Once a project finance transaction is finalised and the asset is constructed, it becomes crucial to monitor and report its continuous performance.
The way the model is used and what it does before financial close changes significantly once the deal is agreed. Complex parts of the model that were extensively used to work out the investment and funding structure, or perhaps work out what price to charge for whatever the asset produces, might no longer be needed as the funding structure is set and the revenue agreements are signed.
But other parts of the model which might have been simple before (forecasting a predictable revenue stream for many years) can become much more complicated as the model assumptions clash with real life. As time goes by successive time periods of the model change from forecasted numbers to actual history, presenting challenges at the interface between history and forecast, and what to do when reality diverges from what was expected.
Imagine a cost has been lower than expected. What should the operational model do with that? Should it set some provisions aside in the expectation that the cost will catch up when the supplier sends in their late bills? Or has the project genuinely saved some money so that saving could be paid to owners of the asset?
Stakeholders, particularly lenders, seek assurance that the asset is generating the expected cash flow and complying with all contractual obligations.
Typically, the responsibility of reporting ongoing operational performance falls upon the asset manager. However, a significant challenge arises.
The Challenge…
The model used during the bidding phase fails to account for the ongoing performance of the asset. What makes this more tricky is that the model is typically developed by a financial advisor who is no longer available when the asset becomes operational. Consequently, the expertise required to understand and modify the model is absent which can lead to some hair-pulling frustrations.
So, what can an asset manager do in such a situation?
One possible approach is to manually modify the original model by hardcoding changes, meticulously entering formulas, and hoping for accuracy. However, this method is time-consuming, arduous, and prone to errors.
It’s essential to consider the long-term implications since these assets can have lives spanning decades. Multiple individuals attempting to modify the model over time can result in a convoluted and error-ridden mess.
Alternatively, there is a more robust and efficient solution…
Transitioning to an operational model explicitly designed for ongoing performance reporting offers several benefits. This model will solely focus on the necessary functionalities for reporting, eliminating the complexities related to debt sizing and various accounting treatments found in a bid model.
The operational model can seamlessly incorporate actual data and can even integrate with your management accounting system through mapping or direct linkage. Additionally, it could feature a customised dashboard to fulfill investors’ requirements and ensure their satisfaction.
If you have a model that needs changing or redeveloping, then we should talk.
Reach out to us to discuss effective strategies for reporting the ongoing performance of your infrastructure assets.
At Gridlines, our dedicated team of specialists has extensive experience developing operational and portfolio models for numerous assets worldwide, spanning all major infrastructure sectors.
