

£6

£7

£28

£69

Retained earnings available Opening – retained earnings Proit in period prior to dividend declared Retained earnings available for distribution Dividend declared

Proit & loss account

£0

£0

£0

£0

£0

Dividend paid

Cash low

£0

£0

£0

£0

£0

The extract from the inancial model in the illustration shows each unique formula in grey, although on the software this would be bright blue. Each blue formula would have to be inspected. The colour-coding key for the tool means that a unique formula is a bright blue cell and copy down or across of the unique formula is a lighter shade of blue. Bright yellow cells are labels (left-hand column) and light yellow is an input or hard coded cell. In general, different proprietary tools will have a different colour-code key but the principal of the unique formula should remain the same, regardless of the tool used.

Analytical review The process for an analytical review has been outlined earlier in the section on limited-scope inancial model reviews. A relatively senior member of the team will undertake the analytical review, possibly ensuring that the other members of the team are aware of areas that look unreasonable and that may require further attention.

Data book and legal documentation The process for reviewing the data book or legal documentation into the inal model is to crossreference each of the speciic documentation sections in terms of where the text can be found in the inancial model, ie, range B4 to C6 funding sheet. Where areas of the documentation can be quantiied and the inancial model does not comply with, or is not relected in, the inancial model, an issue or comment should be logged and raised with the inancial modeller.

Tax A tax specialist from the professional irm will review the tax treatment in the model against the treatment for the required model audit. For example, does the corporation tax and value added tax treatment materially comply with UK tax treatment? Comments or issues will be 71

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raised by the tax specialist given clear guidance of the nature of the inancial models’ calculations outlined to them by a member of the inancial model audit team.

Accounting An accounting specialist from the professional irm will review the accounting treatment in the model against the treatment for the required model audit. For example, does the accounting treatment materially comply with UK GAAP, IFRS or local accounting treatment? Comments or issues will be raised by the accounting specialist given clear guidance of the nature of the inancial models calculations outlined to them by a member of the inancial model audit team.

Review comments Review comments will be provided to the modeller by the inancial model audit team.

Iterations and base case clearance process The audit team will present the review comments to the inancial model builder based upon the current version of the model until the base case comments are cleared.

Sensitivities It is standard practice that, after the clearance of the base case projections, each sensitivity case is reviewed on a case-by-case basis. This will be a similar methodology to that adopted in the sensitivity or lex-testing approach outlined in the limited review section of this book. If there are any issues arising from the sensitivity review, these will be raised as review comments, and the model or the deinition of the sensitivity in the data book would even amend the sensitivity logic to relect the issues and gain overall clearance.

Second senior review Once the engagement manager is happy that they are ready for sign off of the opinion letter, it is normal that a second senior reviewer looks at the review work performed, and carries out some further analytical review. It is also critical that they double check the basis of the lenders’ ratios and shareholder returns against the facility agreement or data book as appropriate. The double-checking of the key outputs is critical, given that any error at the highest level can often produce the most material sources of error.

Partner sign-off Once the inancial model audit team have satisfactorily completed their work and the professional services irm can support their opinion, the partner will be able to sign the opinion letter. Of course, an opinion letter can be issued prior to all the review comments being cleared, but the outstanding points will clearly have to be attached as indings or qualiications to an opinion.

Disclaimers It is highly recommended, given the multiple sources that can give rise to errors in inancial models of this nature, that liability needs to be waived as appropriate. The text below 72

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outlines a typical disclaimer that should always be placed in inancial model before it is distributed. Disclaimer This model has been prepared by Modelling Solutions Ltd (MS) from data provided by various parties. It has not been audited and recipients should use their own due diligence. No representation, warranty or undertaking (expressed or implied) is made in relation to it. No responsibility is taken or accepted by MS for the accuracy of the model or the assumptions on which it is based, and all liability therefore is expressly excluded.

User and technical documentation It is common and best practice that user and technical documentation is in place for a PFI PPP inancial close or bid inancial model, particularly where a template model is used for all inancial modelling projects. However, for one-off bid and inancial close projects, user and technical documentation is not strictly necessary. Often the original inancial modelling is controlled by the original modeller. However, I strongly recommend the preparation of such documentation where a template model is used for most of the organisations bids and for inancial close purposes. This will help to safeguard an understanding of the template model in the event of the original model builder leaving the organisation, and also helps to leverage the solution to other team members and allow ease of update of both logic and the assumptions. The type of user and documentation shown in Illustration 47 can be used for our example inancial close model. Illustration 47 User and technical documentation, inancial close or bid model DEMONSTRATION FINANCIAL CLOSE OR BID FINANCIAL MODEL USER & TECHNICAL DOCUMENTATION V1 CONTENTS 1. Purpose of the model .................................................................................................Page x 2. Operating the model ..................................................................................................Page x 3. Model layout..............................................................................................................Page x 4. Material calculations ..................................................................................................Page x • Financing ..............................................................................................................Page x • Revenue ...............................................................................................................Page x • Operating ..............................................................................................................Page x • Working capital......................................................................................................Page x • Dividends ..............................................................................................................Page x • Accounting ............................................................................................................Page x • Taxation ................................................................................................................Page x • Lenders’ ratios ......................................................................................................Page x • Senstivities............................................................................................................Page x 5. Model outputs ...........................................................................................................Page x 6. Financial model inputs ...............................................................................................Page x continued 73

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PASSWORDS Worksheets and workbook – “xxxxxxxx” VBA editor – “xxxxxxx” August 11 2009 MODEL VERSION: FCBIDinancialmodelDEMOV1.xls 1 PURPOSE OF THE MODEL This bid or inancial close model has been developed for the purposes of bidding for and closing PFI PPP concessions. The model presents the inancial statement forecasts (P&L, cash low and balance sheet), six-monthly to the end of concession. The construction cash lows are computed on a monthly basis. The lenders’ ratios are computed on a six-monthly basis as per the facility agreement. Shareholders’ IRRs are also computed. 2 OPERATINg THE MODEL The model’s input sheets are represented by the marked worksheets.

Above is an input sheet from the model which shows the menu bars that are added into the Excel environment. The additional added menu bars above refer to the functionality below: • Run model results: This menu bar runs speciic aspects of the model:  The base case. This runs the interest on cash calculation by breaking the interest on the cash circularity. continued 74

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 Sensitivity 1 – “percentage change in retail price indexes.” This runs the results for the speciic sensitivity case. The results of which can be observed in the sensitivities sheet.  Sensitivity 2 – “percentage change in interest rates.” This runs the results for the speciic sensitivity case. The results of which can be observed in the sensitivities sheet.  Sensitivity 3 – “percentage change in (case not deined).” This runs the results for the speciic sensitivity case. The results of which can be observed in the sensitivities sheet.  Sensitivity 4 – “percentage change in (case not deined).” This runs the results for the speciic sensitivity case. The results of which can be observed in the sensitivities sheet.  Sensitivity 5 – “percentage change in (case not deined).” This runs the results for the speciic sensitivity case. The results of which can be observed in the sensitivities sheet. • Model outputs: This menu bar allows the selection of each output schedule; and • Model inputs: This menu bar allows the selection of each input sheet. Typically, the following order needs to be followed: • change all the yellow input assumptions contained in the yellow input sheets to values as required; • select “base case” to calculate the interest on cash; • change the necessary yellow input assumptions contained in the sensitivity inputs sheet before running each sensitivity case; • select any of the sensitivity cases to compute the speciic sensitivity result, ie, sensitivity 1, sensitivity 2, etc; and • select “run all cases” to compute the base case and all sensitivities after changing all the necessary inputs. 3 MODEL LAYOUT The model has been designed using the following conventions: • input worksheets are coloured yellow; • intermediate calculation worksheets are coloured green; and • output worksheets are coloured blue. The model’s worksheet layout together with the purpose of each area is outlined below: WORKSHEET NAME

PURPOSE OF THE WORKSHEET

COVER

The cover showing the disclaimer

VERSION CONTROL

A log of changes between versions

CHANGE CONTROL

A request of changes to be made to the model

INPUTS

The start of the inputs section

General inputs

This is inputs such as project dates, inlation, etc

Sensitivity inputs

These are the sensitivity assumptions for each the cases

Time-based inputs

These are the time-based assumptions, eg, operating and capital expenditure

Financing inputs

These are the inancing assumptions

Accounting inputs

These are the accounting assumptions continued 75

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Taxation inputs

These are the taxation assumptions

CALCULATIONS

This is the start of the calculations section

Construction

This is the construction projections

Financing

This is the inancing and debt schedule calculations

Revenue

This is the unitary charge projections

Operating costs

This is the operating costs calculations

Working capital

This is the working capital calculations

Dividends

This is the dividend calculation

Accounting

This is the accounting calculations

Taxation

This is the corporation tax and VAT calculations

GRAPH – DATA

This is data for producing the graphs

Sensitivity calcs 1

This is the holding area for of the sensitivity case results

Sensitivity calcs 2

This is the holding area for of the sensitivity case results

Sensitivity calcs 3

This is the holding area for of the sensitivity case results

Sensitivity calcs 4

This is the holding area for of the sensitivity case results

Sensitivity calcs 5

This is the holding area for of the sensitivity case results

OUTPUTS

This is the start of the outputs section

P&L summary – reforecast

This is the forecasted P&L to the end of the concession

CASHFLOW – reforecast

This is the forecasted cash low to the end of the concession

BALANCE SHEET – reforecast

This is the forecasted balance sheet to the end of the concession

LENDERS’ RATIOS

These are the senior lenders’ ratios

SUMMARY

This is the project summary

SENSITIVITIES

These are the results of the base case and the sensitivities for the senior lenders’ ratios

CHECKS

These are reconciliation checks

4 MATERIAL CALCULATIONS Financing The project inancing uses the facility amounts, interest rates, fees and repayment proiles for both senior and subordinated debt as per the facility agreement. Revenue The unitary charge revenue is calculated as per the real unitary charge and by applying the speciic indexation basis.This represents the cash receipts. This can be optimised by inding the unitary charge that equals certain outputs. continued

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Operating costs Operating costs are projected as per the forecast assumptions at today’s prices applying speciic inlation assumptions. Working capital Working capital has been projected as a number of days outstanding for payables and receivables. Dividends Dividends are restricted to the level of retained earnings subject to suficient cash available for distribution purposes after taking into account the lock-up ratios. Accounting Finance debtor accounting (FRS 5) has been adopted as opposed to the on-balance sheet accounting treatment of the asset. Lenders’ arrangement fees have been capitalised and amortised over the life of the debt. Deferred tax is provided for the timing difference arising between the inancial statements and taxable proits in respect of corporation tax losses. Taxation Corporation tax is calculated with reference to chargeable proits arising from Schedule D cases I and III, with the capability of any taxable losses being carried forward and relieved against the next available taxable proit. Value added tax is applied to all output and input revenues and expenses as appropriate. Lenders’ ratios The senior lenders’ ratios are calculated on a materially similar basis to inancial close and the facility agreement. Senstivities Sensitivities are calculated on the lenders’ ratios by varying the deined variable by a +/- percentage from the base case variable. 5 MODEL OUTPUTS There are various inancial statement outputs included in the model, which are shown in the model layout above. However, the main output schedules are as follows: • • • • •

P&L – summary – reforecast; cash low – reforecast; balance sheet – reforecast; summary; and sensitivities.

6 FINANCIAL MODEL INPUTS There are various input assumptions included in the model as shown in the model layout above.

Data book A data book of assumptions is the documentation that supports a inancial model prior to a inancial close. It is a document that outlines the inputs for the base case, the key calculations, key outputs and sensitivities. The following guidelines should be adopted when compiling a data book of assumptions. 77

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A list of contents Here you should outline the contents of the data book as per the following sections.

Introduction A description of the project: Northampton Schools PFI The inancial model details: NorthamptonSchoolsPFIFModelV13.xls Outline the instructions to operate the model. Assumptions gENERAL INPUTS Project name

NORTHAMPTON SCHOOLS PFI

Project discount rate

10.00%

Model start date

January 1 2007

Unitary charge Target shareholders’ rate of return for unitary charge

Blended – nominal

15.0%

Real unitary charge at base date prices

Semi-annual £000s

£109,445

Unitary charge indexed

%

75%

Unitary charge indexation

Index type

Retail Price Index

Residual value

£s

£50,000

Project dates Financial close date

September 30 2008

Construction start date

October 1 2008

Construction end date

December 31 2011

Operations start date

January 1 2012

Concession period

30

Concession end date

December 31 2041

Indexation Base date for indexation

June 1 2007

Retail Price Index

% per annum

2.00%

Index 1

% per annum

3.00%

Index 2

% per annum

4.00%

Index 3

% per annum

4.00%

Index 4

% per annum

5.00%

Index 5

% per annum

4.00%

Index 6

% per annum

4.50% continued

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Working capital Receivables days Days

30

Days

30

Operating costs – category 1

Index type

Index 1

Operating costs – category 2

Index type

Index 2

Operating costs – category 3

Index type

Index 3

Operating costs – category 4

Index type

Index 4

Operating costs – category 5

Index type

Index 5

Operating costs – category 6

Index type

Index 6

Operating costs – category 7

Index type

Index 1

Operating costs – category 8

Index type

Index 2

Operating costs – category 9

Index type

Index 3

Operating costs – category 10

Index type

Index 4

Capital costs – category 1

Index type

Index 1

Capital costs – category 2

Index type

Index 2

Capital costs – category 3

Index type

Index 3

Capital costs – category 4

Index type

Index 4

Capital costs – category 5

Index type

Index 1

Capital costs – category 6

Index type

Index 2

Capital osts – category 7

Index type

Index 3

Capital costs – category 8

Index type

Index 4

Capital costs – category 9

Index type

Index 5

Capital costs – category 10

Index type

Index 6

Lifecycle costs – category 1

Index type

Index 1

Lifecycle costs – category 2

Index type

Index 2

Lifecycle costs – category 3

Index type

Index 3

Lifecycle costs – category 4

Index type

Index 4

Lifecycle costs – category 5

Index type

Index 1

Lifecycle costs – category 6

Index type

Index 2

Lifecycle costs – category 7

Index type

Index 3

Lifecycle costs – category 8

Index type

Index 4

Lifecycle costs – category 9

Index type

Index 5

Payables days Indexation basis

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Lifecycle costs – category 10

Index type

Index 6

Legal

Index type

Index 1

Financial

Index type

Index 2

Insurance

Index type

Index 3

Technical

Index type

Index 4

Success fee

Index type

Index 5

Planning supervision

Index type

Index 6

Development fee

Index type

Index 4

Bid and project costs

Index type

Index 4

Land for temp accommodation

Index type

Index 4

Project management fee

Index type

Index 4

Technical fee

Index type

Index 4

Due diligence – legal

Index type

Index 4

Due diligence – technical

Index type

Index 4

Due diligence – inancial

Index type

Index 4

Due diligence – other

Index type

Index 4

TIME-BASED INPUTS OPERATING COSTS

→

SIX MONTHLY

Period commencing

January 1 2007

Month ending

June 30 2007

Operating period Operating costs – category 1

Six-monthly at todays prices £000s

Operating costs – category 2

Six-monthly at todays prices £000s

Operating costs – category 3

Six-monthly at todays prices £000s

Operating costs – category 4

Six-monthly at todays prices £000s

Operating costs – category 5

Six-monthly at todays prices £000s

Operating costs – category 6

Six-monthly at todays prices £000s

Operating costs – category 7

Six-monthly at todays prices £000s

Operating costs – category 8

Six-monthly at todays prices £000s

Operating costs – category 9

Six-monthly at todays prices £000s

Operating costs – category 10

Six-monthly at todays prices £000s continued

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CAPITAL EXPENDITURE

UP TO SIX YEARS MONTHLY

Period commencing

January 1 2007

Period ending

January 31 2007

Construction period Capital costs – category 1

Monthly at todays prices £000s

Capital costs – category 2

Monthly at todays prices £000s

Capital costs – category 3

Monthly at todays prices £000s

Capital costs – category 4

Monthly at todays prices £000s

Capital costs – category 5

Monthly at todays prices £000s

Capital costs – category 6

Monthly at todays prices £000s

Capital costs – category 7

Monthly at todays prices £000s

Capital costs – category 8

Monthly at todays prices £000s

Capital costs – category 9

Monthly at todays prices £000s

Capital costs – category 10

Monthly at todays prices £000s

LIFECYCLE EXPENDITURE

SIX MONTHLY

Period commencing

January 1 2007

Period ending

June 30 2007

Operating period Lifecycle costs – category 1

Monthly at todays prices £000s

Lifecycle costs – category 2

Monthly at todays prices £000s

Lifecycle costs – category 3

Monthly at todays prices £000s

Lifecycle costs – category 4

Monthly at todays prices £000s

Lifecycle costs – category 5

Monthly at todays prices £000s

Lifecycle costs – category 6

Monthly at todays prices £000s

Lifecycle costs – category 7

Monthly at todays prices £000s

Lifecycle costs – category 8

Monthly at todays prices £000s

Lifecycle costs – category 9

Monthly at todays prices £000s

Lifecycle costs – category 10

Monthly at todays prices £000s

UPFRONT COSTS

UP TO 6 YEARS MONTHLY

Period commencing

January 1 2007

Period ending

January 31 2007

Legal

Monthly at todays prices £000s

£200

Financial

Monthly at todays prices £000s

£200 continued

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Insurance

Monthly at todays prices £000s

£200

Technical

Monthly at todays prices £000s

£200

Success fee

Monthly at todays prices £000s

£200

Planning supervision

Monthly at todays prices £000s

£200

Development fee

Monthly at todays prices £000s

£200

Bid and project costs

Monthly at todays prices £000s

£200

Land for temp accommodation

Monthly at todays prices £000s

£200

Project management fee

Monthly at todays prices £000s

£200

Technical fee

Monthly at todays prices £000s

£200

Due diligence – legal

Monthly at todays prices £000s

£200

Due diligence – technical

Monthly at todays prices £000s

£200

Due diligence – inancial

Monthly at todays prices £000s

£200

Due diligence – other

Monthly at todays prices £000s

£200

FINANCINg INPUTS RESERVE ACCOUNTS DSRA Reserve account active

Yes

Months senior debt service required

6

MRA Reserve account active

Yes

Months lifecycle costs required

6

INTEREST RECEIVABLE / OVERDRAFT Annual interest rate – receivable

%

6.00%

Annual interest rate – overdraft

%

6.70%

Senior debt

%

90%

Sub debt

%

6%

Equity

%

4%

PROJECT FINANCING TERMS FUNDING PROPORTIONS

Total

100%

SENIOR DEBT Repayment proile

Sculpted historic ADSCR continued

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Repayment term

Years from ops date

20

Base rate

%

5.50%

Margin

%

2.00%

Commitment fee

% of undrawn facility

0.2%

Arrangement fee

% debt facility size

1.1%

ADSCR

Forward min

1.10

ADSCR

Historic min

1.10

LLCR

Min

1.25

PLCR

Min

1.20

Interest rates

Fees

Target ratios

SUBORDINATED DEBT Repayment proile Repayment term

Straight line Years from ops date

20

%

12.00%

Commitment fee

% of undrawn facility

0.2%

Arrangement fee

% debt facility size

1.1%

Interest rates Coupon rate Fees

ACCOUNTINg INPUTS Depreciation

Years

Mix

Fixed asset – category 1

Straight line basis

30

20%

Fixed asset – category 2

Straight line basis

25

20%

Fixed asset – category 3

Straight line basis

20

20%

Fixed asset – category 4

Straight line basis

15

20%

Fixed asset – category 5

Straight line basis

10

20% 100%

Borrowing costs Fees

Capitalise and write-off over life of the debt

Deferred tax continued 83

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FRS5 Finance debtor accounting

Yes / No

Yes

Finance debtor interest rate

%

7.0%

Payment mechanism The unitary charge revenue is calculated as per the real unitary charge as at inancial close, applying the speciic indexation basis. This represents the cash receipts. Costs These are indexed from base year prices levels at RPI for each type of operating cost. Construction and development costs These are indexed from base year prices levels at RPI for each type of construction and development cost. Working capital assumptions Working capital has been projected as a number of days outstanding for payables and receivables. Financing The project is inancing by equity, subordinated debt and senior debt. The senior debt has been sculpted in order to it the cash lows accordingly. The model also has the ability to consider other types of principal proiles. Tax assumptions Corporation tax is calculated with reference to chargeable proits arising from Schedule D cases I and III, with the capability of any taxable losses being carried forward and relieved against the next available taxable proit. VAT is applied to all output and input revenues and expenses as appropriate. Accounting assumptions Financial asset accounting (IFRS) has been adopted as opposed to the on-balance sheet accounting treatment of the asset. Lenders’ arrangement fees have been capitalised and amortised over the life of the debt. Lenders’ commitment fees have been expensed to the P&L account immediately. Deferred tax is provided for the timing difference arising between the inancial statements and taxable proits in respect of corporation tax losses. IRRs The models’ IRRs are calculated on both a real and nominal basis. They include the project IRR, which represents project cash lows excluding inancing, the equity IRR, which represents the equity invested in comparison to the shareholders’ dividends, and the blended IRR, which represents equity IRR cash lows plus the subordinated debt invested and interest and fees earnt. continued 84

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Lenders’ ratios The following lenders’ senior debt ratios are calculated on a six-monthly basis: Historic ADSCR = Total cash available before debt service divided by total senior sebt servicing for the previous six months plus the current six-month period Forward ADSCR = Total cash available before debt service divided by the total senior debt servicing for the current six months plus the next six-month period Loan life cover ratio = (NPV (Project cash low + interest on cash + DSRA movements + MRA movement) – Discounted at the senior debt interest rate) divided by the senior debt balance Sensitivities Sensitivities are calculated on the lenders’ ratios by varying the deined variable by a +/- percentage from the base case variable. Sensitivity 1 = % 50% increase in the RPI from the base case Sensitivity 2 = % 10% increase in the base rate from the base case

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Section 3

PFI PPP Post-Financial Close or Operational Modelling and Analysis Introduction After achieving inancial close for a PFI PPP project there is the need for ongoing inancial management. This should address the needs of lenders, shareholders and management to the special purpose company. In order to manage the inancial risks, a post-inancial close or operating inancial model is required. Many readers will ask the question: why not simply update the inancial close model? Reasons for preparing a revised inancial model include the following. – The inancial close model was often built with the objective of closing a transaction. When working to tight timelines, user friendliness or a inancial model built to be updated by someone other than the original inancial model builder was not a consideration. Indeed, the same inancial modeller probably updated both the logic and the inputs up until sign-off. – The inancial close model hasn’t been built to integrate the actual inancial position or, indeed, report actuals alongside the reforecast as the contract develops. There is a need to ensure that the latest balance sheet is the starting position, and when accounting for this starting point the balance becomes zero at the end of the concession. It is important that the actual cash low timing and amounts are captured in order to reforecast the shareholders’ returns and lenders’ ratios. – The inancial close model hasn’t been built in the inancial statement format required for internal management reporting. There is often a need to link the two as much as possible. – The accounting concepts of accruals and prepayment accounting are often ignored in a inancial close model that is prepared on a six-monthly basis. The accruals concept is part of the income matching or proit measurement concept used in accountancy, and involves the need to match an expense to the accounting time period more fully in the P&L account. For example, if the insurance was paid annually in advance, there’s a need to match this cost to the periods that it relates. The prepayments concept is also part of the income matching or proit measurement concept used in accountancy, and involves the need to match an expense to the accounting time period more fully in the P&L account. The treatment for accruals and prepayments will be discussed more fully later in the book. – There may be the need to update the post-inancial close model on a quarterly basis rather than a six-monthly basis. This will facilitate more timely management reporting and forecasts for the SPC. 87

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– The inancial close model may not accurately relect the accounting treatment for the SPC. – There is the need to use this model as a basis for dividend distribution decisions.

Scope Obviously, given the discussions regarding inancial modelling best practice outlined in the previous section, our starting point for the purposes of this book is to deine the scope of our PFI PPP post-inancial close or operating model build project. (1) The purpose of the inancial model is to provide inancial projections or forecasts, and monitor and update for actuals over the concession or contract period for an infrastructure project – such as a road, school or hospital – through the use of a typical design, build inance and operate PFI PPP structure. (2) Given the nature of this type of project and the key stakeholders, we consider what the key outputs schedules are. First, we consider the stakeholders who are likely to be involved. We have the project’s sponsors, who typically provide the equity and subordinated debt, the lenders, who typically provide the senior debt and the public sector body, who will typically pay the unitary charge to the private sector service provider. Given the nature of our stakeholders and the requirements of the SPC, the following key outputs can be summarised: – We are required to prepare a P&L account, balance sheet and cash low over the life of the concession; this will be presented in a number of relevant formats. – We are required to evaluate and measure the shareholders’ returns given the actuals to date and the reforecast to the end of the contract. – We are required to evaluate and measure the senior lenders’ debt cover given the actuals to date and the reforecast to the end of the contract. – The unitary charge or bid price and the associated terms to the government over the life of the concession will remain ixed as per inancial close, unless renegotiated. (3) When considering the periodicity of our inancial modelling, it is fairly normal that the timeline is on a monthly basis during the irst 24 months, and thereafter is quarterly.

Designing the inancial model Again, given the discussions regarding FMBP previously outlined, our next stage is to deine the design for our PFI PPP inancial model. It is obvious that our inancial model can and will be built in Excel. Any version from Excel 2002 onwards will be suitable for our requirements. Given the required outputs and analysis at the scoping stage, it is apparent that there is quite a large amount of modelling to be done here. We can logically split the work between requirements for both lenders and shareholders, and requirements for management reporting. Given this position, it appears best to have two workbooks: one for the lenders and shareholders, and one for management reporting purposes. 88

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The lenders’ and shareholders’ workbook should be built irst, and the management reporting one after that. The management reporting model will be fed by the inputs imported from the lenders’ and shareholders’ inancial model. Each workbook will be required and we will design our model on a modular basis, breaking down the key areas of the logic.

Layout The next stage is to deine the structure of the lenders’ and shareholders’ inancial model (postinancial close model) in Excel for our PFI PPP inancial model, so that we can complete the logic, and deine the inputs and then collect them. The example outlined in Illustration 48 (see Illustration 48.xls) shows a layout of the inancial model that will allows us to start our inancial model project. The inancial model layout includes administration sheets at the front, followed by yellow sheets for inputs, intermediate calculations sheets in green, and output sheets in blue. The colour scheme adopted again presents us with an increase of colour shading from left to right in the form of white, yellow, green and blue. You will notice that the sheets are organised on a modular basis given the scope and purpose of the inancial model. The sheet names are clear and pretty well self-explanatory. Where there is an exception to this rule, please refer to the model layout listing below, which explains the purpose of each sheet. Essentially, the input and calculations are in worksheets where you would logically expect to ind them. You will notice that the output schedules are already included as at this stage, it is quite standard to have agreed these with the end client by such a stage in the inancial model build project. We have a format for the P&L – reforecast, cash low – reforecast and balance sheet – reforecast, lenders’ ratios, summary, etc. Box 1 WORKSHEET NAME

PURPOSE OF THE WORKSHEET

COVER

The cover showing the disclaimer

VERSION CONTROL

A log of changes between versions

CHANGE CONTROL

A request of changes to be made to the model

INPUTS

The start of the inputs section

Actuals

This is the actual balance sheet and P&L for the SPV

P&L – actual

The monthly actual P&L accounts inputs

Cash low – actual

The monthly actual cash low inputs

Balance sheet – actual

The monthly actual balance sheet inputs

Balance sheet – other debtors & accruals

Detailed debtors & accruals

Reforecast overlay inputs

Adjustment for cash low reforecast

KEY INPUT SUMMARY

Key input assumptions for banks

General inputs

This is inputs such as project dates, inlation, etc

Sensitivity inputs

These are the sensitivity assumptions for each of the cases continued 89

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Time-based inputs

These are the time-based assumptions, eg, operating and capital expenditure

Financing inputs

These are the inancing assumptions

Accounting inputs

These are the accounting assumptions

Taxation inputs

These are the taxation assumptions

CALCULATIONS

This is the start of the calculations section

Financing

This is the inancing and debt schedule calculations

Revenue

This is the unitary charge projections

Operating costs

This is the operating costs calculations

Working capital

This is the working capital calculations

Dividends

This is the dividend calculation

Accounting

This is the accounting calculations

Taxation

This is the corporation tax and VAT calculations

CASH FLOW – opening balance accruals

Opening balance sheet effect on cash

Lenders’ actual cash lows

Converts actuals into lenders’ CAFDS

GRAPH – DATA

This is data for producing the graphs

Sensitivity calcs 1

This is the holding area for of the sensitivity case results

Sensitivity calcs 2

This is the holding area for of the sensitivity case results

Sensitivity calcs 3

This is the holding area for of the sensitivity case results

Sensitivity calcs 4

This is the holding area for of the sensitivity case results

Sensitivity calcs 5

This is the holding area for of the sensitivity case results

SHAREHOLDER actual calcs

Computes actual shareholder cash lows

SHAREHOLDER analysis

Shareholder cash lows and returns

BALANCE SHEET – budget calcs

Balance sheet budget calcs

CASH FLOW – budget calcs

Cash low budget calcs

Summary P&L – budget calcs

P&L budget calcs

P&L – reforecast calcs

P&L reforecast calcs

Detailed P&L – budget calcs

Detailed P&L – budget calcs

CASH FLOW – budget calcs – YTD

Reforecast calcs

CASH FLOW – reforecast calcs

Reforecast calcs

BALANCE SHEET – reforecast calcs

Reforecast calcs

OUTPUTS

This is the start of the outputs section

P&L – Summary – reforecast

This is the reforecasted P&L to the end of the concession continued

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WORKSHEET NAME

PURPOSE OF THE WORKSHEET

CASH FLOW – reforecast

This is the reforecasted cash low to the end of the concession

BALANCE SHEET – reforecast

This is the reforecasted balance sheet to the end of the concession

Key input schedule

Summarise key inputs for lenders’ purposes

P&L – summary – inancial close

This is the P&L from the inancial close model

CASH FLOW – summary – inancial close This is the cash low from the inancial close model BALANCE SHEET – inancial close

This is the balance sheet from the inancial close model

CASH FLOW – variance forecast v reforecast

Comparisons used at the initial build stage

P&L – variance forecast v reforecast

Comparisons used at the initial build stage

BALANCE SHEET – variance forecast v reforecast

Comparisons used at the initial build stage

LENDERS’ RATIOS

These are the senior lenders’ ratios

SUMMARY

This is the project summary

SENSITIVITIES

These are the results of the base case and the sensitivities for the senior lenders’ ratios

Graph – dividends v cash & earnings

This shows the dividends, retained earning and cash over the life of the project

Actuals – for management reporting

Actuals for management reporting model

Budget – for management reporting

Budget for management reporting model

CHECKS

These are reconciliation checks

Layout exercise You are just about ready to start building your bid inancial model in your copy of Excel. Please prepare the model layout by using the same sheet layout and output schedules as used in the example. The next stage is to deine the structure of the lenders’ and shareholders’ inancial model (management reporting model) in Excel for our PFI PPP inancial model, so that we can complete the logic, and deine the inputs and collect them. The example outlined in Illustration 48 shows a layout of the inancial model that will allow us to complete our inancial model. As with the bid or inancial close model, when you look at the layout for both the workbooks above, and cross-reference the narrative above to the illustration, it is plain to see that the names used in our layout are relatively commonsense and straightforward. This is what one would expect to ind from such an approach.

Timeline The timeline is added to the operating inancial model as shown in Illustration 49 (see Illustration 49.xls). The P&L – actual, cash low – actual and balance sheet – actual modules all use 91

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the eomonth formula to calculate the required monthly timeline. In most of the green calculation sheets and for the reforecast output sheets we have used the eomonth formula to calculate a 24-monthly, and quarterly basis thereafter, timeline. In each of the actual and reforecast output modules, we have used the eomonth formula to compute the timeline for the current and next inancial year on a monthly basis. This is also shown with a data type that highlights whether the data is actual or reforecast. This is achieved by incorporating a condition which checks whether the timeline is less than or equal to the reporting month end.

Exercise timeline For the inancial model that you have built to date, please add the following logic to compute the logic for the model’s timeline. Use the eomonth formula to automate the 24-monthly, and quarterly basis thereafter, timeline for the relevant green calculation modules and the relevant blue output modules.

Main differences to a bid or inancial close model Timeline It is apparent that the inancial close model is usually built on a six-monthly basis, and it is often the case that a monthly timeline will be required for part of the reforecast to the end of the concession. It is usual to have the irst 12–36 months of the reforecast on a monthly basis, and quarterly or six-monthly thereafter. The irst 12–36 months are required for the purposes of the internal forecasting requirement of the SPC. The rest of the contract life is normally on a quarterly or six-monthly timeline.

Actuals When the PFI contract is live there is the need to keep internal management accounts on a monthly basis – this, in turn, will form a basis of the annual statutory audited accounting statements. It is often desirable to keep each and update each month’s actual proit and loss, cash low and balance sheet from the irst to later monthly accounting periods. The latest actual balance sheet for the SPC is a critical statement for the purpose of forecasting the PFI contract to the end of the PFI concession. It will contain information on the debt drawn to date and the cash position, amongst other things, and will undoubtedly differ in timing to the forecasted inancial close position.

Accruals and prepayments The accounting concepts of accruals and prepayment accounting are often ignored in a inancial close inancial model that is prepared on a six-monthly basis. The accruals concept is part of the income matching or proit measurement concept used in accountancy. It involves the need to match an expense to the accounting time period more fully in the P&L account, particularly if reforecasts are prepared on a monthly or quarterly basis. For example, if the insurance was paid annually in advance there is a need to match this cost to the periods that it relates. The prepayments concept is part of the income matching or proit measurement concept used in accountancy. It involves the need to match an expense to the accounting time period more fully. 92

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The prepaid insurance cost is required to be more closely matched to the periods that it relates to in the P&L account, particularly if reforecasts are prepared on a monthly or quarterly basis. The treatment for accruals and prepayments will be discussed more fully in a later section of this book.

More output schedules The post-inancial close or operational inancial model is likely to have more output schedules than the inancial close model. These are likely to include the following: – the need to reforecast the inancial statements, ie, proit and loss, cash low and balance sheet, in the inancial close model format; – the need to present both the actuals and the reforecast in the inancial statements, ie, proit and loss, cash low and balance sheet, in the inancial close model format; – the need to present the actuals, budget (inancial close) and reforecast in the inancial statements, ie, proit and loss, cash low and balance sheet, in the internal management reporting format; – there may be the need to present a historic statement of the lenders’ ratios at each debt service period end; and – the need to reconcile the actual plus reforecast position to the inancial close total contract position for at a minimum for the cash low purposes and ideally for the P&L account also for the total contract. This should ideally be repeated for the total contract P&L account.

Alignment to the management reporting The inancial close model is not aligned to the internal management reporting basis and, for ongoing control purposes, it is better to restate both the budget (at inancial close) and the reforecast to the end of concession.

Used throughout the life of the contract As we are building a lexible and well-designed inancial model means that it has the beneit of use over the contract life. When it is irst built the model relects the contractual arrangements as they currently are; however, the post-inancial close model will be capable of being of updated for any change in the contract over the life.

Improved design, lexibility and use ability The adoption of best practice design standards, a protected workbook, protected sheets and clear user documentation make the post-inancial close model simple to update for actuals and for changing the reforecasts at any point in the future, providing we are working from actual quarter ends.

Can be used to aid contractual negotiations along the way Sensitivity analysis can be used to measure the impact on lenders’ ratios and shareholders’ returns on the contract. Where there is a potential risk to either the shareholder or the lender renegotiations or contract, restructuring may be required. 93

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Process for building a post-inancial close model The following process is required for building a post-inancial close model. The diagram in Illustration 50 outlines the desirable approach to building such a model. Illustration 50 Process for building a post-inancial close model Use the specified timeline

Use FC statement outputs

Use FC inputs

Use FC material calculations

Use FC lenders calculations Use lenders agreements

Use FC audit opinion letter

Reconcile FC model to post-FC model

Build additional output schedules

Reconcile total contract at FC v post-FC

Once reasonable, save version with FC inputs

Change reforecast inputs and update for actual – ongoing 94

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The irst step is to use the speciied timeline for the post-inancial close model. Basically, it is important to relect what is required; however, the usual timeline will vary from anything monthly for the irst 12–36 months, and quarterly or six-monthly thereafter. The initial monthly part for the purpose of the reforecast will be for internal management reporting requirements. The quarterly or six-monthly options thereafter will depend upon whether the SPC wishes to reforecast quarterly using its latest actual position, thus having a more timely reforecast process or, indeed, whether a six-monthly reforecast in line with the lenders’ debt servicing requirements is suficient. An important consideration when deciding whether to use a quarterly timeline is that it is often more dificult to compare to the inancial close model due to quarterly versus sixmonthly differences. If you wanted to compare six-months period you would have to sum the two quarters together although, due to having more detail between the six-monthly periods, this makes the comparison more cumbersome, although not impossible. The second step is to initially use the inancial close model inancial statement outputs – P&L account, cash low and balance sheet – for the purpose of building the post-inancial close model. The reason why we would use the inancial close formats is so that we can directly compare the results to the inancial close model. The third step will be to use the inancial close model inputs, which again helps us to directly compare the results to the inancial close model. The fourth step will be to use the basis of the material calculations from the inancial close model where logically acceptable, which again helps us to directly compare the results to the inancial close model. The next steps are to use the inancial close models lenders’ ratio basis, ensuring that this is in line with the lenders’ or facility agreement. It is very important to review the basis of the lenders’ ratios both in the inancial close model and in the agreements, as these represent a critical key output that may be subject to precise deinitions. It’s important to note that each bank and each lender, and indeed each transaction, may deine these ratios differently. If possible, you should use the inancial close models audit opinion letter to help identify the version and the scope of the audit, so that it can be used for helping to identify any differences in the post-inancial close results if necessary. The very fact that a inancial model has been audited doesn’t mean that you are building your post-inancial close model and comparing it to the audited inancial close model version. For completeness, the accurate version can be veriied against the opinion letter. Again, referring to the opinion letter will help you to assess if any qualiications have been made, and account for any of the differences arising from your comparison to the inancial close model. It could be that any review of the tax or accounting treatment in the model was excluded from the scope of the audit, which could be a logical reason for some of the differences from the inancial close model. Next, reconcile the outputs of the inancial close model to the reforecast model “postinancial close model”. In terms of the reforecast outputs generated from the post-inancial close model, it’s recommended that these are compared to the forecasts from the same date in the inancial close model for both the P&L account and the cash low in the inancial close model format from the reforecast date until end of the concession. Differences in each line should be commented upon.

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The actual balance sheet used for the starting point in the post-inancial close model should be compared to the balance sheet at the same date in the inancial close model. Any material differences should be noted and taken into account when projections are made for the P&L account and cash low over the life of the contract. A comparison of the lenders’ ratios and shareholders’ returns should be reviewed and compared between the inancial close model and the post-inancial close model. The next logical step after building the reforecast logic from a starting point and matching it to the inancial close model, would be to build the additional output schedules. These include the need to present both the actuals and the reforecast in the inancial statements, ie, proit and loss, cash low and balance sheet, in the inancial close model format. Second, there is the need to present the actuals, budget (inancial close) and reforecast in the inancial statements, ie, proit and loss, cash low and balance sheet, in the internal management reporting format. Third, there may be the need to present a historic statement of the lenders’ ratios at each debt service period end. Fourth, there is the need to reconcile the actual plus reforecast position to the inancial close total contract position for, at a minimum, the cash low and, ideally, for the P&L account and the total contract. Illustration 51 (see Illustration 51.xls) shows an example of this. A further step at both the model build stage and any update stage would be to reconcile the total contract reforecast to the total contract at inancial close. Indeed, it is best to be able to know that the projections are materially accurate over the life of the contract. Once the outputs look reasonable based upon the inancial close inputs, it’s recommended that you save the inancial model version. This may be useful as a reference document if an external audit opinion is required for lenders’ purposes at a later date. It demonstrates a diligent approach in terms of the development of your post-inancial close model. You should then change the forecast inputs and update for actual on an ongoing basis. Once you are happy that your inancial close model is giving you materially accurate results you can use it on an ongoing basis. It’s time to change the input assumptions and update the actual as required.

The post-inancial close (operating model) The process for building the operating model which is primarily used for both lenders and shareholders, and as an output to the management reporting model, is outlined below – with necessary examples and exercises that build up to your completed draft model on a moduleby-module basis.

Actual inputs and actual logic As outlined earlier, an important part of post-inancial close inancial modelling is the ability to integrate the actual accounting position with the ongoing reforecast over the life of the concession. There is the requirement to design the input and calculation areas to facilitate the accurate integration of the actual management accounting over the life of the concession. I shall walk you through the process for building this part of the logic with reference to Illustration 52 (see Illustration 52.xls). 96

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First, the special purpose company’s management reporting formats should be set up as inputs as per the yellow sheets with the worksheet tab names P&L – actual, cash low – actual and balance sheet – actual. These represent the inancial statements on a month-by-month basis from the start date of the SPC. These can usually be imported through a simple cut and paste from the management reporting pack. The timeline used should be monthly from the start of the concession. We see here the use of eomonth formula in Excel, which is useful for ensuring the timeline has a certain deined interval – in this case, a month. Looking at the P&L – actual sheet, we can see that columns C and D deine the allocation of the management reporting for both the inancial close outputs and the management reporting outputs. During the course of the post-inancial close model build we will be using Excel’s drop-down box facility for the purpose of reclassifying the outputs into different required output formats as necessary. This appears to be the most appropriate stage to outline how to do this. A drop-down box for each cell is simply achieved by using the data and then the validation menu, and then selecting the range of labels. In rows 6–8 you can see the set-up of important labels that are used later in the inancial model for accessing the year to date, full year and contract to date. For both the year to date and the full year, the following function is used: =IF(YEAR(G$3)=YEAR(Actuals_Balance_Sheet_Date),”YTD”,””) This simply checks whether the year on the timeline is equal to year of the actual balance sheet date, if it is then the year to date or full year lag is used. =IF(YEAR(G$3)