International Center For Environmental Finance

1. International Center For Environmental Finance Series B – Course #3 Determination of Financial Feasibility

2. Determination of Financial Feasibility • Is the project financially feasible? Can you pay for the project? (one financing option) • Which financing option is the best? (more than one option)

3. Financial Feasibility Calculation Cash Available for Debt Service (CADS) must exceed Annual Debt Service Payments.

4. Financial Feasibility Calculation • Calculate CADS. • Calculate project’s debt. • Calculate Annual Debt Service Payments (for each option). • Subtract Annual Debt Service Payments from CADS

5. Financial Feasibility Calculation • If the Financial Feasibility Calculation is positive, the project is financially feasible. • If the Financial Feasibility Calculation is negative, the project is not feasible.

8. Determination of Financial Feasibility The ratio of CADS to Annual Debt Service is called the “Debt Service Coverage Ratio”

9. Determination of Financial Feasibility • If the Debt Service Coverage Ratio is >1.0, the project is feasible. • If the Debt Service Coverage Ratio is <1.0, the project is not feasible.

10. Determination of Financial Feasibility If there is more than one project finance option, then the option with the highest debt service coverage ratio is the most feasible.

11. Financial Feasibility Calculation • Calculate CADS. • Calculate project’s debt. • Calculate Annual Debt Service Payments (for each option). • Subtract Annual Debt Service Payments from CADS

12. Financial Feasibility Calculation Calculation of CADS

13. Calculation of CADS Total Cash Income Non-recurring Cash Income* CADS *Non-recurring cash income may be used to reduce total project cost

14. Financial Feasibility Calculation Calculation of Project Debt

15. Calculation of Project Debt Total Project Cost Cash Contributions Project Debt

16. Cash Contributions • Savings. • Non-recurring cash income*. • Grants. *Collected prior to debt issuance.

17. Financial Feasibility Calculations Calculate Annual Debt Service Payments, using either: • The Level Payment Method • The Level Principal Payment Method, or • The Irregular Method

18. Financial Feasibility Calculations CADS Annual Debt Service Payments (either + or - )

19. Financial Feasibility Calculation • If the Financial Feasibility Calculation is positive, the project is financially feasible. • If the Financial Feasibility Calculation is negative, the project is not feasible.

20. Determination of Financial Feasibility What to do if project is notfeasible ?

21. Determination of Financial Feasibility If the financial feasibility calculation is negative, then you must: • Increase income, or, • Reduce project costs, or • Both.

22. Determination of Financial Feasibility Increase Project Income

23. Increase Project Income • Adopt a consumption based tariff • Replace general rate subsidies with targeted rate subsidies • Increase tariffs to the maximum extent that is politically possible • Improve billing and collection. • Reduce operating costs for labor, energy, etc., to the greatest extent possible.

24. Determination of Financial Feasibility Reduce Project Costs

25. Reduce Project Costs • Reduce size and scope of the project • Seek grants or additional cash contributions • Seek extended terms • Seek lower rates.

26. Determination of Financial Feasibility Re-calculate financial feasibility using increased income and lower annual debt service payment.

28. Once Cash Available for Debt Service and Annual Debt Service Payments are Known, a Determination of Financial Feasibility for the Project can Readily be Made.