Annex B

Task 3 - Conduct Financial Analysis

Example 1. Proposal for U.S. Trade and Development Agency (USTDA) Feasibility Study Grant

For application to USTDA for a feasibility study grant, the project sponsor should prepare the following materials.

Implementation Financing: A discussion of financing options for project implementation, including:

An overall cost estimate, proposed ownership and financing structure, and schedule for project implementation; and
Evidence that financing is available or likely to be available for the project, including a description of discussions with representatives of potential lenders and, if the project is host-country financed or guaranteed, representatives of the appropriate host country financing authority. Provide names and phone numbers of contacts, and summarize their comments.

For projects involving U.S. equity investment, the following additional information must be provided:

A complete set of audited financial statements from the U.S. investor for the past three years which show evidence of an operation with a solid financial structure and cash flow and a net worth sufficiently large to assure the availability of the equity required for the project; and
Evidence of a debt-equity structure for financing the project that corresponds to the requirements of the most likely source of implementation financing. Sources of equity should be identified, and letters of intent/commitment from investors should be provided.

In the event that any of the requested additional information or documentation is not available, you should explain why it cannot be provided.

Other topics: In addition, the project sponsor must provide as part of the application the following sections: executive summary, project description, developmental impacts, project sponsor's commitment, U.S. export potential, foreign competition, impact on the environment, impact on U.S. labor, qualifications, justification, and terms of reference for the feasibility study including a detailed task breakdown and budget.

Example 2. Investment Proposal to the International Finance Corporation (IFC) for Project Implementation Financing

The following information is required to be included in any application to the IFC for implementation financing of project debt or equity.

Market and sales:

Basic market orientation – local, national, regional, or export.
Projected treatment capacity, unit prices, sales objectives, and market share of the proposed venture.
Potential users of the treatment facilities and specific services to be used.
Present sources of treatment services. Future competition and the possibility that the market may be satisfied in other ways, e.g., through pollution prevention, use of more distant facilities, etc.
Restrictions on where wastes can be sent, e.g., rules requiring that treatment occur in the same region the waste is generated in.
Other critical factors that determine market potential.

Investment requirements, project financing, and returns:

Estimate of total project cost, broken down into land, construction, installed equipment, and working capital, indicating foreign exchange component.
The proposed financial structure of the venture indicates expected sources and terms of equity and debt financing.
Type of IFC financing – loan, equity, or both, and amount.
Projected financial statement information on profitability, and return on investment.
Critical factors determining profitability.

Other topics. The following additional information should also be provided in the application to IFC: brief description of the project; sponsorship, management, and technical assistance; technical feasibility, human resources, raw material resources, and potential environmental issues; government support and regulations; and timetable envisaged for project preparation and completion.

Step 3.1 Identify Factors Influencing Financial Feasibility

There are a large number of factors influencing the financial feasibility of HWMFs, including:
Laws and regulations prevent improper disposal and long-term on-site storage of POPs/hazardous waste, requiring them to be identified, cleaned up, and treated or disposed only at permitted HWMFs.
Strict standards for HWMF permitting, siting, design, operation, closure, and post-closure, favoring development of large-capacity, multiple-capability regional HWMFs.
Monitoring and enforcement of hazardous waste identification, cleanup, and HWMF laws.
Legal right of HWMFs (commercial or not) to set tariffs for HWMF services.
Administrative capability of HWMFs to bill users for HWMF charges and collect payments from them.
Willingness and ability of HWMF users to pay their bills.
Status and trends in pollution prevention and waste minimization, both mandatory and voluntary.
Status and trends in contaminated site cleanups regarding waste material removal to off-site HWMFs versus on-site treatment or disposal, both mandatory and voluntary.
The government guarantees reliable, consistent waste quantities, or of revenue.

These factors should be identified and evaluated for the project area.

Step 3.2 Conduct Financial Analysis of the Most Promising Options

Conduct a detailed financial analysis of the two or three most promising options as determined from Step 2.4 of the Economic Analysis. The financial analysis should be consistent with generally accepted accounting standards for the preparation of income and cash flow statements. Prepare a 10-year pro-forma analysis for the options. The income statement should show annual revenue and cost data for the major operational components. Calculate a net annual cash flow projection, return on investment (if applicable), and net present value of investment. These financial documents should be suitable for demonstrating project financial characteristics to potential investors. The analysis should address how to account for revenues from the sale of any energy generated by the thermal treatment facility and whether the prices for these items will be subsidized by the government or allowed to achieve market levels.

Step 3.4 Perform Sensitivity Analysis of Financial Estimates

Perform a sensitivity analysis of the financial estimates, including variations in waste quantity (depending on the extent of enforcement of hazardous waste management regulations), unit revenue (including the extent to which generators pay all disposal costs or discounts offered by the regulatory authorities to generators practicing pollution prevention), and unit costs (including the effect of any governmental subsidies for facility construction or operation), so that potential investors can understand the potential range of financial impacts.

Step 3.5 Prepare Cash Management Analysis

Investigate the method of billing and collecting revenues. If there is a gap between the monthly monies required and the monies available, then evaluate alternatives such as short-term loans, annualized payments, and late payments.

Step 3.6 Calculate Financial Internal Rate of Return

Once capital costs and operational costs are determined, establish the actual cost of waste disposal. This should include a rate structure that can be applied to facility users. Develop a spreadsheet indicating the rate of return versus the cost structure for facility users.

Step 3.7 Analyze Investment Risk

The investment risk is dependent on projections made of waste generation, and capital and operational costs. The cost of money is also a factor in determining risk. A related issue is the number of POP accumulations in the service area and the possibility that they may or may not be taken to the proposed POPs/hazardous waste thermal treatment facility. Develop a series of best-case and worst-case scenarios to put the investment risk, as defined by facility cost versus facility return, into perspective.

Step 3.8 Summarize Financial Analysis

Summarize the financial analysis into a cogent, credible spreadsheet, including analyses of smaller versus larger collection areas, more versus fewer trucks, options for developing facilities of different sizes or more than one facility, considerations of placing a waste disposal facility at one location rather than at another, etc.

Step 3.9 Evaluate Project Financing Alternatives

Identify local financial capacity as well as foreign loan and export credit opportunities. Recommend the most attractive alternatives given the nature of the investments. This may not include the alternative with the least capital cost but rather would be the alternative with the lowest overall cost over its lifetime. Alternatives may include one with the least effect on the environment and one with the least (greatest) labor requirement, etc.

Step 3.10 Develop Project Ownership Structure and Investment Plan

For the selected alternative, identify potential ownership, management, and operating scenarios. Describe the potential benefits and drawbacks of each scenario in a chart or spreadsheet. Prepare a business plan describing the business (including operations, management, legal, and financial aspects) that can be used by the project sponsor to solicit financing.

Step 3.11 Identify and Review Financing Sources

Identify and review sources of financing that have expressed a willingness to consider investments in the past on a loan or equity basis. The list of financing sources should depend on the nature of the selected project. Projects proposed in developing countries may consider applying for financing from a multilateral development aid bank (multi-country sponsored bank aiding individual developing countries, e.g., the World Bank) or bilateral development aid agency (single-country sponsored agency aiding individual developing countries, e.g., the U.S. Trade and Development Agency), together also called “international financial institutions” (IFIs). Possible IFI financing sources are listed below according to the type of project sponsor and type of financing sought:

Multilateral and bilateral grants for technical assistance for government and private project sponsors – Global Environment Facility (managed by the United Nations Development Program and World Bank), United Nations Industrial Development Organization, International Finance Corporation, European Bank for Reconstruction and Development, United States Trade and Development Agency, European Union, and Japan Program for Human Resources and Development, among others.
Multilateral and bilateral loan and loan guarantee programs for government project sponsors – World Bank, African Development Bank, Asian Development Bank, European Bank for Reconstruction and Development, Inter-American Development Bank, and Islamic Development Bank.
Multilateral and bilateral investment debt and equity financing, loan guarantees, political risk insurance, and equipment export financing, for private project sponsors – International Finance Corporation, Asian Development Bank (Private Sector Department), European Bank for Reconstruction and Development, US Overseas Private Investment Corporation, and US Export-Import Bank.

Commercial banks may be another source of financing for these projects. Plan and hold a meeting with selected investors who are relevant to the type and amount of financing needed and have shown preliminary interest in financing the proposed project. Present a summary of the investment plan and obtain feedback on investors’ interest and next steps.

The box below provides two examples of the information and analyses required by international financing institutions in applications submitted by project sponsors. The first example addresses what the U.S. Trade and Development Agency requires applicants to submit to be considered for a feasibility study grant. The second example covers what the International Finance Corporation (which is the private sector lending branch of the World Bank Group) requires from a private sector applicant for project implementation financing (debt or equity).

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