FINANCIAL FEASIBILITY
The financial viability is measured in terms of the financial internal rate of return of the project, availability of a clear and reliable source for revenue generation, and the LGU’s capacity to finance and/or repay the loan. The analysis involves an examination of the income statement of the City of Passi. A certification as to the maximum borrowing capacity of the City also needs to be issued by the Bureau of Local Government Finance – Department of Finance (BLGF-DOF).
PROJECT COSTS
Capital Costs
The cost of constructing the proposed sanitary landfill covering the 1.5-hectare land area and the proposed Material Recovery and Composting Facility is P20.1M. The cost per component of the landfill and other utilities is presented in the table below.
The access road is of the macadam type, which is 6 meters wide and 450 meter long and is provided with a side drainage. The cross section of the design of the road is provided in the annexes. The development cost for this component involves the use of heavy equipment (particularly bulldozer and compactor) and the purchase of sand and gravel for the surfacing.
The cost for the development of landfill cell covers labor, and costs for fuel and oil for the heavy equipment to carryout hauling and filling of excavated materials, compacting, grading, and the construction of embankment.
The cost for clay and bentonite is approximately P300 per cubic meter at current prices. Adding the costs for gravel and sand and the cost for installation of the clay at the site would bring up the current price of the liner system to approximately P650/sq m. The details of other components are shown in the subsequent table of costs.
| N | COMPONENNTS | Subtotal | Remarks |
| 1 | Construction of access road | 1,350,000.00 | Road width is 6 meters and 450 meter long. |
| 2 | Development / preparation of landfill cell | 3,750,000.00 | The cost for land development involves the use of heavy equipment |
| 3 | Liner System (materials and installation) | 9,750,000.00 | The liner system is estimated to be around P650/sq m |
| 4 | Leachate collection system | 275,400.00 | Piping system for leachate consist of perforated pipe around 612 meters long at 10 inches diameter |
| 5 | Collection pond / treatment | 1,000,000.00 | Treatment system for leachate consist of 2-chambered baffled tank each 150 cum capacity and a 500 cum lagoon |
| 6 | Drainage system | 336,000.00 | Drainage system around the perimeter is around 560 meters |
| 7 | Gas Venting System | 75,000.00 | 3 vents made of GI pipe 600 mm in diameter, gravel filled |
| 8 | Monitoring well | 60,000.00 | 30 meter depth, 50mm in casing diameter |
| 9 | Fencing and tree planting | 200,000.00 | Concrete posts with interlink mesh wire |
| 10 | Administration building | 480,000.00 | A 40 m floor area, with office IEC and board room for meetings |
| 11 | Utilities and auxiliary structures | 150,000.00 | This include the entrance gate with signage, water supply, power connections, telephone, service area, etc. |
| 12 | MRF and Composting Facility | 2,673,600.00 | Consists of 1200 sqm composting area, with equipment. List breakdown of cost is given |
| GRAND TOTAL | 20,100,000.00 |
It must be noted that the purchase of land is not included in the above cost breakdown since the City has already bought the property in 2005. This is also true for the power connection; it shall be under the City’s program of activities for 2007.
The breakdown of cost for the MRF facilities is as follows:
| N | Components | QTY | Unit | Unit Cost | Subtotal |
| 1 | MRF & Compost shed (200 sqm) | 200 | sqm | 5,000.00 | 1,000,000.00 |
| 2 | Storage area (60 sqm) | 60 | sqm | 5,000.00 | 300,000.00 |
| 3 | Compost pile areas | 800 | sqm | 500.00 | 400,000.00 |
| Equipment | |||||
| 4.1 Screener | 1 | ls | 250,000.00 | 250,000.00 |
|
| 4.2 Shredder (5 hp) | 1 | unit | 350,000.00 | 350,000.00 |
|
| 4.3 Conveyor belt with motor (5 hp) | 1 | unit | ls | 373,600.00 |
|
| GRANDTOTAL | 2,673,600.00 |
Operational and Maintenance Cost
The annual operational cost is approximately P2.268M. It consists of the salaries for manpower, fuel and oil, repair and maintenance and miscellaneous costs which include supplies, testing, and utilities such as water and power. Maintenance of the equipment is also considered. On the other hand, since clay soil is available on site, the cost for acquiring this material is nil.
| N | ITEMS | Qty | Unit | unit cost | Subtotal |
| A | Manpower / Personnel | 8 | 1,183,000.00 | ||
| Landfill manager | 1 | Pax | 195,000.00 | ||
| Admin/secretary | 1 | Pax | 104,000.00 | ||
| Backhoe / compactor operator | 1 | Pax | 130,000.00 | ||
| Security guard / recorder | 1 | Pax | 78,000.00 | ||
| Landfill maintenance worker | 2 | Pax | 156,000.00 | ||
| MRF supervisor | 1 | Pax | 130,000.00 | ||
| MRF personnel | 6 | Pax | 390,000.00 | ||
| B. | Landfill & MRF Operation | 730,000.00 | |||
| Fuel and oil - Heavy equipment | 4 | Hours | 730,000.00 | ||
| Soil cover - taken from the area | |||||
| C | Repair and Maintenance | 1 | l.s | l.s | 110,000.00 |
| MRF equipment | 40,000.00 | ||||
| Loader compactor | 70,000.00 | ||||
| D | Water and Power | 125,000.00 | |||
| Water supply, electrical consumption for operating MRF, Admin, etcs | |||||
| D | Miscellaneous (water test, utilities) | 12 | Mo | 2,500.00 | 120,000.00 |
| Water test (4 samples per year) | 4 | 12,000.00 | |||
Total Annual Operating Cost |
2,268,000.00 | ||||
FINANCING OPTIONS
To realize the proposed project, two financing options are considered, namely: a) Loan from DBP-KfW, and b) LGU Self-financing. The financing packages and opportunities are discussed below.
Loan Option – DBP KfW
The Development Bank of the Philippines (DBP) in collaboration with the Kreditanstalt fur Wiederaufbau (KfW) is extending a credit line for Solid Waste Management (CLSWM) for Local Government Units and private enterprises that wish to participate in projects implementing ecological solid waste management program. Identified projects may include the construction of sanitary landfills, the acquisition of equipment for waste disposal and treatment, the purchase of collection vehicles, and the construction of waste treatment and recycling facilities. Below are the features of the loan package
| FEATURES | DESCRIPTION |
| Interest | Prime, fixed rate based in prevailing market rate at the time of the loan |
| Repayment term | Maximum of 12 years and maximum of 3 years grace period |
| Commitment fee | 0.25% per annum on undisbursed loan amount |
| Loanable amount per project | For LGUs: Maximum of 90% of the total project cost For Private Enterprises: maximum of 80% of the total project cost. |
| Equity Participation | For LGUs: Minimum of 10% of the total project cost For Private Enterprises: Minimum of 20% of the total project cost |
| Collateral Requirements | The loan shall be fully secured by assets acquired out of the loan proceeds and other collaterals acceptable to the Bank such as but not limited to real estate mortgage (except landfill site), chattel mortgage, loan guarantee, assignment of insurance cover, assignment of revenues from the project, assignment of a portion of Internal Revenue Allotment (IRA) in favor of DBP with holdout agreement (for LGUs) |
In order to qualify for the loan, the Bureau of Local Government needs to issue a certification on the borrowing capacity of Passi City. Per record, Passi City can borrow up to P28 Million Pesos. However, the City Government decided to borrow only P15 Million for the proposed implementation of the sanitary landfill project. Since the landfill project cost P20.1 Million, the remaining balance, which is P5.1 Million shall be the equity of LGU
LGU Self- Financing Option
Another option is for the Local Government Unit of Passi City to set aside a portion of the development fund from their Internal Revenue Allocation (IRA) and from their local revenues for the construction of the sanitary landfill. It is important to note that considering the financial requirements of all other LGU projects, reliance on the IRA of the City which is limited, may result in delay in construction of the landfill or construction on a piecemeal basis. It was noted during the technical meetings that the City has other priority projects which also require financing such as the local housing project. In comparison with this scenario, the loan option appears to be the more viable option in implementing the project.
Financial Capacity of LGU to Borrow
The financial or borrowing capacity of Passi City may be determined by using financial indicators such as; income, expenses, assets and liabilities. The succeeding below presents the Statement of Income and Expenses of the City of Passi while a table presenting the Asset and Liabilities for the year 2002, 2003 and 2004.is also shown. It is shown that the City posted a net income of P33.6M, P31.4M and 9.8M for the years indicated. Moreover, the City has around 258 Million of Equity as indicated in the Balance Sheet for the year 2004. The Bureau of Local Government Finance – Department of Finance (BLGF-DOF) is the agency tasked to certify the maximum borrowing capacity of the LGU.
| 2002 | 2003 | 2004 | |
| Income | 195,510,652.95 | 206,138,938.70 | 207,127,007.48 |
| Expenses | 137,993,883.65 | 171,437,331.18 | 197,521,666.48 |
| Operating Incom | 57,516,769.30 | 34,701,607.52 | 9,605,341.00 |
| Less: | 23,863,123.73 | 3,284,846.54 | 31,751,687.25 |
| Finance Costs and Charges | 17,494,123.73 | ||
| Subsidies Paid | 6,369,000.00 | 3,284,846.54 | 31,751,687.25 |
| Add: | 32,007,790.19 | ||
| Subsidies Received | 32,007,790.19 | ||
| Net Income | 33,653,645.57 | 31,416,760.98 | 9,861,443.94 |
| 2002 | 2003 | 2004 | |
| Total Assets | 413,341,033.05 | 399,382,624.27 | 446,009,798.80 |
| Current Assets | 60,804,867.59 | 30,554,492.27 | 22,554,066.65 |
| Fixed Assets | 352,516,145.08 | 368,808,111.62 | 423,286,049.77 |
| Other Assets | 20,020.38 | 20,020.38 | 169,682.38 |
| Total Liabilities and Equity | 413,341,033.05 | 399,382,624.27 | 446,009,798.80 |
| Total Liabilities | 242,440,432.47 | 191,297,688.33 | 187,280,391.27 |
| Current Liabilities | 35,014,390.27 | 27,925,448.02 | 28,566,244.94 |
| Long-term Liabilities | 204,851,727.20 | 161,282,957.35 | 149,848,136.60 |
| Other Liabilities | 2,574,315.00 | 2,089,282.96 | 8,866,009.73 |
| Equity | 170,900,600.58 | 208,084,935.94 | 258,729,407.53 |
FINANCIAL ANALYSIS
The financial analysis and projection is presented herein to determine the financial viability of the project. Several scenarios are explored as to the tariffs or fees which have to be paid by waste generators belonging to different sectors; namely; residential, commercial, private disposal services, and other LGUs. Possible income of the landfill project may also include projected revenues from compost production in the facility.
In the analysis, three (3) financial scenarios are formulated with defined parameters. LGU decision makers may refer to these parameters in their discussions and negotiations. The parameters for each of these scenarios are discussed and shown on the table below.
| Parameters | Base Scenario | “High End” Scenario | “Low End” Scenario |
| Revenue from Domestic | Households pay average garbage fee of P100 per year | Households pay average garbage fee of P200 per year | Households pay average garbage fee of P50 per year |
| Revenue from Businesses | Businesses pay average garbage fee of P500 per year | Businesses pay average garbage fee of P700 per year | Businesses pay average garbage fee of P400 per year |
| Revenue from Private Sector | Private tipping average garbage fee of P600 per ton | Private tipping average garbage fee of P1000 per ton | Private tipping average garbage fee of P500 per ton |
| Revenue from other LGUs | Tipping average garbage fee of P800 per ton | Tipping average garbage fee of P1000 per ton | None |
| Income from Composting | P6.00 per kilo of compost | P8.00 per kilo of compost | P5.00 per kilo of compost |
Assumptions of the Financial Analysis
Analysis of the annual disbursements of the City for the repayment of loan and for financing the operation of the landfill facility is provided herein. The following assumptions are considered:
- Interest rate fixed at 10%
- Grace period of 3 years
- Revenue collection from household will
Debt Service Schedule
For a P15M loan amount with DBP-KfW, the amount of amortization and repayment schedule is indicated in the table below. The repayment period is 12 years (maximum) at 10 percent interest with a 3-year grace period.
Year |
Principal |
Annual Interest |
Principal Amortization |
Total Debt Serviced |
Outstanding Loan |
| 2007 | 15,000,000 | 1,500,000 | 1,500,000 | 15,000,000 | |
| 2008 | 15,000,000 | 1,500,000 | 1,500,000 | 15,000,000 | |
| 2009 | 15,000,000 | 1,500,000 | 1,500,000 | 15,000,000 | |
| 2010 | 15,000,000 | 1,500,000 | 1,666,667 | 3,166,667 | 13,333,333 |
| 2011 | 13,333,333 | 1,333,333 | 1,666,667 | 3,000,000 | 11,666,667 |
| 2012 | 11,666,667 | 1,166,667 | 1,666,667 | 2,833,333 | 10,000,000 |
| 2013 | 10,000,000 | 1,000,000 | 1,666,667 | 2,666,667 | 8,333,333 |
| 2014 | 8,333,333 | 833,333 | 1,666,667 | 2,500,000 | 6,666,667 |
| 2015 | 6,666,667 | 666,667 | 1,666,667 | 2,333,333 | 5,000,000 |
| 2016 | 5,000,000 | 500,000 | 1,666,667 | 2,166,667 | 3,333,333 |
| 2017 | 3,333,333 | 333,333 | 1,666,667 | 2,000,000 | 1,666,667 |
| 2018 | 1,666,667 | 166,667 | 1,666,667 | 1,833,333 | |
| Grand total | 12,000,000 | 15,000,000 | 27,000,000 | ||
Cash Flow Statement
Cash flow under the base scenario is shown below. It is shown that the City has a negative net cash flow during the first nine (9) years of operation. This negative scenario is mainly due to the repayment of the P15 Million loan. At the end of the landfill operation which 15 years, the remaining net cash flow would only be P80,000.00.
Income Statement
Under the base scenario, the projected income statement in operating the Passi City sanitary landfill is also presented. During the first five (5) years of its operations, a negative earning is expected. Operations will post positive earning only at the end of 15 years which is approximately P3.31 Million of retained earnings.
Financial Viability
The financial viability analysis is aimed to assess the financial soundness of the project’s revenue streams and to determine its capacity to meet its debt-service obligations. The indicators to be used for estimating the financial viability of the project include the following:
- Financial Internal Rate of Return (FIRR), defined as the discount rate, which equates the present value of revenues to the present value of costs. The discount factor used in the analysis is equal to the Weighted Average Cost of Capital (WACC) based on the “all capital” investment approach. The hurdle rate of the FIRR is the WACC. If the FIRR is less than the WACC, the project is not considered viable.
- Net Present Value (NPV), compares the present value of the revenues generated by the project as against the present value of the costs by the same project. The decision role is to accept projects where the NPV is greater than zero.
- Benefit-Cost Ratio (B/C Ratio), divides the sum of the revenues generated by the project by the sum of the present value of the costs incurred by the Project. The decision rule is to accept projects where B/C Ratio is one.
Sensitivity Analysis
The objective of the sensitivity analysis is to determine whether the project will remain feasible if changes or deviation from the base scenario were to take place. The results are expressed in terms of the financial internal rate of return and cost benefit ratio as shown below.
| N | Scenario | Base Scenario | High End | Low End |
| 1 | Revenue from Domestic | Rate P100/HH/yr | P200/HH/yr | P50/HH/yr |
| 2 | Revenue from Businesses | P500/Unit/yr | P700/unit/yr | P400/unit/yr |
| 3 | Revenue from Private | P600/ton | P1000/ton | P500/ton |
| 4 | Revenue from other LGUs | P800/ton | P1000/ton | None |
| 5 | Income from Composting | P6/kilo | P8/kilo | P5/kilo |
| FIIR (%) | 3.2 | 19.9 | Less than 0 | |
| B/C RATIO | 0.82 | 1.28 | 0.56 | |
The results show that the internal rate of return for the base scenario is only 3.2 %. This is still below the hurdle rate of 10%. Under the base scenario and the “low-end” scenario, the project appears to be not financially viable. The only viable scenario is the high–end scenario with 19.9% internal rate of return.
Under a base scenario retaining all parameters but with the parameter on composting reduced by fifty percent (50%), the result would still be an FIRR of less than 0 and a Benefit–Cost ratio of 0.62.
The results clearly show that the City needs to subsidize the operation of the landfill. To generate local revenues the City needs to consider the option of maximizing revenues from the operations of the composting facility. At present, it is reported that the price of compost products is around P10 per kg and that there exists a substantial local demand.
The present level of garbage fees charged to the commercial and industrial sectors definitely would not suffice to finance the operation and maintenance of the sanitary landfill. The city LGU does not impose fees for the collection of garbage in the residential areas. Given this situation, it is necessary to increase the tariff for commercial and industrial establishments and to impose the required garbage fee for households.
- Review tariff for garbage to include all residential areas. Cross subsidy may be practiced considering the paying capacity of low, medium and high-income households.
- Explore institutional mechanism for garbage fee collection. Garbage fees may be bundled with the water bill, power bill, and other existing mechanisms such as payment of residence certificates (CEDULA).
- Enforce penalties for violators of “no littering“ and “no segregation” policy; and for those who still practice indiscriminate dumping of garbage.
- Increase the tariff on garbage fee for commercial establishments and charging of considerably higher fees for generators of hazardous and toxic wastes.
- Annual allocation of an amount for the repayment of the loan from the City IRA
