Work Methodology

Development of Financial Model:

In the Engineering Survey & Design and Technical feasibility phase our technical partner will do the
necessary work regarding surveys and investigation, we will obtain the relevant data from them, discuss
the constraint relating to the costs estimated, and provide our feedback.

Financial modeling is the task of building an abstract representation (a model) of a financial decision-
making situation. This is a mathematical model designed to represent a simplified version of the
performance of a project over its life with a testing the limits by applying various sensitivities. The core
objectives of this financial model will be to examine the financial and economic impacts of project.

Sensitivity analysis can also help in a variety of other circumstances, which can be handled by the
settings illustrated below.

 To identify critical assumptions or compare alternative model structures

 Other Variables
All the variables associated with the development of a financial model, will be identified upon reviewing
the technical surveys. Based on the above financial model and information a financial and commercial
feasibility report shall be prepared which will include the overall costs and returns over the life of
project.

To assess the financial viability, we will also aim to follow certain Valuation Techniques such as Internal
Rate of Return (IRR), Payback Period and Adjusted Present Value (APV).

In the financial viability assessment phase, we will obtain the finalized cost estimates related to the
construction, revenues, O&M details etc. for the project. We will then Design and develop the financial
Model using the cost estimates provided by the technical partners and incorporate those cost estimates
in the model for further detailed analyses. The pivotal objective of the financing model is to assist for
sound decision making, for that matter the interactive projection model with an ample level of
customization will be build which helps in making permutations and combinations using various aspects.

The model will have the degree of automation appropriate to its intended use, including user-interactive
point-and-click features. Once the financial model is developed and set live we will conduct a series of
sensitivity analysis and conduct comprehensive scenario modeling to check the financial viability of the
transaction because its pivotal to determine whether or not the project will be able to generate enough
cash from its operations over a certain time period to pay for (a) all of its operating costs; (b) debt
service (if any), that is, repayment of loan principal and interest charges and fees; (c) capital
expenditures that will be needed on an ongoing basis once the facility begins operating; and (d)
dividends and other forms of return on equity.

Once the model is built, variables are defined, and analyses we will conduct PPP options analysis in
which we are going to plan a viable transaction structure. A detailed risk metrics will be developed to
analyze all the direct and indirect risks associated with the project. PPP options will be measured and
analyzed to see their impact and the value for money analyses will be prepared after that the PPP
options will be finalized.

The financial model would depict the following information:

 Development costs and their phasing plan.

 Potential revenues & its analysis.
 Operating expenses.
 Working capital requirements.
 Senior & sub-ordinate Debt Modeling.
 PPP Options Analysis.
 Value for Money Analysis.
 Financial analysis (IRR, Payback, NPV).
 Scenario Modeling.
 Sensitivity Analysis to assess key risk areas.

Preparation of cost estimates for allied facilities and ancillary works

Based on the review reports and survey results prepared by the consortium, we will develop
comprehensive financial models. The financial model will cover the following.

 Preliminary cost estimates. Preliminary operation & maintenance cost estimates over the
concession period.
 Expected revenues.
 Based on preliminary transaction structure, funding requirements and mode of financing.
 Cash flow analyses and project returns from the investor/ developer point of view.
 The financial model will be robust, transparent, and flexible, user friendly and capable of
running designated sensitivities with respect to key assumptions and variables.
We will also determine the requirements of allied facilities and ancillary works based on schematic
designs prepared with the help of our surveys and technological assessment. Client approval will be
obtained on schematic designs and their requirements.

According to the timeline presented in the Work plan, Financial Viability assessment report will be
submitted to the client after review of steering committee. The contents of the report will include:

 Financial model covering estimated costs and revenues, capital projection for the
prospective investor by considering the survey reports from all the experts in the
consortium.
 Assumptions used in calculations and projections
PPP Option Analysis
Overview of PPP Option Analysis
There is no single, universally accepted definition of Public-Private-Partnerships. Unfortunately, PPP
often means different things to different people, which can make assessing and comparing international
experience difficult at times.

In general, however, Public-Private-Partnerships refer to forms of cooperation between public

authorities and the private sector, which aim to ensure the financing, construction, renovation,
management, operation and/or maintenance of an infrastructure and/or the provision of a service.

At their core, all Public-Private-Partnerships involve some form of risk sharing between the public and
private sector in the provision of an infrastructure or service. The allocation of risk to the private partner
is the key determinant in distinguishing between PPP and the more traditional, public-sector model of
public service delivery.

There are two basic forms of Public-Private-Partnerships: contractual PPP and institutional PPP.
Although institutional PPP have been quite successful in some circumstances, particularly in countries
with well-developed institutional and regulatory capacity; contractual PPP are by far the more common
methodology, especially in developing economies.

In general, PPP offer a new and dynamic approach to managing risk in the delivery of infrastructure and
services.

PPP range of options

As mentioned previously, there are wide-ranging definitions of PPP across the world, but public-private-
partnerships fall somewhere in between the traditional public sector model of public service delivery
and full privatization. Within this range, however, there are an infinite number of potential PPP
transaction structures, which can be employed, depending on the public sector’s objectives and needs.

The decision as to the specific transaction design will depend on which risks, and responsibilities remain
with public authorities, and which are to be transferred to the private partner.

As one moves across the spectrum of contracting options, from traditional public works and service
contracts towards divestitures and privatizations, private sector risks and responsibilities increase.

For instance, with management contracts, public authorities retain ownership and investment
responsibilities, but transfer management and operations to the private partner. Further along the
spectrum, with concessions, Build-Operate-Transfer schemes (including BTO, BOOT, DBFO, PFI, etc.), and
long-term lease arrangements, public authorities retain ownership of infrastructure, but transfer both
investment and operations/management responsibility to the private partner. With BOO and
divestitures, the ownership, operations and investment responsibilities are all transferred to the private
partner, while the public sector only retains responsibility for regulation and strategic sector planning. In
other words, different PPP contract modalities reflect distinct distributions of risk and responsibility.

PPP Risk-Reward Curve and Compensation Models

Given that public-private-partnerships allocate certain risks to the private partner, the private entity
must be compensated for assuming these risks. Generally speaking, the greater the risk, the greater the
required return.

In PPP arrangements, the private partner is typically compensated through either:

 User-based payments (i.e., toll roads, airport charges, Processing Charges etc.).
 Availability Payments from the public authority (i.e., PFI, PPA, WPA, etc.); or
 Hybrid - A combination of the above.
Often in the case of user-based payment structures, the government or public authority will need to
provide some financial support to the project in order to mitigate specific risks, such as demand risk, or
to ensure that full cost recovery is compatible with affordability criteria and the public’s ability to pay.
Government support mechanisms can take many different forms, such as contributions, investments,
guarantees and subsidies, but should be carefully designed and implemented to ensure an optimal risk
allocation between the public and private sectors. When government supports are present, the
objective is to maximize private capital mobilization per unit of public sector contribution.

In infrastructure PPP, service providers are paid to deliver a particular level of service (not inputs). In
other words, payments are contingent upon the private service provider delivering services to an agreed
performance standard. Indeed, the essence of PPP is, “No Delivery, No Payment”.

Availability payments are at the heart of one form of PPP, the Private Finance Initiative (PFI) model. PFI
is a system for providing capital assets for the provision of public services. Born in the U.K., this model is
used for many infrastructure projects and provides the private sector with strong incentives to deliver
infrastructure and services on time and within budget, while simultaneously allowing governments and
public authorities to spread the cost of this public infrastructure projects over a long (20-30 year) period.
This creates greater budget certainty, while also liberating scarce public resources for other socially
priorities.

Possible PPP options and their impact on the project

Based on the scoping exercise, different PPP options will be suggested for the Project by the consortium
after encompassing the input from the legal team. The options will provide basic components of a few
different types of PPP formats/ structure such as management contract, service contract, lease,
concessions, etc., along with the responsibility shared between private and public entities. For the
benefit of the Client, the consortium will develop a matrix of PPP options for some scenarios that may
typically be encountered during the assessment exercise. Each scenario will have a unique set of
features. For each scenario, a suitable PPP structure/ format will be suggested by keeping in mind each
scenarios’ impact on the financial and commercial viability of the project, financial model and
transaction structure.

We shall evaluate each option and choose the best option that will be most beneficial in terms of costs
as well as revenues and will be profitable for investors.

Value for Money (VfM) analysis based on public sector comparator model
Value for money means that the provision of an institutional function by a private party result in a net
benefit to the institution, defined in terms of cost, price, quality, quantity, or risk transfer, or a
combination of these. As a preliminary analysis of affordability, the risk-adjusted PSC model is
compared with the Client’s budget. The consortium will demonstrate if the Project can provide value if it
is procured and implemented under the PPP methodology Value for money analyses will also benefit the
GoS in

assessing the costs, price, quality risk transfer or a combination thereof. We shall prepare a value for
money for both public and private parties.

Identification of possible Government support

Contracting Authorities / Government can provide financial support to or reduce the financial risk of a
project in many ways. Although projects should necessarily be self-sustainable however in general
forms, some common forms of government support include the following:

Cash subsidy
The government or public authority agrees to provide a cash subsidy to a project. It can be a total lump
sum or a fixed amount on a per unit basis, and payments can be made either in installments or all at
once.

Payment Guarantee
 The government agrees to fulfill the obligations of a purchaser (typically a publicly-owned-
enterprise) with respect to the private entity in the case of non-performance by the
purchaser. The most common example of this is when a government guarantees the fixed
 payment of an off-take agreement (e.g., Power Purchase Agreement (PPA), Water Purchase
Agreement (WPA)) between a private entity and the publicly owned enterprise.
 Debt Guarantee
 The government secures the borrowings of a private entity. That is, a government
guarantees repayment to creditors in the case of a default by a private entity.

Revenue Guarantee
 The government sets a minimum variable income for the private partner; typically, this
income is from user fee payments by end-use customers. This form of guarantee is most
common in roads with minimum revenue set by government.
How a government contributes, financial support to a concession project and how much it contributes
are often limited to what is required to attract private financing and promote the success of the project.

We shall evaluate the assistance of Government required and in what areas e.g., security, provision of
utilities and changes in law etc.

Identification and development of Project risks.

A set of annotated risk allocation matrices for public-private partnership (PPP) transactions is very
important as risk allocation is at the center of every PPP transaction, and a deep understanding of the
risk allocation arrangements is a precondition to the drafting of every PPP agreement. The appropriate
application of risk allocation principles is what determines whether a given PPP project will be
‘bankable’ (i.e., financeable), and whether it will be long lasting (i.e., able to remain viable though to the
end of a long-term contract).

We will devise a comprehensive risk matrix covering but not limited to the below stated risks.

 Technological Specification Risk

 Completion Risk
 Cost Over-run Risk
 Design Risk
 Environmental Risk
 Business Risk
 Force Majeure Risk
 Inflation Risk
 Maintenance Risk
 Demand Risk
 Political Risk
 The risk that the Project Assets at termination or expiry of Concession Agreement will not
be in the prescribed condition.
 Utilities risk
 Tax rate change risk
 Provision of assistance in the preparation of the PPP Options Analysis from the legal team,
which shall include the following tasks:
 Provision of assistance to the Financial Advisor and Technical Advisor in identifying potential
risks associated with the Project.
 Preparation of a risk matrix and provision of advice in relation to equitable risk allocation.
 Provision of advice regarding potential solutions for mitigation of risks in order to meet the
objectives of the Procuring Agency in relation to the Project.
 Provision of advice regarding the structuring of the Project in light of the legal framework
applicable to the Project, and the technical and financial input received from the Technical
Consultant and the Financial Consultant.

Prepare a viable transaction structure for implementation of the Project

A proposed structure of the project will be devised demonstrating the relationship between the Client,
Private Party SPV to be established, lenders, shareholders, suppliers, subcontractors, and other
stakeholders. This planned project structure must incorporate the funding structure, appropriate equity
returns, and the costs and key terms of debt funding (including for instance, debt service cover ratios if
applicable). All assumptions must be clearly stated, as these will directly affect the cost of capital for the
project. In particular, the following must be developed:

 Legal / financial structures and identification of various participants.

 Ratios such as Annual Debt Service Cover Ratio and Loan Life Cover Ratio.
 Financial Internal Rate of Return.
Based on the feasibilities carried out above, different options for structuring the transaction will be
explored. Profitability analysis for the perspective investor shall also be computed and considering the
project requirements, transaction structure will be finalized for implementation of the project.

Marketing
The market and communication strategy will be developed keeping in view the interest of potential
investors and project stakeholders. Through this strategy, demand for the project will be created by
seeking investors’ interests. The key areas for the strategy will be:

 Preparation of information material about the project.

 Dissemination of feasibility study covering legal, financial, and technical viability assessment
reports.
 Assist government in preparation of departmental advertisement through media.
 Assistance will be provided to client to establish data room and Information Kiosks (IK).
 Assist the government in arranging Road shows for the Project.