Financial Analysis and Structuring for Sustainable Investments in Water and Sanitation Services

 
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The World Bank
 
 
 
 
 
Basic
Requirements
for Financially
Sustainable
WSS
Investments
Foundation for a Sustainable Utility
 
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Improved Management
 
Break Through
Financing Limits
 
Financial Viability
 
Expand Coverage/
Service Poor Communities
 
WSS Providers Must Have Sufficient
Working Capital to Pay Their Ongoing
Bills
 
Working Capital is measured by the Current Ratio which essentially calculates
current assets over current liabilities.
 
At minimum, the Current Ratio should be 1.2.  However, a much higher ratio may
indicate that short term assets are not used efficiently.  A ratio of less than 1.0
may indicate cash flow problems or the inability to convert revenues into cash.
 
Determining
the Cash
Flow
Solution
 
Strategy for
Financial
Sustainability
 
Improve sector performance and close
revenue gap
Use subsidies sparingly and for transition
Bring in government as real owners in the
financing challenge
Make use of all sources of financing
Use concessional finance correctly
 
FIRR vs. NPV?
 
The NPV is the value of the sum of projected cash flows discounted at the cost of capital.   Any value over zero
indicates adequate return, but the higher positive value show a higher return.  The NPV calculation Does not
give you’re the exact rate of return.  Just tells you that you are either above or below your threshold level.
The Financial Internal Rate of Return is the rate of return expressed as a percentage that the Project yields.
Through extrapolation you can equate the two by either increasing or decreasing the discount rate so that the
NPV equals zero.  In other words if your NPV is 0 at 15% discount rate then the FIRR should be 15%.
However, the FIRR can produce different values of the same cash flow and can produce the wrong number.
Moreover,  the FIRR formula assumes that the cash surpluses are reinvested at the FIRR rate – which is not
necessarily correct.  In order to correct this problem the Modified IRR formula was developed which deals
separately with the reinvest rate.
The formula for NPV and FIRR are exactly the same for the economic analysis.   In that case they are usually
referred to as the ENPV or the EIRR.   The difference is how you calculate the costs and benefits.   The financial
analysis only includes cost and benefits that accrued to the project, not externalities that accrue outside the
project to the wider economy.
Which Project is More Financially Sustainable?
 
Ways to Close the Financial
Sustainability Gap
 
Revising Capex Program by
Allowing PIP to Take Effect
Reducing CAPEX Program
Altogether
 
Ways to Close
the Financial
Sustainability
Gap
 
Shaping the
Financing
Structure
 
Government
Support
 
12
 
How Financing Can be Structured to Address
Sustainability Cash Flow Problems
Subsidiary Loan
Agreement
Bank Loan/Credit
Agreement to
Government
 
Financially Sustainable
 Terms to the Utility
 
Local currency financing
Extended grace and maturity
periods
Lower cost of funds
Grant allocation
 
Terms to government
 
Government Support Options
 
14
 
Approach of
Blended
Finance
 
Attempts to lower the overall cost of capital to
an investment
Stretch out repayment obligations through long
term sources.  Hence meet both cash flow and
efficiency considerations.
Can work with higher leverage structures with
enhancements such as performance bonds
 
15
 
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Characteristics
 
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Straight Private Deal
Least Govt. Subsidy
Viability Gap Financing
ODA Hybrid I
ODA Hybrid II
Typical Private Finance with 35-65 capital structure,
15 year, 3 year grace.
Private financed deal with up-front government
subsidy  component.
Viability Gap fund made available through ODA
replaces upfront grant from Government.
ODA can increase debt component .  WB has gone up
to 85% debt with tenures of as high 30 years and 10
years grace.
Can add government grant component to the hybrid
I structure.
Structure
 
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Improving
Cost Recovery
 
Biggest
Mistakes Our
Clients Make
Our Loans
 
 
Trickling Disbursements and Losing the Benefit
of Grace periods
Taking on More Debt than the Utility Can Sustain
Loans in FX Currencies
 
 
 
Thank You
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Explore the key principles of financially sustainable investments in Water and Sanitation Services (WSS), including cost recovery, working capital management, and strategies for financial sustainability. Learn about the importance of positive cash flow, foundation for sustainable utilities, and determining cash flow solutions. Discover insights on improving sector performance, using subsidies effectively, and comparing financial metrics like NPV and FIRR.


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  1. Analyzing and Structuring Financially Analyzing and Structuring Financially Sustainable Investments Sustainable Investments The World Bank

  2. Cost Recovery At minimum, operating revenues need to recover operating costs and administrative expenses Basic Requirements for Financially Sustainable WSS Investments Working Capital The system must be able to sustain an adequate level of working capital Positive Cash Flow The projected cash flow must remain positive for all years of projection period

  3. Foundation for a Sustainable Utility Expand Coverage/ Service Poor Communities Financial Viability Cost Recovery Break Through Financing Limits Improved Management

  4. WSS Providers Must Have Sufficient Working Capital to Pay Their Ongoing Bills Working Capital is measured by the Current Ratio which essentially calculates current assets over current liabilities. At minimum, the Current Ratio should be 1.2. However, a much higher ratio may indicate that short term assets are not used efficiently. A ratio of less than 1.0 may indicate cash flow problems or the inability to convert revenues into cash.

  5. Determining the Cash Flow Solution

  6. Improve sector performance and close revenue gap Use subsidies sparingly and for transition Bring in government as real owners in the financing challenge Make use of all sources of financing Use concessional finance correctly Strategy for Financial Sustainability

  7. FIRR vs. NPV? The NPV is the value of the sum of projected cash flows discounted at the cost of capital. Any value over zero indicates adequate return, but the higher positive value show a higher return. The NPV calculation Does not give you re the exact rate of return. Just tells you that you are either above or below your threshold level. The Financial Internal Rate of Return is the rate of return expressed as a percentage that the Project yields. Through extrapolation you can equate the two by either increasing or decreasing the discount rate so that the NPV equals zero. In other words if your NPV is 0 at 15% discount rate then the FIRR should be 15%. However, the FIRR can produce different values of the same cash flow and can produce the wrong number. Moreover, the FIRR formula assumes that the cash surpluses are reinvested at the FIRR rate which is not necessarily correct. In order to correct this problem the Modified IRR formula was developed which deals separately with the reinvest rate. The formula for NPV and FIRR are exactly the same for the economic analysis. In that case they are usually referred to as the ENPV or the EIRR. The difference is how you calculate the costs and benefits. The financial analysis only includes cost and benefits that accrued to the project, not externalities that accrue outside the project to the wider economy.

  8. Which Project is More Financially Sustainable? Project Project FIRR FIRR Year 1 Year 1 Year 2 Year 2 Year 3 Year 3 Year 4 Year 4 Year 5 Year 5 WACC WACC Go/No Go No 1 -150 40 60 30 -50 10% 7.7% No 2 9.1% -50 -50 -50 -50 250 7% No 3 2.6% -100 20 25 30 32 2%

  9. Revising Capex Program by Allowing PIP to Take Effect Reducing CAPEX Program Altogether Ways to Close the Financial Sustainability Gap

  10. Shape Financing Structure Ways to Close the Financial Sustainability Gap Improve Cost Recovery Modify CAPEX Program

  11. Blending with Concessional Loans or Commercial Finance Full or Partial Grant funding for CAPEX Shaping the Financing Structure Reverse Engineering to Determine Loan Amount that Can be Sustained Restructuring Unsustainable Debt

  12. 12 Direct Grants Concessional Loans Government Support Tax and Other Financial Incentives Guarantees

  13. How Financing Can be Structured to Address Sustainability Cash Flow Problems Bank Loan/Credit Agreement to Government Subsidiary Loan Agreement Financially Sustainable Terms to the Utility Terms to government Local currency financing Extended grace and maturity periods Lower cost of funds Grant allocation

  14. 14 Government Support Options

  15. 15 Attempts to lower the overall cost of capital to an investment Stretch out repayment obligations through long term sources. Hence meet both cash flow and efficiency considerations. Can work with higher leverage structures with enhancements such as performance bonds Approach of Blended Finance

  16. 16 Common Transaction PPP Structures Common Transaction PPP Structures Structure Characteristics Typical Private Finance with 35-65 capital structure, 15 year, 3 year grace. Straight Private Deal Private financed deal with up-front government subsidy component. Least Govt. Subsidy Viability Gap fund made available through ODA replaces upfront grant from Government. Viability Gap Financing ODA can increase debt component . WB has gone up to 85% debt with tenures of as high 30 years and 10 years grace. ODA Hybrid I Can add government grant component to the hybrid I structure. ODA Hybrid II

  17. 17 Effects of Blended Finance Structures for PPPs Effects of Blended Finance Structures for PPPs

  18. EFFECTSOF BLENDED FINANCEON NET PRESENT VALUEAND CASH FLOWS

  19. Incorporate Performance Improvement Program in Project OPEX Support for a Transitional Period Improving Cost Recovery Extended Commissioning Period Adjust Tariff to Justified Levels

  20. Biggest Trickling Disbursements and Losing the Benefit of Grace periods Taking on More Debt than the Utility Can Sustain Loans in FX Currencies Mistakes Our Clients Make Our Loans

  21. Thank You

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