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Wednesday, February 29, 2012

Verifying DIAL financial model used in tariff-AERA use of consultants apt?

GMRs demand for 6x-8x tariff increase for Delhi Airport,  made for severe media and interest group scrutiny, as people were mentally reluctant to accept this tariff shock. Hence, the aviation regulator AERA thought it fit to have extensive consultations etc, and released a consultation paper in Jan12 inviting comments by Feb29,2012. While reading that consultation paper(CP-No.32/2011-12-Determination of Aeronautical Tariff –IGI Airport, New Delhi, read it http://aera.gov.in/writereaddata/consultation/116.pdf) I noticed a very interesting section from para 21 onwards which stated that in order to analyse, review and advise on the financial model used by DIAL as a part of their tariff application, the Authority appointed Consultants. The scope of the assignment included
  1. Review and assessment of the models' arithmetic accuracy:-independent cell-by-cell  inspection and sheet-bysheet review of the arithmetic accuracy of formulae and calculations contained in the model including tracing items through the various interlinked sheets and calculations back to the input data and verifying the correct application of addition, subtraction, multiplication and division based on standard business and financial logic
  2. Check for logical and calculation integrity of the models verifying that the links within the model are working accurately; assessing that any macros that govern calculations in the model are running as intended; assessing that the model is logically constructed, internally consistent with respect to calculations and formulae and is fit for the purpose of undertaking analyses of relevant  aspects for tariff determination by the Authority; assessing that assumptions in the Financial Model are at one place and that there are no hard coded numbers in calculations in the Financial Model that might influence calculation results in unexpected ways and checking whether the assumptions listed in the assumption sheet are getting correctly reflected in the various sheets of the financial model.  
  3. Consistency check with key agreements/documents:- Further, the Consultants were also required to ensure that the Financial Model accurately reflects the concession offered by the Central Government with respect to the key agreement(s), and financial documents as also the provisions in the Act. The tasks here included consistency check for incorporation of provisions from key agreements related to various Building Blocks into the financial model.
  4. Assistance in undertaking certain sensitivity analyses. The Consultants were further required to provide assistance to the Authority in identifying such elements that may need to be certified from auditors /Chartered Accountants of DIAL of key aspects/ assumptions taken from the key / concession agreement(s) and also assist the Authority in reviewing the implications/change in results through sensitivity analysis of various factors like growth rate in traffic, inflation etc., to be conducted with respect to specific changes to assumptions for a factor or even reviewing the drivers and projection bases for such factors. 
I agree that financial modelling is not easy, in fact there are entire specialized courses on the subject and that the very complex issues in this(as opposed to power/roads/ports) may have prompted the authority to seek external help. But while the first two aspects could have warranted taking a consultant's help for Excel alone, the consistency checks and sensitivity analyses surely comes within the expected circle of competence of the regulator. Maybe they did not want to risk mistakes in such an important case and so they engaged consultants. Also to be fair, even other regulators do engage consultants to advice on tariffs petition process(but they are not explicitly acknowledged in the orders), so maybe I'm just shooting the messenger(AERA) who was upfront in admitting this, even if for the purpose of protecting themselves against subsequent judicial review. But for anyone in the infrastructure finance field either as preparer, auditor or banker, the above process used by AERA is quite instructive

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