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New or restructured healthcare infrastructures are a typical risky investment, which can be
financed in many different and competing ways. Public Private Partnership and project financing
techniques are increasingly recognized as a useful and appropriate device.
Risk identification, transfer, sharing and management are a key point of the whole structure and
the risk matrix, used in order to classify and - wherever possible - measure risk is an unavoidable
part of the package. To the extent that it can be professionally managed by specialized agents,
risk sharing or transmission is not a zero sum game, even if fairly pricing risk is never a trivial
issue.
While the public part traditionally bears core market risk (demand for health services), other key
risks, such as those related to construction and management of commercial (hot) activities, are
typically transferred to the private part, often represented by a SPV.
An analysis of the SPV's governance peculiarities helps to understand why milder information
asymmetries and softer conflicts of interest can allow for higher even if unsecured leverage.
An original link between financial and operating risk is proposed in this paper, together with an
analytical description of the main kinds of risk.
1. INTRODUCTION
Health project finance (PF) is the financing of long-term hospital social infrastructures based
upon a complex financial structure where project debt and equity are used to finance the project,
rather than to reward project sponsors.
Usually, a project financing structure involves a number of equity investors, known as sponsors,
as well as a syndicate of banks that provide loans to the operation. The loans are most
commonly non-recourse, paid entirely from project cash flow, rather than from the general
assets or creditworthiness of the project sponsors.
1
Previous editions: June 10th, 2009 and May 22nd, 2010.
roberto.morovisconti@morovisconti.it 1
Generally, a Special Purpose Vehicle (SPV) is a legally independent project company created
for each project by the concessionaire, thereby shielding other assets owned by its sponsors from
the detrimental effects of a project failure. As a SPV, the project company has no assets other
than the project and in public healthcare investments; typically the property of the hospital is
transferred to the public commissioner since the beginning. Capital contribution commitments
(limited recourse) by the owners of the project company are sometimes necessary to ensure that
the project is financially sound. No recourse, no personal risk for the SPV shareholders.
Project finance is typically more complicated than alternative financing methods.
Risk transfer and sharing from the public to the private part is a key element in project finance: a
principal / agent optimal risk allocation and co-parenting are the core philosophy of project
finance. Risk transfer is deeply involved with the allocation of risks associated with the
operation of a PFI contract according to the principle that it should lie with the party best able to
manage it.
Value for Money2 for the public part has to take into account not only an economic and financial
comparison with alternative financial packages and instruments, but also parameters such as3:
project efficiency (optimal use of assets facilities during the concession life ) and
(financial and economic) sustainability;
multi-benefit considerations (level of tangible and intangible social benefits to the end
users and the collectivity brought by the new hospital );
effective risk transfers to the private counterpart (considering, in particular, the real value
of the construction risk transfer, often underestimated).
Within the healthcare sector, considering investments in new hospitals, "cold" projects, where
revenues and demand for services mainly depend on the public part, are predominant, since
"hot" revenues for the private part are mainly represented by commercial activities related to the
core investment (parking; restaurants, shops around or within the hospital). The hotter the
projects, the higher the transmission of core demand risk to the private part. Hot revenues are
typically discounted at higher risk rates by the financing banks of the private counterpart, even if
these revenues are more flexible than cold ones and may allow for extra gains, this being the
benign scenario represented by upside risk (i.e., the statistical probability that revenues may be
higher than expected).
This paper covers with unprecedented analysis the main aspects of the risk matrix, identifying
the following main categories:
2
See http://www.hm-treasury.gov.uk/d/vfm_assessmentguidance061006opt.pdf.
As ROBINSON, SCOTT (2009) point out, "value for money" in a PFI project crucially depends on performance
monitoring to provide incentives for improvement and to ensure that service delivery is in accordance with the
output specification. However, the effectiveness of performance monitoring and output specification cannot be fully
assessed until PFI projects become operational. There is a need to examine the role of the performance monitoring
mechanism in ensuring that "value for money" is achieved throughout the delivery of services.
3
See LI, AKINTAYE, HARDCASTLE (2001).
roberto.morovisconti@morovisconti.it 2
Risk can take shape in many different forms, as seen above, but a synthetic consideration may
be focused on "ultimate" risk for the public or the private part (which is the worst event that can
happen?). Apart from force majeure considerations4, the ultimate risk may tentatively be
considered the following:
for the public part, risk that the hospital doesn't properly work, not being functional to
the changing needs of the patients, and that these inefficiencies bring extra costs and
delays; a correct assessment of the responsibilities of the project financing instrument is
however necessary, since malfunctioning would probably be present even choosing other
financing models and core (health) market risk is typically not included in the project
financing package;
for the private SPV and its shareholders, risk that the whole investment, across its (long)
life, is not profitable, eroding the forecast NPV or yielding insufficient financial returns;
for the lending institutions, risk that debt (principal and interests) is not timely and
properly paid back.
For each risk, the table in appendix 1, which constitutes a core part of the paper, gives an
explanation, following a well know structure:
part bearing risk: wherever it is indicated that the risk is private (public) or borne by the
lending institution, it should be noted that in reality the risk is in many cases at least
partially shared, because if one party is consistently disadvantaged, the whole project
might be affected and the counterpart could be exposed to abandonment, delay, extra-
costs or other problems;
description of the risk;
consequences for the risk bearing part (if the risk is mainly shared, as it happens in many
cases, then the impact might well be asymmetric);
mitigation measures, with useful hints for the risk bearing part, sometimes referring to
the bilateral relationship public-versus-private, while in other cases related parties,
mostly represented by the stakeholders which turn around the project and in particular
which have contractual links with the private part bear a substantial portion of risk (e.g.,
banks who finance the SPV; suppliers of goods and services ).
The above mentioned taxonomies are based on some simplifications and may flexibly be
extended to different contexts: for example, in this paper an omni comprehensive model of SPV
is considered, performing all the main business activities of the project financing investment
scheme (project, build, finance, operate and transfer), according to the PBOT scheme which can
be replaced by many other variants, following a well known "Alphabet soup" - a metaphor for
an abundance of abbreviations or acronyms:
BDOT Build-Design-Operate-Transfer
BLT Build-Lease-Transfer
BOO Build-Own-Operate
BOOS Build-Own-Operate-Sell
BOOT Build-Own-Operate-Transfer
BOT Build-Own-Transfer
BTO Build-Transfer-Operate
BRT Build-Rent-Transfer
4
See the annexed table, within the macroeconomic - systemic risk part.
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THE RISK MATRIX OF PROJECT FINANCE IN THE HEALTHCARE SECTOR
The SPV activity may well be divided in different companies, each performing a single task
(building, management, supply of technical services ): considering just one SPV makes the
model simpler and reduces the counterpart risk of the public part, to the extent that it has just
one interlocutor; competition among different private bidders takes place during the tender, but
then the game is over and the wedding between the public and the private part is celebrated,
with few and painful divorce possibilities till the expiration of the concession. It shouldn't be
forgotten that each SPV is unique, with long term responsibilities and legal liabilities; as a
consequence, even if many basic rules and best practices of project financing are increasingly
standardized, each investment has its intrinsically risky peculiarities.
Hospital investments are capital intensive projects with a cash flow timing mismatch for the
SPV, for which the construction period is riskier. Not uniform risk distribution across the life
span of the project is so another hot issue. Although procedural risk is a major source of
problems and uncertainties, this paper will hardly deal with the topic, being focused on the SPV,
which starts functioning when the tender is over and the winner is chosen.
Contract design is crucial in setting reciprocal rewards and obligations.
The perimeter of the project finance investment is a core issue, typically designed by the public
proponent and sometimes agreed upon and contracted with the private counterparts, especially
for what concerns no-core issues, concerning hot commercial revenues.
The investment perimeter plays a fundamental part in shaping the investments overall risk,
defining its contractual boundaries, with deep financial implications.
In PBOT schemes, being the design of the overall investment a key competence of the private
bidder, albeit respecting the desires and musts of the public part, the perimeter is less clear cut
and so is the consequential project risk.
Experience teaches that restructuring is much more slippery and risky than mere building of
brand new hospitals from scratch, since in the former case facilities and plants have to be
adapted and synchronized, patients to be taken care with kindness and respect - have to be
moved from old to new locations possibly when the latter are completed and overall
coordination typically proves an uphill task.
Clear cut identification of all the input data is far from being an easy task for the public
proponent and vagueness or indeterminateness are a typical corollary of hard-to-make choices,
which sometimes may be beneficial for the private counterpart, leaving her more room for
flexible contracting and sometimes .. gambling, whereas the public part may sooner or later
discover unthinkable problems, difficult to be addressed whenever not carefully anticipated.
As an example of difficult input data, estimate of square meters (to restructure, build, clean up,
heat ) is a key but uneasy parameter to measure, often generating confusion and questioning.
If basic layout input data are necessary to make the investment boundary clear, excessive details
are likely to suffocate entrepreneurial freedom of the private participants, which stands within
the core philosophical issue of project financing.
Construction and management risk are different but consequential aspects to be assessed by
private bidders, both depending on the investments perimeter.
Another slippery albeit frequent issue concerns conversion costs from acute patients to long-
term care guests, in order to modernize and restructure existing facilities, concentrating acute
treatment in bigger excellence centres (where economies of scale and experience are likelier)
and strengthening the network system across the territory; computerization of medical data can
greatly help the coordination between hub hospitals and their satellites; flexible options of
conversion are greatly helpful and should conveniently be enclosed in PF programs, shaping
new investments in order to properly consider the healthcare trends.
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THE RISK MATRIX OF PROJECT FINANCE IN THE HEALTHCARE SECTOR
Risk is a concept that identifies and possibly measures the expected probability of specific
eventualities. Technically, the notion of risk is independent from the notion of value and, as
such, eventualities may have both beneficial (upside risk) and adverse (downside risk)
consequences. Lenders intrinsically have particular downside sensitivity.
However, in general usage the convention is to focus only on potential negative impact to some
characteristic of value that may arise from a future event.
Risk can conveniently be measured if compared to the desired outcome for the public part,
mainly identifiable in output (contractually) based specification and consequently to the
probability that the effective ex post outcome is different (lower) than the envisaged one. Pricing
risk is often more difficult than expected and unforeseen events are an additional and by
definition unpredictable source of risk
risk (2 revenues)
upside
risk
project revenues
cold hot
(safer) (riskier)
revenues revenues
downside
risk
Even if many of the risks of a project financing scheme are similar to those of a standard long
term investment with multiple stakeholders pivoting around it, some characteristics are typical
of the peculiar PF structure, such as risk segregation of the SPVs shareholders, due to the ring
fence and no (little) recourse finance; the very fact that the property of the hospital belongs
from the beginning to the public entity increases the no-recourse paradigm, since creditors of the
SPV are unable to grasp neither the personal assets of the SPVs shareholders (ring fence
protection) nor the real estate property, built using the money that mainly privileged debt
holders have lent to the SPV.
The main risks can interact within the risk matrix, with many possible outcomes often difficult
to model and forecast; in many cases, the interaction follows a sort of shangai model, according
to which each stick can randomly hit the others, causing a chain effect with unforeseen results.
The impact of risk on the public or the private part (represented by the SPV and its stakeholders)
is highly asymmetric and while some risks are shared (e.g., bad project design; contractual risk;
force majeure; inflation ), most of them are borne either by the public part (first of all, the
demand for health services) or by the private SPV (construction risk; bankability and liquidity
).
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THE RISK MATRIX OF PROJECT FINANCE IN THE HEALTHCARE SECTOR
The very fact that the healthcare business has little seasonality since patients unfortunately get
ill at any time contributes to decrease the intrinsic volatility of cash flows, which are anyway
mediated by the long time span of the investment.
To the extent that the SPV transfers its risk to its shareholders and, in a broader sense,
stakeholders, there can be a mitigation effect, not only as a consequence of the intrinsic
diversification and spreading, but also because professional stakeholders might undertake the
specific risk that they can conveniently handle; for example, a construction company can
undertake the building risk, while a financial shareholder can monitor the cash flow statements
and a professional manager the operations during the management phase; pass through (back to
back) agreements, according to which the SPV delegates and contracts out some functions (e.g.,
laundry; surveillance ), are highly frequent and can bring to substantial risk transfers, leaving
few if any residual risks within the SPV - good news for its lenders, not so for the lenders of the
sub-contractors, even if risk is both diversified and reduced, to the extent that is professionally
managed.
If the transfer of risks follows a sophisticated number of passages, then complexity can itself
become a risky problem, hiding information asymmetries and difficulties of coordination and
problem detection.
Project finance investments are frequently perceived by the private part as mildly less risky than
other long term investments5, especially if they are mainly driven by expected predominant cold
revenues and as a consequence EBIT volatility is lower than in other businesses; this is due to
the fact that the main market risk - demand for health services from the patients - is typically
borne by the public part.
This somewhat milder risk can be appreciated if the typical business model of a construction
company is considered: if such a company following its standard business model builds real
estate properties, then every 2-4 years its backlog of orders has to be renovated, at the current
market situation; if the portfolio is not sufficiently wide and diversified, then the company can
get stuck in difficult years. In a long term project financing, on the other side, the portfolio of
the management activity is less volatile across the concession period, with a forecast of more
stable cash flows.
Interactions between different risk factors can take place and be identified using either
sensitivity analyses6, changing one parameter at a time (e.g., impact of a decrease in the
availability payment7 on the overall economic and financial plan, from sustainability to
bankability and profitability ) or more complex what-if scenario analyses, where different
parameters change simultaneously, producing possible future events by considering alternative
outcomes8.
5
In project finance longer maturity loans are not necessarily perceived by lenders as being riskier than shorter-term
credits. This contrasts with other types of debt, where credit risk is found instead to increase with maturity ceteris
paribus. We emphasize a number of peculiar features of project finance structures that might underlie this finding,
such as high leverage, non-recourse debt, long-term political risk guarantees and the timing of project cash
flows. See SORGE, GADANECZ (2004)
6
Sensitivity analysis is a means of gauging the impact of individual risks on a financing. Key risks can occur in
three time periods: - Feasibility, engineering and construction phase; - Start up phase (usually through completion);
- Operating phase (post completion).
7
Payments to cover construction, building maintenance, lifecycle repair and renewal and project financing should
conveniently be made on an availability and performance basis, so as to stimulate the concessionaire to maintain a
high quality profile along all the useful life of the project.
8
Given the uncertainty inherent in project forecasting and valuation, analysts will wish to assess the sensitivity of
project NPV to the various inputs (i.e. assumptions) to the Discounted Cash Flow (DCF) model. In a typical
sensitivity analysis the analyst will vary one key factor while holding all other inputs constant, ceteris paribus. The
sensitivity of NPV to a change in that factor is then observed (calculated as NPV / factor). For example, the
analyst will set annual revenue growth rates at 5% for "Worst Case", 10% for "Likely Case" and 25% for "Best
Case" and produce three corresponding NPVs. Using a related technique, analysts may also run scenario based
forecasts so as to observe the value of the project under various outcomes. Under this technique, a scenario
comprises a particular outcome for economy-wide, "global" factors (exchange rates, commodity prices, etc...) as
roberto.morovisconti@morovisconti.it 6
THE RISK MATRIX OF PROJECT FINANCE IN THE HEALTHCARE SECTOR
Risk mitigation is a key issue that makes everybody happy, both from the public and the private
side; the problem is that it is much easier to say than to do; among the main devices, the
following are the most used and effective:
specialization of the agent (public or private) which professionally deals with a specific
risk;
risk sharing among different subjects (e.g., multiple shareholders of the SPV);
insurance, somewhat expensive and in many cases not possible (examples include
construction risk but not market risks, traditionally not insurable);
putting quality first; a good construction, maintenance and management can substantially
decrease risks and related costs.
The weighted average cost of capital (WACC) is the rate that a company is expected to pay to
finance its assets. WACC is the minimum return that a company must earn on existing assets to
satisfy its creditors, owners, and other providers of sources of capital, consisting of a calculation
of a firm's cost of capital in which each category of capital is proportionately weighted.
All else being equal, the WACC of a firm increases as the beta ()9 and rate of return on equity
increases, as an increase in WACC notes a decrease in valuation10 and a higher risk.
In an ideal situation where the average equity = 1 and the riskless debt approaches 0, considering a
possible weighting where the ratio equity versus debt is 20 : 8011, the assets is the following:
well as for company-specific factors (revenue growth rates, unit costs, etc...). Here, extending the example above,
key inputs in addition to growth are also adjusted, and NPV is calculated for the various scenarios. Analysts then
plot these results to produce a "value-surface" (or even a "value-space"), where NPV is a function of several
variables. Another application of this methodology is to determine an "unbiased NPV", where management
determines a (subjective) probability for each scenario the NPV for the project is then the probability-weighted
average of the various scenarios. Note that for scenario based analysis, the various combinations of inputs must be
internally consistent, whereas for the sensitivity approach these need not be so. A further advancement is to
construct stochastic or probabilistic financial models as opposed to the traditional static and deterministic models
as above. For this purpose, the most common method is to use Monte Carlo simulation to analyze the projects
NPV. Using simulation, the cash flow components that are (heavily) impacted by uncertainty are simulated,
mathematically reflecting their "random characteristics". In contrast to the scenario approach above, the simulation
produces several thousand trials (i.e. random but possible outcomes) and the output is a histogram of project NPV.
The average NPV of the potential investment as well as its volatility and other sensitivities is then observed.
This histogram provides information not visible from the static DCF: for example, it allows for an estimate of the
probability that a project has a net present value greater than zero (or any other value).
See http://en.wikipedia.org/wiki/Corporate_finance#Valuing_flexibility.
9
represents sensitivity of the assets changes to a changing market value.
10
Operating cash flows discounted at higher WACC value are automatically reduced.
11
This ratio is decreasing after the credit crunch following the recession of 2008-2009 to lower debt levels.
roberto.morovisconti@morovisconti.it 7
THE RISK MATRIX OF PROJECT FINANCE IN THE HEALTHCARE SECTOR
equity = 1
assets 1 * 20% +
0 * 80% 0,2
debt > 0
From the assets' risk structure (volatility) we derive hints about the convenience of issuing
convertible debt; while the risk is typically quite low within a PF healthcare initiative, hybrid
debt is rather uncommon, since subordinated debt is already considered as quasi equity and the
SPVs shareholders typically do not need or require any further equity kicker to increase their
stake.
In the real world, equity, including quasi equity subordinated debt, is slightly below average
unity, ranging at about 0,9, while debt, essentially represented by senior debt, is higher then zero
- being risky - but lower then the cost of equity. So the SPV representation may be the
following:
Cost of
shareholders's
equity 0,9* capital collection
Operating
Risk, linked to assets 0,9 * 20%
Cost of debt,
operating cash flows + 0,75 * 80% 0,78 linked to
debt 0,75 bankability
*Capital is slightly riskier then subordinated debt, since dividends can be paid out only after many years of
management, when retained earnings are consistent enough and have an adequate cash coverage (Free Cash Flow to
Equity), whereas interests on subordinated loans may be cashed out earlier by the same equity-subordinated debt
holders. And since senior debt commands a priority over subordinated debt in repayment of both interests and
principal, its market price is slightly lower (by some 50 basis point ). so a tentative can be estimated at around
0,7 - 0,8.
Market value of the firm's equity and debt is difficult to assess if the SPV is not listed - this
being the standard case. Should this be the case, value of equity may consider as a proxy market
capitalization, while value of debt could be represented by listed bonds; in standard SPVs,
capital markets benchmarks can be conveniently used only in countries or industries where there
is a significant number of listed and comparable companies. The very fact that each project is
unique represents an obstacle to comparisons.
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THE RISK MATRIX OF PROJECT FINANCE IN THE HEALTHCARE SECTOR
In most developed financial markets, the presence of sophisticated institutional investors can
ease the start of a secondary market for debt and equity, and in such a case pricing becomes an
unavoidable - but precious - issue.
The WACC is a key parameter in project financing, strongly connected with other key financial
ratios, as we can see in table 1.
The WACC level can be a very rough measure of the risks effectively transferred from the
public to the private part. And the financial structure of the SPV (initial and subsequent, along
the whole life of the project) is another complementary indicator of the risk borne by the private
part, up to the limit (absolute and relative debt, measured by leverage) accepted by financial
sponsor.
A leverage simulation with a break even point (floor) / disaster case scenario may be helpful
in detecting which is the maximum bearable debt.
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THE RISK MATRIX OF PROJECT FINANCE IN THE HEALTHCARE SECTOR
E Df
WACC = k e + k d (1 t )
Df + E Df + E
Where:
WACC ------------
Df = Financial debts
E = Equity
Ke = Cost of equity
Kd = Cost of debt
t = Corporate tax rate
If WACC > IRRproject, NPVproject < 0; then it's possible
that CF0 (which strongly depends on the cost of
n
collected capital) > CFO n
t =1 (1 + IRR project ) t
CFO 1 CFO 2 CFO n
NPVproject = + + ... + CF0 = 0 If WACC = IRRproject, NPVproject = 0 and
IRR project 1 + IRR project (1 + IRR project ) 2 (1 + IRR project ) n n
CF0 = CFO n
where:
t =1 (1 + IRR project ) t
CFO = Operating Cash Flow
CF0= initial investment
If WACC < IRRproject, NPVproject > 0 and
n
CF0 < CFO n
t =1 (1 + IRR project ) t
If WACC > IRRequity, NPVequity < 0; then it's possible
that CF0 (which strongly depends on the cost of
n
collected capital) > CFN n
CFN 1 CFN 2 CFN n t =1 (1 + IRR equity ) t
NPVequity = + + ... + CF0 = 0
IRR equity 1 + IRR equity (1 + IRR equity ) 2 (1 + IRR equity ) n
If WACC = IRRequity, NPVequity = 0 and
where: n
CFN = Net Cash Flow CF0 = CFN n
CF0= Initial investment t =1 (1 + IRR equity ) t
n
CFO t If Kd or Ke grow, WACC increases; NPVproject
NPVproject = CF0 decreases.
t =1 (1 + WACC) t
NPV project
where:
CFO = Operating Cash Flow If Kd or Ke reduce, WACC decreases; NPVproject
t = time increases.
CF0= initial investment
n
CFN t If Ke grows, WACC increases and NPVequity decreases.
NPVequity = CF0 If Ke reduces, WACC decreases and NPVequity
t =1 (1 + K e ) t
NPV equity increases.
where:
CFN = Net Cash Flow
t = time Kd changes might influence WACC, but not NPVequity.
CF0= initial investment
Like NPVequity, considering also the fiscal benefit of
APV equity
debt. Higher leverage increases APV, provided that
(Adjusted NPVequity + Present Value of Tax Benefit
there is a positive taxable base and that increasing
Present Value)
probabilities of default do not prevent debt raising.
n
CFO t If Kd increases, financial charges (interests) increase
D too. In this case, ADSCR decreases, while WACC
Average Debt t =1 f t + It
Service Cover ADSCR = might increase (to the extent that riskier debt is not
n counterbalanced by safer equity).
Ratio where:
(ADSCR)12 CFO = Operating Cash Flow
Df = Financial Debts If Kd decreases, interests decrease too. ADSCR
I = Interests increases, while WACC might decrease.
t = time from 1 to n years
If Df grows, Kd increases and Ke decreases.
LEVERAGE Df If Df is reduced, Kd decreases and Ke increases.
E WACC might be unaffected.
12
Other cover ratio measures include Loan Life Cover Ratio, defined as: Net Present Value of Cash flow Available for Debt Service / Outstanding Debt in the period.
roberto.morovisconti@morovisconti.it 11
THE RISK MATRIX OF PROJECT FINANCE IN THE HEALTHCARE SECTOR
where:
Df = Financial Debts
E = Equity
This standardized indicator expresses in relative, rather
than in absolute terms, the multiplier of a project's
value times the EBITDA13, allowing for market
n
CFOt comparisons. If the average EBITDA grows, even
NPV project / NPV project / EBITDA = ( CF0 ) / EBITDAAVERAGE CFO increases, normally at a lower rate14, a higher
EBITDA t =1 (1 + WACC ) t EBITDA may lower the cost of capital, with a positive
impact on the WACC, since the overall risk for both
equity and debt holders is reduced by a higher cash
generation, provided that also the CFO grows.
n
CFO t
Discounted (1 + WACC) t
=0 If CFO decreases or WACC grows, payback period
t =0 increases.
Project Payback
If CFO grows or WACC decreases, payback period
Period
where: shortens.
CFO = Operating Cash Flow
t = time from 1 to n years
If CFN decreases or Ke grows, payback period
n
CFN t increases.
Discounted (1 + K =0 If CFN grows or Ke decreases, payback period
Equity Payback t =0 e )t
shortens. Ke is part of WACC, but it changes may have
Period where:
CFN = Net Cash Flow no effects on WACC, to the extent that cost of debt
t = time (Kd) symmetrically adjusts.
13
Alternatively, EBIT may be used instead of EBITDA.
14
being EBITDA operating net working capital capital expenditure = CFO, any increase in EBITDA is typically accompanied by an increase in Operating Net Working
Capital (a higher inventory and a bigger credit exposure are normally linked to a growing operating economic margin) and also in capital expenditure (more investments are
typically needed for an EBITDA increase). So if EBITDA grows, its positive marginality on CFO is normally lowered by an increase in Operating Net Working Capital and capital
expenditure, which burns out some of the extra cash created by the EBITDA's increase.
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THE RISK MATRIX OF PROJECT FINANCE IN THE HEALTHCARE SECTOR
The relationship between the NPV of the project and its IRR can be represented in the following
graph, well known to any corporate finance practitioner. According to the graph - and the
formulas of NPV and IRR - when WACC grows, the discounted cash flows of the project get
smaller, approaching zero; actually, Internal Rate of Return represents the point at which NPV
is equal to zero.
Sensitivity analyses, aiming at finding the break even point under stress tests where each
variable at a time changes, are particularly useful.
NPVproject
weighted average
NPV risk premium
of debt and
equity
risk free nominal
long term interest rate
Projects evaluations using NPV suffer from lack of flexibility. The use of real options allows
considering in the model the possibility to differ, expand, suspend, abandon, terminate a project. In
the public healthcare industry, flexibility is however very limited, possibly concerning "hot"
revenues deriving from commercial no-core businesses.
During the tender, NPV is driven down by competitive bidders, but not to the point of making the
project unbankable.
If the winner has a very low NPV even approaching zero one might wonder why the project is
still profitable and bankable. The only possible explanation is that either revenues are
underestimated and / or costs are overstated and there can be (significant) saving. In some
detrimental cases, "informal" commercial as well as building activities, may bring to improper
fiscal savings, and unofficial money can fuel corruption and fraud.
The risk matrix has a strong impact on the cost of capital (cost of equity and quasi equity, including
subordinated debt; cost of senior debt; WACC), especially if we consider the financial aspects of
risk, mainly depending on:
Bankability
Liquidity
Degree of maturity (of the loans)
Availability of institutional investors and other qualified sources of funds
Currency and interest rate risk, sometimes bringing to an Assets & Liability mismatch (of
the SPV)
Amount and cash timing of the grant, the availability payment and other revenues
Financial risk is particularly important, since this is how risk is comprehensively priced by capital
providers. Periodical market evaluation of the SPV, wherever possible, should embody its overall
risk assessment and scoring. But two big problems make this theoretically sound reasoning hardly
working: the very fact that SPVs are not listed and, even if they would, capital markets
imperfections and malfunctioning in risk pricing - any reference to the dramatic financial crisis of
2008-2009 is, like in a movie, a pure coincidence
Financial risk, as we shall see in the next paragraph, is strongly linked especially with operating
risk.
Paid in capital is expensive to be raised by the SPVs shareholders, even because it is risky capital,
with no fixed remuneration and to be cashed back as a last claim. Subordinated (junior) debt is
somewhat in the middle between capital and senior debt, being so allocated in the quasi equity
section. For the SPVs shareholders, advantages if underwriting subordinated debt, instead of
capital, derive from the very fact that debt is anyway interest bearing, whereas capital can be
remunerated with dividends only if net results and free cash flow are positive.
It is so convenient, for the SPV, to minimize its outstanding capital, maximizing senior debt and
using subordinated debt as a cushion to balance the two, keeping leverage under control. While the
issue mainly concerns the SPV and its banks, the public part has also an indirect but not trivial
interest in securing that the SPV is financially sound.
The higher the spread of the subordinated debt, the higher the cost of quasi equity; being
subordinated debt typically issued by the SPV's shareholders even if the underwritten amounts
may be asymmetric if compared to the subscribed capital interest rates paid by the SPV to the
subordinated debtholders compete with dividends paid to the SPV's shareholders, as an alternative
form of remuneration. The differences between the return (cost) of quasi equity versus the return
(cost) of equity concern not only the abovementioned possible asymmetric underwriting, but also
the timing since interests on debt start to be paid before dividends and subordinated debt is
reimbursed after senior debt but before capital so the present value of subordinated debt interests
and repayment is, ceteris paribus, higher than that of dividends and paid back capital.
The present value is higher also due to a lower discount factor, since subordinated debt is a fixed
claim whereas risky capital remuneration and reimbursement is conditional upon the SPV's
performance.
Furthermore, to the extent that interest rates on subordinated debt are fiscally neutral (being
deductible costs for the SPV and taxable incomes for its debtholders, with symmetric tax rates)
whereas dividends come up to the SPV's shareholders net of taxes and are (slightly) taxed even
when perceived by its shareholders (in Italy, 5% of the dividend represents its taxable base), there is
a further (small) element which favors subordinated debt and its service.
Asymmetric subordinated debt (and leverage) occurs whenever the shareholders composition
differs from that of the subordinated debtholders; in such a case, the latter, being typically
represented by financial stakeholders (normally underwriting subordinated debt in bigger
proportions if compared to equity) may be tempted to extract value from the SPV stressing the
repayment schedule and imposing to the SPV higher spreads, likely to reduce and delay the payable
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dividends. Competition between the cost of core equity (underwritten share capital) and the cost
of quasi equity (represented by subordinated debt) may well be functional to the SPVs
incorporation, even if it should be kept within reasonable limits, beyond which the whole SPVs
financial structure may be overcharged by improper implicit costs of financial governance.
Being the project financing investment traditionally timed in different phases, concerning the
project, the construction and the management, an analysis of the risks typical in particular of the
latter two phases is important in order to detect the overall hazard of the project.
The optimal perimeter of a PF investment has to consider not only the construction investment
but also the amount and nature of (commercial) services transferred to the public part; the bigger the
amount transferred, the higher the expected economic margins for the private agent and so the lower
the required availability margin; there is a symmetric risk of (over)inclusion or (over)exclusion
Within the perimeters definition, technical equipment (electro-medical ) so crucial in hospitals
may be provided by the private agent:
either within the PF package, so exposing both parts, especially the public one, to the risk of
unpredictable technological advances, to be mitigated with complex technical and legal
agreements;
or with a shorter time agreement (consistent with the average useful life of the equipment),
with renewable contracts based on prevailing market tests.
Alternatively, technical equipment may be well excluded from the PF and its purchase could be
financed with a full lease or other debt instruments.
For the private agent, the investment risk is mainly concerned with the hospitals construction or
restructuring.
The Eurostat clarification of February, 11th, 2004, says that a Design, Build, Operate and Finance
projects asset is off balance sheet, and therefore does not affect the General Government Balance
upfront over the construction period, provided that the private sector partner carries the
Construction risk and either the Availability or the Demand risk. This classification of risk within
three main categories synthesizes the broader taxonomy described in the appendix.
Risk assessment typically follows a bottom up approach, detecting the possible basic risks and
eventually reconsidering them with a synthetic scoring.
This is an important device a sort of Troy horse to promote public investments in infrastructures
in highly indebted EU countries, which would otherwise be unfeasible. In the peculiar case of
public hospitals, the Demand risk later on described as mainly referring to the demand of public
healthcare treatment in that particular hospital, depending also on demographic and epidemiological
indicators obviously remains within the strategic priorities of the public part and so the other two
risks have to be transferred to the private part.
The transfer of the construction risk from the public to the private actor has a fundamental
importance, especially in countries where the construction of public infrastructures is typically
subject to long delays and cost increases, seriously risking to be borne old when the hospital is
eventually ready.
Variants and upgrading are typically expensive and unforeseen, so increasing the overall costs, even
if not considered in the initial project and in its financial structure. Just to give an idea of the
possible delays and extra costs, it often happens that hospitals directly constructed by the public part
normally take one or more extra years, with consistent construction delays well above the minimum
3 years (including the executive project) normally necessary to build them up from scratch (being
restructurings even longer and more subject to uncertainties).
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Extra costs may well exceed 20 %, potentially with no upward limits. On the other side, should the
private part undertake the construction risk, as it always happens with PF investment schemes, the
public part is exempt from any construction risk and delays are typically charged to the private
concessionaire, and extra costs are harder to recognize. Since the private part has a better control
over construction risks, they can significantly be optimized with their transfer.
Financial costs tend to be cheaper for the public counterpart, if the State acts as a sort of lender of
last resource, protecting from any bankruptcy risk, even if delays in repayments are much more
frequent and may be exhausting, especially if the public part takes profit of its position, which
normally discourages or makes inconvenient any litigation. The private counterpart, being
potentially exposed to default, typically with no public parachute, is deemed to pay higher spreads
on lent funds, even if this higher cost of collected capital does not fully offset the benefits stemming
from the abovementioned construction risk transfer.
Alternative devices of financing do not comply with the Eurostat rules; for example, should leasing
be selected as an option, then the construction risk would be borne by the public counterpart and the
same happens with an undertaking contract backed by a mortgage.
Transfer of risk from the public to the private part also takes place when the price is partially paid in
kind, whenever the public part remunerates the private constructor with no-core real estate
properties. To the extent that the private part accepts to be paid with heterogeneous properties
(typically inherited by the public hospital), she bears the risk of dealing with them, whereas if the
public part puts them on sale, the risk remains public; in the latter case, in order to choose the
proper timing for selling, the public estate owner may well ask a bridge financing, backed by the
properties, to its shareholder (Municipality; State ).
While the issue is hardly questionable if concerning the construction risk, typically completely
transferred to the private part, the balance of power is held by the availability risk, whose
(predominant) transfer to the private part is decisive; a contractual clause according to which the
availability periodical payment is made to the private part not as an automatic repayment of the
construction costs incurred but, at least partially, conditionally upon the management quality and
performance may greatly help to consider the risk predominantly transferred to the private part, so
complying with the Eurostat requirements. The matter, in times of public debt expansion and audit
tightening is far from being trivial.
Considering the construction risk in particular, it shouldnt be forgotten that in practice there is a
(potentially) significant difference between building a new hospital from scratch and restructuring
an existing one: in the latter case, while the building phase can be more complex (avoiding possible
interferences with the patients hosted in the restructuring building), the financial planning can often
benefit to the extent that the management phase is (at least partially) coincident with the
restructuring and so invoicing can start sooner.
In such a case, due to the quicker payback, the whole time extension of the plan can be shorter, not
only because the construction period coincides with the management phase, but also because the
anticipated revenues allow to shorten the time extension of the overall project without necessarily
undermining its financial stability.
Restructuring of existing hospitals is a particularly difficult investment, due to the necessity of
intervening in a context where patients have to be moved and men at work have to cohabit with
them, possibly without disturbing already suffering people; restructuring needs a sound
organizational framework, with a coordination of the various phases and taking into account that
any delay, so common in complex investments, can have a chain effect on subsequent steps;
restructuring is often complemented by the building of new facilities, with a synergic interaction
between the two phases: for evident reasons, normally the building of the new areas commands a
priority, so as to let the transfer of patients when it is completed, so with a preliminary emptying of
the old part, making its restructuring possible.
Construction costs are typically kept fixed in the financial business plan of the SPV, even if they
tend to last some 2-3 years or even more, especially if restructuring is concerned. Lack of any
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financial discount during this period is a risky factor entirely borne by the private agent, being
proportional to the time extension of the construction, to its deferral from the time when the
business plan has been conceived and approved and to the macroeconomic scenario within the
considered time span.
The main risks to which the SPV in project financing is subject to the operating risk and the
financial risk. The operating leverage is a measure of how revenue growth translates into growth (
Sales) in operating income (EBIT). It is a measure of how risky (volatile) a company's operating
income is:
The fixed/variable revenues and cost mix strongly depends on the company's business model and
allows to evaluate the degree of translation of an increase of revenues on the EBIT. In our case, the
SPV typically has a limited revenues growth potential, since commercial incomes normally can be
exploited up to a physical and contractual limit, but it also has a fairly stable cost structure.
Fixed revenues guarantee a valuable minimum revenue level, appreciated by lending institutions.
Contracts envisaging a guaranteed minimum produce fixed revenues for the private concessionaire
(with specular fixed costs for the public counterpart); this lack of flexibility produces a risk transfer
from the private to the public entity that should be carefully considered and agreed on.
A classification of the main operating revenues and costs, according to their level of flexibility and
resilience, is the following:
Fixed operating monetary costs (C) Insurances, staff costs, financial fees, SPVs
managing costs, sundry fixed costs
Variable operating cost (D) variable costs from no-core (no health)
services17; variable commercial (tariff) costs18
15
The public grant partially covers the cost of the investment; the SPV cashes the grant in tranches, according to the
work in progress and then defers it in constant arrays till the end of the concession. For an analysis of the accounting
problems, see IAS 20 par. 12.
16
A (small) part of the availability payment is paid to the SPV subject to a quality control of the services rendered and
so can be variable.
17
Some of these costs may be fixed.
18
Only if there are no pass-through contracts with third partes.
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The level of EBIT is important in order to ascertain whether the SPV can reach an operating break
even point - minimum acceptable rate of return - this event being a matter of survival.
Residual Value At Risk for the SPV has to take into account the difference between construction
costs and variable incomes and costs, i.e. the part of the building costs which the SPV is not sure to
cover19:
Cumulated construction costs fixed revenues + fixed costs = operating amount to be covered
The SPV has to reach a minimum critical mass in order to guarantee its sustainability; in such an
effort, the growth risk factor - so important in start up scenarios - should not be so important and
limited to marginal hot revenues, since predominant cold revenues should come soon and demand
risk is external.
If the availability payment increases, fixed revenues go up, considering also that it is not subject to
pass through repayments to the SPVs suppliers and for this reason the whole marginality belongs
to the SPV. Marginal economic returns and cash flows of each service rendered are to be carefully
monitored, considering also their inter-temporal volatility, from which risk can be inferred.
For any given level of sales and profit, the higher the fixed costs, the more the operating leverage
grows: due to higher fixed costs has a higher contribution margin, and hence its operating income
increases more rapidly with sales than a company with lower fixed costs (and correspondingly
lower contribution margin20).
In project financing, the private part (SPV) often relies (with a "pass through" agreement) on third
parties (sub-contractors) for the management of non-core services and commercial areas, receiving
in return a percentage of revenues. In this case, the pass through contract increases the variable cost
of the SPV, with an impact on EBIT, smoothing operating leverage: in other words, any change in
revenues causes a smaller change in the EBIT - good news if revenues decrease and vice versa.
With pass through there is also a transmission of risk, aimed at having a positive impact on the
value chain.
Even with pass through agreements - typically, Design & Construction or Operation & Maintenance
- bonding the private partners together with back to back contracts within the contract which
subdivide and replicate the obligations of the main contract, some risks should conveniently be
retained within the SPV, in order to represent a permanent incentive to its efficiency21.
Scalability is, broadly speaking, the ability of a business model to generate incremental demand
(additional revenues) economically, i.e. without significantly increasing costs. In the presence of a
scalable business, the operating leverage works as a multiplier of the EBIT.
19
Considering:
- variable revenues
+ variable costs
+ negative interests
+ extraordinary costs
+ taxes
20
Contribution margin is a measure of the operating leverage: the higher the contribution margin (the lower variable
costs are as a percentage of price), the faster profits increase with sales.
21
MARTY, VOISIN (2007).
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The business model of the SPV, in case of project financing in healthcare system, however, doesn't
seem particularly scalable.
Since any change in operating leverage affects a key parameter such as the EBITDA, it also has a
financial effect, due to the circumstance that EBITDA is both an economic and financial margin,
being represented by the difference between monetary operating revenues and costs, as it can be
seen in figure 3. This well known property has important side effects and is a key factor in order to
understand why and to what extent financial and operating risk can be linked.
The rationale behind this statement, applied to the SPV's context, is that any change in the
economic marginality, affecting EBITDA and EBIT, has an impact on operating cash flow, a key
parameter in order to assess the financial soundness of the SPV. Operating cash flow, as it is shown
in tables 1 and 3, is in turn linked with key financial parameters like cover ratio, NPV, IRR, WACC
A deep understanding of these neither immediate nor obvious links is a key factor for the SPV itself
and the stakeholders that pivot around it: shareholders can start to understand how much money
they can make out of the company, lenders can have a better idea of the company's soundness and
bankability and so on. Not a trivial particular.
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Table 3 - Links between the operating leverage and key financial ratios
n
CFO t If EBITDA grows, Operating Cash Flow (CFO)
NPVproject NPVproject = CF0 increases, with a positive impact on NPV, especially if
t =1 (1 + WACC) t WACC decreases.
CFO 1 CFO 2 CFO n If Operating Cash Flow grows, NPV might increase,
IRRproject NPVproject = + + ... + CF0 = 0 then also IRR grows, increasing the financial break even
1 + IRR project (1 + IRR project ) 2
(1 + IRR project ) n
point; the project is more easily bankable.
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n
CFO t cumulated CFOs grow, then financial debt may be
D reduced.
t =1 f t + It
ADSCR =
n
22
This is the standard Modigliani & Miller proposition II, adjusted for taxes. The M&M theorem states that, in a perfect market, how a firm is financed is irrelevant to its value.
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Figure 5 shows the functional links existing at the level of the profit and loss, balance sheet and
cash flow statement.
Figure 5 - SPV's balance sheet, profit and loss account and cash flow statement
Liquidity
Operating Revenues
- Operating (monetary) Fixed Costs Operating
- Operating Variable Costs Leverage
= EBITDA
- Taxes
= Net Profit
Operating Revenues
- Operating Fixed Costs
- Operating Variable Costs
= EBITDA
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Operating revenues, the "engine" of any positive economic marginality and cash flow, depend on
three main sources, represented by the public grant, the availability payment and commercial (hot)
revenues.
SPV
total costs
time
construction management
public grant
availability payment
commercial revenues
net result
The amount of the public grant23 is an essential parameter for the financial soundness and
bankability24 of the SPV, since it represent a huge and timely source of cash, allowing to cover a
substantial part of the investment25 period, when revenue billing hasn't yet started and (building)
costs reach their peak.
An omni comprehensive risk analysis should also take into account that those who build and
operate, as in a traditional project finance investment, bear a self interest in pursuing a good quality
of constructing, so as to save money on the maintenance of the building in the following years. The
option "take the money and run" is not applicable, being the management following the
construction a long lasting period during which mistakes and inappropriate choices are likely to
come up.
Redevelopment risk of ordinary / extraordinary maintenance is another factor to consider: being the
former typically included in the PF and the latter separately paid, if occurring, the private agent may
have an incentive in neglecting ordinary maintenance to transform it into a payable extraordinary
maintenance; ordinary maintenance and programmed extraordinary maintenance are often part of
23
Public contributions from the State or regional institutions to the public hospital can be not repayable or in the form
of mortgages.
24
A preliminary feasibility study conducted by the public part, together with an informal soft test of the financial and
economic model conducted by an independent bank can be of great help in the simulation and solution of problems.
25
Roughly 55% in the Italian experience. See FINLOMBARDA (2007), chapter 2.
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the package, while unforeseeable extraordinary maintenance should by definition be excluded from
the PF and negotiated upon occurrence
Macroeconomic risk, mainly referring to inflation and interest rates (or even to exchange rates, if
considering foreign projects) is a typical external factor that cannot be influenced neither by the
public nor the private part and its effects may be significant, especially if protracted along time.
Indexation mechanisms (to the prevailing inflation rate ) are the first and most used mean of
mitigation and floating rates, albeit difficult to model ex ante, may be used instead of fixed rates,
with timely swaps floating-for-fixed.
While interest rates mainly concern the debt burden of the private agent (from the short termed
VAT or grant facility to the more consistent and protracted senior and subordinated debt), inflation
is a double edged sword for either the public or the public counterpart. Indexation with contractual
agreements and the level of coverage of inflation changes (up to 100 %) can have an impact on the
revenues and costs of the SPV in nominal and real terms, increasing or diminishing the net margin.
The same concept applies to the indexation of availability payment, revenues and costs (less
expected and effective volatility).
When the macroeconomic scenario is perturbed, as it is in the 2008-2010 recession, risk premiums
on debt and equity are increasing, due to the credit tightening following the economic slowdown,
and leverage is decreasing both in its absolute value and in its time extension - shorter projects are
increasingly fashionable.
If you were a bank, would you finance a project with 80-20 debt / equity ratio26, knowing that the
assets - mainly consisting of capitalized construction costs are not suitable collateral and that a
ring fence mechanism protects the SPV's shareholders?
Addressed this way, the question is tricky and would unavoidably bring to a negative answer. The
green light to bankability has to take into account the abovementioned paradox, considering also
other issues that have to make the difference: relatively stable and growing cash inflows are the key
parameter to modify an otherwise negative judgment. And since operating cash flows mainly
consist of positive economic margins, relying on a positive and sustainable operating leverage is the
true key of bankability.
As the operation is typically highly leveraged, repayment constraints represent a strong incentive
for the SPV to meet the performance level contractually required.
Even small but relatively stable marginal surpluses between the return and the cost of capital can
bring to positive capital returns, especially if amplified by leverage, intrinsically risky but well
know as a possible wealth multiplier27.
According to SUBRAMANIAN, TUNG, WANG (2009), project finance makes cash flows
verifiable, enhancing debt capacity, through:
26
Leverage in some case has reached 85 15 or even higher ratios, but is now decreasing to softer rates, due to the
credit crunch effect and the impact on the whole financial system of predatory lending practices. Even safer
investments, such as healthcare PFIs, are affected and also the collection of equity has become more difficult and
expensive.
27
See table 3, (financial) leverage formula.
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private enforcement of these contracts through a network of project accounts, that ensures
lender control of project cash flows.
In PF, extensive contracts combined with private enforcement mechanisms limit borrower
discretion on cash flows. To the extent that cash flows are verifiable, agency costs of debt are
reduced and debt capacity is enhanced. A network of non-financial contracts is set up in order to
limit the managerial discretion of project sponsors, to make cash flows better verifiable for lenders,
and to reduce the negative impact of unexpected events on project cash flows28.
An incentive to increase leverage derives from the tax deductibility of negative interest rates29, to
the extent that there is a sufficient taxable base; the volatility of the tax base, across the investment
time horizon, is a key issue, which changes significantly during the life cycle of the construction
and management period: in the construction years, the tax base is negative, since the SPV hasn't
started invoicing and carried forward losses from the initial period can significantly lower the tax
burden in the first years of management. If competition with other deductible costs excessively
erodes the tax base, the tax shield of debt may become a useless benefit, to the extent that it cannot
be brought forward. Normal business plans foresee a growing tax base towards the end of the
concession, especially when the senior debt is completely reimbursed; so competition with other
deductible costs is asymmetrically concentrated in the construction years and in the first part of the
management phase, progressively declining as time passes.
Risk distribution is, once again, asymmetrically distributed and this also affects the Free cash flow
to equity, with particular reference to dividends: when debt is reimbursed, there is obviously much
more room to remunerate capital but the very fact that this happens later and in a residual way
makes equity injections intrinsically riskier and cost of equity consequently more expensive.
A not ephemeral accumulation of Free cash flow to equity, consistent with the Jensen (1986)
model30, is the basis for the payment of dividends, in respect of restrictive debt covenants (Smith,
Warner 1979), according to which equity can not be depleted at the expense of debtholders, but
also avoiding trapped equity problems, should managers of the SPV prefer to retain liquidity, even
if profitable organic growth opportunities are limited - this being typically the case in our model,
where the project is mainly fixed and few innovations are admitted.
The very fact that cash flows are more verifiable in project than in corporate debt financing31 makes
Free Cash Flow possible abuses less harmful for debtholders, also considering that with public
health investments Free Cash Flow is intrinsically limited.
If the interest rate tax shield is a typical argument in favor of the leverage, conversely risk of default
of the SPV is a topic against excessive debt; this standard trade-off, well known in corporate
finance theory32, has to be adapted to the peculiar characteristics of the SPV. Its default,
28
GATTI, CORIELLI, STEFFANONI (2008).
29
This property influences the Adjusted Present Value, described in table 1.
30
According to Jensen's free cash flow theory, firms that generate substantial cash flow have two options. They can
reinvest the cash in the firm, or they can pay it out either through dividends or by repurchasing shares. Jensen argues
that if free cash flow is reinvested in negative net present value projects, share value will suffer. Alternatively, if free
cash flow is paid in dividends or used to repurchase stock, share value should rise.
31
See table 4.
32
The Trade-Off Theory of Capital Structure refers to the idea that a company chooses how much debt finance and how
much equity finance to use by balancing the costs and benefits. The classical version of the hypothesis goes back to
KRAUS, LITZENBERGER (1973) who considered a balance between the dead-weight costs of bankruptcy and the tax
saving benefits of debt. Often agency costs are also included in the balance. An important purpose of the theory is to
explain the fact that corporations usually are financed partly with debt and partly with equity. It states that there is an
advantage to financing with debt, the tax benefits of debt and there is a cost of financing with debt, the costs of financial
distress including bankruptcy costs of debt and non-bankruptcy costs (e.g. staff leaving, suppliers demanding
disadvantageous payment terms, bondholder/stockholder infighting, etc). The marginal benefit of further increases in
debt declines as debt increases, while the marginal cost increases, so that a firm that is optimizing its overall value will
focus on this trade-off when choosing how much debt and equity to use for financing.
See http://en.wikipedia.org/wiki/Trade-Off_Theory.
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theoretically always possible, would have disastrous consequences for the public part, to the extent
that it would bring to an interruption of strategic services (e.g. clean up; maintenance ). Aware of
this, contractual provisions regulate the case in order to avoid any interruption of core services; this
intrinsically makes the risk of default less dramatic for the public counterpart but not automatically
for the creditors of the SPV. Some may wonder if, just in case, they can replace the equityholders in
managing the SPV and the answer, provided that the public part accepts and that the service is not
worsened, may well be positive; in such a case, the SPV would have a residual value (the
discounted value of future contracts), limiting its default risk, that seems however reasonably
unlikely - if compared with other businesses.
(High) leverage is sustainable also if debt service cover ratio is sufficiently robust, ranging well
above unity - but this unsurprisingly is the case once again especially approaching the final years of
management, where operating cash flows may not be too dissimilar to those of previous years but
residual debt, thanks to reimbursements, is consistently lower.
The standard agency problems of debt concern the conflict of interests between a potential lender
(the principal), who has the money but is not the entrepreneur, and a potential borrower (the agent),
a manager with business ideas who lacks the money to finance them. The principal can become a
shareholder, so sharing risk and rewards with the agent, or a lender, entitled to receive a fixed
claim. Agency theory explains the mismatch of resources and abilities that can affect both the
principal and the agent: since they need each other, incentives for reaching a compromise are
typically strong.
As leverage grows, risk is increasingly transferred from equity to debt holders.
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start end
of construction
end
start
management phase
Ke max Ke 0
Kd 0 Kd max
Typical corporate governance problems between lenders and borrowers, in our case respectively
represented by banks and the SPV, are somewhat milder than the standard ones present in other
private companies and standard corporate investment. It is well known that information
asymmetries traditionally arise since borrowers have better information about their creditworthiness
and risk taking that has the lending bank. They originate conflicts of interest which might seriously
prevent efficient allocation of finance: the liquidity allocation problem derives from the fact that
although money is abundant, it is nevertheless not easy to give it to the right and deserving
borrowers. In the case of project finance, the investment has to be carefully designed and
analytically described, so reducing the information gap between borrowers and lenders.
Relationship lending, which relies on personal interaction between borrowers and lenders and is
based on an understanding of the borrowers business, more than to standard guarantees or credit
scoring mechanisms, can take place when the sponsoring banks are part of the SPV's shareholders
or - to a lesser extent - if they already have strong ties with the main SPV's shareholders, whose
credit trustworthiness is positively acknowledged.
Adverse selection is another typical problem in money lending and it occurs when banks not
knowing who is who cannot easily discriminate between good and risky borrowers, who should
deserve higher interest rate charges.
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Moral hazard is a classical take the money and run problem, since borrowers might try to abscond
with the banks money or try not to fully engage them in the project for which they have been
financed.
To the extent that there is symmetric information between debt and equity holders, project finance
simultaneously alleviates the classical inefficient managerial problems of under and over
investment.
Another positive characteristic of PF is the presence of relatively few information asymmetries in
the assets of the SPV. According to the LELAND and PYLE (1977) seminal paper, borrowers
typically know the value of their assets, to be used as a collateral, much better then lenders, so
rising moral hazard conflict which prevent optimal resource allocation; this produces an incentive to
minimize information asymmetries.
In our case, the SPV's assets used in the example (see paragraph 8) over the 3 years of construction
+ 25 years of management are mainly represented by construction costs (82 % of total assets) and
liquidity, including debt service reserve account (almost 18 % of assets).
Liquidity doesn't bear any information asymmetry33, but also capitalized construction costs are
easily observable by outside providers of finance, who can monitor work in progress during the
construction and get evidence of the effective costs of the SPV.
Incentives for borrowers to exaggerate positive qualities of their projects, with costly or impossible
verification of true characteristics by outside parties, considered in the Leland and Pyle model, are
hardly ever the case in project financing.
Strategic bankruptcy is false information that the borrower gives about the outcome of his financed
investment, stating that it has failed even if its not true only in order not to give back the borrowed
money.
These classical corporate governance problems are well known in traditional banking as it will be
seen in the comparison in table 4 and they naturally bring to sub-optimal allocation of financial
resources and to capital rationing problems that frequently affect even potentially sound borrowers,
if they are not able to differentiate themselves from those who bluff.
Within the project finance context, these problems can somewhat be mitigated, so reducing agency
costs of debt, not only taking profit of lower information asymmetries, but also using simple but
effective devices, such as cash flow channeling - since the SPV's cash flows mostly (apart from
smaller "hot" revenues) come from one big source, the public part, the bank can compensate cash
inflows with expiring debts, so avoiding any potential cash diversion.
PF enhances the crucial verifiability of cash flows through contractual constraints, including a
network of project accounts that are under the lender's control and into which project cash flows are
required to be deposited34.
In such a context, moral hazard temptations are relatively unlikely, since it is difficult either to
divert the bank's money from its strategic aim - financing the building - or to avoid getting fully
engaged in the project, due to the pressure for quality and achievements coming from the public
part - building and running a public hospital is not a joke.
Legal clauses, protecting the financing bank, may consider cash flow verifiability and segregation,
using waterfall provisions.
A comparison between standard corporate debt investments and corporate finance, useful also in
order to assess Value for Money, bankability issues and profitability, is synthesized in table 4.
33
In economics and contract theory, information asymmetry deals with the study of decisions in transactions where one
party has more or better information than the other. This creates an imbalance of power in transactions which can
sometimes cause the transactions to go awry. Examples of this problem are adverse selection and moral hazard. Most
commonly, information asymmetries are studied in the context of principal-agent problems. Potentially, this could be a
harmful situation because one party can take advantage of the other partys lack of knowledge.
34
SUBRAMANIAN, TUNG, WANG (2009).
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Table 4 - To lend or not to lend? Comparison between corporate debt and project finance
roberto.morovisconti@morovisconti.it 29
THE RISK MATRIX OF PROJECT FINANCE IN THE HEALTHCARE SECTOR
35
See HART (1995).
36
See SMITH, WARNER (1979).
37
The valuation can be assets side NPVproject or equity side NPVequity.
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THE RISK MATRIX OF PROJECT FINANCE IN THE HEALTHCARE SECTOR
6.2. Triangulating risk among the public part, the private SPV and the lending institutions
Risk is not a private matter between the public and the private part, since most of the private risk is
transferred to the lending institutions, as it is witnessed by leverage, traditionally high both in
absolute and in relative terms.
In this triangular relationship, alliances and conflicts of interest are again a key point in order to
predict intentions and (mis)behaviors. Since for the SPV the public part is the client and the
borrower the supplier, the SPV has a natural interest to behave properly more with the client than
with the supplier, at least when he has got the money. From this simple reasoning, we draw the
general conclusion that lump sum financing is intrinsically riskier for the lender.
Each part has a natural attitude to behave selfishly, even if cooperative games become a necessity, if
the players want to make the deal. Balance of powers, a mix of shared dissatisfaction and
compromise in the name of a superior common goal are a necessary sign of intelligence, experience
and common sense.
Risk is a key problem to solve together, extracting value from its proper management; if sharing is
insufficient and unfair, the damaged part may claim her out of the game, in a context where all the
three players are needed and opportunistic free riding behaviors are short sighted and contractually
sanctioned. As MARTY, VOISIN (2007) point out, introducing financier as third party allows for
assessing the optimality of the risk allocation.
Even if in some cases the public part and the lending institutions are allies, since they share
incentives in complementarily monitoring the soundness of the SPV ex ante, i.e. during the tender,
in order to assess its reliability and bankability, their ex post objectives, when the bid is won by the
SPV, may substantially diverge: lets think, for example, about the possible extra gains of the SPV
(pushing high hot revenues or minimizing running costs), which make the public part unhappy, to
the extent that the quality of services is deteriorating and it cannot share the extra gains, while the
bank, even if also unable to share these extra gains, is happy about the SPVs cash flows
improvements, which contribute to making the debt safer.
Should the lending institutions be part of the shareholders of the SPV or should they have close
links with the shareholders (with crossed participations, interlocking directorships in their board of
directors ), well in such a case they naturally share common goals and it gets harder for the public
part to benefit from cooperation. The banks are often likely to have ties with sub-contractors, which
in many cases bear a substantial part of operating risk or, sometimes, even with the public part. Due
to their wide and flexible portfolio of clients, they are possibly the most probable source of conflicts
of interest.
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While banks negotiate with the private counterpart the bankability and financial soundness of the
whole investment, they often require most of the expected cash flows to be represented by low risk
revenues such as the availability payment or the public contributions, whereas more volatile and
uncertain commercial returns from hot activities are discounted at a higher rate, albeit representing
the true nature of intrinsically risky project financing investments.
Competition is another strong element which forces the players to cooperate; the public part has to
internally compete with different investment solutions, before choosing project financing, according
to the Value for Money metrics; since ex ante competition between different bidders cannot
eliminate uncertainty and likely differences between ex ante contracting and ex post delivery of
service, value for money cannot be completely assessed before the tender and has to be checked
along the whole life of the investment, even when a definitive choice is made, trying to limit
damages with monitoring and contractual covenants.
Excessive competition among bidders only apparently represents a benefit for the public part, which
can extort better economic conditions. Unbankable or unprofitable bids, placed in order to
maximize the winning chances, are widely recognized as dangerous and able to distort free and fair
competition.
PF is a long term wedding, where divorce is a hardly practicable exit option. In the 1990s in the UK
a public functionary that was going to sign the contract with the private counterpart, entered the
meeting room dressed like a bride with a long white wedding suit, just to symbolize that the
agreement was like a wedding.
Since the PF is a long term contract, monitoring the quality performance of the conductor is
essential for the public proponent, considering that after some years a sort of relaxation, potentially
conducting to lower quality, is likely.
The actual trend is to reduce the PF time span, not only as a consequence of the recessionary credit
crunch, according to which debt facilities shorten, but also in order not to engage the public part for
an excessive time span, during which risks are increasingly difficult to forecast, monitor and
mitigate.
From a practical perspective, it should be worth considering that the reduction of the project length
has an impact on the repayment schedule of debt, which is compressed in a shorter time horizon,
with higher repayment instalments.
Time itself is a risk factor, not only for its financial implications, but also because a potentially
infinite set of events may occur, especially when the investment horizon grows.
Timely monitoring can reduce risk hopefully to an acceptable level; shorter deadlines for ancillary
investments, such as technical equipment (subject to substitution at prevailing market rates and
technological standards, using a market test contractual device) are gratefully acknowledged for
their contribution to the reduction of operating risk.
All the macroeconomic parameters such as interest or inflation rates are deeply time-sensitive, again
especially if a long term horizon is envisaged.
Risk - due to uncertain events - is extremely hard to detect and measure. The most straightforward
method is to estimate the statistical probability that a (negative) event occurs, associating to it a
measurable cost (or cash outflow). But this is hardly possible in many cases, due to the difficulty to
detect the risk source, to forecast the possible outcomes / states of the world and to associate to each
of them a weighted cost according to its probability of occurrence. Also, in a changing scenario,
many risky factors simultaneously interact among them, within a wide and interlinked risk matrix.
Risk assessment and scoring is a key step in a risk management process, consisting in the
determination of quantitative or qualitative value of risk related to a concrete situation and a
roberto.morovisconti@morovisconti.it 32
THE RISK MATRIX OF PROJECT FINANCE IN THE HEALTHCARE SECTOR
recognized threat (also called hazard). Quantitative risk assessment requires calculations of two
components of risk38:
Risk assessment consists in an objective evaluation of risk in which assumptions and uncertainties
are clearly considered and detected. Part of the difficulty of risk management is that measurement
of both of the quantities in which risk assessment is concerned - potential loss and probability of
occurrence - can be very difficult to identify or measure.
Risk can also derive from corporate governance problems and conflicts of interests between the
public and the private part or within the private stakeholders. The first step, hazard identification,
aims to determine the qualitative nature of the potential adverse consequences of the risky situation.
Quantitative risk assessments include a calculation of the single loss expectancy of an asset.
In Project Finance, risk is a holistic system, like the human body.
A risk matrix can be ideally represented by the following figure 8.
The graph shows that risks, purposely unspecified in this example, are linked among them, often in
an unpredictable risky way. The attempt to find out a synthetic measure of overall risk, albeit
theoretically captivating and practically meaningful, is uneasy to carry forward, but still
worthwhile.
A functional matrix of the different areas (heath-care; territorial; administrative; training;
technological and logistic ) may help to complement the risk profile of the project, considering it
from another synergic perspective.
A traditional risk scoring matrix - not so easy to adapt to the project financing context - is the one
described in Figure 9.
38
An example of risk measurement can be given by the Probability of Default used in Basel II credit scoring systems. It
is the likelihood that a loan will not be repaid and fall into default. This Probability Of Default will be calculated for
each company who have a loan. The credit history of the counterparty and nature of the investment will all be taken into
account to calculate the Probability Of Default figures. The probability of default of a borrower does not, however,
provide the complete picture of the potential credit loss. Banks also seek to measure how much they will lose should a
borrower default on an obligation. This is contingent upon two elements:
First, the magnitude of likely loss on the exposure: this is termed the Loss Given Default (and is expressed as a
percentage of the exposure).
Secondly, the loss is contingent upon the amount to which the bank was exposed to the borrower at the time of
default, commonly expressed as Exposure at Default.
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THE RISK MATRIX OF PROJECT FINANCE IN THE HEALTHCARE SECTOR
2 4 6 8 10
(Severity)
2 Minor
3 Moderate 3 6 9 12 15
4 Major 4 8 12 16 20
5 Catastrophic 5 10 15 20 25
Legend: impact of
Blue - Low risk risk mitigation
Grey - Moderate risk
Yellow - Significant risk
Red - High risk
A more sophisticated risk analysis can make use of Monte Carlo simulations39.
Risk Mitigation represents a benefit for all the parties and follows several complementary steps:
1. identification a trivial but fundamental and uneasy task: one can't avoid what he doesn't
know and a quick look to the risk matrix in appendix 1 can give a rough idea of the
problem;
2. selection - of the most suitable risk bearer and contractual insurance regulation;
3. measurement - with probability and severity quantitative estimates;
4. monitoring during the tender and afterwards in the building and management phase;
5. management risk mitigation has a strong impact on corporate governance conflicts among
different stakeholders40: the lower the risk, the higher the harmony and convergence of
interests.
A financial and economic plan of a public hospital project financing is synthetically represented in
appendix 2, with an indication of the basic assumptions, the statements and a synthesis of the
sensitivity analysis, which considers the impact on the model - with particular reference to its key
ratios - of the two most significant parameters:
a decrease in the availability payment, up to a break even point (where NPVproject = 0);
a shortening in the time span of the management phase (from 25 to 20 years).
39
Monte Carlo methods are useful for modeling phenomena with significant uncertainty in inputs, such as the
calculation of risk in business. Monte Carlo methods in finance are often used to calculate the value of companies, to
evaluate investments in projects at corporate level or to evaluate financial derivatives. The Monte Carlo method is
intended for financial analysts who want to construct stochastic or probabilistic financial models as opposed to the
traditional static and deterministic models. For its use in the insurance industry, see stochastic modeling. In finance and
mathematical finance, Monte Carlo methods are used to value and analyze (complex) instruments, portfolios and
investments by simulating the various sources of uncertainty affecting their value, and then determining their average
value over the range of resultant outcomes. The advantage of Monte Carlo methods over other techniques increases as
the dimensions (sources of uncertainty) of the problem increase.
See www.emeraldinsight.com/10.1108/01409170810920620.
40
See ZENNER (2001).
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THE RISK MATRIX OF PROJECT FINANCE IN THE HEALTHCARE SECTOR
The pilot model is taken from a real case, conveniently simplified with rounded up figures and basic
assumptions. The main objective is to assess how the key financial parameters described in
paragraph 4 change if either the availability payment or the time span of the management period -
two key income factors for the SPV - decreases.
In each feasibility study, a similar task may be conveniently carried on, not only to ascertain if and
to what extent the pilot model is working and bankable, but also which are the break even points
(e.g., when the equity NPV reaches zero) which represent an ideal target for the public part: even if
private competitors will make bids above this threshold, if competition is effective they will get
closer to this point.
The main conclusion which can be drawn is that a decrease in the availability payment, ceteris
paribus, worsens all the ratios (NPV, IRR, leverage, cover ratio, payback period )
Availability
Payment ()
3 millions
2,5 millions
2 millions
1,5 million
1 million
NPVproject ()
10 mio 20 mio 30 mio
Annual Availability Payment (VAT not including, base 2009) 3.000.000 2.500.000 2.000.000 1.500.000 1.030.026
Annual Service Revenues (VAT not including, base 2009) 18.675.000 18.675.000 18.675.000 18.675.000 18.675.000
Annual Commercial Revenues (VAT not including, base 2009) 5.000.000 5.000.000 5.000.000 5.000.000 5.000.000
From the above example, we can confirm the basic principle (represented also in Figure 4)
according to which when NPVproject = 0, WACC = IRRproject.
The other big revenue driver for the SPV is represented by the time extension of the concession -
the longer, the better for the shareholders, knowing that free cash flow to equity is maximized
towards the end of the concession, when debt is repaid and the project can become - at least for
some time - a sort of "cash cows", what shareholders really love but patiently have to wait for,
hoping that nothing bad happens in the meantime.
Since this is a challenged parameter during the tender, competing bidders should wonder, in making
their offer, which is the financial and economic break even point:
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THE RISK MATRIX OF PROJECT FINANCE IN THE HEALTHCARE SECTOR
shortening the time span of the management phase, always ceteris paribus, there is a strong -
negative impact - on all the key parameters of the SPV, up to the point of making the
investment unattractive for both shareholders and lenders;
interest rate changes don't have a big impact on the key ratios.
Annual Availability Payment (VAT not including, base 2009) 3.000.000 3.000.000
Annual Service Revenues (VAT not including, base 2009) 18.675.000 18.675.000
Annual Commercial Revenues (VAT not including, base 2009) 5.000.000 5.000.000
Another factor that has an obvious impact on the leverage sustainability - so strongly linked with
the bankability of the project and the profitability of the shareholders - is represented by time41 and
by macroeconomic factors which are so strongly linked with the life span of the concession, interest
rates and inflation.
The term structure (yield curve) of interest rates, which represents the relation between the interest
rate (or cost of borrowing) and the time to maturity of the debt for a given borrower, allows to make
a forecast of the interests along the whole life of the project; to the extent that the curve is positively
sloped, longer term debt commands a liquidity premium over shorter term maturities, with a
consequent higher cost of capital; professional investors, especially if represented by banking or
financial institutions, are institutionally able to deal with long maturities, reducing risk (matching
the maturity of assets with that of liabilities, intermediating funds ).
While the models are normally quite resilient to interest rate changes, especially if the residual debt,
- whose capital is progressively reimbursed over time - decreases, inflation may have a bigger
impact.
41
See the simulation in this paragraph.
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THE RISK MATRIX OF PROJECT FINANCE IN THE HEALTHCARE SECTOR
In general, if costs and revenues are fully indexed, growing inflation simply brings to higher
economic margins; as a matter of fact, it is however quite frequent that indexation mechanism are
asymmetric, this being a bargaining condition among different competitors in the tender. To the
extent that SPV's revenues are not fully indexed to inflation - with a discount of some 10% to the
chosen inflation rate - its economic margins may squeeze, should costs be on the contrary fully
indexed. Pass through agreements with sub-contractors are so important to detect if and to what
extent the SPV is protected from inflationary shocks and to what extent the risk is transferred.
Project finance is an infrastructural investment with extended duration and long and complex
gestation process, substantially illiquid due to its lumpiness and indivisibility, capital intensive,
highly leveraged and difficult to evaluate all characteristics that make the investment intrinsically
risky. When complexity grows, risk increases and supervision becomes more important.
In many countries, especially those with high public debt, limitations upon the public funds due to
constraints fixed by the EU Growth and Stability Pact have led governments, pushed by an
increasing demand in public investments to invite private sector entities to enter into long-term PPP
contractual agreements for the financing, construction and/or operation of capital intensive
projects42, such as hospitals.
For the public procurer, value-for-money is a key parameter in orienting the choice towards project
financing or elsewhere, while for the private project sponsors, such ventures are characterized by
low equity in the SPV and a reliance on direct revenues to cover operating and capital costs, and
service external debt finance.
No wonder that in such a context, risk is a complex and core issue, to be analyzed from the different
perspectives of the public and private sector entities, with the banking institutions representing the
major cash supplier not a secondary partner:
for the public entity, ex ante risks such as value for money comparisons, technical choices
such as selection of location and planning and ex post monitoring of quality and costs,
during the management phase; core market risk (demand of health services) is also entirely
borne by the public part;
for the SPV, profitability for equityholders (NPVequity; IRRequity), after having properly
served the debt;
for the lending institutions, debt service, i.e. getting lent money back.
Unpredictable risk - since goals are always different from outcomes - and wildly guessed
uncertainties need appropriate detection, sharing, transmission and mitigation, wherever possible.
Efficient risk allocation scenarios are one of the solutions that can minimize the risk of under-
performing projects43 and are crucial for bankability. Risk reduction is possible with sharing, but up
to a certain level. And zero-risk is only a dream.
Banana skin is a metaphor for slippery risks and an increasingly used term in the financial
community; empirical analyses are a useful consensus guideline, in order to consider both biggest
42
See GRIMSEY, LEWIS (2002).
43
See ZULHABRI, TORRANCE ABDULLAH (2006),
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THE RISK MATRIX OF PROJECT FINANCE IN THE HEALTHCARE SECTOR
risk and fastest risers. No specific data are available for project financing, but samples in other areas
- for example, microfinance - can be a useful, albeit different, example44. According to the
Murphy's Law45, if anything can go wrong, it will. This basic rule may also apply to project finance.
The contents of this paper may conveniently be extended to non hospital investments, adapting the
main findings to a different context where the nature of the investment can be profoundly diverse,
with a different mix of cold and hot revenues, largely depending on the allocation of key (demand)
market risk.
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RUSTER J., (1996), Mitigating Commercial Risks in Project Finance, Viewpoint Note, No. 69, The
World Bank Group, Public Policy for the Private Sector, February.
SAVVIDES S., (1994), Risk Analysis in Investment Appraisal, Project Appraisal Journal, Vol. 9,
No. 1, March, pp. 3-18.
SCHEINKESTEL N.L., (1997), The Debt-Equity Conflict: Where does Project Financing Fit?
Journal of Banking and Finance Law and Practice, Vol. 8 (2), pp. 103-124.
SHAH S., THAKOR A.V., (1987), Optimal Capital Structure and Project Financing, Journal of
Economic Theory, 42, 207-243.
SMITH, CW. WARNER J. B., (1979), "On financial contracting: an analysis of bond covenants",
Journal of Financial Economics, 7.
SORGE M., (2004), The Nature of Credit Risk in Project Finance, Bank for International
Settlements Quarterly Review, December.
SORGE M., GADANECZ B., (2004), The Term Structure of Credit Spreads in Project Finance,
Bank for International Settlements (BIS), Working Paper, No. 159, August.
SUBRAMANIAN K.W., TUNG F., WANG X., (2009), Law and Project Finance, working paper,
February, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=972415.
THAM J., (2000), Return to Equity in Project Finance for Infrastructure,
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=212148.
WAGSTAFF A., et alt., (1999), Equity in the finance of health care: some further international
comparisons, Journal of Health Economics, 18, 263-290.
YANAGUCHI H., WHER T., RUNESON G., (2001), Risk Allocation in PFI Projects, 17th
ARCOM Annual Conference, Salford, vol. 2., pp. 885-894.
YUNBI A., CHEUNG K., (2009), Project Financing: Deal or no Deal, Review of Financial
Economics, March.
ZENNER M., (2001), How Risk Management Creates Shareholder Value (by lowering the cost of
debt and equity and increasing expected cash flows), Salomon-Smith-Barney, Financial Strategy
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ZULHABRI I., TORRANCE ABDULLAH J.V., (2006), Efficient Risk Allocation in Project
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21th Century, 13-15, June.
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46
In existing hospitals, this is a big challenge, due also to the fact that during the restructuring phase, patients have to be moved elsewhere. If additional buildings are being
constructed, normally patients are moved to the new structure when it is ready and only after the old and by then empty building is restructured.
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).
Risk that tenure/access to a selected site which is not
Delay and cost. Bidders obligation to secure
Availability of site Private SPV presently owned by public entity or private part cannot
access prior to contract signing.
be negotiated or expropriated.
PART
MITIGATION
RISKS BEARING DESCRIPTION CONSEQUENCES
MEASURES
RISKS
2. Risks of planning - engineering - construction
Tangible and hidden extra
Risk that the selected structure of the project finance
costs, delays,
(PBOT, BOT, BOO, BRT ) is not the most suitable. Careful pre-feasibility study,
misunderstandings,
Project finance structure Public The decision about who makes the project - either the examining the pros and cons of
incoherence between the
public or the private part - is the first challenging the different structures.
ideal targets and the real
choice.
accomplishments.
Private part may pass risk to
builder/architects and other
Risk that the design of the facility is incapable of subcontractors while maintaining
delivering the services at anticipated cost and/or that primary liability; public entity
new needs and methodologies of taking care of patients Long term increase in has the right to abate service
(expansion of day hospital treatment, new technologies recurrent costs - possible charge payments where the risk
Design / project Private SPV ) find a physical obstacle in old and not flexible long term inadequacy of occurs and results in a lack of
structures. service. service - it may ultimately result
Late design changes, due to uncareful feasibility project in termination where the problem
or new unforeseen events or to changes due to cannot be suitably remedied. A
alteration of the project. good master planning is
essential: any mistake is going to
be long lasting.
The question is both difficult Careful feasibility studies,
and challenging, since considering the evolving needs
hospitals which are too small of the patients;
Which is the optimal size of a hospital? And according seriously risk being under acknowledgement of similar
Size
Public to which parameters (number of beds; number of specialized and unable to experiences. Comparison with
(of the hospital)
patients; cubic capacity )? reach sufficient economies competing structures,
of scale, while structures that considering key parameters such
are too big are increasingly as geographical closeness,
unmanageable. specialization
Below certain amounts, project
Small projects hardly ever allow to cover fixed costs, Economic viability may be
finance should be carefully
Public / while big projects may become unceasingly problematic, together with
Project's magnitude compared to other possible
Private SPV unmanageable and look more viable when risks are the assessment of Value for
cheaper and easier financial
spread broadly. Money.
packages.
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PART
MITIGATION
RISKS BEARING DESCRIPTION CONSEQUENCES
MEASURES
RISKS
3. Financial risks
Excessive spending and low
Price for quality indicator, depending on contractual quality either in the Detailed contracting, monitoring
Value for money Public remuneration for the performance. The risk is to construction or in the with periodic market test
overpay for poor quality. management can have long inspections.
lasting consequences.
Interest rates
Risk that prior to completion, interest rates may move Bankability of the project Hedging (with derivatives )
pre-completion Shared
adversely (increasing) thereby undermining bid pricing. may be threatened. against interest rates fluctuations
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47
In general terms, a nonrecourse loan is a secured loan that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the
borrower defaults, the lender/issuer can seize the collateral, but the lender's recovery is limited to the collateral. If the property is insufficient to cover the outstanding loan balance,
the lender is simply paid out the difference. The purpose of non-recourse debt is to require lenders to underwrite their loans on a sustainable and prudent basis since the lender is in
the first-loss position with these loans, not the borrower. In project financing concerning public hospital investments, they cannot be disposed of by the banks who finance the SPV.
48
See SUBRAMANIAN, TUNG, WANG (2009).
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of the project (hospital with plants, fixtures and injections if needed are all
fittings49) belong from the beginning to the public measure aimed at preventing
entity and are dedicated to a public usefulness, so liquidity risk.
preventing expropriation from the SPVs debt holders.
Interest rates Interest rate hedging (fixing a
Risk that prior to completion, interest rates may move
pre-completion Shared Increased project cost. ceiling) may occur under Project
adversely (increasing) thereby undermining bid pricing.
Development Agreement.
49
The building always belongs to the public entity from the beginning, while the property of plans, fixtures and fittings follows possible different legal frameworks and might for
instance be in leasing (belonging to the lessor before redemption).
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50
The coverage for physical loss or damage to property is on an "All Risks" basis, i.e. the policy insures against damage to property in the course of construction by all sudden,
accidental and unforeseen causes other than specified excluded perils and forms of damage. This cover includes works brought on to the site for the purposes of the contract as well
as temporary works erected or constructed on-site. Additionally, the policy includes coverage for physical loss or damage to construction plant & machinery, equipment and tools
used per the insured contract. This policy also includes third party liability coverage. This insures against accidental bodily injury or illness to third parties as well as accidental
loss of, or damage to property belonging to third parties, caused by an accident at the construction site. The policy also indemnifies for legal costs and expenses recovered by a
claimant from the insured.
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51
See SORGE (2004).
52
Risk can be generally defined as the probability that the actual volatile outcome differs from the estimated one; should the outcome be better than foreseen, the (upside) risk
would have a positive impact.
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53
This phenomenon causes a well known redistribution effect according to which if the hospital spends more, it increases its deficit, which sooner or later has to be covered by
public funds. But this process is neither quick nor straightforward, often generating expensive complications and sometimes bringing to inefficient and suboptimal allocation,
opening the funds mismanagement and "improper use" of funds, which hollow crooked ways, uneasy to detect and monitor.
54
Considering also the (often asynchronous) matching of expiration times.
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55
See MARTY, VOISIN (2007).
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56
Pareto efficient situations are those in which any change to make any person better off would make someone else worse off.
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Lending problem, since borrowers might try to abscond with inefficiencies and losses. the lending bank makes money
Institution the banks money or try not to fully engage them in the hiding extremely difficult
project for which they have been financed.
The track record and reputation
of borrowers is less easily
identifiable in project finance,
Adverse selection is a typical problem in money since the SPV typically has
lending, since banks not knowing who is who several shareholders, but - to the
Private SPV / Bad projects can be
cannot easily discriminate between good and risky extent that the borrower is the
Adverse selection Lending incorrectly chosen and
borrowers, who should deserve higher interest rate new SPV and that the investment
Institution preferred to deserving ones
charges. project is highly detailed,
adverse selection problems are
not so important. Soft testing of
bankability can reduce the
problem.
If the final client is
unsatisfied about the Transparent and understandable
services, the whole structure rules and contractual duties
Patients are the ultimate and most important
is damaged and a consequent linking the private with the
stakeholder which pivots around the hospital; although
decrease in demand for public counterpart, together with
not directly linked to the SPV or to the project finance
health services is likely, efficient and continuous quality
Damaging patients Public agreement, the quality of cares and health intervention
since patients are monitoring.
strongly depends on the Public Private Partnership
increasingly able to choose Patients are not directly handled
how it effectively works is not a private matter between
among different competing by the private part and so its role
the public hospital and the SPV private contractor.
structures and quality is a is for the good or for the bad
vital and highly wanted intrinsically limited.
parameter.
Opportunities can be
deceiving or go beyond Innovation, fancy and incentives,
The new hospital represents a network of opportunities
expectations. The more the together with entrepreneurial
for a large set op people around it, such as its
hospital contributes to the attitudes the best
Networking contribution contribution to education and professional training, job
socio-economical characteristics of capitalism
to the general development Public opportunities in the hospital and in related activities
development of the area, the play a hidden but significant role
of the area (even commercial initiatives run by the private part),
better for the public and in igniting general development,
technological innovation. But opportunities are
private part, who can able to trickle down well beyond
uncertain and intrinsically risky.
directly benefit from related the core business of the hospital.
business.
Changes in the key elements of the contracts, The more flexible the Flexible contractual provisions
Renegotiation increasingly likely if the time span is long, enhance the contract, the easier the which allow renegotiations,
Shared
(of the agreements) risk (and opportunities) of renegotiation of the negotiation of the services to especially under agreed
agreements. be rendered, always circumstances (after a certain
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innovation /shared than anticipated, accelerating refurbishment expense. Private part's revenues may to
Risk of a quicker technical obsolescence of plants, fall below projections either designer, builder or their
fixtures and fittings. It might bring to a shortening of via loss of demand (user insurers.
the useful life of (part of) the hospital. pays model) payment Private part may arrange
abatement (availability contingency/reserve fund to meet
model) and/or operating upgrade costs subject to public
costs increasing; for public entity agreement as to funding
entity - consequence will be the reserve and control of reserve
failure to receive contracted funds upon default;
service at appropriate monitoring from the public
quantity/quality including entity; contractual covenants.
adverse effect on core
service delivery in core
service model.
Revenues of the private part
shrink up to the point of Contractual guarantees with
Risk that some services might terminate before their
endangering the going penalties might soften the
Early termination Private SPV contractual expiration time, for reasons of public
concern of the SPV which problem, albeit not completely
interest which might concern the whole concession.
might be forced to prevent it.
liquidation before time.
Risk that the quality of the services becomes
Benchmarking and periodically
technologically obsolete or that they become too
market testing the ongoing
expensive; new products, to be tested, may make
services component of projects,
obsolete the previous ones.
with a technical monitoring,
Projects have provisions in their contracts that require
Economic margins of the allow periodical quality checking
the value of certain services, such as catering and
private part risk to shrink, and prevent rent maximizing
cleaning, to be tested at intervals, typically every five to
due to growing costs of attempts from the SPV, should
seven years. The services that are subject to this value
running out-of-date services economic margins become
testing are often a significant part of the total cost of a
Market test or to missing new revenues, excessive.
Private SPV PFI contract and so the process of value testing is an
(benchmarking) should the services be Testing the value of services
important aspect in seeking to achieve value for money
assigned to a competitor. during the management phase is
from a PFI contract which may run for 25 or 30 years
Even benchmarking may a mean to reintroduce
or more. Value testing may involve comparing
result in a cost reduction. competition after the initial bid.
information about the current service providers
Benchmarking is cheaper than
provision with comparable sources [benchmarking] or
market testing, as no re-
alternatively, inviting other suppliers to compete with
tendering of the service against
the incumbent in an open competition [market testing].
the incumbent supplier is
While market testing results in a re-tendering of the
needed.
service against the incumbent supplier, with consequent
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57
MARTY, VOISIN (2007).
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58
these include cases and situations such as:
Comfort Zone Biases (People tend do what's comfortable rather than what's important);
Perception Biases (People's beliefs are distorted by faulty perceptions).
Motivation Biases (People's motivations and incentives tend to bias their judgments).
Errors in Reasoning (People use flawed reasoning to reach incorrect conclusions).
Group Think (Group dynamics add additional distortions).
See http://www.prioritysystem.com/reasons1.html.
59
See par. 4.
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60
AHP (Analytic Hierarchy Process); TOPSIS (Technique for Order Preference by Similarity to Ideal Solution); EVAMIX (Evaluation of Mixed Criteria).
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61
See www.transparency.org.
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PART
MITIGATION
RISKS BEARING DESCRIPTION CONSEQUENCES
MEASURES
RISKS
9. Macroeconomic systemic risks
Force Majeure is a common clause62 in contracts which Insurances, wherever possible;
essentially frees both parties from liability or obligation contractual covenants; reserve
when an extraordinary event or circumstance beyond the funding; contingency provisions;
control of the parties, such as a war, strike, riot, crime, building best practices (against
Loss or damage to the asset,
or an event described by the legal term "act of God" earthquakes ). Mechanisms for
service discontinuity for
(e.g., flooding, earthquake, eruption), prevents one or minimizing such risks include:
public entity (which may
both parties from fulfilling their obligations under the (a) conducting due diligence as
include inability to deliver
Force majeure Shared contract. However, force majeure is not intended to to the possibility of the relevant
core service) and loss of
excuse negligence or other malfeasance of a party, as risks; (b) allocating such risks to
revenues, or delay in
where non-performance is caused by the usual and other parties as far as possible
revenues beginning, for
natural consequences of external forces (e.g., predicted (e.g. to the builder under the
private part.
rain stops an outdoor event), or where the intervening construction contract); and (c)
circumstances. These circumstances are unlikely but requiring adequate insurances
catastrophic. which note the financiers'
interests to be put in place.
The likelihood that changes in the business
Repatriation of international
environment will adversely affect operating profits or
funds becomes harder and Contractual provision of
the value of assets in a specific country. Country risk
more expensive, if possible protective clauses is possible but
includes the threat of currency inconvertibility,
at all. hardly effective if the host
expropriation of assets, currency controls, devaluation
Financial costs borne by country falls apart, its guarantees
or regulatory changes, institutional corruption or
foreign equity and debt tend to be worthless
instability factors such as mass riots, civil war and other
holders of the SPV grow Country and political risk can be
Country Private SPV potential events. Failing states with bad policies and
(little if any dividends, reduced with Country Default
governance, especially if landlocked63 by bad
interests and debt Swaps.
neighbors, unsurprisingly have a higher and persistent
repayments). Depending on Currency hedging, wherever
country risk. In times of distress, sovereign risk
the timing of country risk possible and effective, might also
becomes effective; credit default swaps spreads
events, the project can be mitigate but not entirely solve
"explode" and recovery value shrinks. Country debt
abandoned, delayed, country risk problems.
restructuring might prove painful and with long lasting
downscaled.
reputation drawbacks.
62
See FORTIN (1995); MIZRACHI (2006).
63
This expression is taken from COLLIER (2007), according to which countries are landlocked if they have no direct access to the sea and heavily depend upon their coastal
neighbor for transport costs. Each country benefits from the growth of neighbors and this is particularly true for landlocked countries, even if wireless devices somewhat soften this
dependence. Land-locked countries could serve as labour resource pools, rather than develop as independent national economies.
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64
Http://conflictsensitivity.org/files/publib/Conflict_Project_Finance.pdf.
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Construction costs and publuc grant distribuition percentage during the construction phase
2010 33,33%
2011 33,33%
2012 33,33%
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WACC INPUTS
Beta 0,9
Market Risk Premium 4,7%
Risk Free Rate 3,8%
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PROFIT & LOSS STATEMENT () Construction Phase Management Phase
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Revenues for Services 21.018.877 21.649.443 22.298.927 22.967.894 23.656.931 24.366.639 25.097.638 25.850.568 26.626.085 27.424.867 28.247.613 29.095.042 29.967.893 30.866.930
Availability Payment 3.376.526 3.477.822 3.582.157 3.689.622 3.800.310 3.914.320 4.031.749 4.152.702 4.277.283 4.405.601 4.537.769 4.673.902 4.814.119 4.958.543
Commercial Revenues 5.627.544 5.796.370 5.970.261 6.149.369 6.333.850 6.523.866 6.719.582 6.921.169 7.128.804 7.342.669 7.562.949 7.789.837 8.023.532 8.264.238
Total Operating Revenues - - - 30.022.948 30.923.636 31.851.345 32.806.885 33.791.092 34.804.825 35.848.969 36.924.439 38.032.172 39.173.137 40.348.331 41.558.781 42.805.544 44.089.711
Costs for Services 18.766.854 19.329.860 19.909.756 20.507.049 21.122.260 21.755.928 22.408.606 23.080.864 23.773.290 24.486.488 25.221.083 25.977.716 26.757.047 27.559.759
General Costs 412.000 424.360 437.091 450.204 463.710 477.621 491.950 506.708 521.909 537.567 553.694 570.304 587.413 605.036 623.187 641.883 661.139
Commercial Costs 5.024.593 5.175.331 5.330.591 5.490.508 5.655.224 5.824.880 5.999.627 6.179.615 6.365.004 6.555.954 6.752.633 6.955.212 7.163.868 7.378.784
Total Operating Costs 412.000 424.360 437.091 24.241.651 24.968.900 25.717.967 26.489.506 27.284.192 28.102.717 28.945.799 29.814.173 30.708.598 31.629.856 32.578.752 33.556.114 34.562.798 35.599.682
EBITDA - 412.000 - 424.360 - 437.091 5.781.297 5.954.735 6.133.378 6.317.379 6.506.900 6.702.107 6.903.170 7.110.266 7.323.574 7.543.281 7.769.579 8.002.667 8.242.747 8.490.029
Construction Costs Amortization 4.000.000 4.000.000 4.000.000 4.000.000 4.000.000 4.000.000 4.000.000 4.000.000 4.000.000 4.000.000 4.000.000 4.000.000 4.000.000 4.000.000
Capitalized Financial Charges Amortization 28.792 28.792 28.792 28.792 28.792 28.792 28.792 28.792 28.792 28.792 28.792 28.792 28.792 28.792
Public Grants Deferred 1.818.182 1.818.182 1.818.182 1.818.182 1.818.182 1.818.182 1.818.182 1.818.182 1.818.182 1.818.182 1.818.182 1.818.182 1.818.182 1.818.182
EBIT - 412.000 - 424.360 - 437.091 3.570.687 3.744.126 3.922.768 4.106.769 4.296.290 4.491.497 4.692.561 4.899.656 5.112.964 5.332.671 5.558.969 5.792.057 6.032.137 6.279.419
Financial Charges - - - - 3.249.093 - 3.062.525 - 2.926.051 - 2.789.577 - 2.653.104 - 2.516.630 - 2.380.157 - 2.243.683 - 2.107.210 - 1.970.736 - 1.834.262 - 1.697.789 - 1.561.315 - 1.424.842
Pre-tax Result - 412.000 - 424.360 - 437.091 321.594 681.601 996.717 1.317.192 1.643.187 1.974.867 2.312.404 2.655.973 3.005.754 3.361.935 3.724.707 4.094.268 4.470.822 4.854.578
Taxes - - - - 204.480 299.015 395.157 492.956 592.460 693.721 796.792 901.726 1.008.581 1.117.412 1.228.280 1.341.246 1.456.373
Net Income - 412.000 - 424.360 - 437.091 321.594 477.121 697.702 922.034 1.150.231 1.382.407 1.618.683 1.859.181 2.104.028 2.353.355 2.607.295 2.865.988 3.129.575 3.398.204
check - - - - - - - - - - - - - - - - -
Construction Costs 33.333.333 66.666.667 100.000.000 96.000.000 92.000.000 88.000.000 84.000.000 80.000.000 76.000.000 72.000.000 68.000.000 64.000.000 60.000.000 56.000.000 52.000.000 48.000.000 44.000.000
Capitalized Financial Charges 85.718 374.591 719.790 690.999 662.207 633.415 604.624 575.832 547.041 518.249 489.457 460.666 431.874 403.083 374.291 345.499 316.708
Fixed Assets 33.419.051 67.041.258 100.719.790 96.690.999 92.662.207 88.633.415 84.604.624 80.575.832 76.547.041 72.518.249 68.489.457 64.460.666 60.431.874 56.403.083 52.374.291 48.345.499 44.316.708
Total Assets 35.019.633 70.244.893 109.476.385 106.106.881 100.876.883 97.475.033 94.076.578 90.209.339 86.348.230 82.493.436 78.645.146 74.803.555 70.968.864 67.141.280 63.321.016 59.508.293 55.703.335
Liabilities
Share Capital 5.000.000 5.000.000 5.000.000 5.000.000 5.000.000 5.000.000 5.000.000 5.000.000 5.000.000 5.000.000 5.000.000 5.000.000 5.000.000 5.000.000 5.000.000 5.000.000 5.000.000
Retained Earnings - - 412.000 - 836.360 - 1.273.451 - 951.857 - 474.736 - - - - - - - - - - -
Net Income - 412.000 - 424.360 - 437.091 321.594 477.121 697.702 922.034 1.150.231 1.382.407 1.618.683 1.859.181 2.104.028 2.353.355 2.607.295 2.865.988 3.129.575 3.398.204
Equity 4.588.000 4.163.640 3.726.549 4.048.143 4.525.264 5.222.965 5.922.034 6.150.231 6.382.407 6.618.683 6.859.181 7.104.028 7.353.355 7.607.295 7.865.988 8.129.575 8.398.204
Subordinated Debt 10.000.000 10.000.000 10.000.000 10.000.000 10.000.000 10.000.000 10.000.000 10.000.000 10.000.000 10.000.000 10.000.000 10.000.000 10.000.000 10.000.000 10.000.000 10.000.000 10.000.000
VAT Facility 1.600.582 3.203.636 3.208.654 1.605.600 - - - - - - - - - - - - -
Senior Debt 3.577.947 22.469.951 46.978.861 44.629.918 42.280.975 39.932.032 37.583.089 35.234.146 32.885.203 30.536.260 28.187.317 25.838.374 23.489.431 21.140.487 18.791.544 16.442.601 14.093.658
Public Grants 15.151.515 30.303.030 45.454.545 43.636.364 41.818.182 40.000.000 38.181.818 36.363.636 34.545.455 32.727.273 30.909.091 29.090.909 27.272.727 25.454.545 23.636.364 21.818.182 20.000.000
Sources 30.330.044 65.976.617 105.642.060 99.871.882 94.099.157 89.932.032 85.764.907 81.597.782 77.430.657 73.263.532 69.096.408 64.929.283 60.762.158 56.595.033 52.427.908 48.260.783 44.093.658
Net Commercial Workin Capital 101.589 104.637 107.776 1.030.597 1.061.515 1.093.361 1.126.161 1.159.946 1.194.745 1.230.587 1.267.504 1.305.530 1.344.696 1.385.036 1.426.587 1.469.385 1.513.467
VAT on Debit - - - 1.156.259 1.190.947 1.226.676 1.263.476 1.301.380 1.340.421 1.380.634 1.422.053 1.464.715 1.508.656 1.553.916 1.600.533 1.648.549 1.698.006
Current Liabilities 101.589 104.637 107.776 2.186.856 2.252.462 2.320.036 2.389.637 2.461.326 2.535.166 2.611.221 2.689.558 2.770.244 2.853.352 2.938.952 3.027.121 3.117.934 3.211.472
Total Liabilities 35.019.633 70.244.893 109.476.385 106.106.881 100.876.883 97.475.033 94.076.578 90.209.339 86.348.230 82.493.436 78.645.146 74.803.555 70.968.864 67.141.280 63.321.016 59.508.293 55.703.335
roberto.morovisconti@morovisconti.it 75
THE RISK MATRIX OF PROJECT FINANCE IN THE HEALTHCARE SECTOR
CASH FLOW STATEMENT () Construction Phase Management Phase
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Operating Revenues - - - 30.022.948 30.923.636 31.851.345 32.806.885 33.791.092 34.804.825 35.848.969 36.924.439 38.032.172 39.173.137 40.348.331 41.558.781 42.805.544 44.089.711
Operating Costs 412.000 424.360 437.091 24.241.651 24.968.900 25.717.967 26.489.506 27.284.192 28.102.717 28.945.799 29.814.173 30.708.598 31.629.856 32.578.752 33.556.114 34.562.798 35.599.682
EBITDA - 412.000 - 424.360 - 437.091 5.781.297 5.954.735 6.133.378 6.317.379 6.506.900 6.702.107 6.903.170 7.110.266 7.323.574 7.543.281 7.769.579 8.002.667 8.242.747 8.490.029
Initial Cash & Banks - - 0 0 0 2.398.815 2.939.682 3.703.097 4.469.908 4.767.933 5.072.090 5.382.561 5.699.536 6.023.210 6.353.784 6.691.466 7.036.467 7.389.009
Final Cash & Banks - 0 0 0 2.398.815 2.939.682 3.703.097 4.469.908 4.767.933 5.072.090 5.382.561 5.699.536 6.023.210 6.353.784 6.691.466 7.036.467 7.389.009 7.749.316
Cash & Banks Variation - 0 0 - 0 2.398.815 540.867 763.416 766.810 298.026 304.157 310.471 316.975 323.674 330.574 337.681 345.002 352.541 360.308
Cumulative Cash Flow - 0 0 0 2.398.815 2.939.682 3.703.097 4.469.908 4.767.933 5.072.090 5.382.561 5.699.536 6.023.210 6.353.784 6.691.466 7.036.467 7.389.009 7.749.316
roberto.morovisconti@morovisconti.it 76
THE RISK MATRIX OF PROJECT FINANCE IN THE HEALTHCARE SECTOR
PROFIT & LOSS STATEMENT () Management Phase
2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038
Revenues for Services 31.792.937 32.746.726 33.729.127 34.741.001 35.783.231 36.856.728 37.962.430 39.101.303 40.274.342 41.482.572 42.727.049
Availability Payment 5.107.299 5.260.518 5.418.334 5.580.884 5.748.310 5.920.760 6.098.382 6.281.334 6.469.774 6.663.867 6.863.783
Commercial Revenues 8.512.165 8.767.530 9.030.556 9.301.473 9.580.517 9.867.933 10.163.971 10.468.890 10.782.956 11.106.445 11.439.638
Total Operating Revenues 45.412.402 46.774.774 48.178.017 49.623.358 51.112.058 52.645.420 54.224.783 55.851.526 57.527.072 59.252.884 61.030.471 -
Costs for Services 28.386.551 29.238.148 30.115.292 31.018.751 31.949.314 32.907.793 33.895.027 34.911.878 35.959.234 37.038.011 38.149.151
General Costs 680.973 701.402 722.444 744.118 766.441 789.435 813.118 837.511 862.637 888.516 915.171
Commercial Costs 7.600.148 7.828.152 8.062.997 8.304.886 8.554.033 8.810.654 9.074.974 9.347.223 9.627.640 9.916.469 10.213.963
Total Operating Costs 36.667.672 37.767.702 38.900.733 40.067.755 41.269.788 42.507.882 43.783.118 45.096.612 46.449.510 47.842.995 49.278.285 -
EBITDA 8.744.730 9.007.072 9.277.284 9.555.602 9.842.270 10.137.539 10.441.665 10.754.915 11.077.562 11.409.889 11.752.186 -
Construction Costs Amortization 4.000.000 4.000.000 4.000.000 4.000.000 4.000.000 4.000.000 4.000.000 4.000.000 4.000.000 4.000.000 4.000.000
Capitalized Financial Charges Amortization 28.792 28.792 28.792 28.792 28.792 28.792 28.792 28.792 28.792 28.792 28.792
Public Grants Deferred 1.818.182 1.818.182 1.818.182 1.818.182 1.818.182 1.818.182 1.818.182 1.818.182 1.818.182 1.818.182 1.818.182
EBIT 6.534.120 6.796.462 7.066.674 7.344.993 7.631.661 7.926.929 8.231.055 8.544.305 8.866.952 9.199.279 9.541.576 -
Financial Charges - 1.288.368 - 1.151.894 - 1.015.421 - 878.947 - 742.474 - 606.000 - 606.000 - 454.500 - 303.000 - 151.500 0
Pre-tax Result 5.245.752 5.644.568 6.051.253 6.466.045 6.889.187 7.320.929 7.625.055 8.089.805 8.563.952 9.047.779 9.541.576 -
Taxes 1.573.726 1.693.370 1.815.376 1.939.814 2.066.756 2.196.279 2.287.516 2.426.941 2.569.186 2.714.334 2.862.473
Net Income 3.672.026 3.951.197 4.235.877 4.526.232 4.822.431 5.124.650 5.337.538 5.662.863 5.994.767 6.333.445 6.679.103 -
check - - - - - - - - - - - -
Construction Costs 40.000.000 36.000.000 32.000.000 28.000.000 24.000.000 20.000.000 16.000.000 12.000.000 8.000.000 4.000.000 -
Capitalized Financial Charges 287.916 259.124 230.333 201.541 172.750 143.958 115.166 86.375 57.583 28.792 - 0
Fixed Assets 40.287.916 36.259.124 32.230.333 28.201.541 24.172.750 20.143.958 16.115.166 12.086.375 8.057.583 4.028.792 - 0 -
VAT on Credit - - - - - - - - - - -
Cash & Banks 8.117.623 8.494.169 8.879.201 9.272.973 9.675.749 12.300.267 12.490.305 12.796.231 13.112.290 13.438.786 16.124.532
DSRA (Debt Service Reserve Account) 3.500.837 3.364.364 3.227.890 3.091.417 2.954.943 606.000 2.954.500 2.803.000 2.651.500 2.500.000 -
Working Capital 11.618.460 11.858.532 12.107.091 12.364.390 12.630.692 12.906.267 15.444.805 15.599.231 15.763.790 15.938.786 16.124.532 -
Total Assets 51.906.376 48.117.657 44.337.424 40.565.931 36.803.442 33.050.225 31.559.972 27.685.606 23.821.373 19.967.578 16.124.532 -
Liabilities
Share Capital 5.000.000 5.000.000 5.000.000 5.000.000 5.000.000 5.000.000 5.000.000 5.000.000 5.000.000 5.000.000 5.000.000
Retained Earnings - - - - - - - - - - -
Net Income 3.672.026 3.951.197 4.235.877 4.526.232 4.822.431 5.124.650 5.337.538 5.662.863 5.994.767 6.333.445 6.679.103
Equity 8.672.026 8.951.197 9.235.877 9.526.232 9.822.431 10.124.650 10.337.538 10.662.863 10.994.767 11.333.445 11.679.103 -
Subordinated Debt 10.000.000 10.000.000 10.000.000 10.000.000 10.000.000 10.000.000 10.000.000 7.500.000 5.000.000 2.500.000 -
VAT Facility - - - - - - - - - - -
Senior Debt 11.744.715 9.395.772 7.046.829 4.697.886 2.348.943 - 0 - 0 - 0 - 0 - 0 - 0
Public Grants 18.181.818 16.363.636 14.545.455 12.727.273 10.909.091 9.090.909 7.272.727 5.454.545 3.636.364 1.818.182 -
Sources 39.926.533 35.759.409 31.592.284 27.425.159 23.258.034 19.090.909 17.272.727 12.954.545 8.636.364 4.318.182 - 0 -
Net Commercial Workin Capital 1.558.871 1.605.637 1.653.806 1.703.420 1.754.523 1.807.158 1.861.373 1.917.214 1.974.731 2.033.973 2.094.992
VAT on Debit 1.748.946 1.801.414 1.855.457 1.911.120 1.968.454 2.027.508 2.088.333 2.150.983 2.215.512 2.281.978 2.350.437
Current Liabilities 3.307.817 3.407.051 3.509.263 3.614.541 3.722.977 3.834.666 3.949.706 4.068.197 4.190.243 4.315.950 4.445.429 -
Total Liabilities 51.906.376 48.117.657 44.337.424 40.565.931 36.803.442 33.050.225 31.559.972 27.685.606 23.821.373 19.967.578 16.124.532 -
roberto.morovisconti@morovisconti.it 77
THE RISK MATRIX OF PROJECT FINANCE IN THE HEALTHCARE SECTOR
View publication stats
Fixed Assets 0 0 0 0 - 0 0 0 - 0 0 - 0 - 0 - 0
Net Commercial Working Capital 45.404 46.766 48.169 49.614 51.103 52.636 54.215 55.841 57.516 59.242 61.019 - 2.094.992
VAT on Credit/Debit 50.940 52.468 54.042 55.664 57.334 59.054 60.825 62.650 64.529 66.465 68.459 - 2.350.437
Unlevered Cash Flow 8.841.074 9.106.306 9.379.495 9.660.880 9.950.707 10.249.228 10.556.705 10.873.406 11.199.608 11.535.596 11.881.664 - 4.445.429
Initial Cash & Banks 7.749.316 8.117.623 8.494.169 8.879.201 9.272.973 9.675.749 12.300.267 12.490.305 12.796.231 13.112.290 13.438.786 16.124.532
Final Cash & Banks 8.117.623 8.494.169 8.879.201 9.272.973 9.675.749 12.300.267 12.490.305 12.796.231 13.112.290 13.438.786 16.124.532 -
Cash & Banks Variation 368.307 376.546 385.032 393.773 402.776 2.624.518 190.038 305.926 316.059 326.496 2.685.746 - 16.124.532
Cumulative Cash Flow 8.117.623 8.494.169 8.879.201 9.272.973 9.675.749 12.300.267 12.490.305 12.796.231 13.112.290 13.438.786 16.124.532 -
roberto.morovisconti@morovisconti.it 78