Financial and Economic Analysis and Business Evaluation
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Financial and Economic Analysis and Business Evaluation Financial and Economic Analysis The purpose of the project is to improve transmission capacity by replacement of the existing transmission line with a high quality and low loss transmission line and to increase the number of the transmission lines. The benefit of the improvement of the transmission network is to contribute to the increase of power supply to the capital city area and to the improvement of the reliability of electricity supply. The objective for evaluation of the project is to analyse the possibility of implementation of improvement of the existing 220kV transmission line between Tarbela substation and Burhan substation (approximately 35 km). In addition to the improvement mentioned above, analysis of the possibility of implementation of the new construction of a branch transmission line (approximately 40 km) will also be conducted, which will be reviewed in the other report. The output of the implementation of the project, e.g. goods and services, is the transmission infrastructure to be improved by the project. The fundamental framework of the project is to be as follows; (1) Output: Increase of electricity supply by improvement of the transmission line (2) Outcome: Improvement of reliability on electricity supply and countermeasures against future expected insufficient transmission line capacity (3) Impact: Sustainable economic and social development Financial Analysis Financial analysis is to be carried out to evaluate the profitability of NTDCL as the implementation organization. The investment amount is to be estimated by the market price as the financial cost and at the same time the financial benefit given by the implementation of the project is also to be estimated by the market price. Financial Cost The financial expenses are consisting of the following items7; 1) Construction cost and materials price 2) Consultant costs 7 Interest during construction (IDC) and price escalation are not included. 2-59 3) Fund of the construction and materials (physical contingency) 4) Administrative expenses 5) Taxes (VAT and Import Duties8) 6) Front-End Fee Financial Benefit The major benefit is to be recognised by the increase in income based on increased quantity of electric transmission of 87.75MW together with the benefit of 2.78MW gained by the reduction of transmission loss. The benefit is estimated as the increase of income by NTDCL using a wheeling charge of PKR130 /kW month9. Assessment of the benefit is based on① transmission quantity due to the strengthened transmission lines and ②reduction of transmission loss by the usage of high quality transmission lines. The following table shows the annual increase of the quantity measured between the “With-project” and “Without-project” cases. Table 7.1.1 Benefits of implementation of the project Tarbela-Bruhan (circuit 3) Tarbela-ISPR Total (MW) (MW) (MW ) Send. End Receiv. End Loss Send. End Receiv. End Loss Performance Loss 2020 (without) 233.52 230.71 2.81 241.26 238.58 2.68 469.29 5.49 2020 (with) 289.96 288.41 1.55 269.79 268.63 1.16 557.04 2.71 Difference 57.7 1.26 30.05 1.52 87.75 2.78 (Source: JICA Survey Team) Prerequisites for the IRR calculation Followings are the assumptions for estimating IRR; Table 7.1.2 Assumptions for estimating IRR10 (Source: JICA Survey Team) 8 VAT in Pakistan are defined as 17% as General Sales Tax (GST), Customs Duty: 20% (Conductor), GST: 17%, Income Tax: 5.5% 。Comprehensive tax rate is (1+20%) x (1+17%) x (1+5.5%) = 1.481 (48%) 9 PKR 126.75/kW month is the official rate of the wheeling charge determined by NEPRA for NTDCL as of June 2016. The 10 PKR130/kW month is used by the JICA survey derived from the rate for the economic evaluation in PC-1 planned by NTDCL in January 2016. 2-60 Financial costs and financial benefits are compared as the present value over the expected useful life of the project, i.e. 40 years. The discount rate in the case of the present value of the total financial cost, being equal to the present value of the total financial benefit, is evaluated as the benchmark to evaluate the feasibility of this project, which is determined as the financial internal rate of return, FIRR. Being based on the conditions above, IRR is calculated as follows; 1) Financial internal rate of return (FIRR) is to be 3.35%. 2) B/C ratio is to be 0.72 (discount rate of 10%) and 0.65 (discount rate of 12%). 3) Annual benefit of 72.8 million yen gives a breakeven period of 42.7 years for the investment cost of 3,109.4 million yen. Table 7.1.7 shows the result of estimation of the financial internal rate of return (FIRR). 2-61 Table 7.1.3 Financial internal rate of return (FIRR) FINANCIAL ANALYSIS - CASHFLOWS Tarbera - Bruhan (Existing) JPY = 1.01 x PKR (JPY. in Million) Project Cost Project Benefit Project Loss Financia O & M Revenue @ Reduction Investment Total Power Net Total l year Cost Power Gross USCF USCF (MW) Net Benefits Cost Annual Cost Revenue (increase p.a.) Rs./kW/month 2.78 2% 5% 97% 130.00 130.00 (JPY.mln) (JPY.mln) (JPY.mln) (MW) (MW) (JPY.mln) (JPY.mln) (JPY.mln) (JPY.mln) 1 2 3 4 5 6 7 8 9 10 2016 0.0 0.0 0.0 2017 66.8 66.8 -66.8 2018 469.5 469.5 -469.5 2019 2,421.4 2,421.4 -2,421.4 1 2020 151.7 62.2 213.9 87.8 85.1 134.1 4.4 138.5 -75.4 2 2021 62.2 62.2 92.1 89.4 140.8 4.6 145.4 83.2 3 2022 62.2 62.2 96.7 93.8 147.9 4.8 152.7 90.5 4 2023 62.2 62.2 101.6 98.5 155.3 5.1 160.3 98.1 5 2024 62.2 62.2 106.7 103.5 163.0 5.3 168.3 106.1 6 2025 62.2 62.2 112.0 108.6 171.2 5.6 176.8 114.6 7 2026 62.2 62.2 117.6 114.1 179.7 5.9 185.6 123.4 8 2027 62.2 62.2 123.5 119.8 188.7 6.2 194.9 132.7 9 2028 62.2 62.2 129.6 125.8 198.1 6.5 204.6 142.4 10 2029 62.2 62.2 136.1 132.0 208.1 6.8 214.8 152.7 11 2030 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 12 2031 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 13 2032 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 14 2033 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 15 2034 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 16 2035 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 17 2036 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 18 2037 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 19 2038 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 20 2039 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 21 2040 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 22 2041 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 23 2042 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 24 2043 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 25 2044 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 26 2045 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 27 2046 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 28 2047 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 29 2048 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 30 2049 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 31 2050 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 32 2051 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 33 2052 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 34 2053 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 35 2054 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 36 2055 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 37 2056 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 38 2057 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 39 2058 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 40 2059 62.2 62.2 142.9 138.6 218.5 7.1 225.6 163.4 Total 3,109.4 2,487.5 5,596.9 5,391.8 5,230.0 8,509.6 2,912.6 IRR 3.35% Total Capital Cost 3,109.4 Costs Benefits B/C Ratio Income p.a.