This activity analyzes the financial health and sustainability of the utility and to what extend its revenues cover the costs and obligations using rations and benchmarks references. It also includes assessment of the balance sheet (e.g., asset register, short-and long-term debt) and remuneration to the capital.
The objective of this activity is to review the financial health of the utility and assess to what extent revenue from service delivery covers the costs to ensure financial sustainability of the public utility. The objective is also to consider whether the company is following international standards of financial accounting and reporting.
The analysis considers a range of practices, starting from when this revenue is insufficient to cover disbursable operating expenses, up to the point of generating a surplus that enables payment of remuneration to capital (i.e., return on equity). Additionally, it includes assessment of the practices related to tariffs and to basic information necessary to monitor and manage the elements that have an impact on financial sustainability, considering as basic information financial statements, financial projections, and cost information.
This activity also assesses the entity’s liquidity and financial solvency, i.e., its capacity to access financing to meet its short- and long-term financial obligations, and to hedge financial risk. In addition, application of mechanisms to assess and improve the internal control system is reviewed due to its impact on appropriate management of financial resources.
Some of the most common accounting standards used in the industry are the International Financial Reporting Status (IFRS) and International Accounting Standards (IAS) which depending on each country these standards are required for domestic public companies. There are specific IFRS guidelines for the Power and Utilities sector, and these will be mentioned in the reference section of this section.
This activity of financial sustainability in the utilities is currently under development and will be incorporated soon.