NSSMP Technical & Financial Toolkit Joint ADB-WB Philippine Workshop on Wastewater Management 29 January 2014 1
Outline I. Technical and Financial Toolkit II. Parameters used in the Financial Toolkit III. Process for financing sewerage/ septage projects with NSSMP subsidy 2
I. Technical and Financial Toolkit
Septage/Sewerage Management Toolkit Interactive toolkit designed to help project planners determine the basic parameters of a given sanitation project Can be used as a planning tool, not for the conduct of a full-blown feasibility study Toolkit components: 1) Septage Management Toolkit 2) Sewerage Toolkit 3) Financial Toolkit
Septage Management Toolkit (1) Allows estimation of septage design flow, number of trucks needed, and overall service costs Toolkit tabs: Tab 1: Septage Design Flow Tab 2: How Many Trucks Tab 3: Estimated Costs Tab 4: Financial
Septage Management Toolkit (2) Tab 1: Septage Design Flow Enter data obtained from surveys designed to provide information on the number, volume and accessibility of septic tanks Design flow is calculated to determine the size of treatment facilities and plan for the collection Input Output Data from the community obtained from surveys Design flow of septage treatment facility (cubic meters)
Septage Management Toolkit (3) Tab 2: How Many Trucks Using the design flow calculated from Tab 1, determine the size and the number of septage vacuum trucks required Choose the capacity of the trucks, either 5 or 10 m 3, to optimize collection of septage (i.e., larger trucks means fewer trips and fewer trucks) Input Output Design flow of septage treatment facility (cubic meters) Number of trucks needed
Septage Management Toolkit (4) Tab 3: Estimated Costs Calculates the estimated capital and O&M costs for the treatment plant and septage vacuum trucks Calculates the estimated tariff based on the number of service connections, loan payments and operations expenditures Input Design flow of septage treatment facility (from Tab 1) Number of trucks needed (from Tab 2) Estimated cost of trucks (PhP) and water consumption (m 3 ) Output Total cost of treatment plant and collection trucks (PhP) Estimated O&M costs (PhP) Estimated annual billed volume (m 3 )
Septage Management Toolkit (5) Tab 4: Financial Uses the assumptions from Tabs 1 to 3 Computes for the WACC and loan amortization Provides the income and cash flow statements Computes for the Project IRR and Project NPV Input Total cost of treatment plant and collection trucks (from Tab 3) Financing mix (obtained from WD/LGU equity and bank loan) Increase in costs and population growth rate Output Project IRR and NPV Septage Management Toolkit v2.xls
Sewerage Toolkit (1) Interactive sewerage toolkit designed to help local implementers better understand the costs and resources required to develop sewerage infrastructure projects Provides rough estimates of CAPEX and OPEX for operating for sewerage systems based on population figures Calculates the NG subsidy, and then the annual and monthly payments Calculates the required tariff based on the number of people connected to the system and monthly payments
Sewerage Toolkit (2) Input Output Number of people to be connected to the sewerage system Debt conditions, interest rate and loan tenor CAPEX, OPEX, Debt Repayment Monthly tariff per household Sewerage Toolkit.xls
Financial Toolkit (1) Guides local implementers in getting a preliminary assessment of the project s financial viability Final feasibility assessment based on more refined project proposal/design Simple financial model that calculates revenues, expenditures and cash flow for 10-15 years from the year the investment was made Uses data and assumptions on user fees, O&M costs, and growth rates Provides the projected income and cash flow statements
Financial Toolkit (2) Input Output Capital and O&M costs Financing mix Increase in costs and population growth rate Project IRR and NPV Financial Toolkit.xls Septage Sewerage Management Toolkit sample.xls
II. Parameters Used in the Financial Toolkit
Parameters used in Financial Models 1.WACC 2.IRR 3.NPV
Weighted Average Cost of Capital (1) Weighted Average Cost of Capital (WACC) discount rate used to take into account the multiple sources of financing which have varying interest rates computed as WACC = r 1 *p 1 + r 2 *p 2 + r 3 *p 3 where: r i = interest rate charged by source i P i = proportion of funds source i to total financing OR WACC = [cost of debt X (debt/total financing)] + [cost of equity x (equity/total financing)]
WACC (2) Example Loan # 1 P100 M r1 = 15% p1 = 25% Loan # 2 P200 M r2 = 6% p2 = 50% Equity P100 M ROE = 18% p3 = 25% WACC = r 1 *p 1 + r 2 *p 2 + r 3 *p 3 = (15% * 25%) + (6% * 50%) + (18% * 25%) = 3.75% + 3% + 4.5% WACC = 11.25%
Internal Rate of Return (1) Internal Rate of Return (IRR) discount rate at which the present value of benefits are just equal to the present value of costs for a project (i.e., it sets the Net Present Value, NPV, equal to zero) 0 = S [(B t - C t ) / (1+K) t ] Where: K = is the IRR (B t - C t ) = net benefit
Internal Rate of Return (2) Use of IRR if IRR > cost of funds, implement project when ranking across several projects, choose project with the highest IRR calculated on the basis of project data alone a typical project with an initial investment period, followed by a period of positive net cash benefits, will yield a unique IRR
Internal Rate of Return (3) discount rate that produces a net present value (NPV) of zero break-even discount rate; represents the maximum cost of finance at which the project remains viable determined through an iteration process using different discount rates until an NPV of zero is produced IRR decision rule IRR > hurdle rate, accept/pursue the project IRR < hurdle rate, reject the project Project IRR should be GREATER than the WACC Equity IRR should be GREATER than the Cost of Equity
Net Present Value (1) NET PRESENT VALUE - accepting/rejecting a project RULE ONE: Do not accept a project unless it generates a positive NPV when discounted by the opportunity cost of funds. Project A : PV Costs = P10M ; NPV = + P 0.7M Project B : PV Costs = P50M ; NPV = - P 0.5M Project C : PV Costs = P20M ; NPV = + P 1M Project D : PV Costs = P30M ; NPV = - P 0.25M
Net Present Value (2) NET PRESENT VALUE - budget constraint RULE TWO : Within the limit of a fixed budget, choose that subset of available projects which maximizes NPV. Project E : PV Costs = P10M ; NPV = + P 0.6M Project F : PV Costs = P30M ; NPV = + P4.0M Project G : PV Costs = P20M ; NPV = + P 1.5M Project H : PV Costs = P20M ; NPV = + P 2.25M If budget constraint is P40M: FG and FH not possible as they cost too much. EG, EH & GH are within budget but dominated by EF, which has a higher combined NPV
Net Present Value (3) NET PRESENT VALUE - mutually exclusive projects RULE THREE: Where there is no budget constraint but a project must be chosen from mutually exclusive alternatives, always choose the one that generates the highest NPV. Project I : PV Costs = P10M ; NPV = + P 3.0M Project J : PV Costs = P40M ; NPV = + P 7.0M Project K : PV Costs = P15M ; NPV = + P 6.0M
Net Present Value (4) NET PRESENT VALUE - mutually exclusive and different lengths of life RULE FOUR: When comparing mutually exclusive projects of different lengths of life, choose the one with highest positive NPV, after adjusting their project lives to comparable lengths. TWO WAYS TO ADJUST: 1. Shorten the life of longer project 2. Extend life of shorter project
III. NSSMP Financing Process
FINANCING PROCESS 1. IDENTIFY FINANCING NEEDS 2. SECURE FINANCING 3. IMPLEMENT COST RECOVERY MECHANISMS 26
FINANCING PROCESS (Step 1) Determine the project's financial feasibility Determine financing requirements and prepare project brief 1. IDENTIFY FINANCING NEEDS 27
1. IDENTIFY FINANCING NEEDS 1.1 Determine the project s financial feasibility Use NSSMP financial toolkit to determine whether the project is financially viable Financial indicators (IRR, NPV, etc.) will give idea of the project s viability 28
1. IDENTIFY FINANCING NEEDS 1.2 Determine financing requirements & prepare project brief Determine the appropriate financing mix (equity and loan financing requirements) Project brief standard way of communicating project details with stakeholders, LGU officials and potential funders A 3-5 page document that summarizes proponent information, project objectives, major project features, beneficiaries, and anticipated project budget Can be shown to LGU officials, GFIs and commercial banks, NSSMP Project Office, potential private sector partners and to the WD 29
FINANCING PROCESS (Step 2) Develop partnerships to help satisfy financing needs No Can private sector participate? Yes Submit project brief Submit budget request to secure LGU counterpart financing Submit project brief to GFIs/commercial banks to secure loans PPP process 2. SECURE FINANCING Submit budget request to NSSMP to secure NG share 30
2. SECURE FINANCING 2.1 LGU & WD enter into partnership agreement MOA between LGU and WD that defines the responsibility of each party, cost and risk sharing arrangement, revenue allocation, etc. Example: a) LGU provides the ROW or lot for the sewerage treatment plant; and b) WD constructs and operates the sewerage system (can be in partnership with a private sector partner) 31
2. SECURE FINANCING 2.2 LGU & WD seek partnership with a private sector investor Go through the PPP process If PPP scheme is selected, LGU may still avail of the NG cost share but level of NG subsidy (in the form of viability gap funding) may be lower depending upon the requirements to make the project financially feasible 32
2. SECURE FINANCING 2.3 Submit budget request to secure LGU counterpart financing Include the sewerage project in the Local Expenditure Program LCE submits the Local Expenditure Program to the Sanggunian for approval 33
2. SECURE FINANCING 2.4 Submit project brief to GFIs/ commercial banks to secure loans Secure loan financing LGU from GFIs and commercial banks WD from LWUA and from banks 34
2. SECURE FINANCING 2.5 Submit budget request to NSSMP to secure NG share LGU to first secure counterpart financing LGU submits plan and proof of financing to DPWH DPWH reviews the proposed projects and include priority sewerage projects in the DPWH annual budget When NG cost share has been approved and budgeted, LGU will develop a financial plan with NSSMP Office to determine when drawdowns and disbursements will be made DPWH endorses fund release to LGUs according to the schedule of drawdowns and disbursements 35
FINANCING PROCESS (Step 3) Project development and implementation 3. IMPLEMENT COST RECOVERY MECHANISMS 36
3. IMPLEMENT COST RECOVERY MECHANISMS Project development and implementation Charging user fees to meet cash flow requirements but also to achieve full cost recovery over the long term for effective pricing, LGU or WD need to consider affordability, willingness to pay, and effects of pricing scheme on revenues Collect user fees through water bill or through environmental fees 37
Determine the project's financial feasibility Determine financing requirements and prepare project brief 1. IDENTIFY FINANCING NEEDS Develop partnerships to help satisfy financing needs No Can private sector participate? Yes Submit project brief Submit budget request to secure LGU counterpart financing PPP process 2. SECURE FINANCING Submit project brief to GFIs/commercial banks to secure loans Submit budget request to NSSMP to secure NG share Project development and implementation 38 3. IMPLEMENT COST RECOVERY MECHANISMS
Thank You! 39