This project appears viable and attractive from the perspective of the private sector. Calculations for the financial results are shown in Table 3-9. The overall return to capital, the FIRR, of 20 percent is well over the WACC of 16.36 percent. The IRR on equity is 22 percent also well above the assumed acceptable rate of return on equity of 15 percent. The overall NPV of the project is P146.88 million which is well above zero.
The NPV on equity is high and the return to equity indicates that the project could support a higher debt to equity ratio. The payback period after taxes is within the five year payback period generally sought by the private sector. This result implies that tax incentives from the LGU may not be necessary in order to attract private investors.
Financial Viability Indicator Results
• FIRR (%) | 14.54% |
• IRR on Equity (%) | 17.20% |
• NPV on Project (million pesos) | 87.353 |
• NPV on Equity (million pesos) | 32.424 |
• Payback Period After Tax (years) | 7 years |
Table 3-9 Summary of Results of the Financial Analysis
| Concession period (years) | |||
| 5 | 10 | 15 | 20 |
1 Debt amortization |
|
|
|
|
1a Repayment starts in year: | 2 | 2 | 2 | 2 |
1b Number of yearly installments | 7 | 7 | 7 | 7 |
8 | 8 | 8 | 8 | |
1c Tenor of debt (years) |
|
|
|
|
2 Debt service coverage ratio |
|
|
|
|
1.15 | 1.15 | 1.15 | 1.15 | |
2a Minimum DSCR | 1.41 | 1.41 | 1.41 | 1.41 |
2b Average DSCR |
|
|
|
|
-11.29% (180,875,346.29) -29.19% (121,591,246.11) | 7.31% (61,463,343.64) 7.23% (57,371,789.24) |
12.52% 24,491,851.04 14.82% (2,026,567.86) | 1 4.54% 87,353,844.08 17.20% 32,494,818.49 | |
3a Project IRR (post tax) | ||||
3b Project NPV@11.4% (PhP million) | ||||
3c Equity IRR (post tax) 3d Equity NPV@15% (PhP million) | ||||
4 Debt-equity gearing | 0% | 0% | 0% | 0% |
Loan coverage ratios |
|
|
|
|
LLCR | 0.16 | 0.26 | 0.27 | 0.28 |
PLCR | 0.16 | 0.72 | 1.42 | 2.03 |
The high internal rate of return on equity means that the LGU should attempt to get much more out of the project, to benefit its public. There are two immediate recommendations. First, the LGU can ask for a larger public market, or ask the proponent to build ancillary facilities (e.g., public park). This would increase project cost, and reduce the IRR on equity. Second, the LGU might want to include a revenue-sharing provision in the contract, for example, to have 4 percent of gross revenue from the commercial center go to the LGU. This could then be used for running the public market at a lower rate (i.e., reduce stall fees).
Additionally, the high IRR on equity has two implications for the private sector proponent: (i) that smaller commercial centers might be possible, and still keep the project financially profitable, and (ii) that the commercial center rental fees can be lowered. A smaller commercial center implies that a smaller LGU population (i.e., the demand) will be needed to make the project financial viable. Thus, this project may be viable for LGUs with populations of less than 100,000.
A sensitivity analysis conducted below showed in Table 3-10 reflects that the LGU can increase the public market by up to fifty percent, and still keep the project financially attractive:
Table 3-10 Sensitivity Analysis for LGU Shopping Center and Public Market
|
| Pre-tax Project IRR (for 15-yr concession) | ||
|
| -20% | Base case | +20% |
1 | Construction cost | 22.54% | 16.66% | 14.38% |
2 | O&M cost | 17.39% | 16.66% | 15.92% |
3 | Revenue | 11.85% | 16.66% | 21.03% |