Determining the Optimal Concession Period in Cancer Hospital Project using Public-Private Partnership (PPP) with Availability Payment Scheme

Abstract

The construction of Cancer Hospital in city of X which require total Capital Expenditure of Rp 1,135,834,554,688 can answer the need of comprehensive cancer services in Indonesia. But due to limited local government budgets, forcing local government to find alternative funding through Public Private Partnership (PPP) scheme. One of the newest PPP scheme at the moment is the Availability Payment (AP) scheme.
 Through this research, authors analyze the optimal concession period and the feasibility of this investment plan by calculating the required Capital Expenditures, Operating Cost, and other expense and Risk embedded to the project. The optimal concession period is analyzed by simulation of different concession period scheme ranging from 10-25 years and find the lowest required Availability Payment. The feasibility of the cancer hospital project is analyzed by using Discounted Cash Flow parameter which are Net Present Value, Internal Rate of Return and Payback Period. The risk embedded to the project is analyzed by using sensitivity, scenario and monte carlo analysis.
 From the result of Availability Payment calculation, the optimal concession period for this project is 22 years, this period scenario generates AP payment of Rp 287,712,786,883. The result of this project is financially feasible with positive Net Present Value of Rp 95,490,595,725, the Internal Rate of Return (IRR) of 12,66% which greater than Weighted Average Cost of Capital (WACC) of 11.92% , and Payback Period of 11,17 years. This Cancer hospital Project is financially safe to build by business entity (BUP). From 10,000 trials of Monte Carlo simulation, the project NPV will lies between Rp 59,335,915,203 to Rp 121,260,967,584 with 95% certainties with worst case scenario NPV still positive Rp 40,041,126,128. Based on the sensitivity analysis the COGS expense is the variable that most affecting the overall NPV of this project, followed by the long-term debt interest rate.