Catalog

	Table of Contents
p. 161 of 203 BACK | NEXT Foreword 1. Introduction to the Guidelines 2. User Instructions 3. Preparing and Appraising Investment Project 4. Financial Management of Executing Agencies 5. Reporting and Auditing 6. Financial Institutions 7. Knowledge Management 7.1. Useful Websites 7.2. Operations Manual (OM) 7.3. Project Administration Instructions (PAIs) 7.4. International Standards 7.5. International Accounting and Auditing Architecture 7.6. Financial Review Checklist for RRPs 7.7. Appraisal Checklist: Nonrevenue-Earning Project 7.8. Appraisal Checklist: Revenue-Earning Project 7.9. Appraisal Checklist: Private Sector Project 7.10. Appraisal Checklist: Financial Institution 7.11. Undertaking Sensitivity and Risk Analyses 7.12. Model Operating Covenants 7.12.1. Rate of Return 7.12.2. Self-Financing Ratio 7.12.3. General Price Level 7.12.4. Operating Ratio 7.12.5. Breakeven Covenant 7.13. Model Capital Structure Covenants 7.14. Model Liquidity Covenants 7.15. Commonly Used Ratios 7.16. Model Financial Statements: Service Organization 7.17. Model Financial Statements: Manufacturing Organization 7.18. Model Terms of Reference for an Auditor 7.19. Audit Report Questionnaire Addendum

Financial Management and Analysis of Projects : 7. Knowledge Management

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7.12. Model Operating Covenants

7.12.1. Rate of Return (see 3.6.2.2)

7.12.1.1. The following is an outline for a Rate of Return covenant for use in a loan agreement. It is intended as a guide only. It is the responsibility of the OGC to determine, in consultation with the mission leader and financial analyst, the precise wording for inclusion in the legal agreements. In cases of borrowers conducting multiple operations, the text of the covenant should define which operations are to be subject to performance measurement. As an example, in an electric power project to be carried out by a borrower that operated electric power, water supply, and telecommunications services, the covenant normally would be drafted to apply only to the electric power operations.

Section _____.

1. For the purposes of this Loan Agreement, all financial calculations, ratios, and financial covenants shall be applied in respect of the Borrower's Operations only.
2. Except as ADB shall otherwise agree, the Borrower shall earn, for each of its fiscal years after its fiscal year ending on [day/month/year], an annual return of not less than _____ % of the average current net value of the Borrower's fixed assets in operation.
3. Before (date/month) in each of its fiscal years, the Borrower shall, on the basis of forecasts prepared by the Borrower and satisfactory to ADB, review whether it would meet the requirements set forth in paragraph (a) in respect of such year and the next following fiscal year and shall furnish to ADB the results of such review upon its completion.

Paragraph (d): Option 1: Where the borrower or government has discretion to adjust tariffs/rates:

4. If any such review shows that the Borrower would not meet the requirements set forth in paragraph (b) for the Borrower's fiscal years covered by such review, the Borrower shall promptly take all necessary measures (including without limitation, adjustments of the structure or levels of its rates (prices)) in order to meet such requirements.

Paragraph (d): Option 2: Where there is an independent regulator in place (or where it is anticipated that an independent regulator may be established during the project implementation period):

4. If any such review shows that the Borrower would not meet the requirements set forth in paragraph (b) for the Borrower's fiscal years covered by such review, the Borrower shall promptly take all necessary measures (including without limitation, filing applications with the [name of regulator] seeking a tariff/rate increase) to meet such requirements.
5. For the purposes of this Section:
   1. The annual return shall be calculated by dividing the Borrower's net operating income for the fiscal year in question by one half of the sum of the current net value of the Borrower's fixed assets in operation at the beginning and at the end of that fiscal year.
   2. The term "net operating income" means total operating revenues less total operating expenses.
   3. The term "total operating revenues" means revenues from all sources related to operations, after making adequate provisions for uncollectible debts, but excludes government grants, subsidies and transfers.
   4. The term "total operating expenses" means all expenses related to operations, including administration, adequate maintenance, taxes and payments in lieu of taxes, and provision for depreciation on a straight-line basis at a rate of not less than ____ % per annum of the average current gross value of the Borrower's fixed assets in operation, or other basis acceptable to ADB, but excluding interest and other charges on debt.
   5. The average current gross value of the Borrower's fixed assets in operation shall be calculated as one half of the sum of the gross value of the Borrower's fixed assets in operation at the beginning and at the end of the fiscal year [where revalued: as valued from time to time in accordance with sound and consistently maintained methods of valuation satisfactory to ADB].
   6. The term "current net value of the Borrower's fixed assets in operation" means the gross value of the Borrower's fixed assets in operation less the amount of accumulated depreciation [Where revalued:, as valued from time to time in accordance with sound and consistently maintained methods of valuation satisfactory to ADB].
   7. The terms "operations" or operating" refer to the [identify relevant part of the operations] operations of the Borrower.

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