Financial Appraisal Projects and Capital Acquisitions

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

2. Agenda • Introduction • The Dilemma • Options Analysis • Options Analysis Methodology

3. 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. How do you manage this dilemma?

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

7. 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. Identify and Categorise Benefits

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

10. Identify and Categorise Costs

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

14. Information Gathering

15. 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. 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. Estimating Costs and Benefits

18. 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

21. Basis for Estimating Costs

24. Cash Flow Impact

25. 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. Cash Flow Impact Scenario 1 – Benefits begin accruing in Year 2: Scenario 2 – Benefits begin accruing in Year 3:

29. Financing Mechanisms

30. Financing Mechanisms

31. Financing Mechanisms

32. Financing Mechanisms

33. Financing Mechanisms

34. Financing Mechanisms

35. Risk Analysis

36. 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. Risk Analysis The main risk factors that are focused on in options analysis are consequence and likelihood. Consequence x likelihood = risk rating

38. Risk Analysis

39. Options Analysis Summary