The output from a financial model shows the results of employing a particular set of assumptions regarding a project. As the financial model is used to decide on the best structure for the transaction, the modeller will have to consider a number of different scenarios. For a water supply PPP project, one scenario might involve using the current tariff schedule, and an alternative scenario might use full cost recovery tariffs. Other scenarios might use alternatives regarding the physical configuration of the facilities, alternative asset replacement and maintenance programs, or length of concession period.
Microsoft excel provides tools for creating various scenarios (base case, full cost tariffs, etc) and for displaying the results in pivot tables. Scenarios are used to simulate the project under alternative settings. Each scenario will be based on forecasts of future events that are uncertain and beyond anyone's control, such as future traffic volumes. The model uses the most likely values for forecast variables, but it is almost certain that actual results will vary from the forecast. The effect of this variance is modelled by sensitivity analysis, in which key variables are allowed to move by, say, plus and minus 10% from forecast, and the impact on IRR/NPV is calculated. It is also informative to turn this calculation around, and calculate the "switching value" for each variable. The switching value is the percentage change in a variable that would be required to turn the project NPV negative. Switching values are particularly informative for projects that are only marginally financially viable.
For a typical PPP project the following sensitivities would be run:
● 20% reduction in consumption or patronage volumes
● 20 % increase in consumption or patronage volumes
● 20% increase in cost
● Increase in Discount rate
As the number of scenarios and sensitivities grows, it becomes particularly important to maintain strict discipline in the use of the model. To exercise control over the model, one should use clear unambiguous file names and scenario names as well as maintain the practice of having only one input worksheet with all input fields clearly identified. If a scenario is presented in a report, the backup documentation for the report should contain the full file name and a printout of the input and output pages (the "Summary" page in the specimen model).