Preliminary Financial Analysis for TSDF

P. Bineesha

The financial analysis for the proposed TSDF for HW generated in the state of Karnataka is based on the Polluter Pays Principle. In this operation model, the generators should bear the cost of treatment and disposal. However, as most of the industries cannot afford an onsite treatment and disposal facility, a common TSDF is proposed by GoK.

Furthermore, since the cost of transportation and initial investments for a TSDF is very high, the Government has sought bilateral assistance as soft loans, and Grants for Technology Transfer and land. Thus the HAWA project is being executed with the support of GTZ for Technology Transfer to KSPCB. In addition, a soft loan to the GoI from KfW is being finalised for the construction of the TSDF.

Nevertheless, since examples of successful private financing already exists in India (TSDFs in Hyderabad and Mumbai), a second model with complete Private Financing is also thought of. Thus two Financing Mechanism Models have emerged, which needs to be tested.

The Two hypothetical models considered with the following financing mechanism are:

  • Model -1 – Public Ownership, Public & Private Funding and Private Operation
  • Model - 2 – Private Sector Financing with Government incentives

The objectives of this mission were to test the above models for the following:

-Under what criteria will these models be techno-economically viable?

-For the corresponding conditions what is the tariff structure that needs to be charged?

-What is the super fund (for aftercare) and monitoring charges that needs to be fixed?

Specific Objectives of the mission were as follows:

-Establish a viable operation model/s

-Determine the fixed and operation and maintenance cost of the TSDF

-Ascertain a tariff structure based on quantity and quality of waste

-Determine the economic instruments required to make the TSDF profitable.

The fixed and O&M cost of TSDF was initially determined. A model tariff for the services, which will ensure the financial sustainability of the project and satisfy the requirements of the Financial Institutions (FIs) and the Independent Private investors, was suggested. The financial indicators used are minimum Debt Service Coverage Ratio (DSCR) of 1.5 and a Return on Equity (ROE) of 20% and an Internal Rate of Return (IRR) of 16% values. A Sensitivity analysis for the proposed tariff was also conducted with varying externalities like the waste handled per year, variation in tariff, variation in interest rates etc. More than 36 scenarios were examined and the results given. A moratorium period of 3 years and interest rate of 11% and 15% respectively for Model -1 and 2 was assumed as base case scenarios.

This mission faced the following constraints and limitations for establishing the models:

•The quantity and distribution of waste available was sketchy and not reliable. Experts felt that the data might vary drastically. This would affect the viability of the project.

•A technology scheme which is essential for ascertaining the fixed cost and maintenance and operation cost was not available. This would affect the determination of tariff structure.

Hence, to overcome the above constraints and limitations, the following additional activities were undertaken by the mission:

•Preparing a Preliminary Technology scheme and layout

•Making provisions in the model for in-putting the revised quantity and distribution of waste.

•Carrying out a sensitivity analysis for various parameters.

The Financial analysis for both the models was carried out as per the generally accepted accounting principles. As such, a conservative approach of accounting was adopted, wherein losses are anticipated. Depreciation of the assets were computed using a Straight Line Method, where in the depreciable cost of the asset was proportionately allocated as expense against the revenues during each year of the useful life of the asset. Cost prices were computed based on the inputs of the components like labour, machinery, materials, etc. The annual production costs as a result of the waste processed was also computed. Equipment sizing and rate analysis for each item was carried out. The Selling prices / tariff were derived by adding the overhead and markup over the variable costs as per the assumptions. The Financial Analysis Models also projected annual incomes. The interest and repayment calculations as per means of financing were developed as part of the loan repayment schedule. Computation of insurance as per rates in assumptions was undertaken. Cash flow & Profitability projections and balance sheet for 20 years was carried out and.

The results of the analysis for both the models are as follows:

The results of the Sensitivity Analysis for Model-1 is as follows:

  • The sensitivity for the project viability on account of project cost has been analysed for a variation of +/- 5%. As expected, the ROE and ROI are not healthy with the increase in project cost, unless it is matched by a corresponding increase in the tariff/ gate fee. Hence, project cost should be controlled with in 5% of the budgeted estimate.
  • A volume of 60,000 tpa has been used for the projections based on data from the KSPCB. If this is an overestimated quantity, the project economics will be rendered unviable. However, in case the actual volumes are higher, then the TSDF operator can afford to operate more than one shift to generate more profits.
  • The projections are made for interest rates of 11%. It can be observed that for a rate of 9% the DSCR is 2.0, which is a preferred value and acceptable to a lending institution. In view of the falling interest rates, a lower interest rate will be more suitable for this project.
  • The tariffs have been computed for various services based on the toxicity and the process involved for treatment. The tariff for various services range from Rs.1398 to Rs.1748 per tonne, which is inclusive of the transportation cost. The economics are affected drastically with reduction in tariff.
  • The moratorium period has a positive bearing on improving the IRR of the project, but, since the interest burden increases, the DSCR, ROI and ROE reduces.
  • The payback period is Eight years. The sensitivity of the interest rates and NPV=0 is shown in fig I.

The results of the Sensitivity Analysis for Model-2 are as follows:

  • As the project cost and the annual sales volume remains the same for model 2, the trend of sensitivity is similar to the earlier model-1.
  • The projections are made for interest rates of 15%. It can be observed that the DSCR ranges between 1.6 to 1.4, which is generally not preferred by the lending institutions. In view of the falling interest rates, a lower interest rate will be more suitable for this project.
  • The tariffs have been computed for various services based on the toxicity and the process involved for treatment. The tariff for various services range from Rs.1746 to Rs.2184 per tonne, which is inclusive of the transportation cost. The economics are affected drastically with reduction in tariff. This tariff is incidentally about 25% more than the tariff in model-1.
  • The moratorium period has a positive bearing on improving the IRR of the project, but, since the interest burden increases, the DSCR, ROI and ROE reduces.
  • Although the tariffs are higher in this model, the project economics are lower compared to the previous model-1. This can be offset to a large extent by reducing the debt component and increasing the industries contribution, which is presently zero.
  • The payback period is Six years. The sensitivity of the interest rates and NPV=0.

It is recomended the Economic instruments to make the models viable

  • Interest rates to be reduced to 9% by way of soft loan or providing an interest subsidy by the GoK so as to make the DSCR greater than 2.0.
  • A long term loan of twenty years including a moratorium period of three years is ideal for the project to be viable as it will improve the IRR.
  • Government to facilitate the industries contribution to the equity proportionate to the quantum/ quality of waste generated.
  • The GoI may consider waver of the Minimum Alternate Tax (MAT) for this project by considering it as a social project.
  • In view of reducing the project cost, the GoK can consider exemption of sales tax and entry tax as applicable.