5.3  Worksheet: General Inputs (I (Gen))

5.3.1  General (or non-time based inputs) - This worksheet is the main input source for the Model, and includes all inputs that are not in a time series (these are entered separately on worksheet 'I (Time)' - see section 5.4). In completing this worksheet, the user is required to type in the pale yellow cells only. To assist with completing input sheets some calculations are included on this sheet to allow the user to see the impact of their inputs as they are entered. In addition, check cells are included which indicate either "OK" or "Problem" where appropriate on the worksheet, mainly in column O.

5.3.2  Names & Dates - this section allows the user to apply appropriate labels to the Model as well as set up the key dates/time series that will run through most of the worksheets. In setting the dates, check cells are provided at O13, O17, O22 and O27. These are to ensure that dates are in the correct sequence, which is as follows:

5.3.2.1  Names - three cells (D7:D9) that allow the authority to keep track of the scheme name, version and status of the Financial Model. The cell "Filename" will adjust as the user saves the spreadsheet under a different name.

5.3.2.2  Model Dates - cell G13 defines the start of the time period that the Model will cover (see worksheet 'I (Time)', cell L3).

5.3.2.3  Contract Dates - cells G17:G18 define the Financial Close date of the contract and the duration of the contract. Typically for PFI deals the duration will be 25-30 years.

5.3.2.4  Construction Dates - the start of the initial phase of construction and the duration in years are required to be input into cells G22 and G23 respectively. Typically, the initial construction phase will include elements of New Build as well as refurbishment and will commence at Financial Close. As such, it would be common for cells G22 to be the same as G17. As this is an annual model, the initial period of construction/refurbishment must be entered as a whole number of years. If the intended period is not a whole number then it should be rounded up as no fractions or decimals can be input.

5.3.2.5  Operation Dates - Unlike other sectors, one of the characteristics of HRA and non-HRA housing projects is that operations can often commence prior to the completion of the construction phase. The Model has been designed to incorporate this functionality which is driven from the date entered in cell G27. It is assumed that operations will then run until the contract end date (cell G19). Any ramp-up (or down) of services during the operations period is to be reflected in the operating costs input in worksheet 'I (Time)' (section 5.4).

5.3.3  Operational Data - The scheme type (HRA or non-HRA) is selected using cell G33. The main impact of this is in the treatment of Rental Income from the properties in terms of affordability. For HRA schemes, Rental Income is assumed to pass through the project to the central HRA fund. This means that Rental Income has no impact on the UC required by the Contractor. For non-HRA schemes, the Rental Income is retained by the Contractor. Whilst this is no longer a source of income for the Authority, it has the effect of reducing the UC payable. On selecting a particular scheme type (HRA or Non-HRA) the irrelevant cells will be greyed out.

5.3.4  Economic Assumptions - Base dates for the Model indices (see section 5.3.5) are set in cell G39. These represent the price base for the cost inputs and must be set earlier than the date the Model is being completed to ensure that the inflation assumptions made are completely transparent.

5.3.5  Model Indices - This section allows the user to specify different indices for the different income/cost streams entered on worksheet 'I (Time)' (see section 5.4). The section "Model Indices (Continued)" is there for formatting reasons when the worksheet  is printed out, but the same methodology applies to all indices.

Firstly, the user must specify a number of different indices in the Index Options (section 5.3.5.1). Secondly, a weighting of these different indices must be assigned to give an "aggregate" index for the income/cost stream.

5.3.5.1  Index Options - It is possible for the user to blend up to 5 indices by entering values in cells E45, F44, G45, H45 and I45. It is not expected that the user will adjust RPI or HICP (cells E45 and G45). An "RPI + 1.5%" index is included as a proxy to the Annual Earnings Index (AEI) (cell F44), which users may want to adjust with appropriate justification. Finally there is the option for the user to use two other indices in cells H45 and I45, with appropriate labelling in cells H43 and I43 respectively.

5.3.5.2  Construction - Indices are built for both PFI New Build, PFI Renovation, and PFI Other (e.g. demolition costs) on rows 50, 51 and 52 respectively. Taking the New Build input cells (E50 to I50), the user is required to input values between 0% and 100% in each cell to build up an aggregate index for the costs. Any shortfall is designated as being "unindexed" (cell J50), and in the event of the sum of the weightings being in excess of 100%, the check cell (O50) will show "Problem".

The three aggregated indices for New Build, Renovation and other are then weighted based on the level of expenditure for each cost type to generate a "PFI Construction Cost Index" (cell L53) that flows through the Model. For reasons of clarity, it is assumed that the same indices apply to PSC costs in assessing VfM for the project (cell L57).

This method of building up aggregate indices applies through all the indices covered in sections 5.3.5.3 to 5.3.5.9.

5.3.5.3  Pre-Operating Costs - These are broken down into two categories; Bid Costs, and other Pre-Operating costs (rows 60 and 61 respectively). The default value for these has consequently been set to zero, however a positive value may be entered if indexation of these costs is required.

5.3.5.4  Lifecycle Costs - The 5 main categories of lifecycle costs are covered in rows 68 to 72. In addition, it is possible to have up to an additional three lifecycle cost lines, which the user can label in cells C73:C75.

5.3.5.5  Operating Costs - As with the lifecycle cost indices, the major operating costs are identified in cells C88:C90 and C95. Additional cost headings identified by the user can be included in rows 91 to 94 and indexed separately, with the user labelling these costs in cells C91:C94.

5.3.5.6  Revenue - Rental incomes for non-HRA schemes are included as an income stream to the Contractor and an appropriate index is required to be constructed in row 112. For HRA schemes, this value should be zero and treatment of rental income streams incorporated in the affordability analysis (section 5.3.5.8)

5.3.5.7  Dowry - Experience from related projects has shown that Authorities are sometimes able to make initial cash injections to the Contractor during the early years of the agreement, to improve affordability. Examples of this would include profits on the sale of land assets.

Should the authority want to index these values, this can be done via cells E119:I119. It is recognised that the dowry is commonly a nominal value (i.e. the indexation input cells will remain zero).

5.3.5.8  Affordability (Authority Revenue Resources) - For HRA schemes, an appropriate index for rental incomes is required to be incorporated in row 122. The other common sources of authority revenue for HRA and non-HRA projects are included in rows 123:125, but row 126 is provided in case there are any additional revenue sources to be taken into account for affordability.

5.3.5.9  Affordability (Costs to be Netted Off) - As with Authority Revenue Resources the main authority costs to be met outside the Unitary Charge are input in rows 129 and 130.

5.3.6  Unitary Charge - Cell G136 specifies the annual Unitary Charge. Whilst it is possible to type a value in this cell, it is expected that the user will typically generate this value by running a macro.

Running this macro can be done in two ways with identical consequences. Either by clicking on the grey box labelled "Calculate Unitary Charge" to the right of cell G136, or by clicking on the grey box on the 'O (Summary)' worksheet, also labelled "Calculate Unitary Charge". Once running, the macro calculates the level of Unitary Charge to achieve the necessary returns for shareholders.

5.3.7  Revenues - The proportion of Unitary Charge to be indexed is specified by the user in cell G140. To assist the user in completing this value, an indicative level of the costs that are subject to inflation is calculated in cell G141. In assessing bids, DCLG will expect the two values to be the same or very similar, unless a specific rationale for doing otherwise is provided by the Authority.

Under a number of PFI contracts, the Contractor is incentivised to deliver 100% of the service as agreed in the contract, and not stop just short of complete service delivery by means of a Handover Reserve provision. This reserve is accumulated during the refurbishment or development period. Upon completion of this period, and subject to complete service delivery, the Handover Reserve is returned to the Contractor in the form of a lump sum in the first year of full operations.

Should the Authority want to incorporate such a provision, a percentage can be input in cell G143. This has the effect of reducing the UC by the input percentage (default value of 5% has been incorporated in the Model). When included, the effect of this can be seen graphically in the chart "Unitary Charge Profile" on the worksheet 'O (Summary)'.

5.3.8  Residual Value - where the Contractor retains the assets on contract termination, the Residual Value (RV) of the assets is to be incorporated as part of the return to shareholders. The level of this RV is entered by the user in cell G147. The RV is treated as a cashflow to the Contractor at the end of the contract. This is commonly returned to the Contractor's shareholders as a dividend payment at the end of the project, helping them to meet their target returns (see section 5.3.9.6).

In some projects however, Contractors have been able to use some of this RV as collateral for their senior debt. This means that a proportion of the senior debt is repaid as a "bullet" at the end of the contract when the RV is realised, which has the impact of reducing the financing costs to the Contractor. Typically, lenders only allow a proportion of the RV to be used in this way, a value which is required to be entered by the user in cell G148.

5.3.9  Financing

5.3.9.1  LIBOR - The most widely used benchmark or reference rate, LIBOR stands for the London Interbank Offered Rate and is the rate of interest at which banks borrow funds from other banks, in marketable size, in the London interbank market.

At Financial Close, the Contractor will normally take out at 25 year LIBOR swap, effectively fixing their interest rates for the duration of the project. The 25 year swap rate varies on a daily basis and will only be fixed at Financial Close. As such, a default value of 5.50% has been set in the Model (cell G154). It should be noted that the 25 year swap rate may change over time and Authorities should assure themselves that the rate input here is appropriate.

5.3.9.2  Rate received on Credit Balances - Annual interest rate received on any outstanding cash deposits including reserve accounts (cell G156). Note that this is an absolute rate, rather than a margin applied to a reference rate (such as LIBOR).

5.3.9.3  Equity Amount - Pure equity injection to the Contractor by its shareholders representing the par value of the shares (cell G158).

5.3.9.4  Insurance Risk Premium - In order to populate the Model appropriately, it is expected that the Authority and its advisers will have approached the insurance market to assess the cost of insurance for the project. Given the variable nature of insurance costs over the life of the contract, the Insurance Risk Premium value in cell G160 allows the Authority to factor in some contingency to their insurance costs over the duration of the contract.

5.3.9.5  Funding Sources

The Model assumes a Project Financed approach with Senior and Subordinated Debt tranches defined in cells G164:G181 and I164:I181 respectively. Default debt terms have been included that reflect current norms, and unless there are specific justifications from the Authority, it is not recommended that changes are made to these values at OBC stage. As such, detailed description of all these terms is not included in the guidance.

The user is required however to input the Senior and Subordinated Debt facility sizes. From the Model calculations, the maximum drawdown requirements are shown in cells G167 and I167. The Authority is required to have demonstrated in their OBC that they have identified adequate facilities to meet these requirements and entered the size of these facilities in cells G166 and I166 respectively.

It is noted that for non-HRA schemes in particular, Corporately Financed projects are a possible alternative to Project Financed solutions.  The incentive for bidders to pursue this solution is that it offers a more affordable solution to the Authority.  Indeed it is typical for Corporately Financed bids to be presented by Financial Advisers with Project Finance funding assumptions.  As such, it is considered prudent to assume Project Financing terms as the default at this stage.

5.3.9.6  Target IRR - the nominal post tax blended equity return that the shareholders in the Contractor Company expect to receive on their investment is set in cell G187. This is the value that drives the UC macro and outputs the final value in worksheet 'O (Summary)' (see section 5.6).

5.3.9.7  Gearing - the percentage of total funding requirement met by the senior debt. Typically this value is 90% for projects of this nature (cell G189).

5.3.9.8  Cover Ratios - Annual Debt Service Cover Ratios (ADSCRs) is the level of "headroom" that the Contractor must generate in order to not breach the repayment terms of their senior debt facility in a given year. Default values reflecting current norm levels have been included in cells G193 and G194. If the Authority wishes to submit the Model with different values, they will be required to provide supporting justification from their financial advisers.

Loan Life Cover Ratios (LLCRs) are the level of "headroom" that the Contractor requires to pay off the full amount of the loan over the life of the senior debt facility. As with ADSCRs, default values reflecting current norm levels have been included in cells G196 and G197, and the user would be required to provide supporting evidence if they were to change these values.

5.3.9.9  DSRA - The Debt Service Reserve Account (DSRA) is a cash reserve normally required by senior lenders to provide a cash buffer should there be a shortfall. Lenders often require that a proportion of this reserve is pre-funded prior to operations cashflows being available.

The user is required to specify the level of pre-funding required for the DSRA at the end of the initial capex phase, and the required balance of the account in terms of the number of months debt service required to be held in this reserve). These are entered in cells G200 and G201 respectively. The pre-funding level entered is required to be at or up to 10% in excess of the level required - one of the checks carried out in worksheet 'O (Detail)' (section 5.7.1.3).

5.3.9.10  MRA Profile - Major or lifecycle maintenance very rarely occurs on an equal annual basis. In order to smooth the actual profile of spend, a Maintenance Reserve Account (MRA) is often specified as part of the lending terms. This is modelled by requiring a percentage of subsequent year's lifecycle costs to be held in a cash reserve. Typically this percentage will reduce the further away the lifecycle costs are, and the Model has the functionality to cope with an MRA of up to 10 years (see cells G204:G213).

5.3.9.11  Distributions - Dividends are only paid out from the contractor to its shareholders after the year in the contract specified in cell G216 (i.e. if this value is 20, then dividends will not be paid until year 21).

Once dividends are allowed to be paid, the proportion of retained earnings paid as dividends is specified by the user in cell G217. As such, the value the user can enter in this cell ranges from 0 to 100%. The default value for this cell is 100% (i.e. all retained earnings are paid as dividends after the year specified in cell G216). The main reason to reduce this figure would be if part of the senior debt were being paid as a bullet at the end of the contract and the contractor needed to build up reserves to meet this payment (see section 5.3.8).

The Model ensures that no distributions are made to shareholders unless there is sufficient cash and retained earnings.

5.3.9.12  Other - The real discount rate of 3.50% specified in cell G220 reflects current guidance in "The Green Book - Appraisal and Evaluation in Central Government" issued by HMT that has been live since 1st April 2003. The value in this cell cannot be changed without first getting agreement from DCLG.

5.3.10  Taxation

5.3.10.1  Corporation Tax Rate - The tax on the PFI contractor's taxable income or profits. The value in the Model is the prevailing corporation tax main rate of 30% (cell G227).

5.3.10.2  VAT Recovery/Payment delay - The duration between VAT payment and recovery has been set at a default value of 60 days. This can be changed by the user if supported by appropriate evidence from the Authority (cell G229).

5.3.11  VAT Recovery - In housing projects, New Build Properties are zero-rated (i.e. no VAT is added to the price). As such, it is not possible for the contractor to recover the VAT on the costs of New Build, hence the default value of 0% set in cell F235.

The VAT costs are paid on any Renovation construction costs. As such, a default value of 100% is set in cell F236.

Finally, pre-operating costs are fully recoverable; hence the default values of 100% specified in cells F241 and F242.

5.3.12  Capital Allowances - Capital allowance tax treatment has been included in the Model. For clarity, the key assumptions have been included in cells G248, G250, G251 and G252. If an Authority wishes to submit a Model with different values, permission from DCLG must be obtained in advance.

5.3.13  Finance Debtor Policy - The Finance Debtor Interest Rate is the rate used to generate the amortisation profile for Finance Debtor calculations. The value of 7% used reflects current market norms (cell G256). If an Authority wishes to submit a Model with different values, permission from DCLG must be obtained in advance.

5.3.14  Set-up costs to be capitalised - current DCLG policy is to allow 70% of set up costs to be capitalised (cell G260).

5.3.15  Affordability Assumptions - It is the intention of the DCLG housing unit to base the calculation of the quantum of PFI credits on a revenue abatement method. The RSG resulting from the PFI Credit value is calculated in line with DCLG guidance from 2008/9, and in order to calculate the RSG, the following assumptions need to be input by the user:

5.3.15.1  PFI Credits Requested/Calculated - Whilst the value of the maximum level of PFI Credit Allowable is calculated and shown in cell G267, as is emphasised in section 1.1.3, this figure is an indicator only and DCLG does not guarantee to meet the entire PFI credit requirement shown. As a result the level of PFI Credits used in the calculation of the RSG is entered manually by the user in cell G266.

5.3.15.2  Scaling Factor (Non-HRA Only) - The Scaling Factor has been set to 1.00, the rate for fiscal years 2008/9 and 2009/10. It is therefore required that the user submits the Model on the basis of this value. A different value may be set for future years and the user has the flexibility for changing the value should sensitivity checks be required. A scaling factor is not attributable to HRA Schemes. For HRA Schemes this value is fixed at 100% and the Model will indicate a "Problem" in cell O268 if the cell value is changed.

5.3.15.3  Interest Rate for PFI Credit Calculations - The rate for 2009/10 of 5.4% is included as a default. Users have the flexibility however to change the value for their own sensitivity purposes (cell G269).

5.3.16  Treasury VfM Model - Additional Inputs

5.3.16.1  Additional Escalators - This is the "CapEx Escalator" input in the Quantitative Assessment User Guide (section A.44). Unlike the HMT model which requires a single input value, the Capex Escalator calculated in cell G277 is a weighting of the Construction and Pre-Operating Cost indices. This is essentially a "ground-up" method of calculating the appropriate escalator for the VfM analysis.

5.3.16.2  Tax Adjustment Factors - The estimate made in cell G280 is to reflect the additional tax take that accrues to the government under the PFI option in line with the Green Book (see Quantitative Assessment User Guide section A.129-A.131 for further details).

5.3.16.3  Other VfM Inputs - These are broken down into two sections.  Estimated indirect VfM factors are required to be entered in cells G283 and H283 as NPV values, discounted from the nominal costs/benefit cash flows (see section A.121-A.128 of the Quantitative Assessment User Guide for further details).  Public sector transaction costs are those costs incurred by the Procuring Authority in reaching contractual arrangement under different procurement methods.  Costs in £'000s should be entered in cells G284 and H284 (see section A.105-A.107 of the Quantitative Assessment User Guide for further details).

5.3.16.4  Flexibility Costs - This section assesses the impact of a major change in scope between the PSC and PFI procurement options. The central premise of this section is that the likelihood and scope of change is comparable in both cases, but there is a premium to be paid in the PFI case (cell H289) reflecting the costs associated with a change notice (see section A.110-A.120 of the Quantitative Assessment User Guide for further details).

5.3.16.5  Optimism Bias - Pre-Financial Close - This represents the Optimism Bias (OB) between Outline Business Case and Contract Signature. As discussed in section 4.4, there is demonstrated systematic tendency for project appraisers to be optimistic. The OB Pre-Financial Close is assumed to be the same for both procurement options.

For capex, lifecycle costs and opex, an Upper Bound Optimism Bias (UBOB) is specified in cells F335, I335 and L335 respectively. The default values in these cells are based on a study by Mott Macdonald suggesting that in the past this has averaged to 24% for capital expenditure and lifecycle costs, and 41% for operating expenditure in standard building projects.

Whilst this value for UBOB is a given assumption in the Model, it is expected that Authorities will have queried this figure in completing the Model amended the given assumption as appropriate.

The UBOB is then sub-divided across the different types of costs in the project by applying uplift percentages to each cost type (cells D297:D331, G297:G331 and J297:J331 for capex, lifecycle costs and opex respectively). For each of these cost types, the sum of all the uplift percentages is 100% (cell D333, G333 and J333). This equates to all the OB occurring (i.e. 24% uplift in capex, lifecycle costs and 41% uplift in opex).

The user is then required to review each individual uplift percentage to see how much this can be mitigated, and assigns a Mitigation Factor in the range of 0-1 in the cells E297:E331, H297:H331 and K297:K331 against the corresponding uplift percentage. A Mitigation Factor of 0 means none of the risk is mitigated, whereas a value of 1 means that all the risk is mitigated in for the risk identified with an uplift percentage at the cell to its left.

The result of these Mitigation Factors against each uplift percentage is to generate a revised figure for OB, which is less than the UBOB, reflecting the extent of mitigation. These values for capex, lifecycle costs and opex are given in cells F337, I337 and L337 respectively.

In addition to capex, lifecycle cost and opex OB, there are also public sector transaction cost and third party income OB to be considered and input in cells F340 and F341. The default values have been set at zero and Authorities will be expected make an appropriate assessment the value for these input cells.

Finally, it should be noted that the cost of achieving this level of mitigation is required to be included in the Model.

5.3.16.6  Optimism Bias - Post-Financial Close - This represents the OB post contract signature - as such, this does not apply to the non-PFI option (see sections A.55-A.61 of the Quantitative Assessment User Guide for further details). Change notices which affect the cost of the PFI option have been captured previously under Flexibility Costs (see section 5.3.16.4).

The method of determining OB for capex, lifecycle and opex by identifying the UBOB and mitigating this risk as appropriate (cells F389, I389 and L389 respectively) is the same as described in section 5.3.16.5.