See-Through Modelling. Dominic Robertson

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       Design

       Build

       Test

       Deliver.

      1. Specification (S)

      Specification means ‘the specification of the content and structure of the model’. The model content is made up of a logical machine into which data is input. This logical machine will use this input data to calculate defined outputs. The model structure is made up of organised content set in a specific timeframe.

      The first step in building a new model is to define the timeframe of the model. By this I mean start dates, end dates, reporting dates and periodicity. The second step is to define and specify the main outputs in the model; these main outputs are the financial statements of the legal entity or company being modelled.

      After these two steps each line of the financial statements is used to further define the content of the model.

      2. Design (D)

      The design of a model is about the structure, organisation and choice of logic. So model design is also about the choice of formulae. For a project finance company in operations there is limited design left to do given the sheer quantity of projects out in the market. In other words, there is a clear template that can be used.

      However, there will always be occasions when some further design is necessary to overcome particular difficulties. These might arise from projects with more complicated operations, such as waste water projects. Or they might arise from more complicated finances, with more tranches of junior debt, such as mezzanine finance. Essentially the model is a pragmatic expression of a series of contracts between various parties and the project company. So design also means the nitty-gritty logic that describes these contracts.

      There is good design and bad design.

      Good design:

       achieves the objectives in an elegant and transparent solution

       knows its limitations – it is not the intention to build a model that can withstand a 100-year storm

       flags errors and requires further design later as required

       employs clear organisation and structure

       has no duplication or repetition

       minimises logical counter flows

       minimises the number of reports

       understands the importance of model maintenance for the success of a model

       above all, is simple.

      Bad design:

       is over-complicated logic

       is massive formulae

       is changing timelines on the same sheet

       is disorganised and has a lack of structure

       is repetitive and duplicative

       has no respect for hierarchy

       creates endless rehashed versions of the financial statements that will require constant maintenance, and

       is the use of un-auditable formulae like OFFSET.

      Basic model structure

      For a modeller, the basic structure of a PPP/PFI model is well established. This structure was shown in Figure 6.

      The operating model will contain most or all of these sheets in the order shown in Figure 6 and with the components as listed. Since this design is well-tested the modeller can concentrate on the design of the calculations, which will be particular to the project in hand.

      Business map of the model

      The manager may not want to see the model in the same overall structure as the modeller. However, we can’t change the order of the building blocks to suit the manager as some important benefits derived from the modelling structure would be lost and this would complicate life for the main user of the model. Instead the manager is offered the Quick Start sheet which allows direct navigation to those areas of interest to the manager.

      See Appendix 5 for the Quick Start sheet.

      3. Build (B)

      Shadow phase

      The objective is to re-perform the results of the old FC model. Most of the model build takes place during this phase. During this phase there are three important steps.

      Step 1 – Update:

      The objective is to update with actuals and make any further requested/specified changes.

      Step 2 – Test:

      The objective is to test the model after the updated changes.

      Step 3 – Audit:

       The updated and tested model now goes for audit where a reputable firm of model auditors review both the integrity and usability of the new model according to a set specification.

       This phase is important for the lenders as it creates an audit trail between the financial close model and the new operating model.

       This phase validates the logic that has been built and asks a whole series of questions about the model logic that the builder has to respond to – these are called queries and are normally categorised:

       Actual error, Potential error, Formatting/label query, Clarification, Numerical assumption, Information.

      4. Test (T)

      Testing a model is a vital part of the build process. In fact, it is so vital that I have dedicated a section within the body of modelling theory to testing; see ‘Class 4: Model testing theory’.

      5. Deliver (V)

      Model delivery is the act of passing a model over to the end user. This happens at various stages during the build process.

      There are various strategic moments when this is best done and certainly moments when it is not best done. In general it is better to lower delivery expectations by adding some delay rather than delivering a sub-standard product. However, this is something that comes with experience.

      There are three main model delivery events in the production of a UK PFI project finance operating model, СКАЧАТЬ