You are here

Share:

Appraising PPP Projects

46.2 Inputting the Capital Expenditures

The initial capital expenditures (initial Capex) group represent the expenses incurred from the private consortium’s preparation of its proposal until the commissioning of the asset. These expenses commonly occur before the project company obtains any revenue. The expenses are mostly obtained from the design of the technical requirements. Some typical items that should be included in the estimates of capital expenditures are listed below:

  • Construction costs: This is the actual construction cost that is required to deliver the infrastructure, including the civil works, equipment required, and the associated supervision costs. Other concepts such as clearing site works may be included here. A very common configuration is for the project company to enter into Engineering, Procurement and Construction (EPC) contracts with one or more construction companies that segregate risks among private entities. These costs are likely to represent the vast majority of all investment done by the private party. Thus, extreme care and prudence (and even conservatism) should be taken when estimating the amount. As noted, the main source of data is the technical requirements that describe in detail the design and the construction costs associated with the project. This information must be time bound. In other words, it is vital that the construction costs are allocated to the specific periods during the Construction Phase in which they will be incurred, and not only included in the initial period;
  • Design costs: Typically, the private partner has to do considerable work detailing the infrastructure design before the construction. These costs should be estimated at this stage. In some projects, these costs may be embedded in construction costs as the construction contractor may be in charge of designing the project;
  • Bidding costs: These refer to the work to prepare the proposal and qualification documents. These costs generally relate to internal staff, external advisers, the bid bond premium, and so on. They can be very considerable costs, depending on the complexity of the project. Bidding costs can be understood, in many respects, as an early upfront type of equity application in the project company;
  • Project company costs: These costs refer to the staff directly employed by the project company, general costs of the SPV (for example, rent of office for headquarters, and so on), as well as, potentially, costs input to the SPV by the shareholders for managing support tasks;
  • Environmental compensation costs: Depending on the nature of infrastructure implemented, these might represent a very significant proportion of the total Capex. The correct estimation of these costs depends, to a large extent, on the results of the Environmental Feasibility exercise. However, since it is common not to obtain the environmental approvals at the Appraisal Phase, the clear view of all environmental compensation initiatives might be only confidently estimated later on in the PPP process, when the financial model will be revisited. At this stage, the best possible estimate should be made to avoid jeopardizing the precision of the conclusion of the Commercial Feasibility exercise;
  • Insurance and guarantees: Several insurances must be contracted in the early stages of project implementation. Generally, the Capex estimates should include the cost of insurances that cover physical damage during construction, loss of revenue due to delays in completion (advance loss of profit – ALOP), and third-party liabilities, as well as performance guarantees required by the PPP contract. Depending on the project and country, protection against variations on exchange rates can also be contracted. Thus, its costs need to be estimated;
  • Costs of obtaining licenses and permits: A number of licenses and permits for construction and operations will be required. All costs and fees related to the licenses required by the private partner must be estimated and included as expenditures. This can include costs for building permits, environmental licenses, and others;
  • Costs associated with the financing: In many cases, the private partner must pay interest during construction, which must be accounted for because it needs to be accommodated in the general financial structure of the project. Other costs during construction associated with the financial agreement are the debt arrangement fees, availability fees, and the costs of the lenders’ advisers (see appendix A to chapter 6 for more details);
  • Utility reallocation and archaeological removals: In some projects, the project company will incur significant costs due to the condition of the site on which the infrastructure is to be built. There may be utilities that must be relocated (such as energy and water infrastructure) or special work that must be done to deal with archaeological findings. Those costs must be included in the financial model;
  • Expropriation and land acquisition costs: In some projects, the cost of obtaining the land to implement the project is borne by the private sector. If so, this cost must be estimated; and
  • Taxes: Taxes are essentially a country specific issue. Most relevant taxes will affect construction costs (for example, value-added tax – VAT) but these are paid/embedded within construction costs to be paid out to the construction contractor. Corporate taxes must also be modelled — mostly because they will create tax shields during the Construction Phase. Lastly, some projects will have specific taxes imposed on the contractual rights (for example, taxes related to the grant of the concession or lease rights that are usually paid upfront).

 

Add new comment

By submitting this form, you accept the Mollom privacy policy.