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Analyzing and Structuring Financially Sustainable Investments

Learn about the basic requirements for financially sustainable water and sanitation investments, including the importance of working capital and cash flow management. Explore strategies for financial sustainability, the use of subsidies, and the different approaches to calculating return on investment. Discover ways to close the financial sustainability gap and shape the financing structure for long-term success.

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Analyzing and Structuring Financially Sustainable Investments

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  1. Analyzing and Structuring Financially Sustainable Investments The World Bank

  2. Basic Requirements for Financially Sustainable WSS Investments

  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. 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

  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?

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

  10. Ways to Close the Financial Sustainability Gap

  11. Shaping the Financing Structure

  12. Government Support

  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. Government Support Options

  15. 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

  16. Common Transaction PPP Structures Characteristics Structure Straight Private Deal Typical Private Finance with 35-65 capital structure, 15 year, 3 year grace. Least Govt. Subsidy Private financed deal with up-front government subsidy component. Viability Gap Financing Viability Gap fund made available through ODA replaces upfront grant from Government. ODA Hybrid I 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 II Can add government grant component to the hybrid I structure.

  17. Effects of Blended Finance Structures for PPPs

  18. Effects of Blended Finance on Net Present Value and Cash Flows

  19. Improving Cost Recovery

  20. 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

  21. Thank You

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