Table Of ContentPFI PPP FINANCIAL
MODELLING AND ANALYSIS
A Practical Guide
David Whittaker
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ACKNOWLEDGEMENTS
The author would like to thank his family, Katerina and Daniella, for their support and all the
professional people that have positively contributed to his skills, experience and knowledge
over the years.
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CONTENTS
Introduction vii
Section 1. Public Sector Financial Modelling and Analysis 1
Section 2. Bid or Financial Close Modelling 5
Financial modelling best practice 5
Scope 7
Layout 10
Timeline 12
Construction 13
Financing 13
Unitary charge 18
Operating costs 18
Working capital 19
Accounting 22
Financial asset accounting 25
Taxation 26
Dividends 27
Profit & loss account 28
Cash flow 29
Balance sheet 30
Sensitivities 30
Checks 33
IRRs 33
Lenders’ ratios 35
Summary 36
Finalising the bid or financial close model 36
Optimising the unitary charge 46
Sensitivity logic 48
Debt sculpting 50
Sources of error 55
Self testing the model 55
Limited scope financial model reviews 56
Using the model 60
Financial model audits – financial close model 60
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Contents
Disclaimers 72
User and technical documentation 73
Data book 77
Section 3. The Post Financial Close (“Operating Model”) 87
Introduction 87
Scope 88
Designing the financial model 88
Layout 89
Timeline 91
Main differences to a bid or financial close model 92
Process for building a post-financial close model 94
Actual inputs and actual logic 96
Funding 99
Unitary charge 103
Operating costs 104
Working capital 105
Accounting 108
Dividends 115
P&L summary – reforecast 116
Cash flow – reforecast 116
Balance sheet – reforecast 118
Cash flow – full contract 119
P&L summary – actual and reforecast 120
Cash flow – actual and reforecast 120
Balance sheet – actual and reforecast 121
P&L summary – financial close 121
Cash flow summary – financial close 122
Balance sheet – financial close 122
Shareholder actual calculations 122
Shareholder analysis 123
Lenders actual cash flows 124
Lenders’ ratios 124
Summary 126
Historic debt statement 126
Historic debt statement exercise 126
Sensitivities 126
Actuals – for management reporting 129
Budget – for management reporting 129
Checks 129
Finalising the operating financial model 130
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Contents
Disclaimers 139
User and technical documentation 139
Section 4. The Post Financial Close (“Management Reporting Model”) 147
Model layout 147
Timeline 148
Imports and inputs 149
P&L account management reporting – reforecast calculation 149
P&L actual management reporting calculation 149
Cash flow management reporting – monthly calculation 150
Balance sheet management reporting – monthly calculation 150
Detailed P&L 150
Cashflow statement detailed 151
Balance sheet 151
Summary P&L 152
P&L account management reporting – monthly 152
Cashflow management reporting – monthly 152
Balance sheet management reporting – monthly 153
Checks 153
User and technical documentation – management reporting model 153
Finalising the management reporting model 156
Using the model and the control process 168
Sources of error 168
Self or internal testing the management reporting model 169
Section 5. Other Areas for Financial Modelling and Analysis 171
Contract renegotiations 171
Refinancing 171
Restructuring 173
Secondary markets 174
Project managing financial modelling projects 176
The use of generic and template financial models 177
Conclusion 178
Glossary 179
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Introduction
This book has been written specifically to address the financial modelling and analysis needs
for PFI and PPP projects both at the bid, financial close and post-financial close stages. It will
be useful for those who are required to enhance their skills in this area, whether at the begin-
ner or intermediate level. However, it will also be useful for managers who require a further
understanding of the process without having to become hands on. The main areas that require
analysis are examined through extracts from a demonstration financial model that serves as a
working example. The reader will be able to work through the process of building the financial
models on a step-by-step basis, with reference to sample exercises, at their own pace, to help
them build up their skills in this area.
PFI stands for the private finance initiative, the UK government’s initiative to use private
sector finance for government sector projects. It is a method that provides private finance for
“public private partnerships” (PPP) between the public and the private sector.
It is worth noting that this is book is not intended or suitable for only UK readers, as the
PFI and PPP concepts have been adopted almost on a worldwide basis, with further adoption
likely to follow by other nations.
It makes good sense to outline how typical PFI PPP arrangements actually work, before
examining financial modelling and analysis of PFI PPP in detail, which is the main objective
of this book.
A typical PFI PPP structure can be seen in Illustration 1.
A typical project structure is comprised of a consortium of project sponsors from private
sector companies, who provide equity in the form of ordinary shares and subordinated debt or
a shareholder loan to the special purpose company (SPC). A syndicate of senior lenders led by
a lead arranger provide senior debt to the SPC in return for its principal repayment, interest
and fees. The SPC then contracts with the public sector body, such as a local council, hospital
trust, etc, for the provision of the service through a project or concession agreement. The SPC
receives a unitary payment in return for providing the services to the public sector body. The
SPC contracts with the design and build contractor for the construction of the asset, and with
the facilities management contractor for the provision of the ongoing services, such as catering
and maintenance. In order to facilitate such a project structure, the following typical contracts
are drawn up and signed before financial close:
• project or concession agreement;
• design and build agreement;
• lender’s facility agreement;
• facilities management agreement; and
• shareholders’ agreement.
The financial and contractual arrangements are reflected in a financial model that will forecast
results over the life of the concession at the bid and financial close stage. There should be the
ability to measure the impact of risk upon these results through sensitivity analysis prior to
financially closing the contract. Once the PFI PPP concession is underway there is the need to
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PFI PPP Financial Modelling and Analysis
Illustration 1 A typical design, build, finance and operational PFI PPP structure
Sub debt and equity
Consortium
Blended returns
Debt Project agreement
Special
Senior Public
purpose
lenders sector
company
syndicate body
(SPC)
Debt servicing Unitary payment
Design and Facilities
build management
contractors contractors
Construction Services
Source: Modelling Solutions
regularly monitor the project performance by updating the actual financial results to date and
changing any necessary input assumptions, as well as helping to identify any likely problems
as soon as possible, so that corrective action can be taken as appropriate.
In summary, the financial model will produce essential outputs, including profit and loss
(P&L), balance sheets, cash flows, and shareholders’ returns and lenders’ ratios. This book,
being a practical guide, will demonstrate and provide skills transfer in both PFI / PPP bid and
post-financial close (operational modelling) and analysis, thus providing financial manage-
ment skills enhancement over the life of the concession.
PFI PPP Financial Modelling and Analysis includes numerous examples of numbers,
calculations and code for specific areas of modelling and analysis. There are also practical
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Introduction
exercises for the reader to complete in order to refine their skill and understand key issues.
The book has been broken down into appropriate sections, which allows readers to focus on
the areas of more interest to them. I hope that you gain great benefit from the reading and use
of this book.
It is important to note that the figures or the Excel example logic used in this book do
not represent any past, current or, indeed, future PFI PPP bids, special purpose company or,
indeed, actual financial evaluation of any kind. The numbers and results contained herein are
purely fictional.
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