What drives value creation in large projects? An application of sensitivity analysis to project nance transactions

The valuation of the economic convenience and the …nancial sustainability of large projects requires the development of large complex models for capital budgeting purposes [Kleijnen and Van Groenendaal (1997).]. However, complex models challenge the management in the identi…cation of the key value drivers of the performance of the new project, particularly if management needs to know which, among a large set of inputs, in‡uences to a larger extent the valuation criteria used in capital budgeting. Sensitivity analysis (SA) plays a central role in explaining the model results but recent literature [Saltelli (1999) and (2002), Borgonovo and Peccati (2006)] has shown that SA techniques must be quantitative, model independent and must minimize the need for qualitative statements. In this paper, we develop an approach based on the di¤erential importance measure aimed at evaluating model correctness, response to changes in the input factors and identi…cation of key performance drivers in a systematic way. We apply the methodology to the special case of project …nance where a new project is incorporated in a specially created vehicle (a Special Purpose Vehicle or SPV) whose sole objective is the design, construction and management of a single, high capital intensive venture for a given number of years. In our case, the project is represented by the construction of a parking lot for which we have available the evaluation model prepared by the mandated lead arranging bank in charge of the organization of the funding. The model requires a vector of 428 inputs. Using such a complex model enables us to reach two important results: (1) we introduce a computational algorithm and derive the sensitivity of the model to each factor in order to identify model response and key individual performance drivers and (2) we group the inputs in categories so as to o¤er a synthetic view of the problem exploiting the additivity property of the di¤erential importance measure which streamlines the assessment of [email protected]; [email protected]