1. Analyzing and Structuring Financially Sustainable Investments
The World Bank

2. Basic Requirements for Financially Sustainable WSS Investments
At minimum, operating revenues need to recover operating costs and administrative expenses
Cost Recovery
The system must be able to sustain an adequate level of working capital
Working Capital
The projected cash flow must remain positive for all years of projection period
Positive Cash Flow
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
Improve Sector Performance and Close the Revenue Gap
Bring in Government as Key Stakeholders in the Financing Challenge – as contributors of equity, guarantors, or direct borrowers).
Over-Reliance on Subsidies Will Only Delay Progress. The Use of Subsidies Should be Transitional and Primarily Aimed at Serving Poor Communities.
Make Use of All Sources of Financing – Public or Private and Create Framework Where Risks Are Properly Allocated and Bound By Enforceable Contracts.

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?
FIRR
No 1
7.7%
No 2
9.1%
No 3
2.6%
Year 1
Year 2
Year 3
Year 4
Year 5
-150 40 60 30
-50
250
-100 20 25 32
WACC
10% 7% 2%
Go/No Go

9. 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

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

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

12. Tax and Other Financial Incentives
Direct Grants
Concessional Loans
Tax and Other Financial Incentives
Guarantees
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
Straight Private Deal
Typical Private Finance with 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
Incorporate Performance Improvement Program in Project
OPEX Support for a Transitional Period
Extended Commissioning Period
Adjust Tariff to Justified Levels
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