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Appraising PPP Projects

46.8 Cash Flow

Two important outputs of the financial model are the free cash flow of the project and the free cash flow of the investor (shareholder).

The free cash flow of the project, for each period, represents all the revenues less the expenses incurred, including capital and operational expenditures.

During the first years of the contract, while the asset is being constructed, the cash flow is usually negative. This is the reason that the project company must raise capital in the form of equity or from other sources. Once the project is operational and revenues begin to flow into the project company, all the operational expenses, taxes, and other outflows are paid and a cash amount is free to be used to service debt and, provided there is no obstacle[22], distribute dividends that repay the equity.

Conversely, the model needs to estimate the cash flow of equity, which is the inflow and outflow of resources from the investors’ perspective. The cash flow of equity depicts only the amount of Capex that has been financed with money from shareholders (disregarding the values financed from loans or other form of debt). It also only considers the money effectively repaid to investors in the form of dividends or other equity repayments.

This allows the project team to solely identify the cash flow of equity, reflecting exclusively the shareholder’s financial point of view about the project. The equity cash flow is an important output of the financial model as it is one of the central sources of information to assess the commercial feasibility, as discussed in the next section.

[22]
Generally, these barriers can delay the distribution of dividends. They can be
legal or regulatory issues or covenants in debt agreements.

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