infrastructure

In the legal industry it is common practice for professionals to perform work ‘pro bono’ to support certain organisations or people in need. I don’t know how this practice started and what is keeping it going, but reflecting upon it the lack of pro bono services in the financial modelling community is quite obvious.

Pro-bono at Wikipedia

Why do lawyers work for free when financial modellers don’t?

The closest a financial modeler comes to pro-bono work is a success fee-based fee structure payable only upon successful completion of a project. It’s not quite the same thing as providing free advice to a person or organisation with no capacity to pay for their services today AND in the future.

I suppose that one reason the lack of pro-bono services for financial modellers is that these services are not really required on an individual level. Most people’s personal cashflows don’t require investment banking level of analysis to understand sensitivities or scenarios. If they do, you probably have bigger problems than just modelling your situation… (This article ‘pro bono financial management’ highlights similar thoughts)

Who would need pro bono financial modelling?

In my view pro bono financial modelling could apply to a number of projects, mainly in emerging markets social infrastructure or energy projects. In many cases it would be enough to find a suitable template to be used for the analysis. In a way I suppose some banks already do this by providing financial modelling ‘for free’ on the assumption that they will recover the costs through the financing fees at a later stage….

I suppose writing this without backing it up would be rather pointless, so here we go…. If you could argue that you are trying to build a better world with no purpose of getting rich in the process and see the need for financial modelling - let me know and I will help you out - pro bono!

A consortium led by Leighton contractors has been awarded the AUD 1.1 billion contract for design, build and maintenance for seven schools on Queensland, Australia.

This is regarded by many as a success for the supported debt model and proves that the big PPP banks the Commonwealth Bank and National Australia Bank have become comfortable with the supported debt model which was widely discussed in the bid phase of this PPP project (I even wrote an article for Project Finance International (”PFI”) on the topic (subscribers only - sorry) ‘The brave new world of PPPs’

Project Finance Execution at the Commonwealth Bank

It is very satisfying to the Commonwealth Bank win this process as I used to work in their Project Finance Execution team. The team has really improved their modelling standards in the last few years after appointing Joseph Lau (who was previously with Mercers model audits) as responsible for financial modelling methodology and quality.

No doubt a background in financial model audits help when performing peer reviews on internal bids prior to bids (or even prior to external independent model audits). I am surprised that not more banks have taken this approach of developing a ‘centre-of-excellence’ for financial modelling.

Additional info on the PPP transaction

• Leighton wins AU$ 1.1 billion schools PPP project
• Queensland Government announcing the bid process (2008)
• Shortlisted proponents after the Expression of Interest

Congratulations Leightons and the CBA! (and NAB of course, I just don’t know them as well…)

Anyone who has been through a financial model audit knows that it can, if not well managed, be a stressful experience with a lot of pressure on the modeller who has built the financial model. Finding a significant spreadsheet error at a late stage in a transaction can result not only in embarrassment for the modeller, but also in large additional legal costs for the consortium or the bidder/buyer.

Can we decrease model risk by finding spreadsheet errors earlier?

I spend a lot of time thinking about ways of minimizing model risk and how to automate the verification of the validity of a financial model or a spreadsheet. A blog entry by Nick Crawley at Navigator (5 reasons Google will replace Microsoft Excel) got me started thinking of a new way of validating financial models in real time, at a fraction of the cost.

Online on-demand shadow modellers

My idea is based on using the lower cost of labour in some countries combined with the salary discount many people would accept for being able to work from home or from a pleasant location (such as their cottage in the country or beach house). One could imagine a team of “shadow modellers” (ex bankers, analysts and modellers) who continuously review all the work performed on a centralised spreadsheet platform, like Google Spreadsheets. These Shadow Modellers could be placed anywhere in the world geographically, and being in a different time zone is even an advantage. They don’t even need to be employed by the company but could be an ‘on demand’ service which you simply use on an as needed basis.

Benefits of a centralised on-line spreadsheet platform

Today, using corporate networks and Excel files this approach would be practically impossible for many reasons but shifting spreadsheets to a centralised platform would makes this work a lot more efficient. One could even have a financial model reviewed while it is under development, a functionality that is built in natively in Excel but doesn’t work in practice for more complex spreadsheets (because of file corruption and data loss).

To be fair, I think Google Spreadsheets has some way to go before it can fully replace Excel in the corporate space but with the pace it is developing I certainly wouldn’t bank on Microsoft dominating the spreadsheet space in ten years from now. Google are working on new functionality including Macros, Drawings and Solver so we are definitely getting there.

Would this approach replace a traditional financial model audit?

I don’t really see this as a replacement for a formal financial model audit in its traditional sense. However, I think the centralised review approach could have applications for teams who lack the capacity or resources to perform peer reviews of analysis before internal decisions are executed. Maybe this could simply be seen as a structured peer-review framework, but at a lower cost than having two people from the same team performing it, or as a quality insurance for smaller teams with only one analyst.

I was born in Stockholm, Sweden and lived there until I moved to Australia in 2003. Coming to Australia was like travelling back in time in regards to the “internet” used in Australia. Ads on TV still compared “broadband” to dial-up, a concept I couldn’t believe anyone was still using.

Going from Napster (it feels like a long time ago now, doesn’t it..?) on 10 Mb/s in my bedroom to Australia where the most used site on the web was the Commonwealth Bank of Australia’s NetBank which doesn’t allow you to use the ‘back’ button for ‘security reasons’ and looks like it has been designed by the guy who invented Lego was nothing short of a shock .

Kevin Rudd’s national internet infrastructure project

Finally, as a positive spin to the global financial crisis, the Australian government has decided it is time for Australia to see the light and to upgrade the national internet infrastructure to a decent standard. For a thorough analysis on this see BuddeComms analysis of the situation.

What outcomes can we expect of the infrastructure investment?

The Swedish investments in solid internet infrastructure have resulted in many fantastic internet solutions including Skype, Spotify and Pirate Bay. A successful delivery of this massive project (AUD 43 Billion) will put Australia on the map as forward thinking and potentially open up new sources of export now that resources seems to be of everyone’s mind for a bit….

I really hope that Rudd’s project will increase the Internet awareness in Australia which may result in

• more cross-border collaboration (via applications like WebEx and video conferencing via Skype),
• more efficient corporate infrastructure (using offsite storage and cloud based applications like Salesforce , the Google suite of corporate tools and DropBox)
• Better use of outsourcing of non-core tasks (RentACoder , Amazon Mechanical Turk )

When I was working with Navigator Project Finance we needed a new website. As a solution we hired a Mexican Developer in Sinaloa, Mexico through GetAFreelancer.com at the cost of US 300 using OpenSource Joomla compared to our best Sydney quote of AUD 12,000 (~USD 10,000) using a very second rate in-house CMS.

Most people found that very strange but what is really so different with a consultant in Mexico compared to someone at the other side of your own home town. Most tasks can be done with no face-to-face interaction.

How does Internet Infrastructure impact Corality?

At Corality we are constantly evaluation ways of working more efficient with clients all over the world. Only this week I have been liasing with clients in Kuwait, Saudi, Holland, United Kingdom and Australia (Sydney, Perth and Adelaide).

Out of these clients I have only met two face to face. Sure, for certain tasks one has to be in on site but 95% of all project related work can be performed from our Sydney offices. We are currently experimenting WebEx-based long-distance training catering for the US and Africa in particular.

Working with a global client base

With such a wide-spread client base I welcome all new solutions that can improve long-distance collaboration. We have over the years tested many tools including

• Blackberries (of course)
• Skype (voice, chat and video)
• WebEx (with great success)
• Remote Desktop (can’t live without it)
• VPN (useful but dull)

and more recently

• Google spreadsheets (very exciting!)
• LinkedIn (fantastic networking tool but unfortunately underrated by many professionals)
• Twitter (I still don’t get it..).

So, let’s just hope this project gets delivered sooner rather than later. No one would be happier than I too see some serious speed in our Internet infrastructure.