Treasury Corporation of Victoria

PPP Modelling
Scenarios
March 2014

For further information Address

please contact:
Level 12
Robert Hibbard 1 Collins Street
Melbourne VIC 3000
Nathan Carr
Australia
Philip Rappoccio
Justin Lofting
Project Advisory Services
Telephone: +61 3 9650 7577
Facsimile: +61 3 9650 7557
1.0 Executive Summary
TCV has been requested by the Department of Treasury and Finance (DTF) to undertake a Public Private
Partnerships Financial Modelling Exercise to determine the impact of changes in key input cost components
on the Net Present Cost (NPC) of the Quarterly Service Payments (QSP) of a typical PPP Project.

TCV has considered four Baseline Models with four scenarios modelled for each. The four models are based
on the following assumptions:

Baseline 1 - is based on a typical availability payment/social infrastructure PPP with a capital component
of the projects QSP of 60%
Baseline 2 - is more capital cost intensive (capital component of the QSP is around 85%)
Baseline 3 - is more operationally cost intensive (capital component of the QSP is around 40%)
Baseline 4 includes a capital contribution at the end of construction.
TCV has modelled the impact on the NPC of the QSP for each Baseline under the following scenarios:

Scenario 1 - reducing construction cost in the model by 5%, 10% and 20% (noting that reduced
construction cost will have a flow on impact on other cost line items)
Scenario 2 - reducing the financing fees and margins by 5%, 10% and 20% (noting what the equivalent
basis point change is)
Scenario 3 - reducing the operating costs by 5%, 10% and 20%
Scenario 4 reducing equity returns by 5%, 10% and 20%.
Each of these scenarios has been analysed based on two discount rates:

an example PPP bid discount rate of 7.18% (risk free rate plus systematic risk premium)
an example risk free rate of 4.98%.
The results of our modelling for the 5% sensitivity are shown below.

Chart 1: Project Sensitivities at 5%

Under the Baseline 1 Model, the results of the analysis show that reductions to the hypothetical projects
construction cost have the greatest NPC sensitivity. The sensitivities to changes in financing fees and
margins, equity returns and Facilities Management (FM)/consortium costs have a lesser impact.

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Under the Baseline 2 and Baseline 4 analyses, variations to construction costs are also shown to have the
greatest NPC impact, while as expected under the Baseline 3 analysis, operating costs are show to have the
greatest NPC impact to varying base assumptions.

In addition, while a lower discount rate increase the costs associated with the project on an NPC basis, when
the discount rate is varied to the risk free rate the results of the analysis are similar in relative terms.

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2.0 TCV hypothetical PPP Model
A hypothetical PV project has been developed, with key base case input assumptions summarised in Table 1
below. Given the hypothetical PPP Model utilised by TCV, it should be noted that all results are theoretical
only.

Table 1: Key PPP model inputs

Description Value

Total Construction Cost $250 million

Construction Period 3.25 years

Operating Period 25.0 years

Indexation (assumed CPI) 2.50%

The following pie chart shows the break-down of cash-flows (uses of funds) associated with the hypothetical
projects NPC of its QSP (Baseline 1).

Chart 2: NPC of Quarterly Operating Cash Flows

2.1 Approach to modelling scenarios

In conducting the modelling the following approach was taken for each scenario:

Scenario 1 was modelled by re-solving the hypothetical model by adjusting the construction cost along
the construction S-curve down by 5%, 10% and 20% respectively, keeping the other key general inputs
from Table 1 constant
Scenario 2 was modelled by re-solving the hypothetical model by adjusting the four major financing cost
components (Construction Margin, Commitment Fee, Upfront Debt Underwriting Fee and Operating
Margin) down by 5%, 10% and 20% respectively, keeping the other key general inputs from Table 1
constant

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 Scenario 3 was modelled by re-solving the hypothetical model by adjusting the Consortium and Facility
Management Costs assumed in the hypothetical model down by 5%, 10% and 20% respectively, keeping
the other key general inputs from Table 1 constant
Scenario 4 was modelled by re-solving the hypothetical model by adjusting the Equity Returns (and the
debt service coverage ratios) assumed in the hypothetical model down by 5%, 10% and 20%
respectively, keeping the other key general inputs from Table 1 constant.

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3.0 Modelling Results
3.1 Baseline 1 Social Infrastructure Project
This structure assumes that the capital component of the NPC of the QSP is around 60%. To achieve this
Baseline model, the operating costs were adjusted keeping the construction cost fixed at the assumed S-
curve, totaling $250 million. In this instance, the base case NPC of the QSP in our hypothetical model is
$415.5 million.

Table 2 below summarises the impact on the NPC of the QSP that was achieved through the model re-
solves under each scenario described above.

Table 2: Baseline 1 Output Summary

Description Value % Change Value % Change
versus versus
Base case Base case

Discount Rate 7.18% 4.98%

Base Case NPC $415.5m $552.4m

Scenario 1 Construction down 5% $403.4m -2.9 $537.4m -2.7

Scenario 1 Construction down 10% $391.3m -5.8 $522.7m -5.4

Scenario 1 Construction down 20% $367.0m -11.7 $493.0m -10.8

Scenario 2 Financing Fees & Margins down 5% $412.9m -0.6 $549.0m -0.6

Scenario 2 Financing Fees & Margins down 10% $410.3m -1.3 $545.7m -1.2

Scenario 2 Financing Fees & Margins down 20% $405.3m -2.6 $539.0m -2.4

Scenario 3 FM/Consortium costs down 5% $406.7m -2.1 $540.6m -2.1

Scenario 3 FM/Consortium costs down 10% $398.0m -4.2 $529.0m -4.2

Scenario 3 FM/Consortium costs down 20% $380.8m -8.4 $506.0m -8.4

Scenario 4 Equity Returns down 5% $412.8m -0.6 $548.8m -0.7

Scenario 4 Equity Returns down 10% $411.0m -1.1 $546.3m -1.1

Scenario 4 Equity Returns down 20% $406.7m -2.1 $540.5m -2.2

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3.2 Baseline 2 Capital Cost Intensive Project
The Baseline 2 structure assumes that the capital component of the NPC of the QSP is around 85% (such as
a road freeway availability project). To achieve this Baseline model, the operating costs were adjusted
keeping the construction cost fixed at the assumed S-curve, totaling $250 million. In this instance, the base
case NPC of the QSP in our hypothetical model is $298.2 million.

Table 3 below summarises the NPC of the QSP that was achieved through the model re-solves under each
scenario described above.

Table 3: Baseline 2 Output Summary

Description Value % Change Value % Change

versus versus
Base case Base case

Discount Rate 7.18% 4.98%

Base Case NPC $298.2m $393.9m

Scenario 1 Construction down 5% $286.1m -4.1 $378.9m -3.8

Scenario 1 Construction down 10% $274.0m -8.1 $364.2m -7.5

Scenario 1 Construction down 20% $249.8m -16.2 $334.5m -15.1

Scenario 2 Financing Fees & Margins down 5% $295.5m -0.9 $390.2m -0.9

Scenario 2 Financing Fees & Margins down 10% $292.9m -1.8 $387.2m -1.7

Scenario 2 Financing Fees & Margins down 20% $287.7m -3.5 $380.5m -3.4

Scenario 3 FM/Consortium costs down 5% $295.4m -0.9 $390.1m -1.0

Scenario 3 FM/Consortium costs down 10% $292.5m -1.9 $386.2m -2.0

Scenario 3 FM/Consortium costs down 20% $286.9m -3.8 $378.0m -4.0

Scenario 4 Equity Returns down 5% $295.5m -0.9 $390.3m -0.9

Scenario 4 Equity Returns down 10% $293.6m -1.5 $387.8m -1.5

Scenario 4 Equity Returns down 20% $289.4m -3.0 $382.0m -3.0

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3.3 Baseline 3 Operational Cost Intensive Project
The Baseline 3 structure assumes that the capital component of the NPC of the QSP is around 40%. To
achieve this Baseline model, the operating costs were adjusted keeping the construction cost fixed at the
assumed S-curve, totaling $250 million. In this instance, the base case NPC of the QSP in our hypothetical
model is $636.4 million.

Table 4 below summarises the NPC of the QSP that was achieved through the model re-solves under each
scenario described above.

Table 4: Baseline 3 Output Summary

Description Value % Change Value % Change

versus versus
Base case Base case

Discount Rate 7.18% 4.98%

Base Case NPC $636.4m $850.8m

Scenario 1 Construction down 5% $624.3m -1.9 $835.8m -1.8

Scenario 1 Construction down 10% $612.3m -3.8 $820.9m -3.5

Scenario 1 Construction down 20% $588.3m -7.6 $791.3m -7.0

Scenario 2 Financing Fees & Margins down 5% $633.7m -0.4 $847.0m -0.4

Scenario 2 Financing Fees & Margins down 10% $631.2m -0.8 $844.0m -0.8

Scenario 2 Financing Fees & Margins down 20% $626.2m -1.6 $837.5m -1.6

Scenario 3 FM/Consortium costs down 5% $616.7m -3.1 $824.0m -3.1

Scenario 3 FM/Consortium costs down 10% $596.9m -6.2 $797.3m -6.3

Scenario 3 FM/Consortium costs down 20% $557.5m -12.4 $744.2m -12.5

Scenario 4 Equity Returns down 5% $633.7m -0.4 $847.1m -0.4

Scenario 4 Equity Returns down 10% $631.8m -0.7 $844.6m -0.7

Scenario 4 Equity Returns down 20% $627.6m -1.4 $838.8m -1.4

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3.4 Baseline 4 Social Infrastructure Project with Capital Contribution
The Baseline 4 structure is based on Baseline 1 however a $100 million capital contribution at the end of
construction is made. Income tax has also been excluded. In this instance, the base case NPC of the QSP in
our hypothetical model is $404.5 million.

Table 5 below summarises the NPC of the QSP that was achieved through the model re-solves under each
scenario described above.

Table 5: Baseline 4 - Output Summary

Description Value % Change Value % Change
versus versus
Base case Base case

Discount Rate 7.18% 4.98%

Base Case NPC (incl. capital contribution) $404.5m $516.6m

Scenario 1 Construction down 5% $392.8m -2.9 $502.5m -2.7

Scenario 1 Construction down 10% $381.1m -5.8 $488.1m -5.5

Scenario 1 Construction down 20% $357.9m -11.5 $459.6m -11.0

Scenario 2 Financing Fees & Margins down 5% $402.7m -0.4 $514.2m -0.5

Scenario 2 Financing Fees & Margins down 10% $400.7m -0.9 $511.7m -0.9

Scenario 2 Financing Fees & Margins down 20% $397.1m -1.8 $506.6m -1.9

Scenario 3 FM/Consortium costs down 5% $396.0m -2.1 $505.1m -2.2

Scenario 3 FM/Consortium costs down 10% $387.4m -4.2 $493.4m -4.5

Scenario 3 FM/Consortium costs down 20% $370.0m -8.5 $470.0m -9.0

Scenario 4 Equity Returns down 5% $403.4m -0.3 $515.1m -0.3

Scenario 4 Equity Returns down 10% $402.4m -0.5 $513.8m -0.5

Scenario 4 Equity Returns down 20% $400.1m -1.1 $510.8m -1.1

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4.0 Summary of Findings
Under the Baseline 1 Model, the results of the analysis show that reductions to the hypothetical projects
construction cost have the greatest NPC sensitivity. The sensitivities to changes in financing fees and
margins, equity returns and FM/consortium costs have a lesser impact.

This is driven by the fact that the projects construction cost is directly correlated with the amount of capital
required (both debt and equity). This in turn drives the required amounts to be serviced under the structure,
and hence reductions in constructions costs reduce both debt and equity outstanding and the flow on to
consequential interest and equity distributions required.

Under the Baseline 2 Model, where a more capital intensive project is considered, the hypothetical projects
sensitivity to construction costs is increased from the Baseline 1 Model. As there is a greater amount of debt
in the structure than Baseline 1, the sensitivity to financing fees and margins and equity returns is also
increased from the Baseline 1 Model, while as expected, the FM/consortium costs sensitivity is reduced.

Under the Baseline 3 Model, the projects FM/consortium costs provide the greatest sensitivity to the
Projects NPC. The construction cost sensitivity is reduced and the sensitivity split between construction and
FM/Consortium costs is broadly in proportion to the 40/60 capital/operating composition, when compared
with Baseline 1s 60/40 Capital/Operating composition.

Under the Baseline 4 Model, where a State capital contribution is introduced, the sensitivity to construction
costs and FM/consortium costs is similar to Baseline 1 where there is no State capital contribution. The
major point of differentiation is as expected, the projects NPC is less sensitive to changes to financing fees
and margins as the amount of debt in the structure has been reduced on construction completion.

In addition, while a lower discount rate increase the costs associated with the project on an NPC basis, when
the discount rate is varied to the risk free rate the results of the analysis are similar in relative terms.

DISCLAIMER

This Public Private Partnership Modelling Scenarios (PPP Financial Modelling Paper) has been prepared by
Treasury Corporation of Victoria (TCV) at the request of the Victorian Department of Treasury and Finance.

This PPP Financial Modelling Paper:

is subject to hypotheses and assumptions outlined above

is based on PPP information and financial markets information available to TCV at the time of
preparation
has been prepared on the basis that there will be no significant changes in current market conditions or
increased volatility in interest rates.
The analyses set out in this PPP Financial Modelling Paper are based on assumptions regarding future
uncertain events and any conclusions drawn from it may be materially affected if future events are different
to the assumptions used. Outcomes will also be subject to variations due to fluctuations and changed
financial market or economic conditions. TCV therefore does not warrant or represent that the information
contained in this PPP Financial Modelling Paper will be complete, accurate or suitable for use and, to the
fullest extent permitted by law, TCV accepts no responsibility or liability (whether from negligence or
otherwise) to any person for any direct or indirect loss, damage, cost or expense whatsoever arising from
use of the information contained in this PPP Financial Modelling Paper.

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