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Financial Management and Analysis of Projects :
7. Knowledge Management :
7.12. Model Operating Covenants
7.12.4. Operating Ratio (see 3.6.2.5)
7.12.4.1. The following is an outline for an Operating Ratio 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.
7.12.4.2. This covenant may be converted
to a working ratio covenant by substituting a definition of working
expenses for operating expenses. This will normally require that
depreciation be omitted from the definition of operating expenses
recommended herein.
Section______
-
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.
-
Except as ADB shall otherwise agree, the Borrower shall maintain,
for each of its fiscal years after its fiscal year ending on _________,
a ratio of total operating expenses to total operating revenue
not higher than _______ (percent).
-
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:
- 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):
-
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) in
order to meet such requirements.
-
For the purposes of this Section
-
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 that ______ percent 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.
-
The term total operating revenues means revenues
from all sources related to operations, after making adequate
provisions for uncollectible debts.
-
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, as valued
from time to time in accordance with sound and consistently
maintained methods of valuation satisfactory to ADB.
-
The terms operations or operating refer
to the [identify relevant part of the operations] operations
of the Borrower.
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7.12.3. General Price Level | Next
7.12.5. Breakeven Covenant |
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