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Financial Management and Analysis of Projects : 4. Financial Management of Executing Agencies : 4.3. Financial Analysis
4.3.2. Financial Analysis Objectives4.3.2.1. Introduction and Objectives4.3.2.1.1. This section examines the following topics:
4.3.2.1.2.
The primary objective of financial
analysis is to forecast and/or determine the actual financial status
and performance of a project and, where appropriate, of the EAs.
This is to enable ADB to combine that information with all other
pertinent data (technical, economic, social, etc.) to assess the
feasibility, viability, and potential economic benefits, of a proposed
or continuing lending operation. 4.3.2.2. Financial Objectives: Public Sector Project4.3.2.2.1. Public sector projects are classified as revenue-earning and nonrevenue-earning.Revenue-earning Projects4.3.2.2.2. A principal objective of revenue-earning projects is the achieving of financial viability of revenue-earning EAs (REEAs). This has two purposes. First, to enable self-sustainability and to achieve a degree of autonomy in their day-to-day operations to encourage better management. Second, to relieve governments from financial burden associated with the continuous provision of scarce public funds.4.3.2.2.3. The provision of these latter funds contributes to the scope of the government budget deficit and is, therefore, likely to be inflationary. Increased taxation, borrowing, and/or reduction of other forms of public expenditure may finance them. 4.3.2.2.4. The pursuit of certain financial goals by a REEA can also be seen as a means of stimulating managerial efficiency. If financial viability were to be ignored, the incentive to hold down costs may be weakened, if not removed. Adequate levels of (real, i.e., cash) revenues earned from the sale of their services should enable REEAs to have a satisfactory financial performance. It generally indicates an ability to generate sufficient revenues to cover operation and maintenance costs, renew assets, service debt, pay dividends on equity capital, where appropriate, and finance a reasonable proportion of their capital expenditures from internally generated funds. 4.3.2.2.5. REEAs are sometimes required to generate additional revenue to supplement national resources for investment. Experience in some DMCs, however, suggests that the continuing financial losses made by many REEAs may not make them satisfactory tools for resource mobilization, unless government is willing to enforce the use of effective tariffs and revenue collection. 4.3.2.2.6. Tariffs should permit a level of financial performance that would enable a REEA to operate efficiently and on a continuous basis, provided that the collection of revenues continues to be efficient. 4.3.2.2.7. Financial analysis is used at the design and appraisal stages of a project to define financial performance. Throughout implementation and commissioning, it is used to measure, by use of financial indicators, the EA's performance in delivering the project according to design estimates. Financial analysis is used to measure the operational performance and achievement of financial objectives. The analysis should examine: (i) ongoing operations during project implementation (where these are present), and (ii) the combined performance of ongoing operations and the new project following commissioning throughout the life of the ADB loan. Nonrevenue-Earning Projects4.3.2.2.8. A principal objective of nonrevenue-earning projects is the achievement of the financial and economic goals of a project. This has three purposes. One is to enable the project to deliver the forecast benefits at the price(s) estimated at time of design and financial and economic evaluation. A second objective is to achieve a degree of efficiency in the EA's implementation operations to encourage better management of the development of the project. A third objective is to minimize the government's financial cost to reduce as much as possible of the financial burden associated with the continuous provision of scarce public funds.4.3.2.2.9. As for revenue-earning projects, financial analysis is a key tool in defining and measuring the achievement of financial objectives. 4.3.2.3. Financial Objectives: Private Sector Project4.3.2.3.1. The financial objectives
of a private sector project are similar to those of a public sector
revenue-earning project, except that the owners, stakeholders, and
management of the enterprise are substituted for the government.
Unlike governments that may have access to temporary funds to sustain
a financially ailing public utility EA, the owners and management
of a private company are quickly judged by market forces as to their
financial capability and competence. 4.3.2.4. Using Financial Analysis to Identify Achievement Indicators4.3.2.4.1. The financial performance
of a public and private sector EA should normally be measured by
the use of at least one indicator selected from the range of the
following groups of indicators derived from the financial analysis
of a project and its EA: (i) operation; (ii) capital structure,
and (iii) liquidity. 4.3.2.5. Economic Objectives 4.3.2.5.1. The efficient allocation
of resources is an important consideration in pricing policy, particularly
for REEA services. Financial analysis is used to describe the impact
of such a policy.
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