Greater Mekong Subregion Kunming–Hai Phong
Transport Corridor – Noi Bai–Lao Cai Highway Project
(RRP VIE 33307)
FINANCIAL ANALYSIS
A.
Introduction
1.
The financial analysis follows the Asian Development Bank (ADB) guidelines described
in Financial Management and Analysis of Projects.1 It reappraises the financial viability of the
project, incorporating revised cost estimates and updated information as available. The financial
analysis has been undertaken for the entire project, including the additional financing. It also
includes examination of the financial sustainability of the project.
2.
A 26-kilometer (km) section of the highway from Noi Bai to Vinh Yen was opened to
public traffic on 27 December 2013. The Government of Viet Nam decided on a base toll rate of
D1,500/km per passenger car, taking into consideration (i) the financial capacity of Vietnam
Expressway Corporation (VEC) to repay the project loans, (ii) requirements for financing
highway operation and maintenance (O&M) costs, (iii) willingness of highway users to pay for
the highway services, and (iv) the prevailing toll rates for expressways in Viet Nam.
3.
ADB’s original ordinary capital resources (OCR) and Asian Development Fund (ADF)
loans for the project were onlent from the government to VEC, with an onlending rate of 0.2%.
In 2013, the government decided to cancel the onlending arrangements for the ADF loan as well
as soft-term loans from the World Bank and Japan International Cooperation Agency. Now, the
government distributes these soft-term loans to VEC as grants.
B.
Financial Evaluation
4.
The financial internal rate of return (FIRR) is computed in real terms and after tax from
2015 to 2044, in 2014 prices. Costs incurred before 2014 are restated in 2014 prices and
included in the overall analysis. The operating revenues of the project stem from the tolls
collected. The toll revenues are derived from the traffic demand forecast with the base toll rate
of D1,500/km per passenger car in constant 2014 prices. It is assumed that the toll rate will be
updated every 5 years based on the average inflation rate of 6% per year. The project costs
include both capital and operational expenditures. All costs are expressed in real terms in 2014
prices. It is assumed that pavements will have to be renewed every 7 years, and highway
facilities and O&M equipment will be renewed every 10 years. The FIRR for the incremental
after-tax cash flows is calculated to be 4.65%. Table 1 summarizes the project incremental cash
flows and FIRR computation.
5.
The weighted average cost of capital (WACC) is calculated in real terms and after tax by
incorporating the funding arrangement between the government and VEC. Table 2 presents the
financing components by source, cost of fund of each component, and estimated WACC. For
ADB’s OCR loan, a fixed interest swap, adjusted for ADB spread and maturity premium, is used
as proxy for the London interbank offered rate (LIBOR). In addition, the onlending rate of 0.2%
from the government to VEC is added to the cost of the OCR loan. The nominal cost of
government subsidy is assumed to be 15%, taking a proxy value for the government’s cost of
debt. The WACC, in real terms and after tax, is estimated to be 1.08%.
1
ADB. 2005. Financial Management and Analysis of Projects. Manila.
Greater Mekong Subregion Kunming–Hai Phong
Transport Corridor – Noi Bai–Lao Cai Highway Project
(RRP VIE 33307)
Table 1: Project Incremental Cash Flows and Financial Internal Rate of Return
($ million)
Costs
Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
CAPEX
30.88
46.07
155.14
103.46
144.41
223.78
323.21
262.08
O&M
6.36
6.36
6.36
6.36
6.36
36.00
6.36
6.36
6.36
28.26
8.00
36.00
6.36
6.36
6.36
6.36
6.36
36.00
6.36
28.26
8.00
6.36
6.36
36.00
6.36
6.36
6.36
6.36
6.36
57.90
VAT
5.71
6.05
6.43
6.84
7.30
7.80
8.36
8.97
9.65
10.41
11.21
11.81
12.40
13.02
13.67
14.36
15.07
15.83
16.62
17.45
18.32
19.24
20.20
21.21
22.27
23.02
23.63
24.28
24.95
25.66
Corporate
Tax
0.00
0.00
0.00
0.00
0.15
0.00
3.33
4.57
6.51
3.06
10.40
5.13
14.24
16.00
17.83
19.72
21.68
16.30
25.82
22.46
29.87
32.66
34.97
29.97
39.91
41.72
43.24
44.82
46.47
40.79
Total
30.88
46.07
155.14
103.46
144.41
223.78
323.21
274.14
12.41
12.79
13.20
13.80
43.80
18.05
19.91
22.53
41.73
29.61
52.94
33.00
35.39
37.86
40.43
43.11
68.13
48.80
68.17
56.20
58.26
61.53
87.18
68.54
71.10
73.23
75.46
77.78
124.35
Revenue
57.06
60.50
64.28
68.43
72.99
78.03
83.59
89.74
96.55
104.10
112.14
118.11
124.01
130.21
136.72
143.56
150.74
158.27
166.19
174.50
183.22
192.38
202.00
212.10
222.71
230.17
236.31
242.75
249.52
256.62
Cash Flow
After Tax
(30.88)
(46.07)
(155.14)
(103.46)
(144.41)
(223.78)
(323.21)
(217.08)
48.09
51.49
55.22
59.19
34.23
65.54
69.83
74.02
62.37
82.52
65.17
91.01
94.83
98.86
103.12
107.63
90.15
117.39
106.33
127.03
134.13
140.48
124.92
154.17
159.07
163.08
167.30
171.74
132.27
FIRR = 4.65%
( ) = negative, CAPEX = capital expenditure, O&M = operation and maintenance, VAT = value-added tax.
Source: Vietnam Expressway Corporation and Asian Development Bank estimates.
Greater Mekong Subregion Kunming–Hai Phong
Transport Corridor – Noi Bai–Lao Cai Highway Project
(RRP VIE 33307)
6.
The FIRR of 4.65% exceeds the WACC of 1.08%, indicating that the project is financially
viable. By using the WACC as the discount rate to evaluate the net cash flows of the project, the
financial net present value (FNPV) is found to be $1,065.6 million. The positive FNPV shows
that the project yields net financial benefits.
Table 2: Computation of Weighted Average Cost of Capital
Item
Amount ($ million)
Weighting (%)
Nominal cost (%)
Tax rate (%)
Tax-adjusted
nominal cost (%)
Inflation rate (%)
Real cost (%)
Weighted
component of
WACC (%)
ADF
Original
195.19
13.55
1.50
25.00
ADB
ADF
OCR
Additional
Original
30.00
896.00
2.08
62.20
2.00
1.94
25.00
25.00
Bond
Subsidy
OCR
Additional
117.00
8.12
2.44
25.00
161.82
11.23
15.00
25.00
40.57
2.82
15.00
0.00
1.13
1.50
1.46
1.83
11.25
15.00
1.10
0.02
1.10
0.40
1.10
0.35
1.10
0.72
6.00
4.95
6.00
8.49
0.00
0.01
0.22
0.06
0.56
0.24
Total
1,440.58
100.00
1.08
ADB = Asian Development Bank, ADF = Asian Development Fund, OCR = ordinary capital resources, VEC =
Vietnam Expressway Corporation.
Source: Vietnam Expressway Corporation and Asian Development Bank estimates.
7.
A sensitivity analysis is performed to investigate the impact of adverse changes in key
project variables on the base-case FIRR. The sensitivity analysis scenarios include (i) 10%
increase in outstanding capital costs, (ii) 10% increase in O&M costs, and (iii) 10% decrease in
toll revenues. Table 3 summarizes the results of sensitivity tests. In each sensitivity scenario,
the FIRR exceeds the WACC, and the FNPV remains positive, demonstrating that the project is
still financially viable when it is influenced by adverse changes in key quantifiable variables.
Table 3: Sensitivity Analysis
Scenario
Base case
Outstanding capital costs increased by 10%
O&M costs increased by 10%
Toll revenues decreased by 10%
FIRR
(%)
4.65
4.40
4.56
3.70
FNPV
($ million)
1,065.6
1,011.6
1,034.0
731.6
FIRR = financial internal rate of return, FNPV = financial net present value, O&M = operation and
maintenance.
Source: Vietnam Expressway Corporation and Asian Development Bank estimates.
C.
Financial Performance
8.
While the project is financed by a government grant and by onlending the OCR loan,
project O&M will be supported by the income generated from the project. To determine whether
the project is financially sustainable, its future financial performance has been analyzed.
9.
Table 4 summarizes the projected key financial performance indicators of the project.
The projections show that after capital and O&M expenses, sufficient cash flows are available
Greater Mekong Subregion Kunming–Hai Phong
Transport Corridor – Noi Bai–Lao Cai Highway Project
(RRP VIE 33307)
for debt service throughout the projection period, meaning that the project has financial capacity
to maintain its operations and fulfill its financial obligations.
Table 4: Key Financial Performance Indicators
Item
Operating revenue ($ million)
Total assets ($ million)
Debt–equity ratio
Debt service requirement ($ million)
Accumulated cash after debt service ($ million)
2015
57.7
1,419.8
70:30
12.8
45.5
2020
84.6
1154.3
68:32
61.5
4.7
2025
130.3
1007.9
54:46
61.5
95.5
2030
178.8
1,025.1
29:71
56.6
352.9
Source: Vietnam Expressway Corporation and Asian Development Bank estimates.
D.
Conclusion
10.
Supported by a positive FNPV and an FIRR exceeding the WACC, the financial cost–
benefit analysis demonstrates that the project will bring financial benefits and is financially
viable. The analysis of the project’s financial performance reveals that it will have adequate
financial capacity to ensure sustainability. In conclusion, the results of the financial analysis
indicate that the project is financially viable and financially sustainable.