FINANCIAL ANALYSIS. Second Greater Mekong Subregion Tourism Infrastructure for Inclusive Growth Project (RRP REG 49387)

Transcription

1 Second Greater Mekong Subregion Tourism Infrastructure for Inclusive Growth Project (RRP REG 49387) FINANCIAL ANALYSIS 1. The financial analysis follows Asian Development Bank (ADB) guidelines. 1 Subprojects were evaluated in real terms using constant 2018 prices. Cost estimates in nominal terms were converted to real terms by adjusting for the projected effects of foreign and domestic inflation as well as currency fluctuation. Road improvements in Cambodia, and roads and small port improvements in the Lao People s Democratic Republic (Lao PDR), were classified as nonrevenue-generating. Solid waste management improvement subprojects and Cambodia s Preah Sihanouk City Koh Rong ferry pier subproject were classified as revenue-generating. The analysis assessed nonrevenue-generating subprojects financial sustainability and revenuegenerating subprojects financial viability. The borrower and recipient have assured that they will adequately fund any shortfall in the operation and maintenance (O&M) cost of project facilities through the national budget. Covenants are included in the loan and grant agreements for this purpose. A. Financial Sustainability of Nonrevenue-Generating Subprojects. 2. Provincial departments of public works and transport (DPWTs) will own the infrastructure improved by the project and are responsible for its maintenance. Funds to maintain the assets will be sourced from annual DPWT budgets, allocated by central governments. DPWT financial statements covering the period were analyzed to determine historic budget allocations, with overall financial positions projected for 12 fiscal years (FY2018 FY2029). Based on past allocations, budget revenue and expenditure are assumed to increase by 5% per year, while subproject maintenance costs are assumed to increase by 3% per year. Periodic maintenance is scheduled every 7 years for all subprojects. The analysis assumes that DPWTs will take ownership of the improved infrastructure assets in Preah Sihanouk Province, Cambodia. Preah Sihanouk DPWT will maintain upgraded urban roads, drainage, lighting, and other facilities constructed at Occheuteal and Otres beaches as part of the Preah Sihanouk seaside access and environmental improvements subproject. Annual subproject routine O&M costs are KR39 million KR76million, equal to about 1.3% 1.9% of the DPWT s total budget. Periodic maintenance costs are KR28 million. 4. Champasak Province, Lao PDR. Champasak DPWT, through Khong District Office of Public Works and Transport (OPWT), will maintain the Nakasang access road, attached small port, and Det-Khone islands road network. Khong OPWT will require an additional annual routine maintenance budget appropriation of KN66 million KN82 million beginning in 2022, equal to about 1% of the DPWT s projected total annual expenditure. Periodic maintenance costs are KN831 million. 5. Vientiane Province, Lao PDR. Vientiane Province DPWT, through the Vang Vieng OPWT, will maintain the 26-kilometer western loop road, Kaeng Yui access road, improved urban roads and drains, and the new Nam Xong river bridge. The OPWT will require an additional routine maintenance budget appropriation of KN396 million KN433 million per year, equal to about 6% 7% of the DPWT s projected total annual expenditure. Periodic maintenance is estimated to cost KN2,867 million. Vientiane Province DPWT, through Keo Oudom District OPWT, will also maintain the improved concrete and bitumen roads at Nam Ngum reservoir. To do so, the OPWT will require an additional annual routine maintenance budget appropriation of KN18 million 1 ADB Financial Management and Analysis of Projects. Manila; ADB Financial Due Diligence: A Methodology Note. Manila.

2 KN21 million, equal to about 6% of its projected annual budget expenditures. Periodic maintenance costs of the Keo Oudom subproject are KN44 million. B. Financial Viability of Revenue-Generating Subprojects 6. Preah Sihanouk City Koh Rong passenger pier improvements. The subproject owner is the Government of Preah Sihanouk Province, which will form a public entity to manage the piers. Preah Sihanouk DPWT will be responsible for structural maintenance and navigation aids. Annual routine O&M costs are equal to about 0.4% of the DPWT s total budget. 7. Preah Sihanouk City and Koh Touch village piers will generate revenue from passenger departure fees (KR5,063 per passenger), ferry berthing fees (KR4,050 per one-way trip), parking fees (KR2,025 per vehicle), and commercial space rental at KR81,000 per square meter per month. Projected revenue and O&M costs are in Table 1. Table 1: Preah Sihanouk City Koh Rong Passenger Pier Improvements Revenues Preah Sihanouk City Koh Rong ferry service Ferry trips 10,868 11,387 11,931 15,065 20,493 22,243 Average passengers per vessel Passenger trips ( 000) International ( 000) Domestic ( 000) Preah Sihanouk ferry pier operation Total receipts 1,206 1,260 1,317 1,645 2,212 2,395 Passenger departure fee 1,111 1,164 1,219 1,539 2,094 2,273 Berthing fees Parking fees Stall and kiosk rental Koh Rong-Koh Touch ferry pier operation Total receipts 1,195 1,249 1,305 1,632 2,198 2,380 Passenger departure fee 1,111 1,164 1,219 1,539 2,094 2,273 Berthing fees Stall and kiosk rental Total revenue 2,401 2,509 2,623 3,277 4,410 4,775 Operation and maintenance costs Routine Periodic 1 Subtotal Operating surplus 2,388 2,496 2,609 3,260 4,389 4, Kep solid waste management improvements. The subproject owner is Kep Municipality, which through Kep DPWT will be responsible for maintaining the landfill and landfill access road, to be funded by the annual budget of the Government of Kep Province. Household tariffs will be sufficient to cover waste collection and transport to the landfill by a private contractor, managed by DPWT. Annual landfill and access road routine O&M costs range from KR168 million to KR501 million, equal to about 10% 23% of the DPWT s total budget. Periodic maintenance costs are KR295 million. 2

3 9. Kep s urban and peri-urban population is increasing by about 2.0% per year, and tourist arrivals are expected to reach 1.8 million in However, only about 45% of 1,825 households (population 9,000) and 150 businesses and government offices have access to waste collection services. With project assistance, garbage collection will be expanded from 821 to about 1,500 households (80% coverage). Garbage collection fees are assumed to be KR4,500 per household, per month. Garbage-collection fees for businesses will be higher, based on volume. To help finance landfill O&M, an environmental fee will be collected from international (KR4,050) and domestic tourists (KR2,025) through an accommodation surcharge. Surveys and focus group results indicate that residents and tourists are willing to pay these modest solid waste collection fees and environmental fee. Projected revenue and O&M costs are in Table 2. Table 2: Kep Solid Waste Management Improvements Population (Kep urban/peri-urban) 9,555 9,778 10,006 10, ,464 17,796 Number of households 1,911 1,956 2,001 2,048 2,245 2,893 3,559 Coverage area 80% 80% 80% 80% 80% 80% 80% Households in coverage area 1,529 1,564 1,601 1,638 1,796 2,314 2,847 Operating revenues Garbage fees Household collection revenue Business collection revenue Subtotal Environmental fees Number of visitors International visitors ('000) Domestic visitors ('000) 1,440 1,508 1,578 1,651 1,982 2,817 3,055 Total visitors 1,514 1,585 1,659 1,736 2,083 2,961 3,211 Revenue International visitors Domestic visitors 2,917 3,053 3,195 3,344 4,013 5,705 6,187 Subtotal 3,215 3,365 3,522 3,686 4,423 6,288 6,819 Total revenue 3,381 3,534 3,695 3,863 4,614 6,538 7,127 Operation and maintenance cost Routine Periodic 295 Subtotal Operating surplus 3,213 3,361 3,517 3,680 4,116 6,253 6, Vang Vieng solid waste management improvements. The subproject owner is Vang Vieng Urban Development Administration Authority (UDAA), responsible for district-wide solid waste collection and landfill O&M. The subproject is classified revenue-generating since the UDAA mandates its operating units to collect fees and charges to fund entity operations. Landfill O&M funding, including all onsite infrastructure and equipment maintenance, will be provided by the provincial government through the UDAA. 11. Vang Vieng s urban and peri-urban population is increasing by 4.5% per year and could reach 31,000 in 2020, while tourist arrivals are expected to reach 230,000 the same year. Currently only about 28% of Vang Vieng s 4,800 urban and peri-urban households have access to reliable waste collection services, along with 392 shops and guest houses, 32 offices, 2 markets, 6 schools, 5 cement plants, and 2 hospitals. 3

4 12. The UDAA will generate incremental revenue from expanding solid waste collection to 80% of Vang Vieng s urban and peri-urban households and collecting environmental fees from each international (KN8,300) and domestic tourist (KN5,063) through a tourist site entry surcharge. Garbage collection fees were recently increased from KN10,000 to KN15,000 per household per month. The higher collection fees will be retained and reassessed periodically. Survey and focus group results indicate that residents and tourists are willing to pay higher solid waste collection fees and higher tourist site entry fees to improve environmental management. Projected revenue and O&M costs are in Table 3. Table 3: Vang Vieng Solid Waste Management Improvements Covered households 1,551 1,621 3,765 3,935 4,112 4,297 5,124 8,316 12,358 Revenues Garbage collection fees ,356 1,417 1,480 1,547 1,845 2,994 4,449 Total visitors International visitors ('000) Domestic visitors ('000) Total visitors Environmental fee International visitors Domestic visitors 937 1,002 1,071 1,118 1,168 1,220 1,451 2,022 2,202 Total 1,336 1,415 1,499 1,565 1,634 1,705 2,024 2,808 3,050 Operation and maintenance costs Routine Periodic 3 Total operation and maintenance Operating surplus 2,438 2,553 2,672 2,797 3,354 5,093 6, Financial analysis. Financial internal rates of return (FIRRs) were calculated based on incremental costs and benefits in the with- and without-investment scenarios and compared with the weighted average cost of capital (WACC) based on project financing assumptions for Cambodia and the Lao PDR. Incremental benefits are revenues generated from expanding solid waste collection services and from imposing environmental fees, passenger departure fees, retail space rental, and berthing and parking fees, assessed in nominal terms. Other assumptions are that (i) the analysis covers 2018 to 2049, including construction; (ii) total subproject costs include physical contingency and taxes, and exclude price contingency and financial charges; (iii) all costs are in 2018 prices and converted at an exchange rate of $1 = KR4,050 or $1 = KN8,300; (iv) O&M costs include regular and periodic maintenance, administration, labor, materials, and equipment as estimated in the technical study; (v) annual increases are assumed to follow real increases, excluding the impact of inflation; and (vi) the WACC is 10.6% or 2.5% (Table 4). Table 4: Weighted Average Cost of Capital Computation Cambodia Lao PDR Item Grant Equity WACC Grant Equity Amount weighting Nominal cost a Tax rate Tax-adjustable nominal cost Inflation rate b WACC 4

5 Real cost Weighted component of WACC % % Lao PDR = Lao People s Democratic Republic, WACC = weighted average cost of capital. a Nominal cost for grant and equity averages 14.5% based on the long-term interest rate issued by the National Bank of Cambodia (January 2018) and a 5.1% long-term interest rate issued by Lao commercial banks. b Cost escalation factors for Cambodia and the Lao PDR. 14. The financial analysis confirms that the proposed subprojects are viable, with base-case FIRRs ranging from 3.5% for the Lao PDR to 12.6% for Cambodia, higher than the computed WACC for the respective country. All sensitivity test scenarios are also above the WACC (Table 5). Table 5: Financial Analysis Summary Results Cambodia: Subproject and Scenario Financial Cost FIRR NPV Switching Value Sensitivity Indicator Preah Sihanouk City-Koh Rong passenger piers improvements 24,402 Base case ,536 10% investment cost increase % O&M cost increase , % tourist and revenue decrease (10.7) (9.35) 1-year implementation delay ,085 Kep solid waste management improvements 31,335 Base case ,202 10% investment cost increase , % O&M cost increase , % tourist and revenue decrease ,825 (15.1) (6.62) 1-year implementation delay ,407 Lao PDR: Subproject and Scenario Financial Cost FIRR NPV Switching Value Sensitivity Indicator Vang Vieng solid waste management improvements 55, ,825 Base case , % investment cost increase , % O&M cost increase ,882 (38) (2.66) 10% tourist and revenue decrease ,252 1-year implementation delay ,825 () = negative value, FIRR = financial internal rate of return, KN = kip, KR = riel, Lao PDR = Lao People s Democratic Republic, NPV = net present value, O&M = operation and maintenance. 5