Supplementary Appendix J 1
SUPPLEMENTARY APPENDIX J DETAILED FINANCIAL ANALYSIS
A. Financial Analysis of Non-revenue Generating Components
1. The financial analysis of the Project has been carried out in accordance with Asian Development Bank’s (ADB’s) Financial Management and Analysis of Projects.1 The non- revenue generating components are urban roads and solid waste management facilities which covers five cities, namely, Altay, Changji, Hami, Kuytun, and Turpan in the Xinjiang Uygur Autonomous Region (XUAR).
2. Financial analysis was carried out to ensure fiscal sustainability of the project components by analyzing city government finances. The city governments receive income from taxation, non-tax income, shared revenues with the central government, and transfers/subsidies from the central government. Although income from taxation has increased over the period 2003–2007 in all cities, its share in total revenue has decreased, while the share of financial transfers has increased substantially. In recent years, city governments have become more reliant on the central government as the self-generated share of total revenue decreased. City expenditure has increased on average by 11% to 12% annually, which has been financed to an increasing extent from transfers from the central government, resulting in the cities being able to report marginal fiscal deficits (if any), and present a stable financial position.
3. The counterpart fund requirement for project implementation is around 10% of income in all cities. City governments have earmarked funds for each subproject. It is likely that counterpart funding will be from existing cash resources (at end of 2008) and also in the form of a financial transfer from the central government. The city governments will ultimately be responsible for debt service. Therefore, debt service costs have been considered. The debt service and O&M cost amounts to around 2% of the total expenditure of each city.
4. The financial sustainability analysis will assess whether Altay, Changji, Hami, Kuytun, and Turpan City Governments have the ability to provide the counterpart funds during the construction period and cover the O&M and debt service during the operating period.
B. Historical Revenues and Expenditures
5. The historical financial conditions of the city governments are analyzed to determine whether they can contribute the required counterpart funds during the construction period and necessary funds for O&M and debt service during the operating period. Annual average growth rates (AAGR) of revenues and expenditures during the project period are calculated.
1. Altay City
6. Table SA J-1 shows that the revenues of Altay City Government have grown at an average rate of 11% for the last five years to CNY462 million in 2007 from CNY225 million in 2003. Over the same period, the government expenditures have grown at the same rate.
1 ADB. 2006. Handbook for Borrowers on the Financial Management and Analysis of Projects. Manila.
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Table SA J-1: Revenues and Expenditures (2003-2007) Altay City Government
2003 2004 2005 2006 2007 AAGR Revenue 225,450,000 255,820,000 298,370,000 358,540,000 461,710,000 11% Expenditures 225,450,000 255,820,000 298,370,000 358,540,000 461,710,000 11% Surplus(Deficit) 0 0 0 0 0 AAGR – annual average growth rate
2. Changji City
7. As illustrated in Table SA J-2, the revenues of the Changji City Government have increased by 11% per annum for the last five years to CNY727 million in 2007 from CNY335 million in 2003. Over the same period, the expenditures have increased at the same rate as income.
Table SA J-2: Revenues and Expenditures (2003-2007) Changji City Government
2003 2004 2005 2006 2007 AAGR Revenue 335,070,000 368,790,000 376,000,000 526,360,000 727,276,800 11% Expenditures 335,070,000 368,790,000 376,000,000 526,360,000 727,276,800 11% Surplus(Deficit) 0 0 0 0 0 AAGR – annual average growth rate
3. Hami City
8. From Table SA J-3, we can see that the revenues and expenditures of Hami City Government have increased by an average rate of 12% over the last five years (2003 to 2007).
Table SA J-3: Revenues and Expenditures (2003-2007) Hami City Government
2003 2004 2005 2006 2007 AAGR Revenue 314,450,000 374,170,000 427,540,000 570,790,000 714,996,800 12% Expenditures 314,450,000 374,170,000 427,540,000 570,790,000 714,996,800 12% Surplus(Deficit) 0 0 0 0 0 AAGR – annual average growth rate
4. Kuytun City
9. The historical data indicate that the revenues of the Kuytun City Government have grown at 11% per annum for the last five years to CNY406 million in 2007 from CNY197 million in 2003. Over the same period, the government expenditures have grown at 11% per annum.
Table SA J-4: Revenues and Expenditures (2003-2007) Kuytun City Government
2003 2004 2005 2006 2007 AAGR Revenue 196,510,000 224,810,000 332,730,000 412,820,000 406,290,000 11% Expenditures 196,510,000 224,810,000 332,730,000 412,820,000 406,290,000 11% Surplus(Deficit) 0 0 0 0 AAGR – annual average growth rate
Supplementary Appendix J 3
5. Turpan City
10. As shown in Table SA J-5, the revenues of Turpan City Government have increased by an average rate of 12% over the last five years to CNY466 million in 2007 from CNY213 million in 2003. Over the same period, the government expenditures have increased at the same rate as income.
Table SA J-5: Revenues and Expenditures (2003-2007) Turpan City Government
2003 2004 2005 2006 2007 AAGR Revenue 212,560,000 239,220,000 264,010,000 391,910,000 466,450,000 12% Expenditures 212,560,000 239,220,000 264,010,000 391,910,000 466,450,000 12% Surplus(Deficit) 0 0 0 0 0 AAGR – annual average growth rate
C. Projections of Revenues and Expenditures
11. The average annual growth rates derived above are utilized to forecast the government revenues and expenditures for the coming years. The financial sustainability analysis involves comparing the estimated counterpart funds with the government revenues during the implementation period, and comparing the O&M and debt service with the government expenditures during the operating period.
1. Altay City
12. The results of the financial forecast show that both government revenues and expenditures in Altay City will continue to increase. The annual counterpart funds comprise 2% to 7% of projected revenues during the implementation period. On the other hand, O&M and debt service are about 2% of annual projected expenditures and represent reasonable proportion of the government expenditures at the start of the operating period.
Table SA J-6: Projected Revenues and Expenditures Altay City Government
2009 2010 2011 2012 2013 2014 2015 Revenue (CNY) 564,170,469 623,635,579 689,368,473 762,029,795 842,349,819 931,135,793 1,029,280,051 Expenditures (CNY) 564,170,469 623,635,579 689,368,473 762,029,795 842,349,819 931,135,793 1,029,280,051 Surplus(Deficit) 0 0 0 0 0 0 0 Annual counterpart funds (CNY) 12,467,000 24,934,000 49,868,000 24,934,000 12,467,000 Counterpart funds as a % of revenues 2% 4% 7% 3% 1% Debt service cost and O&M (CNY) 22,792,877 22,792,877 O&M and Debt Service as a % Expenditure 2% 2% O&M = operation and maintenance
2. Changji City
13. The result of the financial forecast for the Changji City Government indicates that both government revenues and expenditures will continue to increase. The counterpart funds represent about 2% to 7% of projected revenues during the implementation period while O&M and debt service represent about 2% of projected expenditures. Therefore, both counterpart funds and O&M and debt service costs represent minimal proportions of the
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city’s projected revenues and expenditures and are not expected to jeopardize the government’s fiscal sustainability.
Table SA J-7: Projected Revenues and Expenditures Changji City Government
2009 2010 2011 2012 2013 2014 2015 Revenue (CNY) 903,231,433 1,006,580,927 1,121,755,872 1,250,109,357 1,393,149,298 1,552,556,146 1,730,202,636 Expenditures (CNY) 903,231,433 1,006,580,927 1,121,755,872 1,250,109,357 1,393,149,298 1,552,556,146 1,730,202,636 Surplus(Defi cit) 0 0 0 0 0 0 0 Annual counterpart funds (CNY) 18,757,917 37,515,833 75,031,666 37,515,833 18,757,917 Counterpart funds as a % of revenues 2% 4% 7% 3% 1% Debt service cost and O&M (CNY) 34,218,024 34,218,024 O&M and Debt Service as a % Expenditure 2% 2% O&M = operation and maintenance
3. Hami City
14. The result of the financial forecast for the Hami City Government shows that both government revenues and expenditures will continue to increase. The counterpart funds are about 1% to 3% of projected revenues during the implementation period and the O&M and debt service are about 1% of projected expenditures. Therefore, both counterpart funds and O&M and debt service costs account for small proportions projected revenues and expenditures and are not expected to have negative impact on the government’s fiscal sustainability.
Table SA J-8: Projected Revenues and Expenditures Hami City Government
2009 2010 2011 2012 2013 2014 2015 Revenue (CNY) 899,596,623 1,009,066,238 1,131,856,931 1,269,589,710 1,424,082,839 1,597,375,843 1,791,756,429 Expenditures (CNY) 899,596,623 1,009,066,238 1,131,856,931 1,269,589,710 1,424,082,839 1,597,375,843 1,791,756,429 Surplus(Deficit) 0 0 0 0 0 0 0 Annual counterpart funds (CNY) 7,296,569 14,593,138 29,186,276 21,889,707 Counterpart funds as a % of revenues 1% 1% 3% 2% Debt service cost and O&M (CNY) 13,169,926 13,169,926 13,169,926 O&M and Debt Service as a % Expenditure 1% 1% 1% O&M = operation and maintenance
4. Kuytun City
15. The result of the financial forecast for Kuytun City Government shows that both government revenues and expenditures will continue to grow. The counterpart funds are about 1% to 3% projected revenues during the implementation period and O&M and debt
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service costs are about 2% of projected expenditures. Therefore, both counterpart funds and recurrent costs comprise small proportions of projected revenues and expenditures and are not expected to hurt the government’s fiscal sustainability.
Table SA J-9: Projected Revenues and Expenditures Kuytun City Government
2009 2010 2011 2012 2013 2014 2015 Revenue (CNY) 497,774,427 550,973,620 609,858,428 675,036,496 747,180,412 827,034,644 915,423,224 Expenditures (CNY) 497,774,427 550,973,620 609,858,428 675,036,496 747,180,412 827,034,644 915,423,224 Surplus(Deficit) 0 0 0 0 0 0 0 Annual counterpart funds (CNY) 10,822,914 21,645,828 43,291,656 21,645,828 10,822,914 Counterpart funds as a % of revenues 2% 4% 7% 3% 1% Debt service cost and O&M (CNY) 19,900,912 19,900,912 O&M and Debt Service as a % Expenditure 2% 2% O&M = operation and maintenance
5. Turpan City
16. The results of the financial forecast for the Turpan City Government indicate that both government revenues and expenditures will continue to increase. The counterpart funds account for --% to --% of projected revenues during the implementation period. On the other hand, O&M and debt service costs comprise -% of projected expenditures.
Table SA J-10: Projected Revenues and Expenditures Turpan City Government
2009 2010 2011 2012 2013 2014 2015 Revenue (CNY) 581,078,850 648,559,841 723,877,436 807,941,702 901,768,395 1,006,491,232 1,123,375,586 Expenditures (CNY) 581,078,850 648,559,841 723,877,436 807,941,702 901,768,395 1,006,491,232 1,123,375,586 Surplus(Deficit) 0 0 0 0 0 0 0 Annual counterpart funds (CNY) 13,930,669 27,861,338 55,722,677 27,861,338 13,930,669 Counterpart funds as a % of revenues 2% 4% 8% 3% 2% Debt service cost and O&M (CNY) 24,352,680 24,352,680 O&M and Debt Service as a % Expenditure 2% 2% O&M = operation and maintenance
D. Fiscal Affordability
17. Assessment of the fiscal affordability of the non-revenue generating components involves comparing the amount committed by local governments with the amount needed for counterpart funds, debt service and O&M during the project period. O&M cost is estimated at 10% of the total investment cost.
1. Altay City
18. As shown in Table SA J-11, the annual counterpart funds, debt service and O&M of the road, environmental improvement and capacity building components for Altay City Government are about CNY19 million, CNY8 million, and CNY20 million, respectively. Altay
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City Government has committed to allocate and make available the amount of CNY19 million annually to cover the counterpart funds during the construction period, and the amount of CNY28 million to cover the debt service and O&M during the operating period. Therefore, the government’s contribution to the Project is 100% assured.
Table SA J-11: Fiscal Affordability of Altay City Government Implementation Period Operating Period Annual Debt Amount Counterpart O&M Recurrent Total Component counterpart service Committed fund (CNY Cost Affordability required (CNY (CNY M) Affordability M) Affordability (CNY M) M) Roads 44.2 18.77 42% 6.91 18.52 58% 100% Environmental sanitation 2.46 0.23 9% 0.91 1.32 91% 100% Capacity Building 0.35 0 0% 0.15 0.2 100% 100% Total 47.01 19 40% 7.97 20.04 60% 100%
2. Changji City
19. As shown in Table SA J-12, the annual counterpart funds, debt service and O&M of the road, environmental improvement and capacity building components for Changji City Government are about CNY31 million, CNY13 million, and CNY33 million, respectively. Changji City Government has committed to allocate and make available the amount of CNY31 million annually to cover the counterpart funds during the construction period and the amount of CNY46 million to cover the debt service and O&M during the operating period. Therefore, the government’s contribution to the Project is 100% assured.
Table SA J-12: Fiscal Affordability of Changji City Government Implementation Period Operating Period Annual Debt Amount Counterpart O&M Recurrent Total Component counterpart service Committed fund (CNY Cost Affordability required (CNY (CNY M) Affordability M) Affordability (CNY M) M) Roads 74.73 31.2 42% 12.03 31.5 58% 100% Environmental sanitation 2.64 0.24 9% 0.98 1.42 91% 100% Capacity Building 0.35 0 0% 0.15 0.2 100% 100% Total 77.72 31.44 40% 13.16 33.12 60% 100%
3. Hami City
20. As shown in Table SA J-13, the annual counterpart funds, debt service and O&M of the road, environmental improvement and capacity building components for Hami City Government are about CNY11 million, CNY5 million, and CNY12 million, respectively. Hami City Government has committed to allocate and make available the amount of CNY11 million annually to cover the counterpart funds during the construction period and the amount of CNY16 million to cover the debt service and O&M during the operating period. Therefore, the government’s contribution to the Project is 100% assured.
Table SA J-13: Fiscal Affordability of Hami City Government Implementation Period Operating Period Annual Debt Amount Counterpart O&M Recurrent Total Components counterpart service Committed fund (CNY Cost Affordability required (CNY (CNY M) Affordability M) Affordability (CNY M) M) Roads 26.46 10.94 41% 4.33 11.19 59% 100% Environmental sanitation 0.3 0.03 10% 0.11 0.16 90% 100% Capacity Building 0.35 0 0% 0.15 0.2 100% 100% Total 27.11 10.97 40% 4.59 11.55 60% 100%
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4. Kuytun City
21. As shown in Table SA J-14, the annual counterpart funds, debt service and O&M of the road, environmental improvement and capacity building components for Kuytun City Government are about CNY18 million, CNY8 million, and CNY19 million, respectively. Kuytun City Government has committed to allocate and make available the amount of CNY18 million annually to cover the counterpart funds during the construction period and the amount of CNY27 million to cover the debt service and O&M during the operating period. Therefore, the government’s contribution to the Project is 100% assured.
Table SA J-14: Fiscal Affordability of Kuytun City Government Implementation Period Operating Period Annual Debt Amount Counterpart O&M Recurrent Total Component counterpart service Committed fund (CNY Cost Affordability required (CNY (CNY M) Affordability M) Affordability (CNY M) M) Roads 42.28 17.83 42% 6.69 17.76 58% 100% Environmental sanitation 1.91 0.18 9% 0.71 1.02 91% 100% Capacity Building 0.35 0 0% 0.15 0.2 100% 100% Total 44.54 18.01 40% 7.55 18.98 60% 100%
5. Turpan City
22. As shown in Table SA J-15, the annual counterpart funds, debt service and O&M of the road, environmental improvement and capacity building components for Turpan City Government are about CNY22 million, CNY10 million, and CNY23 million, respectively. Turpan City Government has committed to allocate and make available the amount of CNY22 million annually to cover the counterpart funds during the construction period, and the amount of CNY32 million to cover the debt service and O&M during the operating period. Therefore, the government’s contribution to the Project is 100% assured.
Table SA J-15: Fiscal Affordability of Turpan City Government Implementation Period Operating Period Annual Debt Amount Counterpart O&M Recurrent Total Component counterpart service Committed fund (CNY Cost Affordability required (CNY (CNY M) Affordability M) Affordability (CNY M) M) Roads 52.46 21.88 42% 8.46 22.12 58% 100% Environmental sanitation 1.52 0.11 7% 0.58 0.83 93% 100% Capacity Building 0.35 0 0% 0.15 0.2 100% 100% Total 54.33 21.99 40% 9.19 23.15 60% 100%
23. The five city governments have committed to allocate and make available the necessary amount to cover the counterpart fund during the construction period and the debt service and O&M during the operating period. Therefore, the government’s contribution to the Project is guaranteed.
E. Conclusions and Recommendations
24. In summary, both revenues and expenditures in the five cities have grown rapidly for the last five years. However, the five city governments have been dependent on cash transfers from central government to sustain their operations. It is likely that the counterpart funds will come from cash savings at the end of fiscal year, if any or from cash transfer from central government.