Finance Basics

The Financial Analysis had to Consider Both

Criteria

profits cash flow

Basic Assessment

Financially
Project can earn an adequate rate
Viable of return based on market
Weighted Average Cost of Capital.
Viability
Assessment
Project fails to earn a sufficient
Not Financially
return. No opportunity for
Viable significant tariff Increases.

3
Basic Assessment

Positive Project cash flow is adequate.

Cash Flow
Throughout

Cash Flow
Assessment
Project cash flow negative in
Problematic any given year.
Cash Flow
 Project FIRR and NPV Measures Profitability of the Project
• The NPV is the value of the sum of projected cash flows discounted
at the cost of capital. Typically the assessment was done on the
basis of total return.

How We
• 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
Measure above or below your threshold level.
• The Financial Internal Rate of Return is the rate of return expressed

Financial as a percentage that the Project yields.

• Through extrapolation you can equate the two by either increasing

Viability 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%.
Projected Cashflows Measure Repayment Obligations
• Also conducted on the basis Project’s total return
Total Return Versus Return on Capital
Total Return to Investment (ROI)
• Refers to a Projects return on total investment. Calculated as the
NPV or FIRR based on cash flows that disregard debt servicing.
This provides determines the total return that the project earns
irrespective of financing option.
Return to Capital (ROE)
• Refers to the total return only to the capital contribution and cash
flows specifically incorporate the cost of financing and debt
service to external borrowers.

What are Advantages and Disadvantages of Each?

Why the Change in FA for Water Projects?
Survey of Cost Recovery of WSPs in Different Economies
 Why the Change?

How Meaningful is a Project FIRR in an Environment

Where Most WSPs Have Difficulty Recovering Even
their O&M Costs?

How Meaningful is the Project’s cash flow?

What Does it Take
to Become
Financially
Sustainable?
If Money Could
Truly Grow on
Trees
Financial Sustainability Involves:

 Meeting Financial
Obligations of the
System

 Reliability and Cost of

External Funding
Sources
Basic Financial Sustainability Assessment
Revised
Positive Project consolidated cash flow is
Cash Flow
Throughout
adequate.

Cash Flow
Assessment
Project Consolidated cash flow
Problematic negative in any given year.
Cash Flow

Consolidated refers to a single entity or an entire water system with multiple entities.
Obstacles to Financial Sustainability

FINANCIAL PREDICTABILITY
SUSTAINABILITY OF FUNDING
OF UTILITY SOURCES

UNCERTAIN GOVE
RNMENT
COMMITTMENTS

INADEQUATE TARI
FFS UNDEVELOPED CA
PITAL
MARKETS

LOW EFFECIENCY
POOR REGULATORY
ENVIRONMENT

LOW AFFORDABIL
ITY
SUDDEN SHOCKS
 The Ladder of Financial Sustainability

Source: Baietti 2005

 
 Effect of Loan Maturities on Tariffs

Maturities of
90

80

Financing have a 70

Significant Effect 60

Sugbon

on Tariff Levels
50
Bohol

Tariff
Malabuyoc
40
OBA Cambodia

30

20

10

0
4 6 8 10 12 14 16 18 20 22

Maturity in Years
The Financial Analysis Primarily Consists of
Two Parts

• The Diagnostic – Measuring Historical Financial Performance

• The Consolidated Financial Projection Incorporating Debt Service
Analysis