Westonaria Regional Bulk Sanitation Scheme Zuurbekom Waste Water Works
Total Page:16
File Type:pdf, Size:1020Kb
Westonaria Regional Bulk Sanitation Scheme Zuurbekom Waste Water works Ref no: H/ISI 03/RW FINAL DRAFT REPORT: 01/FM/2015 August 2015 TABLE OF CONTENTS 1. Introduction ....................................................................................................................................2 2. Abbreviations..................................................................................................................................3 3. Assumptions....................................................................................................................................4 4. Definitions.......................................................................................................................................5 5. Operating costs .............................................................................................................................10 5.1 Labour costs ..........................................................................................................................10 5.2 Chemical costs.......................................................................................................................10 5.3 Electrical costs.......................................................................................................................11 5.4 Maintenance costs................................................................................................................11 5.5 Finance costs.........................................................................................................................11 6. Ratio of use: 81% ..........................................................................................................................12 7. Funding – Funding from reclamation: Option 1 ...........................................................................13 7.1 Assumptions..........................................................................................................................13 7.2 Income statement.................................................................................................................14 7.3 Cash flow statement .............................................................................................................15 7.4 Amortisation schedule ..........................................................................................................16 8. Option 2 ........................................................................................................................................19 8.1 Scenario 1- Required tariff with no indigent factor (No Grant funding)...............................19 8.2 Scenario 2- Required tariff incl indigent factor (with Grant Funding) ..................................27 8.3 Scenario 3 – 100% Grant funding of construction and subsequent operational costs ........36 8.4 Scenario 4 - 100% loan recovered through tariff and grant funding....................................44 8.5 Scenario 5 - Required tariff to compensate indigent factor (No Grant funding)..................52 8.6 Scenario 6 – 100% Equity Status Quo (NPV = Zero)..............................................................61 8.7 Scenario 7..............................................................................................................................69 8.7.1 Option 1: Debt/ Equity 50:50 Status Quo ....................................................................69 8.7.2 Option 2: Debt/ Equity 50:50 Status Quo ....................................................................77 8.8 Contributions by developers.................................................................................................82 9. Conclusion.....................................................................................................................................84 1 1. Introduction Westonaria Local Municipality (WLM) is one of the 5 municipalities found in Gauteng Province and within the West Rand District Municipality. Isiphethu Water Services (Pty) Ltd has been entrusted by Rand Water Ltd to undertake the financial assessment of the construction of Zuurbekom WWTW. The assessment will inform the decision on which financial model is best and the financial viability of the implementation of the Zuurbekom WWTW. Financial modelling is the task of building model of a financial decision making situation. This is a mathematical model designed to represent (a simplified version of) the performance of a project. It is about translating a set of hypotheses about the behavior of markets into a numerical decisions to proceed with a specific project. The Westonaria municipality researched the option of building a reclamation water plant together with the planned waste water treatment plant for Zuurbekom project. As a result of that research Isiphethu Water Services has been tasked with developing various financial models, determine if the reclamation project is viable and whether it will be able to sustain itself financially. The capital cost for water treatment and reclamation has been determined to be R1 065 896 370. In the previous financial models the following were assumed. It was only a waste water treatment. With a total capital cost of R751 178 106.98 and the financial analysis and modelling were based on the findings of Social and Economic report that found the indigent ratio to be 81%, which suggest that the grant should be in line with the percentages (81%), R 608 454 266.65 as contribution towards the Capital cost .The 19% R 142 723 840.30 shortfall will have to be sourced from various sources of funds. 2 2. Abbreviations WACC Weighted average cost of capital BEE Black Economic Empowerment BBBEE Broad Based Black Economic Empowerment DWA Department of Water Affairs EAP Economically Active Population IA Implementing Agent IDP Integrated Development Plan Kℓ Kilolitre LED Local Economic Development LM Local Municipality Ml/d Mega litres per day MIG Municipal Infrastructure Grant RBIG Regional Bulk Infrastructure Grant SARB South African Reserve Bank 3 3. Assumptions Capacity of the plant 40ML/d Project life span 20 years Number of months per annum 12 Number of days per annum 365 days Average number of days per month 30.42 Estimated construction time 18months rounded off to 2 years Amount of litres per kilo litre 1 000 litres Amount of kilolitres per mega litre 1 000 litres Income escalation per annum 8% Operating costs to escalate by 8% The financial techniques that should be used for the accuracy of the projections assessments Net profit calculations Full cash flows calculations Weighted average of cost of capital (WACC) Discounted cash flows /Internal Rate of return (IRR) 4 4. Definitions Water reclamation The restoration of water to a state that will allow its beneficiaries to reuse. NET PROFIT Net profit the balance on the Statement of Comprehensive Income which calculates the total revenue projected that will be achieved on yearly basis for the next twenty (20) years. FULL CASH FLOWS Full cash flows demonstrates available projected cash for the project on yearly basis after all the expenses have been deducted. WACC WACC is the average of the costs of sources of financing, (debt, equity and grants) each of which is weighted by its respective use in the project The cost of equity Cost of equity is calculated as follows Risk Free Rate – a RFR is the theoretical rate of return of an investment with no risk of financial loss. This rate represents the interest that an investor would expect from an absolutely risk-free investment over a given period of time. The 8% rate used in the model is the R157 government yield bonds. This risk-free interest rate is of significant importance for rational pricing. Beta – is a number describing the relation of asset returns with the financial markets as a whole, in this model a positive beta of 1.1, depicts that its returns generally follow the markets returns. It basically says to the investor I have an option to invest in the market or in this project and compare the two. 5 Market Risk Premium – is the difference between the risk-free rate and the expected returns on the market. Company-Specific Risk – is a risk A typical from operations and business environment. During the valuation process this rate is an informed judgement, and or using the projected income, usually on a scale of between 0% to 10%. Small-Stock Premium – the smaller the company, the higher the returns. This is the highest point of departure rate of any establishment or concern to achieve, is thus calculated as follows SP = (b x RP) – Rf + RS, Where: SP = small-stock premium, B = beta, RP =expected return on riskless asset, and cost of equity However, in this case SP has been equated the company – Specific Risk, Purposely so for the reason that it came below the required threshold. Cost of Equity – or cost of capital before weighted average adjustments, or a compensation to investors for the risk undertaken. Pre-TAX Cost of Debt (Pre-tax Kd) – is the prime rate Post-TAX Cost of Debt (Kd) – is the cost of equity less the prime rate. Proportion of Equity, Debt, and Grant – this is the various funding mix percentage to ascertain the least cost of capital model, then DISCOUNTED CASH FLOW / IRR – Discounted Cash Flow valuation method is an estimate attractiveness of investment opportunity. It uses further free cash flow projections and discounts them using the weighted cost of capital to arrive at a present value to evaluate the potential for investment. 6