costs of project (mil euro)

Modeling of CF Assistance Ratefor Project

Nr. 2000/LV/16/P/PE/001

„Riga Water and Environment Project, Phase II”

2008

Tehniskās palīdzības projekts Kohēzijas fonda vadošajai iestādei Latvijā palīdz mazināt ekonomiskās un sociālās atšķirības Eiropas Savienības pilsoņu vidū

Objective

(1) Evaluation of existing revenues and expenditures of water management services and comparison with results of feasibility study for justification of CF assistance rate and necessity of increasing of tariffs

(2) Comparison of estimated CF assistance rate with existing rate


Achievements

(1) Recognized factors which cause difference in financial indices during the implementation of project

(2) Analysis of revenues and expenditures of Riga Water, Ltd water management services and updating of forecasts

(3) Analysis of costs of water management services of Riga Water, Ltd and justification of tariffs

(4) Updating of financial analysis, taking into account existing macro-economical and Riga Water, Ltd financial indicators

(5) Modeling of the CF assistance rate, using the methods for years 2004-2006 and 2007-2013, taking into account existing macro-economical and Riga Water, Ltd financial indicators; comparing of estimated rate with actual


Costs of project (mil euro)

Eligible costs Non-eligible costs Total

Application for assistance (2000) 28.00 1.98 (VAT, RW) 29.98

Financing Memorandum (22.12.2000):1. Extension of Zakumuiža-D Wellfield

2. Extension of centralised drinking water and wastewater systems (Vecaki, Mezaparks, Marupe)

3. The gravity sewage main (Vairogu-Gauja street)

4. Extension of sludge deposit “Daugavgriva”

24.30ISPA 17.01 (70%)

RW (including loan)

7.29 (30%)

3.70RW (VAT, extension of sludge deposit)

28.00

Decision of EC (07.08.2006):1. Extension of Zakumuiža-D Wellfield



29.60CF 20.72 (70%)

RW 8.88 (30%)

3.00RU (VAT, supervision)

32.60

In fact (CF project):1. Extension of Zakumuiža-D Wellfield



In fact (outside CF project):Extension of sludge deposit “Daugavgriva”

29.58CF 20.70 (70%)

RW 8.88 (30%)

3.53RW (VAT, supervision)

33.11

3.60


The Increase of the Project Costs

Actual costs, total 36.71 mil euro

The increase of CF project costs 5.11 mil euro (18.2 %)The increase of eligible costs 5.28 mil euro (21.7 %)

The increase of total costs 8.71 mil euro (31.1 %)


Factors which cause difference in financial indicators during the implementation of project

(1) Macroeconomic factors• Inflation and increasing of wages • Currency exchange rate

(2) Specific factors • Change of project content• Water consumption and number of users


Inflation and Increase of Wages

Financial analysis for project (2000) - inflation is not taken into account

Financial analysis for project (2002)

Forecast of inflation in financial analysis – 3 % per year, in fact – 3.6 % - 14.1 %

Forecast of increasing of wages in financial analysis – 4 % per year, in fact – 10 % - 21 %


years 2003 2004 2005 2006 2007

Inflation 3.6 7.3 7.0 6.8 14.1

years 2003 2004 2005 2006 2007

Increase of wages ~10 % ~10 % ~10 % 21 % 18 %


Impact of Currency Exchange RateIndicators m euro m lats

Total investment costs (calculated in 2000) (Financial memorandum, Dec 22, 2000)

Total 28.00

Int. al. eligible costs 24.30

Total 16.52


1 EUR = 0.59 LVL

Actual investment costs within CF financed project

Total 33.11


Total 23.27 Int. al. eligible costs 20.79

1 EUR = 0.702804 LVL

Increase of costs 18.2 % 40.9 %

Impact of Factors (conclusions)

1) Costs of the CF project have increased by 5.11 mil euro (18.2%), int. al. eligible costs have increased by 5.28 mil euro (21.7 %). Taking into account currency exchange rates, total increase of project costs calculated in lats is 6.75 mil lats (40.9 %)

2) Changes in activities financed from CF have caused additional expenses – Riga Water Ltd had to finance the extension of the sludge deposit by attracting a long term credit

2) As the level of actual water consumption per capita and the number of population connected to water and wastewater systems is lower than forecasted in the project application the total revenue of water and wastewater services is also less than forecasted

3) Increase of investment costs and operational costs caused necessity to increase the tariffs


Consumption of drinking water and waste water (households)

2000. 2002 2004 2006

Forecast of consumption of drinking water per year, mil m3

38.5 37.5 37.2 37.5

Consumption of drinking water per year, in fact, mil m3

34.5 31.1 30.0 30.0

Ratio of fact, % 89.7% 83.0% 80.7% 80.0%

Forecast of wastewater per year, mil m3 36.7 35.8 35.6 35.9

Waste water per year, in fact , mil m3 32.6 29.3 28.2 28.3

Ratio of fact, % 88.8% 81.7% 79.3% 78.8%


Tariffs for water supply and sewerage, LVL/kub m


2000 2002 2004 2005 2006 2007 2008

water supply 0.204 0.216 0.220 0.222 0.225 0.227 0.229

sewerage 0.178 0.189 0.193 0.195 0.197 0.199 0.200

water supply 0.204 0.226 0.252 0.271 0.292 0.314 0.334

sewerage 0.178 0.197 0.220 0.237 0.255 0.274 0.292

water supply 0.204 0.226 0.227 0.227 0.240 0.281 0.361

sewerage 0.178 0.196 0.216 0.216 0.239 0.279 0.359

water supply 4.6% 3.2% 2.3% 6.7% 23.8% 57.6%

sewerage 3.7% 11.9% 10.8% 21.3% 40.2% 79.5%

Forecast of tariffs, using prices of 2000

Forecast of tariffs, using consumer price index (2002)

Riga Water, Ltd tariffs, in fact

Ratio of increasing, comparing with forecasted in 2000

Calculated CF Assistance Rate

Methodology 1st variant 2nd variant 3rd variant 4th variant

Discount rate 5 %

Methodology for years 2004-2006 90% 88% 92% 91%

Methodology for years 2007-2013 67.0% 65.6% 68.7% 67.8%

Decrease, percentage points 23.0 22.4 23.3 23.2

Discount rate 8 %




Discount rate 10 %





Conclusions1) Financial analysis was updated by using actual data from years 2000-2007, forecasts for years 2008-2034 and actual macroeconomic assumptions. Analysis demonstrates that approved Riga Water Ltd. tariffs are based on economic factors and don’t cause unjustified revenues.

2) Results of updated financial analysis show that CF assistance rate exceeds 70% if the CF methodology for years 2004-2006 is used. Actual CF assistance rate was 70%.

3) CF assistance rate (70 %) for project “Riga Water and Environment Project – Phase II” is justified


costs of project (mil euro)

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