1. Finance Basics

2. The Financial Analysis had to Consider Both Criteria
profits
cash flow

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

4. Basic Assessment Project cash flow is adequate.
Cash Flow Assessment
Positive Cash Flow
Throughout
Project cash flow negative in any given year.
Problematic Cash Flow

5. How We Measure Financial Viability
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.
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%.
Projected Cashflows Measure Repayment Obligations
Also conducted on the basis Project’s total return

6. 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?

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

8. How Meaningful is the Project’s cash flow?
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?

9. What Does it Take to Become Financially Sustainable?
#1 Ladder - No one solution involved in financial sustainability. The ladder, as it deals with sustainability is a function of cost recovery and reliability (sources of funding)
#2 Infant utility challenge is to grow substantially while understanding the problem of coursing of funds so
#3 long term debpt financing becomes important to grow unless you’re a subsidized economy.
How do you begin to estimate revenue requirements?
A) linked to the ladder. Formulas are pay as you go (bottom), etc.
B) methods: cash, utility & hybrid
C) Look at explicit financial comittement options.
D) Pros and cons of each
E) develop your average tariff
#3 Structuring of tariff (art of design lesson)

10. If Money Could Truly Grow on Trees

11. Financial Sustainability Involves:
Meeting Financial Obligations of the System
Reliability and Cost of External Funding Sources
Its not just the matter of the utility to recover costs, but you need to have reliable sources of funding. For many developing countries, the lack of predictability—or, say, the reliability of subsidies and other
external financing—is a principal constraint. This is particularly true
if the utilities rely on such transfers in order to meet their ongoing cost of operations. Governments with
many pressing and competing commitments for budgetary transfers cannot be relied on entirely. Funding may be
available, but more often on a sporadic or nonrecurring basis. On global basis, donor aid grants funds
are also relatively limited, as are other public sources of financing. Often, these are rationed to accommodate a number of competing
needs across different sectors and purposes. Overreliance on these sources thus means reducing the predictability of financing for any given investment, and hence lowering the opportunity to achieve
financial sustainability in the long term.

12. Basic Financial Sustainability Assessment Revised
Project consolidated cash flow is adequate.
Cash Flow Assessment
Positive Cash Flow
Throughout
Project Consolidated cash flow negative in any given year.
Problematic Cash Flow
Consolidated refers to a single entity or an entire water system with multiple entities.

13. Obstacles to Financial Sustainability
PREDICTABILITY OF FUNDING SOURCES
FINANCIAL SUSTAINABILITY OF UTILITY
SUDDEN SHOCKS
POOR REGULATORY ENVIRONMENT
UNDEVELOPED CAPITAL MARKETS
UNCERTAIN GOVERNMENT COMMITTMENTS
LOW AFFORDABILITY
LOW EFFECIENCY
INADEQUATE TARIFFS

14. The Ladder of Financial Sustainability
Source: Baietti 2005

15. Maturities of Financing have a Significant Effect on Tariff Levels
The spikes are the problem of lumpiness of investments in WSS.
To deal with this problem above, you need long term financing (next slide)
Accounting for various factors in advance by provisioning against future losses or cost increases can
provide an effective buffer against these sudden shocks. This is done by booking the estimated and
eventual charge in anticipation. In doing this, the estimated revenue requirement in the immediate
term also increases but it is normally amortized over a longer period of time such that the effects on
the average annual tariff are minimized.

16. The Financial Analysis Primarily Consists of Two Parts
The Diagnostic – Measuring Historical Financial Performance
The Consolidated Financial Projection Incorporating Debt Service Analysis