1. TRANSACTION ADVISORY SERVICES t Financial Appraisal Projects and Capital Acquisitions Presented by Andre Walcott of Ernst & Young Caribbean

2. TRANSACTION ADVISORY SERVICES t Agenda Introduction The Dilemma Options Analysis Options Analysis Methodology

3. TRANSACTION ADVISORY SERVICES t Introduction Regional Port Authorities are faced with the ever present dilemma of efficiently and effectively utilising the limited financial and natural resources to fulfill the economic and social obligations of the primary shareholder, usually Government. you How do you manage this dilemma?

4. TRANSACTION ADVISORY SERVICES t The Dilemma With limited financial resources, the resistance of Government to guarantee financing obligations, and a country of expectations, how do you know which projects to undertake and which capital acquisitions to make at which time?

5. TRANSACTION ADVISORY SERVICES t Options Analysis Options analysis: examines the economic benefits examines the costs examines the non-financial benefits identifies the risks and their impact on the investment accounts for other qualitative supporting information

6. TRANSACTION ADVISORY SERVICES t IRR Other Indirect Savings/ Revenue Other Agency Savings/ Revenue Savings/ Revenue NPV Payback Policy Environ- mental Strategic Support Information Comparable Projects Social/ Service Delivery Stakeholder Support ROI Options Analysis Methodology Risk Process Strategic Alignment Governance

7. TRANSACTION ADVISORY SERVICES t Approach to Options Analysis There are seven tasks in detailed option analysis: Identify and categorise the benefits Identify and categorise the costs Develop a basis for the estimation of costs and benefits Information gathering Estimation of costs and benefits –Cash Flow –Financing Mechanisms Risk analysis Assembling the analysis in a business case

8. TRANSACTION ADVISORY SERVICES t Identify and Categorise Benefits

9. TRANSACTION ADVISORY SERVICES t BENEFITS CATEGORISATION Internal EconomicExternal EconomicValue ScoreQualitative Increased Revenue Economies of Scale Employee Productivity Savings Other utilisation Savings Cruise line Savings/ Revenue Policy (procurement/tender guidelines) Value Score Supporting Information Other Agency Savings/ Revenue Social/ Service Delivery Comparable Projects Other Indirect Savings/ Revenue Governance (transparency) Stakeholder Support Strategic (Port specific) Strategic Alignment (Country specific) Environmental The Acquisition/ Construction process Other Relevant Measures Category Level Sub-category Level

10. TRANSACTION ADVISORY SERVICES t Identify and Categorise Costs

11. TRANSACTION ADVISORY SERVICES t Cost Categorisation Cost categorisation involves more than examining the capital costs but also the operating costs associated with the acquisition or project.

12. TRANSACTION ADVISORY SERVICES t Operating Costs Admin & Management Insurance Legal fees Consultants Contractors Interest costs and debt service Personnel/Staff Expenses Salaries Overtime Training Facilities Expense Repairs and Maintenance Other Expenses Market research

13. TRANSACTION ADVISORY SERVICES t Capital Costs Market Planning Definition of requirement Business Planning Costs Options Analysis Other Asset Cost Other Asset Costs Assembly and training Procurement Charges/Contractor’ s fees Financing Charges Consultancy Fees Other Expenses

14. TRANSACTION ADVISORY SERVICES t Information Gathering

15. TRANSACTION ADVISORY SERVICES t Information Gathering Information gathering should commence as soon as possible to ensure that the most reliable data available is collected and collated to facilitate estimates and projections of costs and benefits.

16. TRANSACTION ADVISORY SERVICES t Information Gathering Some of the challenges that may be encountered are: –Inability to locate data –Collection of unreliable data –Changes in project requirements –Changes in alternative options for analysis

17. TRANSACTION ADVISORY SERVICES t Estimating Costs and Benefits

18. TRANSACTION ADVISORY SERVICES t Estimating Costs and Benefits Identify and categorise future internal economic benefits Identify and categorise future costs Select the cost assumption basis Identify the cost benefit influences Identify the volume basis for each cost and benefit

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21. t Basis for Estimating Costs

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24. t Cash Flow Impact

25. TRANSACTION ADVISORY SERVICES t Cash Flow Impact In assessing the cash flow impact we not only examine the costs associated with the project but also the timing of the projected cash flows.

26. TRANSACTION ADVISORY SERVICES t Cash Flow Impact Scenario 2 – Benefits begin accruing in Year 3: Scenario 1 – Benefits begin accruing in Year 2:

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29. t Financing Mechanisms

30. TRANSACTION ADVISORY SERVICES t Financing Mechanisms Financing Method OptionsMeritsDemerits Level of Applicability 1. Internal SourcesOperating Cash Flow Cash Reserves -Less burdensome on Government -Insufficient cash flows generated by the Ports under current operating conditions LOW 2. Government Funding Government Bond Issue -Consistent with Government’s current savings initiative -Overall cost of borrowing lower with tax-exempt bonds -Attractive to investors with a long-term investment horizon -Can be used in conjunction with other financing methods -Tax exempt bonds, eliminate potential source of revenue -Increases Gov. debt position -Require Gov. guarantees which can strain current borrowing limits HIGH 3. Asset-Backed Financing Operating Leases -Preserve cash & working capital -Lower debt ratios -Applicable mainly to equipment purchases LOW

31. TRANSACTION ADVISORY SERVICES t Financing Mechanisms Financing Method OptionsMeritsDemerits Level of Applicability 4. Capital Markets Loans from International Funding Institutions (IFI) -Preferential interest rates -Long repayment periods -Onerous terms and conditions -Long turnaround times -Require Gov. guarantees which can strain current borrowing limits -Increase Gov. debt position HIGH Loans from Local/ International Banks -Quicker disbursement times than IFIs -Syndicated loans are available -Can be expensive -Require default assurance from Gov. and can strain current borrowing limits -Typically shorter maturities -Increase debt position on balance sheet, make performance ratios less attractive -If size of financing is significant, lending institution may require head office approval, resulting in delays, increased due diligence etc. HIGH

32. TRANSACTION ADVISORY SERVICES t Financing Mechanisms Financing Method OptionsMeritsDemerits Level of Applicability Bonds-Funds disbursed in tranches to match commitments -Attractive to investors with a long-term investment horizon -High transaction costs -Require Gov. guarantees which can strain current borrowing limits -Increase Gov. debt position -For foreign currency denominated bonds, repayments may strain foreign reserves -Balloon payment due at time of maturity HIGH Sinking Fund-Funds disbursed in tranches to match commitments -Attractive to investors with a long-term investment horizon -Balloon payment financed at start -Capital costs are tax deductible -High transaction costs -Require Gov. guarantees which can strain current borrowing limits -Increase Gov. debt position -For foreign currency denominated financing, repayments may strain foreign reserves HIGH

33. TRANSACTION ADVISORY SERVICES t Financing Mechanisms Financing Method OptionsMeritsDemerits Level of Applicability 6. Pooled Investments Offshore Real Estate Fund -Lower transaction & overall costs -Quicker turnaround times -Unlimited pool of investment capital -Investors require higher rates of return due to mandated hurdle rates -Investor returns paid in foreign currency will strain foreign reserves -Extensive marketing effort required to attract international investors MODERATE/ HIGH Real Estate Investment Trust (REIT) -Cash inflow upfront -Foreign currency exposure minimised -Investor require higher return rates -Insufficient capital pool available locally/ regionally MODERATE

34. TRANSACTION ADVISORY SERVICES t Financing Mechanisms Financing Method OptionsMeritsDemerits Level of Applicability 7. Private Public Partnerships PPP’s (BOLT, BLT, BOOT, etc.) -Debt burden appears less in the short term -Some risk-sharing with the private sector -Government retains ultimate control of the facility -Off balance sheet financing -Relatively new to Barbados -Complex, require finance expertise to ensure adequate structuring -Higher financing costs due to private investor hurdle rates added to financing costs -Clearly defined project terms and responsibilities required HIGH

35. TRANSACTION ADVISORY SERVICES t Risk Analysis

36. TRANSACTION ADVISORY SERVICES t Risk Analysis Risk analysis is about developing an understanding of the risk. Some of the major risk factors for Port projects are: They require major political involvement The project budget is overrun The project completion time is overrun There is a failure to achieve anticipated benefits Cruise ship boycott Natural disasters

37. TRANSACTION ADVISORY SERVICES t Risk Analysis The main risk factors that are focused on in options analysis are consequence and likelihood. Consequence x likelihood = risk rating

38. TRANSACTION ADVISORY SERVICES t Risk Analysis Likelihood Consequences InsignificantMinorModerateMajorSevere Almost CertainMediumHigh Extreme LikelyMedium High Extreme PossibleLowMedium HighExtreme UnlikelyLowMedium High RareLow Medium High

39. TRANSACTION ADVISORY SERVICES t Options Analysis Summary

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