THE REFERENCE CONTEXT:

In this chapter we refer to the extended issue of Public Private Partnership and Project Finance with reference to Law no. 232 of 11 December 2016 (2017 Budget Law) and Legislative Decree 56 of 19 April 2017 (amendment to the Code of Public Contracts and subsequent updates).

In this chapter we will deal in particular with the issues that impact Private subjects in the management of PPP and Project Financing.  

THE OLD METHODS USED FOR PROJECT FINANCING

The PPP sector represents a fundamental economic opportunity for a various market to benefit the investor, the PA and the community.

However, it requires a good preparation and adequate knowledge of:

• Contract Regulations
• Financial economics
• Legal
• Project Management

It also requires accurate technology to represent the economic and financial reality. The classic Excel sheet method can only perform an inadequate economic financial plan, which causes most of the problems. It comes from considering the Financial Economic Plan (PEF) just as formality that is necessary to participate in tender notices instead of as fundamental plan for the investor and the public administration.

In this section below we will introduce the most common mistakes that are made by the specialists in Project Financing. They were found in over 10 years of consulting experience. These mistakes come from use of imprecise “Excel sheet” technology and this inappropriate approach.

THE LIMITS OF EXCEL SHEET TECHNOLOGY IN ECONOMIC FINANCIAL PLANS (PEF)

The limits of Excel sheet technology, in the implementation of the Economic Financial Plans (PEF), can be classified into 3 categories:

• Lack of reliability of the economic and financial representation of reality 
• Lack of Opportunities in managing the various Economic and Financial situations 
• Lack of Sustainability

Let's examine them in detail.

LACK OF RELIABILITY

The average reliability of a PEF implied with Excel spreadsheets technology is at best, 15-20%. Regardless of the competence of the analyst who elaborated it.

If the result has a 20% approximation, Reliability will be low and it will have a margin of error equal to 80%.This implies, for example, that a Cash Flow value of 1,000,000 can fluctuate from a value of 1,000,000 +/- 800,000, i.e. from € 200,000 to € 1,800,00.

This type of approximation highlights the problem of reliability, social and economic responsibility, your high impact as an Investor, Entrepreneur, Consultant, Stakeholder, Public Administration, and finally as a community, which you should take into consideration.

Let's see the structural reasons

ANALYSIS ON AN ANNUAL BASIS:

In fact, Excel sheet technology can only be on an annual basis or, at best monthly for the first few years.

This assumption implies that you can visualize a cash flow on an annual basis that is always positive, when in reality it is negative for most of the months. Its making the project unsustainable, with inadequate indices of profitability, bankability and sources.

An annual cash flow not allow you to analyze the payment of dividends, taxes in specific months therefore it does not show you precise evidence of fluctuations.

LACK OF A SYSTEMIC APPROACH:

Due to the inability of Excel sheet technology to take into consideration all the variables, it forces us to make approximations that lead to unreliable projects. 

The need to specify the VAT rate associated with each variable entering the model.

The days of payment / income.

Tax rates, risk variables, etc..

PROBLEM OF THE VAT REFUNDS MANAGEMENT:

In a lot of Project Financing cases the taxes were managed incorrectly due to the inability of the Excel models to analyze them which leads to a non-sustainable Project Financing.

In one striking case of the PEF, the VAT was considered to be an accounting field but not a financial one. Obviously, the investor found himself in serious trouble. 

We also meet with many cases of PEF in which only vertical VAT compensation was used but not horizontal,forcing Investors to submit to long repayment periods of the Input tax, with financial consequences.

In many PEFs the possibility of VAT line financing is not used, which causes financial consequences.

CIRCULATION PROBLEM (DUE TO DIFFERENCES BETWEEN PAYMENT AND income DAYS): 

In most cases of Project Financing, this difference is ignored due to the inability of obtaining it using annual management.

On one PEF examined, created by a good consulting firm with knowledge of the currency, but unable to represent it on the Excel sheets used, a financial problem of € 700,000 was revealed, not considered in an investment of about € 3 million, which would have completely breached the investor's financial expectations. 

PROBLEM OF LACK OF CERTIFICATION OF THE ALGORITHMS USED:

due to the lack of reference of sources that shows its accuracy

In a Call for Tenders, a Promoter was asked which algorithms were used and by whom they had been certified. The Rup discovered that the consultancy & audit company used different algorithms for the same function and furthermore when asked what the sources were, the answer was: my experience. Obviously, the Promoter lost.

ERROR PROBLEM RELATED TO COMPLEXITY

due to the fact that the more completely the PEF model is created on the Excel sheet, the more the probability of error increases (of formula, unconnected cell, calculation, etc.) making the results unreliable.

Two well-known professors at MIT drafted the three-year works plan for a government department. Unfortunately, a few months later, an MIT university student disavowed the PEF for having found a calculation error, trivial, but which affected calculations, thus making the PEF unreliable with serious damage to the image of the Government and the two distinguished professors. 

THE EXCEL SHEET IS THE FIRST RISK, OF 80-85%.

LACK OF OPPORTUNITY

The ability to flexibly manage various cases that a project consists of is not possible with a PEF developed using Excel sheet technology as this methodology does not allow the development of models that can exhaustively simulate the various economic and financial aspects of the reality.

In fact, inserting the various decisions on an Excel sheet means depersonalizing the model each time, with a consequent waste of time, making operation impossible.

However, not managing them means not being able to translate the entrepreneur's ideas into reliable economic and financial data to find the best solutions.

What does this limit mean for the entrepreneur? It increases risk and the possibility of losing business opportunities that can range from a few thousand euros to millions of euros.

Let's see the structural reasons for the inadequacy of an Excel sheet due to the limited opportunities it can offer in the drafting of an Economic and Financial Plan:

DIFFICULTY / IMPOSSIBILITY OF dividING AN INVESTMENT PROJECT INto BUSINESS UNITS:

Due to the complexity of the Excel model, dividing the projects into its units is impossible. The Business Unit in fact represents the small part of investment, cost and operating revenue precisely, allowing the Investor to decide investment priorities, minimize the return, reduce costs, show opportunities.

An important Project Financing worth about 60 million euros initially developed using spreadsheet methodology had come to a standstill, as without the precise inspection of the Business Units, the Investor would have had to invest 60 million euros, with a financial and economic risk that surely would have jeopardized the initiative.

DIFFICULTY / IMPOSSIBILITY of ANALYsing A PROJECT IN ITS DIFFERENT SCENARIOS

based on various assumptions, is caused by the inability of Excel spreadsheets to manage different formulas without time-wasting and an increase in the possibility of errors.

We cite the case of an important Project Financing relating to the expansion of port docks for the amount of 30 million, elaborated on an Excel model, which had considerable problems during construction, as the consultancy firm itself later said, deriving from the impossibility of having had time to elaborate the different scenarios within the prescribed timeframe, as they would have required the model to be reworked for each scenario examined.

DIFFICULTY IN DELEGATION:

Due to the fact that in the PEF is made using spreadsheets, the data are wired with the various formulas, therefore the Financial Economic Plan can only be fully understandable and used by those who drafted it, with all the limits to delegation to other offices.

In races where time is of the essence, having only one person able to upload data becomes a high-risk bottleneck. In fact, it is known that many promoters are unable to participate in the calls for this issue in good time.

A well-known Investor rightly complained about a well-known consulting firm because they requested payment for uploading data at the cost of a financial analyst. Using different technology, it would have been carried out by a person with fewer skills.

LACK OF PROFITABILITY

The Economic and Financial Plan (PEF) of a work / service created using a spreadsheet, has a reliability of 15-20% and therefore does not allow you to seriously analyze a project of millions of euros with a great impact on the Investor, Public Administration and the community.

Recurring problems:

OVERESTIMATION OF SOURCES (EQUITY, BANK LINES, SHAREHOLDER LOANS)  

Due to Excel technology, as it does not allow for financial optimization of cash flows, which is instead permitted by dividing the project into Business Units, by optimization of cash flows on a monthly basis and by management of self-financing. It is not permitted by Excel technology. This causes an Investor to waste useful capital that could be invested in other initiatives and also reduces profitability of the project, decreasing the shareholder’s NPV.

Due to this problem, a Project Financing with an initially estimated required capital of 25 million euros, once calculated using a correct financial and economical simulation was actually carried out by the investor with only 15 million euros.

The Project Financing of a section of a motorway was carried out with 30% less than the expected investment.

SUSTAINABILITY IS ALWAYS CRITICAL

As it does not take into account all the financial variables involved. The reasons for these results are mainly due to the fact that a predictive financial economic analysis is a very complex analysis that it is inadequate to try to translate on an Excel sheet for the structural limits of the same, for the problem raised. 

Sustainability on an annual basis is in most cases critical as it does not take into account cash flows on a month basis, creating unrealistic Reliability and, ignoring the necessary hedges, thus leading to an underestimation of the debt.

UNEXPECTED PROFITABILITY : 

due to Excel technology that easily leads to the calculation of NPV and IRR values, but the problem is not to obtain these values ​​which are obtained very simply using the Excel functions, but the problem is upstream, from which cash flows have been obtained. Precisely for this reason, the values ​​obtained never respond to reality, constituting a problem for everyone: for the Investor, for the Public Administration, for the community.

On the PEF presented to the Public Administration (before ANAC Line 9), a Project Financing for a car park in the city of Verona had given a very respectable 14.5% pre-tax shareholder IRR, for an investment of 8 million euros. At the end of the works, the same IRR was 1.5% which, if calculated correctly, would have led the Investor to consider alternative investments or to improve the acquisition conditions.

LOW TRADING CAPACITY VS BANKS:

due to Excel technology, mainly due to the fact that it statically determines the Debt lines instead of dynamically, thuscausing excess costs.

In the many Project Financing projects we take over, we see the debt service over 20% compared to an optimal financial simulation.