Support Instrument for Financial Planning and Implementation of Large Scale Projects |
Introduction of the financial model
Investment decisions are made in an environment of competing opportunities, scarce resources and uncertainty. These features of investments are specially true for the large projects of transport infrastructure development in the Central and Eastern European countries being in transition. The lack of modern motorways, the necessary reconstruction of the railways, the building of new logistic centres and terminals for combined transport, the extension of international ports and airports are those kind of investments where the available development sources of the state budget are not sufficient. Therefore the international financial institutions and governments, including the top authorities of EU, have an important role in finding new efficient solutions for financing the necessary transport infrastructure development projects.
The concession system, introduced in the majority of these countries, the joint private-public financing system and the common investment projects co-ordinated by the state and local authorities all require more and more sophisticated computer aided methods supporting the decision makers.
However there exist a few financial models used by international consulting companies for these purposes, the special circumstances of the Central and Eastern European region (e.g. much higher inflation rates than in the developed West European countries, often changing currency rates, fuel prices, tax rates, social security costs, lower purchasing power, higher political and social uncertainty etc.) have made it necessary to develop a new financial model which is able to handle all of these special problems and in the same time fulfil the requirements of compatibility related to the international bank standards .
The investment financing activity can only be performed with the help of a target software run on a computer providing manageability of the immense quantity of data records and producing an output corresponding to the expectations of the international financial institutions both in content and form.
Unlike the majority of the project finance models developed to the PC platform INNOFINance is based on a database (Microsoft Access). So the easy generation of several cases of a project makes INNOFINance an ideal instrument for project finance modelling not only in the economically stabilised countries, but also in the developing areas, where the shortage on sound financial data and forecasts makes the analysis of several cases very important.
The experts (who are working at the Department of Transport Economics at the Technical University of Budapest) have developed a new software package and methodology which has the following key features:
The software package is suitable for handling a wide range of projects, e.g.
- applications include BOT schemes, public, private (or privat-public) sector developments,
- projects with different life span can be investigated;
- financial sources and uses can be given in different currencies;
- variations of projects and sensitivity analisys can be easily generated;
- several types of financing sources can be handled;
- the amount and costs of the necessary types of sources have been automatically calculated
The efficient, highly structured architecture integrates a lot of specific functions, e.g.
- provides detailed demand forecast taking into account the different components of traffic flows, vehicle volumes, fares, tolls and revenue structures,
- provides detailed forecasts of construction and operating cost structure with different volumes, unit costs and scheduling,
- produces detailed cash-flow forecasts;
- examines different length of concession periods;
- identifies the subsidy requirements;
- provides a review of potential funding arrangements;
- calculates the structure of sources and uses;
- examines financial performance under different economic conditions;
- produces tables, graphics, diagrams in any languages.
Calculation of several indicators, e.g.
- net present value (NPV);
- internal rate of return (IRR);
- annual debt coverage ratio (Annual DCR);
- interest coverage ratio (ICR);
- loan life debt coverage ratio (Loan life DCR);
- concession life debt coverage ratio (Concession life DCR);
- project returns;
- return on equity (ROE);
- earnings per share (EPS);
A wide range of sensitivity analysis is included in the program in order to make easier to analyse the risks related to the decision, e.g. it examines the impact of
- increasing or decreasing the values in any income or cost time series
- shortening or lengthening (rush or normal scheduling) of construction
The financial model supports investment proposals and provides decision makers with clear analysis and guidance. The model allows the financial viability of investment projects to be fully tested.
The financial model can accept (or import) the following input data:
- input data of the macro-economy:
- forecasts for consumer price indexes (domestic CPI and the dominant foreign one)
- forecasts for general production price indexes (domestic and foreign)
- forecasts for production price indexes in specific industrial sectors
- forecasts for exchange rates for the dominant currencies
- taxes (local taxes, income tax, VAT, etc.)
- devaluation rate of local currency
- interest rates
- social security rate
- main features of the sources
- own sources
- other sources (subsidies, government support, etc.)
- type of currencies
- indicative debt terms and conditions (domestic, international)
- drawdown schedules
- repayment conditions
- revenue forecasts
- identification of possible categories of revenue
- traffic flows
- indexes for revenues
- data set of capital expenditures
- identification of the different categories of occurring capital expenditures
- forecasts for construction costs (volumes, unit costs)
- indexes for construction costs
Output (calculated) data sheets
The financial model produces cash flow tables
- macroeconomy sheet
- construction costs sheet
- incomes sheet
- operating costs sheet
- depreciation schedule
- cash-flow schedule
- project return & ratios
- balance sheet
- sources and uses (inflow, outflow)
- rate of return and debt coverage ratios
- sensitivity analysis
Applications of the model
After the above described conception developed model using flexible limits of concerned effects is capable to carry out complex financial calculations extended for economic and social assessments. Among these in connection with transport infrastructure developments examinations concerned
- the M5 and M7 motorway,
- Complex economical level analysis of Budapest Intermodal Logistics Centre (BILC),
- feasibility study for purchasing new trams for Budapest urban transport, have to be emphasised.
Financial feasibility analysis of the reconstruction and extension of M7 motorway
M7 motorway was the first constructed motorway in Hungary built in the 60s. It is directed from Budapest (the capital of Hungary) to the lake Balaton, the most popular holiday and recreation area of Hungary. The quality of the concrete surface of the currently about 100 km long motorway is already very poor, as a result of the poor construction quality and the lack of the necessary maintenance and renewal activity in the past decades.
In 1997 and 1998 several feasibility assessment studies were prepared for the Ministry of Transport, Communication, and Water Management concerning to the reconstruction and the extension up to the Hungarian border of the M7 contracted by together with the application of a tolling system. The main aspects of the studies were:
- scheduling of the project (one phase implementation, two phase implementation, extension together only with minimal rehabilitation of the old section)
- funding of the project (pure state owned, concession company owned, joint venture /PPP/)
- application of a moderate toll level together with state provided partial shadow toll
The financial positions of all of the main actors of the project (the state, the financing institutions and the concession company) have been evaluated, applying many financial indicators (IRR, ROE, NPV, debt service cover ratios).
One of the most important conclusion of the calculations was that the minimal total implementation cost occurred in case of the pure state owned project. But analysing the quantity of the required sources the demand for many of the sources (mostly for debts) in case of the state and also of the concession company owned implementation resulted too high, and only at the joint venture (PPP) project implementation resulted such financial resource quantities, what appeared on the national and foreign financial markets probably accessible.
Financial feasibility analysis of the extension of M5 motorway
Currently there is one concession company (called AKA) owned and operated motorway in Hungary, this is the M5 motorway. This road directs to the south from Budapest to the direction of Szeged and Romania currently in about 100 km length. It was constructed in 1996-1997, and since that time the drivers have to pay toll at toll gates.
The concession contract between the state and AKA gives the right to AKA to extend M5 an additional 60 km section up to the Hungarian border. Before and during the discussions concerning to this extension of M5, Eurout Ltd, the technical consultant of the Hungarian state ordered a great number of financial feasibility assessments using the computer model described above.
The analysed cases were constructed from the following parameters:
- scheduling of the project (one phase implementation, highway in the first phase, motorway in the second phase)
- funding of the project (several distributions of the state, AKA funds and debts)
- different toll levels
The purpose was to find that implementation cases,
- what are acceptable for AKA
- • and to analyse the cash-flow positions of the state in short and long terms to select the most favourable project versions
Complex economical level analysis of Budapest Intermodal Logistics Centre (BILC)
Near to the south border of Budapest a new Logistics Centre was planned partly to replace the old combi-terminal called Jozsefvaros of MAV (the Hungarian State Railways). The state
- is building a new railway combi-terminal called Soroksar and
- providing the land for the logistics centre equipped with all of the necessary infrastructure till the fence of the area (water, electricity, telecommunication, road links, ...)
The construction and operation of the logistics centre is performed by a consortium of private logistic companies, who are under selection in an international competitive bidding procedure. The most significant financial parameters were
- the unnecessary reconstruction cost at Jozsefvaros
- increasing revenue of MAV not loosing it’s proportion in combi-transport as a consequence of the high quality rail service on the new Soroksar combi-terminal
- taxes and other revenues
A detailed environment protection assessment has been prepared concerning to the BILC project. Related to the ‘do nothing’ case significant external revenues were occurring in
- decreasing environment stress (air and noise pollution, unfavourable traffic effects to the settlement) in the area of Jozsefvaros (the old combi-terminal is settled relatively close to the centre of Budapest and can be reached by the heavy trucks only on old, congested roads and partly in department areas).
The other external effects
- water and other pollution,
- ground pollution,
- effects to the fauna and flora,
- changes in the built environment didn’t produce significant external costs or revenues.
Monaterising external effects is always difficult. In the BILC case e.g. the quantitative estimation of the air pollution could be evaluated and the monetarised values could be estimated from two directions
- top-bottom direction: on the base of the international research data, the local databases and the performance indicators of the Hungarian economy a rough cost data could be evaluated
- bottom-top direction: analysing the project cash-flows, in the case of shortage of financial resources it can be modelled, what additional financial sources would be required to ensure the financial balance or profitability of the project
The calculation of the two amounts provides a very rough comparison to investigate, if on a socio-economical level the external revenues ensure the ‘incomes’, what are necessary to finance the financial shortage of the project.
The conclusions of the BILC assessment were that the NPV of the project cashflow presents positive value already after 10 years even without taking the external effects into consideration, and the payback period is rather insensitive to the decrease of the projected incomes.
Feasibility study for purchasing new trams for Budapest urban transport
The busiest tram line of Budapest is also the busiest line of Central-Europe, the capacity of it is close to the lower bound of capacity of a metro line. The Budapest Municipality Office of Lord Major and the BKV (Budapest Transport Company) decided to buy new low floor vehicles to this important tram line. This action have a positive influence on the whole Budapest tram network, because a major part of the tram fleet of BKV is more than 40 years old, and many of these coaches should already be scrapped.
We surveyed the cost savings due to directly quantifiable impacts, by matching them against the investment costs, as these savings incur clearly at corporate level:
- the maintenance costs projected to 1000 km have decreased substantially, by 50%
- energy consumption: as a result of the more efficient operation, the modern drive and the recuperation of breaking resulted in a 30% decrease in the overall energy cost related to the old vehicles to be scrapped
- the old vehicles had to be overhaul in every 16 years, these cost can be saved in case of new vehicles.
The indirect economic impacts have been calculated on the base of:
- the money value of the time savings for the national economy achieved by all the passengers.
- In the calculations the following elements were considered:
- the time saving of the improved service quality which had a secondary effect of attracting passengers,
- increasing the revenue generated;
- decreasing the usage of individual means of transport, so decreasing congestion of vehicles, decreasing costs for the owners of vehicles and decreasing the risk of accidents therefore the costs of damage and accident can be cut down as well
At the external effects no substantial improvement compared to the old trams could be experienced. Based on an earlier analysis of BKV (Made for the purpose of information) we carried out analysis of the assumption of not implementing the project of purchasing the new trams. We assumed that we would have to replace the capacity of the trams by buses because of the of the scrapping of the old trams and assessed the increase of air pollution and its impact. According to the results this unfavourable solution would result in the emission of an additional 26,3 t CO, 34,8 t CH, 788 t NOx and 17,7 t of soot each year.