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Financial Modelling for
WTE-PPP project
Veronica
August Sulistyono
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Introduction
PublicPrivatePartnershipmeans:
formsofcooperationbetweenpublicauthoritiesandtheworldof
businesswhichaimtoensurethefunding,construction,renovation,
managementormaintenanceofinfrastructureortheprovisionofa
service
(Commission
of
the
European
Communities
green
paper)
ProjectFinancemeans:
financing
of
a
specific
asset
in
which
lenders
look
principally
to
the
revenues
generated
by
the
operation
of
that
asset
for
the
source
of
funds
from
which
loans
will
be
repaid
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Regulatory Basis PPP-WTE in Indonesia
PPP
PR67/2005(asamended)
Sectoral
LawNo.
18/2008
(waste
management
sectoral law)
GovernmentSupportandGovernmentGuarantee
PR78/2010
MOF
Regulation
260/2010
(Guarantee)
MOFRegulation223/2012(VGF)
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Distinguish between project finance and
PPP
Projectfinancemaybeutilisedbythepartyresponsiblefor
financingaproject
PPPisutilisedbyapublicsectorentitylookingtoshiftthe
responsibilityforfinancingaprojecttoaprivateparty(the
successfulbidder)
PPPandprojectfinancearecombinedwhenthesuccessfulbidder
inaPPPprojectusesprojectfinancetofinancetheproject
(alternatively,thesuccessfulbiddercouldfinancetheprojectusing
equity
or
through
a
conventional
construction
loan,
see
above) Projectfinancemethodscan(andfrequentlyare)usedwithoutPPP
(mostfrequentlyinconnectionwithnaturalresourceprojects
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General Project Finance
GCA SPCPPPagreement
Lenders
Contractor
O&M
Insurer
Supplier
Purchaser
InsurancePackage
ServicesAgreemen
t
EPCContract
Supplycontract
OfftakeContract
Sponsors
Shareholders
Agreementand
EquitysubscriptionAgreement
DirectAgreement
Debtfunding&
Security
Package
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Some Special Characteristics of a Project
Finance Loan Agreement
(Almost)alwayssecuredbyprojectassetsandothersecurity
(butbasis
for
financing
is
revenues
from
project,
not asset
value)
Proceedstobeusedfordefinedprojectcosts(predominantlyconstructioncosts)
o Certificationsregarding
expenditures
as
project
costs
requiredfordrawings(confirmedbytechnicaladvisor)
o Interestduringconstruction(IDC)
o Mayinclude
standby
facility
for
cost
overruns
o Voluntarypartialcancellationofcommitmentsmayrequiredemonstrationthattheborrowercanstillfinancetheprojectwiththereducedamount
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SomeSpecialCharacteristicsofaProjectFinance
Loan
Agreement
Closerelationshipbetweentermsofprojectagreementsand
loanterms
/security
package
Directagreements/collateralwarranties/othersecurity
Referencestoconstructioncontracts,contractorsand
constructionprogramme in
loan
terms
Repaymentprofile:
Usuallyamortizinginaccordancewithprojectrevenues
Notbullet
maturity
(although
this
may
appear
in
project
bondsandinrealestatefinancing)
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PPP-Project Finance in WTE Indonesia
HeadofRegion
SPCPPP
agreement
Lenders
Contractor
O&M
Insurer
PD.Kebersihan
PLN
Insurance
Package
ServicesAgreemen
t
EPC
Contract
Supplycontract
PPagreement
WinningBidder
Shareholders
Agreementand
Equitysubscriptio
nAgreement
DirectAgreement
Debtfunding&
Security
Package
MOFIIGF
RecourseAgreement Guarantee
Agreement
VGF
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General terms in PPP on connection
with financing WTE Indonesia
PR67/2005requiresprivateentitytoreachfinancialclose
within
1
(one)
year
since
PPP
agreement
is
signed
and
can
be
extendedbecauseofgovernmentdefault;
Financialclose:(i)loanagreementissignedtofinancethe
project;and(ii)partofloancanbedisbursedtostart
construction;
CommonlyinseveralWTEprojects,thePPPagreement
requiresratioofloanisnotmorethan80%oftotalproject
capital;and
Theprivateentityisprohibitedtomakesecurityover
state/regionassets.
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Government Support (VGF)
Currently,PPPprojectmaybegrantedfeasibilitysupportby
MOFin
the
form
of
half
of
construction
cost;
ThepurposeofVGFistomaketheprojectfinanciallyfeasible;
GeneralrequirementsforVGF:
a. TheWTE
PPP
project
shall
economically
feasible
to
obtain
VGF;
b. TheWTEPPPProjectshallhaveminimuminvestment
value
IDR.
100.000.000
(one
hundred
million);c. TheWTEPPPprojectisatenderedproject;
d. Etc.
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Simplified VGF Process
Headof
Region
Preparation Transaction Ground
Breaking
MOF SPC
VGFLetter
Application VGF
1. If theprojectisobtainVGFfromMOF,thentheVGFshallbestipulatedunder
tenderdocuments;
2. PleasenotethattheVGFonlycover,formaximum,apartofconstructioncost,not
totalinvestmentaPPPWTEproject.
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Government Guarantee
GovernmentguaranteeinPPPWTEprojectwillbegivenbasedonproposalfromGCAtoIIGF;
IIGFwillguaranteeobligationsofGCA,includinglicensing,permit,approval,changeinlaw,default,delayinfinancialclose,demandrisk,revenuerisk,etc.
Thecriteriatoobtaingovernmentguarantee;
a. TheWTE
PPP
project
shall
atype
of
project
regulated
under
PR
67/2005;
b. TheWTEPPPprojectshallcomplywithsectorlawsandregulationandtenderedincompetitiveway;
c. TheWTE
PPP
project
shall
technically,
financially,
economically,
andenvironmentallyfeasibleanddoesnothavenegativesocialimpact;
d. ThePPPagreementshallhasprovisionforbindingarbitration.
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Simplified Guarantee Process
HeadofRegion
Preparation Transaction FinancialClose
IIGF
SPC
Approval
Application
MOF
GuaranteeAgreement
Recourse
Agreement
CoGuaranteeAgreement
1. IftheprojectisobtainguaranteefromIIGF,thentheguaranteeshallbe
stipulatedundertenderdocuments;
2. Therecourseagreementandguaranteeagreementwillbesignedalong
withthe
PPP
Agreement
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Tipping Fee
InseveralPPPWTEprojectsinIndonesia,inordertomakethe
projectfinanciallyfeasible,theGCAwillpaytippingfeetothe
privateentity;
TippingFeeisthepricechargedtodelivermunicipalsolidwasteto
alandfilldumpsitefacility,WastetoEnergyfacilityandrecycling
facility
ThePPPTipping Fee isamountpaidbyGCAtoprivateentityas
compensationofwastemanagementcost,andconsideredasreturn
ofinvestmentofprivateentityforthebuildandoperatedfacility.
Thetipping
is
charged
by
the
amount
of
tonage
based
on
the
solid
wastedeliveredbytheSolidWasteDumpTruckenteringtheland
filldumpsitefacility,WastetoEnergyfacilityandrecyclingfacility
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Obligation to Purchase electricity
from waste management by PLN
InordertomakefinanciallyfeasibleofPPPproject,theother
sourceof
revenues
may
be
originated
from
sale
of
electricity
generatedfromsolidwastemanagement;
MEMRhasissuedMEMRRegulationNo.4of2012toassign
PLNto
purchase
electricity
from
renewable
energy; the
arrangementarenotifiedonPPA(PowerPurchase
Agreement)
PLNisobligedtopurchaseelectricityfromrenewableenergy
forthecapacityupto10MW.
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Bankability
Ifthefinancialelements(guarantee,VGF,tippingfee,PPA)asaboveisfulfilled,includingthesecurity,andtheriskallocationofrelatedagreement
is
well
managed,
then
the
project
is
ideally
Bankable.
Thedecisiona WtEcompanyhavetomakeisderivedfromhowmuchtheoutcomeofWtE worth. The valuationisthesinglefinancialanalyticalskillthat WtE stakeholdershavetomake.
TheValuation
analysis
involves
assessing
IdentificationofPotentialIncome(TippingFee,PowerPurchaseAgreement,OtherIncome)
ProjectedCashFlowlevels and
RisksinvaluingthoseCashFlows,whetheritbethecashflowfrom(1)assets,(2)debtor(3)equity
Measurementvalue
forecasting
and
risk
assessment
is
avery
complexanddifficultproblem. Including(expectedInterestrate,Inflationrate,CostofMoneyand/orValueForMoney
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Financial Modelling
ThescopeofFinancialModellingincludes:
ModellingVariables
and
Project
Returns
ProjectedProfitandLossStatement
ProjectedCashFlowStatement,ProjectedIRR(InternalRateofReturn)andProjectedNPV(NetPresentValue)
ProjectedBalanceSheetStatement
LoanSchedule
RevenueDetail
ExpenditureDetail
AssumptionofModelling
Performingsensitivityandscenarioanalysisonmodeloutputs
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Assumptions in Financial Model
TheassumptionofFinancialModelbasedon three
basicoperating
inputs:
Capitalexpenditures
Revenues
Operatingexpenses
Basedon thesethreeinputsworkontheIRRandNPVwiththeappropriateExpectedInterestRateandExpectedInflationRate
Forecasts forthevaluedrivers candiffersfromoneWtEFinancialModelandtheother
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Financial Analysis Issues
Foreachlineiteminthefinancialstatements,show
ratiosfor
the
items
and
show
assumptions
for
the
ratios
Thekeyistoidentify realeconomicdriverssuchas
price,capacity
utilization,
market
share
and
other
thingsthatreallydrivevalue
ArrangebyRevenues,Expenses,Capital
Expenditures,Working
Capital
and
Depreciation
Ifdeferredtaxesarepresent,calculate book
depreciationandtaxdepreciation
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Measurement of Risk in Financial
ModellingThefundamentalissueinanyvaluationofFinancialModelling ishowtoassesstheriskoffuturecashflowprojections.
Financialtheory
Financialtheory)shouldbeusedtocomputetheWACC (WeightedAverageCostofCapital),thatcan beusedtoestimateequityreturns,thatoptionspricingmodelsshouldbeusedforcreditspreads,debtcapacityandcovenants.
MathematicalModels
Mathematicalmodelsincludestatisticalmodelsforcreditanalysisandvalueatrisk.
PracticalMarketInformation
Practicalmarketinformationcanbeusedtogaugerequiredequity
returns,required
credit
spreads and
required
financial
ratios
DirectEvaluationwithFinancialModels
Useoffinancialmodelstodirectlyassessrisksthroughsensitivity,scenarioandsimulationanalysis.
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A good WTE financial model should:
Berelativelysimple
Focusonkeycashflowdrivers:WtERevenues (PPAandTipping
Fee),
Rates
(Interest
Rate
and
Inflation),
Expenses,
CapitalExpenditures,WorkingCapitalandDepreciation
Clearlyconveyassumptionsandconclusions
EvaluateRisks
through
sensitivity
analysis,
break
even
analysis,scenarioanalysis.
AgoodFinancialModel allowsdecisionmakerstofocuson
appropriaterisks
and
summarizes
data
in
an
efficient
way
thekeyvaluationissuesshouldbereadableandeasytounderstand,
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THANK YOU