The contract director should monitor the private party's financial position for a number of reasons. A poor financial position can be an early warning of future performance issues or of the project becoming unsustainable. In addition, the private party's financial position may have financial consequences for the government party if the Partnership Victoria contract includes mechanisms such as; sharing in additional revenue generated by the private party, or sharing in risk associated with refinancings.
In Partnership Victoria projects, the private party's cash flows are a key element of its overall financial position. To fully understand the cash flows, the contract director needs to consider both past performance and projected future performance of each of the elements in the cash flow. The following table outlines the key performance issues that should be considered.
| Issues to be considered | Tools or processes |
| Private party cash flow | |
| What are the private party's real sources and uses of cash? What are the real sources of revenue and gain an appreciation of how revenue is likely to change over the project term? What are the revenue drivers? What is the underlying cost structure? What is the underlying capital structure? What are the project risks and how will they impact on the cash flows? At what point are dividends paid/payable? What constraints are there on dividends? How does the payment mechanism work including, where applicable, any abatements for non-performance? What are the project's 'pinch points'? How does the structure and constitution of the private party change over the project lifecycle? | Financial model - the financial model usually required for inclusion with bids is a useful starting point for understanding the cash flows (extract forecast from financial model for rolling annual basis and compare actual for forecast) Audited accounts - for the private party and, where available, the underlying service companies covering the last three years Stock exchange announcements - if a relevant entity (or its parent) is listed on a stock exchange, its stock exchange announcements may contain additional cash flow information Risk matrix - regular monitoring and updating of the risk matrix and management plan developed during the procurement stage and application of the quantification techniques to the financial model Sensitivity analysis - tests the effect on the cash flows of changes in value of underlying costs and revenues (and other variables such as risk as appropriate) Scenario analysis - tests likely combinations of changes in variables to establish downside (and upside) scenarios Probability analysis (for example, Monte Carlo simulation) - used to consider the effects of a range of values applied to underlying private party, revenues and debt service obligations (and other variables such as risk as appropriate) using appropriate probability distributions and computer aided simulation techniques |
The following table outlines the key financial position issues that should be considered and appropriate tools or processes to be used.
| Issues to be considered | Tools or processes |
| Private party financial position | |
| What strengths or weaknesses emerge from analysis of trends in key financial figures? What do the trends in the financial figures indicate about the organisation's financial position? What profits come from where? What is the private party's capital structure? What is the rate of return, both achieved to date and projected? Have dividends been paid? Is there a program for increasing return on investment? Has the management projected operating statements and balance sheets into the future? Is there an effective cash management system? Are existing and projected capital expenditures appropriate for future operational needs? Is the organisation knowledgeable and aggressive in tax planning? Will any anticipated regulatory changes affect the organisation's financial position? What impacts might the private party's financial position have on the government party? | Audited accounts - for the private party and, where available, the underlying service companies / key subcontractors covering the last three years Stock exchange announcements - if a relevant entity (or its parent) is listed on a stock exchange, its stock exchange announcements may contain additional financial information Financier's reporting requirements - (see Note 1 below) What are the financiers monitoring and how often are they receiving reports? For example, cash flow monitoring, key debt service ratios, working capital requirements and repayments schedules Covenant monitoring - what financial covenants has the private party agreed to? How will these be monitored? Dividend monitoring - dividend payments by the private party usually indicate a healthy financial position Credit analysis - what is the financial position of the organisation(s), e.g. activity analysis, liquidity, long-term debt solvency, profitability and valuation? (See Note 2 below) Financial assessment services panel - the Victorian Government Purchasing Board has established a panel of financial assessment services providers to assist with the assessment of the financial capacity of organisations (See Note 3 below) Moody's/Standard & Poor's ratings if available - note that these ratings are based on extensive financial analysis and industry knowledge Newspaper clippings Financial key performance indicators - contracts should include financial key performance indicators, e.g. cash flow monitoring, key debt service ratios, working capital requirements and repayments schedules etc. |
Note 1: There is an alignment of interest between the government and the financiers to see that the project succeeds. However, the government party should be cautious that it is not seen to be the 'underwriter' of the project. The government party must understand the extent to which the financiers are managing risk. Default monitoring may be preferable as the government party may be able to leverage off the banks monitoring systems.
Note 2: See Appendix F for definitions of key financial ratios.
Note 3: VGPB website at: http://www.procurement.vic.gov.au/State-Purchase-Contracts/Professional-Advisory-Services