According to a joint report published by JLL and DLA Piper, public-private partnerships (PPPs) are increasingly being used in Saudi Arabia as a platform to encourage more private-sector engagement in different sectors including real estate. PPPs are considered as a key component of the country’s National Transformation Programme (NTP), which aims to increase the percentage of private sector investment from 40% of GDP in 2016 to 65% by 2030.
A key motivation for governments considering public-private partnerships (PPPs) is the possibility of bringing in new sources of financing for funding public infrastructure needs through project finance. Project finance as defined by International Project Finance Association (IFPA) is the financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash-flow generated by the project.
Islamic PPP Project Finance
One of the available project finance options in the Islamic world in general and the GCC in particular is project finance that is compliant with Sharia law, also known as Islamic Project Finance. The most common form of Islamic project finance structures is the combination of procurement (Istisna’a) and forward lease (Ijara). This will be used to explain the needed financial progress monitoring for PPP projects.
The Istisna’a procurement agreement will be used by the borrower to build the project assets and deliver upon completion to a special purpose vehicle (SPV) (owned by the Islamic financiers), as the purchaser. As consideration for the project company procuring the assets, the Islamic financiers agree to pay the project company an amount no greater than the total project cost of these assets. The project company, as lessee, and the SPV, as lessor, will also enter into a forward lease agreement to lease the assets on delivery. The forward lease agreement operates during the operational phase of the project.
Monitoring and Evaluating Financial Progress of PPP Projects
For Islamic as well as other types of project finance, it is of great importance that the funds allocated to construct the assets are not exceeded as well as the completed assets to be delivered on time and in accordance with the agreed quality standard to ensure timely payments of periodic lease rentals. PMWeb project management information system (PMIS) will provide the two parties of the project finance agreement with a real-time single version of the truth platform to monitor and evaluate project finance. Although PMWeb can be used to implement the best practices of project management to manage, monitor and evaluate physical, schedule, risk, issues and other aspects, nevertheless, this will article will only address the financial aspects as it relates to PPP projects.
Performance Budget Management
One of the most critical objectives in project finance is to ensure that there will be no cost overrun for the approved budget to be financed. Actually, failing to adhere to the project’s approved budget baseline would have drastic impact on the project’s viability and the target internal return on investment (IRR). It is therefore a must to have detailed cost estimate that covers direct and indirect cost as well as contingency or reserve to cover for the unknowns. The detailed cost estimate which is usually done a third-party cost consultant needs to be imported into PMWeb to maintain track of all cost estimate versions and those involved in reviewing and approving the cost estimate along with all the documents used to come with the cost estimate. It should be noted that the cost estimate should not be limited to the asset building stage but also for the operation and maintenance stage.
The project budget will be generated from the approved cost estimate using the cost breakdown structure (CBS) levels which will become the basis for controlling the project cost. Some organizations might opt to have the CBS to be the same as the WBS levels used to define the project scope. Since PMWeb allows multi-currency at line item level, budget line items could have different currency than others when needed. PMWeb has an automated currency exchange module to update the exchange rates at the desired frequency.
The next important step is to provide the financial projection for each budget line item taking into consideration the relevant project schedule activity’s start and finish dates and the expected budget spending for each project period. There are pre-defined projection curves to expedite the projection allocation process, nevertheless, this can be manually adjusted to improve the planned budget value for each period.
All adjustments to the approved baseline budget including budget additions and ommissions as well as transferring funds between cost centers will be governed using the budget request process. This will also include any usage of the approved project contingency and management reserve. Workflow can be assigned to the budget request adjustments to formalize the steps to submit, review and approve those adjustments.
This will enable having real-time report on the project budget performance which could include comparison between the different budget versions, budget planned spending projection which is the same as loan drawdown, list of all budget adjustments along with the reasons for those adjustments, drawdown of project contingency and management reserve among others.
PMWeb project funding module will be used to capture the details of all fund sources that are available to the project including debit (Istisna’a), equity or any other source. It will also include all funding requests issued against those fund sources and the authorization to release those funds. The fund authorization allows breaking down the authorized funds against each Work Breakdown Structure (WBS) levels of the project to keep track of how the funds were dispersed.
Although the project performance budget should be accurate, nevertheless the degree of accuracy can be only verified when the actual purchase orders, subcontracts and other commitments to deliver the project asset are formally awarded. PMWeb will be used to capture all those commitments including their payment terms and conditions. PMWeb will be also used to capture the details of the main contractor who might be also one the equity partners of the PPP project. PMWeb procurement and online bidding modules will be used to manage the procurement process and ensure that there is documented technical and commercial evaluation for all awarded commitments. In addition, PMWeb pre-qualification module can be used to ensure that all awarded contracts where to only pre-qualified suppliers and subcontractors.
Actual Cost and Actual Payments
All invoices received for completed work in place for each commitment contract as well as all miscellaneous invoices and the cost submitted through timesheets for any other resources assigned to manage the project will be captured in PMWeb. All those invoices will be assigned a workflow to formalize the submit, review and approve process. PMWeb will be also used to capture the actual payments made against the approved progress invoices.
Changes to the approved commitments could have drastic impact on the project’s approved performance budget as well as project’s completion date. Therefore, there should be a robust proactive change management process to reduce if not eliminate the negative impact of those changes. PMWeb potential change order module will be the early warning notification process of all possible changes that could impact the project. Based on the formal review of each potential change order, change events will be created for all those viable changes. The change event will capture the impact details of each change on the project’s performance budget and relevant commitment contracts. This will become the basis for issuing a change order to adjust the affected commitment contract. To enforce transparency and accountability, workflow will be assigned to the change order process with conditions to escalate the change order to right individuals based on the approval authorities’ levels assigned to them.
Loan Recovery (Ijara)
For a PPP project, the revenue to be generated from the project asset is what makes the project viable or not. The revenue could be based on long term commitment form organizations, public or private that will be using the project assets. For example, for an affordable housing project, the government, semi-government and private sector organizations might commit to long term lease of those houses. The same approach could be applicable for residential and commercial buildings, hospitals, hotels among other type of capital projects. PMWeb revenue contract document will be used to capture the details of all those agreements and the due payment dates for those periodic lease rentals. In addition, the revenue module will be used to capture any changes to those lease or revenue agreements. Further, the revenue module will be used to issue the invoices for those leases and the actual payments received against those invoices.
Consolidated Financial Report
All of the financial transactions captured above will be consolidated by PMWeb in a single table called the cost ledger. This real-time cost ledger is linked to each financial transaction to provide immediate transparency on the source of the transaction. The cost ledger will become the data source to create what is known as the Cost Worksheet which looks like a spreadsheet with the option to save as a MS XLS file. PMWeb allows creating unlimited number of cost worksheet including new columns and formulas to provide the needed financial analysis.
Reporting Financial Performance
The real-time data captured from the performance budget, budget adjustments, awarded commitments, potential, pending, disputed and approved change orders, progress invoices, actual funds payments, lease and other revenue sources among others will become available to report on in different forms and formats depending on the project stakeholder requirement. What is important is that regardless of what is being displayed, the data source for all is the same.
Monitoring and evaluating the PPP project physical, risk, issues and financial progress is a must for all parties involved to ensure that the PPP project is on track and to trigger performance alerts when needed. Having an integrated project management information system (PMIS) platform like PMWeb not only provides the real-time single version of the truth reporting of project’s performance and health but the insight to trust worthy real-time data to make better and faster informed decisions to keep the project on track. Further, the data and document transactions granularity captured in PMWeb, provides the transparency and accountability needed for internal and external audit.