*5.2. The Cash Flow Analysis for the Projects Economic Evaluation*

To be able to proceed with the project feasibility and/or economic sustainability evaluation, it is necessary to build a cash flow analysis structure that is simultaneously consistent with the purpose of the assessment and with the indications of national and international accounting principles, regarding financial reporting previously mentioned (OIC 10 and IAS 7). Below are two diagrams, one for the Cash-Flow Analysis—CFA, the other for the Discounted Cash-Flow Analysis—DCFA meeting these requirements.

## 5.2.1. Project Equilibrium Evaluation in the Management Phase: The Cash-Flow Analysis

Considering a project for the public buildings improvement, through a public-private partnership that provide the private assignment of the management phase, without any investments from them: To evaluate the project equilibrium, the cash flows (Cash Flow Analysis) in the full year is sufficient, and the result must be equal to or greater than zero (Table 8).

The difference between income and revenues, in the case of for-profit activities, provides the result before taxes, while in the case of non-profit activities, it provides a management surplus, to be used in following years for purposes consistent with the management entity purposes.

### **Table 8.** Scheme of Cash Flow Analysis.


**Management surplus to be used for purposes consistent with the purposes of the managing entity (non-profit)**

5.2.2. Profitability Evaluation of a Project: The Discounted Cash-Flow Analysis—DCFA

In the case of projects for the enhancement of public buildings that provide the private entities involvement, with money investment, the DCFA is used. To this purpose, it is possible to hypothesize the following scheme for the Analysis of Discounted Cash Flow (Table 9):


### **Table 9.** Scheme of Discounted Cash Flow Analysis.

### *5.3. Cash Flows Detection Criteria*

In order to use the diagrams shown above, some in-depth details are needed:

### 2) Other revenues and income

With respect revenues, the most important aspect concerns the investment residual value at the end of the project life cycle: This value must be considered in the case of application of the DCFA, by inserting it in the item (2) Other revenue and income, for the evaluation of the investment profitability and it might vary, in relation to the possible provision of extraordinary maintenance interventions, during the life cycle or not.

A further aspect to be considered for an investment profitability evaluation is the inclusion of other revenues and income, again in item (2), of any public co-financing quota: This item must be considered in those cases where revenues do not allow to fully recover the capital invested (Profitability class A.2).

The case of the project operational sustainability evaluation, under item (2): Other revenues and income can be added to any other public contributions for management reasons or from fundraising activities (membership fees, fundraising, other voluntary contributions private individuals, etc.).

### 4) Costs for services

Within this cost item, in particular, exits for utilities (electricity, gas, telephone, etc.) and exits for routine maintenance must be considered, starting first of all from cleaning costs.

There are different definitions of maintenance.

The definition of maintenance as it appears in the UNI EN 13306 [38] standard, for example, defines maintenance interventions as those characterized by the "combination of all technical, administrative and management actions, foreseen during the life cycle of an entity, intended to maintain it or bring it back to a state in which it can perform the required function".

The most relevant distinction, according to the authors, to be stressed, is that between ordinary and extraordinary maintenance.

The D.P.R. 380/2001—Consolidated text for buildings [39], in art. 3, defines "ordinary maintenance interventions", the building interventions that concern the works of repair, renovation and replacement of the finishes of the buildings and those necessary to integrate or maintain the existing technological systems.

From an economic point of view, ordinary maintenance has a recurring nature (for example cleaning, painting, repair, replacement of parts damaged by use) and it is carried out to keep tangible assets in good working order through interventions that aim to guarantee their life expected profit, as well as the original capacity and productivity; it also includes repairs, and can also be attributed to fixed assets.

According to the national accounting principles issued by the Italian Accounting Body—OIC, in particular, the principle OIC 16 [40], ordinary maintenance costs are those incurred by the company to preserve the efficiency of the asset. The asset to be improved, therefore, has to keep its useful life and the original productive capacity unchanged. This category includes the costs incurred to repair faults, for the replacement of consumables, painting, cleaning, etc. The purchase of consumables, therefore, unlike the others, must be attributed to item 3).

### 6) Workers costs

As specified in the first part, the manager can also affect the costs of human resources.

In some cases, indeed, the activities planned do not produce sufficient income to cover all management costs, including those for human resources involved.

In such cases, a community, considering the value of those initiatives for the entire society involved, may decide to take charge of their performance anyway, through not-for-profit organizations, carrying out no-profit activities. Acting like this, there will be significant cost reductions, even if some member might still be paid, if the conditions are met.

9), 10) Planned investments for the replacement of tangible and intangible fixed assets

A balance of economic activity is guaranteed over time if it generates incomes to restore the capital assets value over time, even for the purpose of replacing them [41].

It is, therefore, advisable to consider a periodic investment intended to replace the furnishings, equipment and intangible assets; together with the establishment of a fund for the extraordinary maintenance of the buildings, point 11), that becomes crucial to maintain the usability purpose of the building and its services over time.

11) Scheduled investments or establishment of a fund for the buildings extraordinary maintenance

In order to guarantee the sustainability of the activities over time, in the case of the management balance assessment through the cash flows analysis, considering the year of operation, a fund that allows periodic interventions of extraordinary maintenance must be established in advance f.

On the contrary, in the case of an investment profitability evaluation through the DCFA application, the prevision of sums for extraordinary maintenance interventions is discretionary and depends on the time range taken into consideration: Considering a life cycle of 10 years, for example, such sums may not be envisaged; conversely, if they are considered, they will positively affect the residual asset value at the end of the measured life cycle.

From an economic point of view, extraordinary maintenance costs are expenditures for the growth, upgrading or improvement of the structural asset elements, translating into a significant and measurable increase:


The above-mentioned art. Three of the Consolidated Law on Building, on the other hand, defines as "extraordinary maintenance interventions", the works and the modifications necessary to renew and replace even structural parts of buildings, as well as to create and integrate hygienic-sanitary and technological services, maintaining volumes and surfaces of the single real estate unit and not involving changes of use.

12) Initial investments (equity ratio)

For the investment profitability evaluation through the DCFA, it is necessary to add the share of private capital, belonging to the initial investment, among the outgoing cash flows, considering the time of implementation. This amount also includes any capital obtained from the private entity through the use of credit (mortgages etc.).

In this way, it will be possible to verify the actual trend of the cash flows and to estimate even more correctly any financial charges.

If the difference between all the discounted incoming and outgoing cash flows is positive or not, it will be possible to check if the revenues produced by the project will cover all the outflows and if they will allow the initially invested risk capital recovery, remunerating it adequately.

13) Interest and other financial charges;

This output item can be considered optional. Indeed, according to some authors, any financial charges fall within the subjective convenience judgment that the private entity expresses when decides to enter a partnership agreement with a public body.

This study, however, looks at the public decision-maker perspective, who must decide whether, and under what conditions, to entrust private subjects to build and manage ì a development project: Thus, the assessment has to consider any payable interest, which may be one of the variables within

alternative forecast scenarios, aimed at verifying the conditions of convenience in the long run, considering different compositions of the capital investment.

Of course, interests on debt capital must be calculated to check the investment profitability. Nevertheless, this item is difficult to quantify, since it depends on variables external to the project (company financial capacity, cost of money, etc.); hence, an ordinary assessment has to be delivered, considering the specific space-time conditions in which the project will be carried out.

As a first step, the composition of the capital should be identified for initial investments, distinguishing it between the capital owned by investors and the debt capital, which will cause the interest expense charges.

On the other hand, no financial burdens must be borne by the private partner in the case of the mere management balance check.

14) Income taxes for the year;

In the case of profitability investment evaluation, the taxes on the gross profits generated by the project must also be considered; the net profits, once the taxes have been paid, represent the remuneration of the invested capital and the corresponding risks, i.e. the investment profitability.

Moreover, in this case, the appraisal of taxes implies significant margins of uncertainty, since the real amount paid depends on the other variables of the company's balance sheet, and as before, an ordinary assessment is mandatory considering all the other variable as nil, therefore, as if the company paid taxes exclusively for the gross profit deriving from the project.
