Analyzing and Structuring Financially Sustainable

Transcript:Analyzing and Structuring Financially Sustainable:
Analyzing and Structuring Financially Sustainable Investments The World Bank Basic Requirements for Financially Sustainable WSS Investments Foundation for a Sustainable Utility Cost Recovery 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