Financial Analysis

This is a highly technical chapter of any Business Case. Guidance is available from a range of other sources to assist in preparing these sections, particularly where external advisors are not used. In addition, ICA and FABG can advise on appropriate technical reference materials, tools and resources.

Purpose of this section of the Business Case

The purpose of this section is to present a summary of the Financial Analysis of the project option(s) so that the Project Team, MPC, FABG and ICA can:

• Understand the financial and funding implications of the project option(s)
• Assess the value for money of the project option(s)
• Ultimately determine the best way to deliver the project including the funding/financing model.

Where the Project Team recommends an Integrated delivery model, it must undertake a more detailed Financial Analysis, which allows ICA and FABG to assess the financial implications of the project option(s) compared with the project being delivered using a Traditional delivery model.

The Project Team should answer the following key questions in this section:

• What is the risk adjusted estimated project capital cost and whole-of-life cashflow for each project option and the Base Case?
• How do the affordability and commercial viability (where applicable) of each project option compare against one another?
• What are the funding requirements and sources for each project option, including options for user charges and/or value capture?
• Are there any alternative sources of finance and/or financing mechanisms for the project (e.g. contribution from land sales, loans or equity)?
• Are there any alternative sources of finance available within Government, other than the Budget process, that can contribute to this project (i.e. Zero Emissions Government Loan Facility and/or Social Cost of Carbon Fund)?
  • If so, what engagement has occurred with the Zero Emissions Government team⁠ (Footnote: zeroemission@act.gov.au ) and what is the quantum of funding available to cover projected capital costs?
• (Integrated delivery models only) What are the estimated annual payments made by Government to Project Co? If applicable, what are the estimated revenues to Government and/or upfront contributions that are required to support the financial viability of the project?
• (Integrated delivery models only) What is the Public Sector Comparator (including raw and risk adjusted), expressed as a Net Present Value (NPV)?
• What are the key assumptions that have been made in the Financial Analysis?

The Project Team should refer to the Guidelines for Public Private Partnerships for more detail on conducting the Financial Analysis of a project that uses an Integrated delivery model. The Project Team should also consider alternative funding and financing mechanisms as part of this assessment.

Interdependencies

The Financial Analysis section of the Business Case is interdependent with the Project Scope, Options Analysis, Delivery Model Analysis, Economic Appraisal and Risk Analysis sections.

Content required for the Business Case

Estimated project capital cost

The Project Team should develop and present an estimated capital cost for the project option(s). The total estimated project capital cost should include:

• Total design and construction costs. For Programs and Precincts, these should be provided for each proposed project of the Program and Precinct
• Contingencies (refer to the detailed Risk Analysis Guidelines)
• Other upfront costs (including direct and indirect)
• MPC services, over and above procurement and contract management, that are provided on a fee for service basis
• Costs related to implementing sustainability measures and obtaining an environmental or sustainability rating (although costs are project specific, these are expected to be one to three per cent of the total estimated project capital cost)
• ACT Insurance Authority (ACTIA) costs (one per cent of total estimated project capital costs)
• ACT Government Solicitor (ACTGS) fees and any external legal fees required
• MPC resources received free of charge - an estimate of the value of any procurement and contract administration services to be provided. In developing capital business cases, agencies must consult with MPC about the cost implications for procurement and contract management of capital proposals and capital business cases must reflect advice from MPC about the estimated value of capitalised resources received free of charge to be provided. Where agencies have not obtained agreed cost estimates, agencies should assume 4 per cent capitalised resources received free of charge or as otherwise advised in Budget Memoranda.
• (For Tier 1 projects) the upfront costs of developing a Benefits Realisation Plan and the ongoing costs of monitoring and reporting on benefits
• (For Tier 1 projects) the cost for undertaking a Post Implementation Review (PIR). The Project Team should seek advice on the value of the funding amount from ICA.
• Escalation
• All Agency costs managed by the Sponsoring Agency (including any external advisors required).

For Tier 2 and Tier 3 projects, the Project Team may also wish to include an optional additional cost for the Sponsoring Agency to undertake a PIR. The Project Team should discuss with ICA whether the project should undergo a PIR and establish whether an additional cost item should be added to provide funding for the Sponsoring Agency to undertake a PIR. The Project Team should seek advice on the value of the funding amount from ICA. More information on the PIR is provided in the PIR Guidelines.

The Project Team should document and articulate clearly the rationale and assumptions for other upfront costs. For any Agency costs identified, the Project Team should detail the recommended staging arrangements, procurement and advisor costs, and other cost drivers.

The Project Team must develop an expected profile of the project’s capital costs over the construction period. This profile is often known as an S-curve, because the cumulative costs of a project over time form a S shape. Typically, the level of capital expenditure in a project’s beginning stages is low, as mobilisation commences. Expenditure gradually increases over time, and then tails off as the project nears completion.

To develop an appropriate S-curve for the project, the Project Team may seek advice from MPC and/or refer to the Capital Project Expenditure Profile Model located within the Business Case Templates. Please contact ICA for further information.

For Tier 1 and Tier 2 projects, the Project Team should provide the profile of capital costs over the construction period in a graphic or tabular form. The Project Team may provide this profile on a monthly, quarterly or annual basis, depending on the degree of accuracy required in the analysis and the frequency of cashflows.

The Project Team should include an initial financial evaluation of the total estimated project capital cost for the various project options against the total estimated project capital cost in the Base Case.

Whole-of-life cashflows

The Project Team should develop and present the cashflows of the project option(s) for the expected life of the asset. The Project Team’s whole-of-life cost estimate should include:

• All operating and lifecycle costs (both direct and indirect)
• All maintenance costs. The default recurrent maintenance cost assumed by FABG is:
  • 0% of the estimated project capital cost in the first year
  • 1% of the estimated project capital cost in the second year
  • 2% of the estimated project capital cost in any remaining years
  • If there is a need for heavy maintenance or if the asset may wear out more quickly than usual, then the Project Team should discuss a deviation from these standard assumptions with FABG
• Ongoing costs associated with implementing sustainability measures over operations (if relevant)
• Revenues, where relevant (for example, farebox revenue and/or other user charges)
• Contingencies (refer to the detailed Risk Analysis Guidelines)
• Escalation
• All costs managed by the Sponsoring Agency, where relevant (with a clear rationale), such as staffing costs.

In an appendix, the Project Team should provide the profile of operating costs and cashflows over time in a graphic or tabular form. The Project Team may provide this profile on a monthly, quarterly or annual basis, depending on the degree of accuracy required in the analysis and the frequency of cashflows. The forecast period should reflect the full life of the project.

Within this table, escalation refers to any expected real increase in costs relative to the Consumer Price Index (CPI), such as wages increasing faster than inflation.

The Project Team should include a summary of the initial financial evaluation of the whole-of-life cost estimates for the various project options.

Project contingency

In this section, the Project Team should provide further information on the contingency allowance that it has developed. For more information on developing contingency allowances, refer to the detailed Risk Analysis Guidelines.

For Tier 1 and Tier 2 projects, the Project Team should cover the following in this section:

• The methodology the Project Team used to develop the contingency allowances, referring to the detailed Risk Analysis Guidelines as needed
• P90 contingency estimates and, where relevant, a summary of the output of the Monte Carlo simulation (e.g. the graphs produced that show the distribution of the likely contingency cost impact)
• Significant risks that are key drivers of the contingency allowance and a rationale for these risks
• The impact of the risk allocation between the public sector and the private sector.

For Tier 3 projects, the Project Team should detail how the contingency was assessed using a deterministic methodology, along with any industry benchmarks and assumptions that were used.

The Project Team should use P90 as the P-value for the contingency allowance. The Project Team should provide a robust rationale should it decide to use an alternative P value.

Summary assessment

For all projects, the Project Team should include a summary assessment of the total estimated project capital costs and whole-of-life costs presented in the preceding sections.

For Tier 1 and Tier 2 projects, the Project Team should calculate the NPV of each project option and the Base Case. The Project Team should rank objectively the project option(s) based on their NPVs. The Project Team should use the results of the Financial Analysis in the Options Analysis to assist with determining the recommended project option.

The Project Team should use the table below to present the NPV (P90, $m, date).

Budget implications

The purpose of this section of the Business Case is to set out the impacts of the project option(s) on the Budget.

The Budget summary analyses the impact of the project option(s) on the Budget, including the operational implications for the Sponsoring Agency and any financial impacts on other Agencies (particularly where there is a joint proposal).

The FABG Budget Summary requires the following elements to be identified across the Budget forward estimates period (five years for capital related investment):

• Capital impacts: the funding required to cover capital costs
• Expense impacts: this includes depreciation impacts (not funded) and the funding requested over the forward estimate period for whole-of-life costs (e.g., repairs and maintenance funding and operational costs).
• Revenue/Commonwealth contribution/savings impacts: revenues, savings or offsets to the costs over the forward estimate period
• Staffing impact: the number of staff associated with the funding sought.

If the project, Program or Precinct has a financial impact beyond five years, the Project Team should include a separate table outlining this impact and the funding required beyond the Budget forward estimates period.

The below table provides an example of the table required for each project option in this section of the Business Case.⁠ (Footnote: This template is an example for the 2023-24 Financial Year. )

The Project Team should include additional lines for offsets where required; for example, where there are multiple discrete offsets for funding components.

Funding and financing strategy

The Project Team should outline the proposed funding and financing strategy for the project option(s). Where the Project Team is seeking funding outside of a specific capital appropriation, such as through grants, revenues or alternative Government funding streams (such as through the Zero Emissions Government Loan Fund or Social Cost of Carbon Fund), it should be detailed in this section, including how any loan will be repaid.

For some projects, there may be opportunities to utilise financing instruments (debt, equity, guarantees) supported by funding from direct beneficiaries (i.e. user charging and/or value capture⁠ (Footnote: Additional information on value uplift and financing techniques for value capture can be found at: Transport Infrastructure and Land Value Uplift ) proceeds). The Project Team should discuss potential funding and financing options (to meet upfront costs) early with Treasury during the EPP, particularly for Tier 1 projects where opportunities to utilise alternative funding and financing are most likely.

If the agency is seeking a PPP arrangement, this should also be detailed in this section. Refer to the Guidelines for Public Private Partnerships for further information.

The Project Team should also consider and document any conditions that may be tied to external funding.

Value for money (Integrated delivery models only)

When the Sponsoring Agency is recommending a project be procured using an Integrated delivery model, in addition to the evaluation of the cost, revenue and contingency of the project option(s), the Project Team must undertake further detailed financial analysis to develop a Public-Sector Comparator (PSC) and assess the value for money of the delivery model. Detailed guidance on conducting the detailed financial analysis is provided in the Guidelines for Public Private Partnerships. The Project Team is also recommended to engage with appropriately qualified PPP financial and commercial advisors to develop the PSC and determine the value for money.

This Guidance is focused on a PPP delivery model approach. If Design Construct Maintain Operate (DCMO) is selected as the recommended delivery model, the Project Team should discuss the approach to the detailed Financial Analysis with FABG and ICA.

Methodology

The Project Team should document the methodology used to undertake the detailed Financial Analysis, including the assumptions used. The assumptions should include the discount rates used and the inflation rate.

Public Sector Comparator

The risk-adjusted PSC represents an estimate of the hypothetical, risk-adjusted total estimated project capital cost and whole-of-life cost (and revenues, where applicable) of a public infrastructure project that is assumed for comparative purposes to be delivered by Government through a Traditional delivery model. The risk-adjusted PSC will generally include risk-adjusted net present costs for capital, lifecycle maintenance, ancillary services and (where applicable) residual values to determine the likely funding requirements. The raw PSC is similar to the risk-adjusted PSC but excludes risk.

The Project Team should develop a risk-adjusted PSC to identify the NPV of the project when delivered using a Traditional model, for comparison purposes.

Further information about developing a risk-adjusted PSC as part of the Financial Analysis can be found in the National PPP Guidelines – Volume 4: Public Sector Comparator Guidance and the Guidelines for Public Private Partnerships. The Project Team is recommended to engage with appropriately qualified specialist advisors to develop the risk-adjusted PSC.

Summary assessment

The Project Team should summarise the Financial Analysis it has undertaken and make a conclusion on the assessment with a detailed rationale. This may be in graphic or tabular form.

Assumptions

The Project Team should document any assumptions that have been used to calculate the total estimated project capital cost, whole-of-life expenditure estimate and project contingency, as well as those used to produce the Budget summary table. These may include:

• Growth assumptions
• Timing assumptions
• Assumptions related to interrelated projects, if required
• Cost inclusions and exclusions
• Revenue assumptions
• Period of cost assessment
• Construction and operations start and end date
• Discount rate used to estimate the NPV
• Price indexation rates (if relevant, noting that most of the analysis should be undertaken in real terms).

Appendices required for the Business Case

The Project Team is required to attach the following documents as appendices to the Business Case:

• Detailed cost estimates that have been prepared (where relevant)
• Detailed annual cashflow profile
• For Tier 1 projects, modelling used to forecast the cashflows and costs for the project option(s)
• For Tier 2 and Tier 3 projects, any other supporting information that was used to inform the cost estimate