PPP in Water Sector

Case Study from PRC

Click to Hisaka Kimuraedit Master subtitle style Head, East Asia Unit Private Sector Infrastructure Division 2 Private Sector Operations Department Asian Development Bank Tokyo 25 August 2011

Session Objective

The session will examine and discuss recent PPP deals that ADB and other partners have concluded. Some of the questions that the session will try to address include : - are water PPP deals actually happening in Asia and elsewhere? - are water utilities/governments ready for PPPs? - what are the major stumbling blocks for water PPP to happen? and how do we overcome them?

Why PPP in Dramatic Times?

set the market to vibrate Singapore Prime Minister

build back better Sichuan-Wenchuan Earthquake Reconstruction Plan a successful vehicle to deliver public services at all levels of government Canada PPP Council Lets reconsider task allocations between the public and private to address ever increasing

Some Thoughts

Water scarcity effects 1 in 3 people worldwide Est. 50% of water in agriculture is wasted Private water operators delivering services to more than 160 million people in emerging markets More than 530 water projects with private participation reached financial close in last 10 years private participation of circa $34 billion PRC accounted for 80% of private water projects by number in emerging markets (more than 300 projects with over $8 billion of investments) Lets take a look at recent cases in PRC

Case Study from PRC

Water Sector in PRC

Water is one of the PRCs most crucial development challenges. Growing demand for water is also highlighting importance of water efficiency: the PRCs per capita water resources are of the global average, but its water consumption per GDP is 5.5 times higher. More than 90% of the urban population has access to piped water. But there is critical shortage in water supply delivery capacity to fulfill last mile connections to the urban areas and ensure service quality can keep up with increased demand while the PRC adds another 200 million or more urban residents by 2020. Doubling funding needs in the next 5 years. This cannot be met by the public sector alone.

Water Supply Value Chain

Local governmen t owned water companies

BOT started in late 1990

Case Study 1

Case Study 2

Local governmen t owned water companies

Case Study 1: BOT Water Treatment Plant

The fist BOT project in the water sector in the PRC Serving 400,000 cubic meter of treated water per day in Chengdu city ADB internal PPP:

ADB public sector operation department provided technical assistance to the Government on developing tender documents and arranging competitive bidding. ADB private sector operation department provided financial assistance to the winning bidder, consortium of Veolia Environment and Marubeni Corporation.

Case Study 1: Structure

Project Sponsor
Construction Dept Water Authority Bureau Municipal Government Concession Agreement

Project Company

Take or Pay Off take agreement

Water sales

Municipal Waterworks General Company (Distribution)

The project supplies treated water under a take-or-pay offtake agreement, with a performance guarantee from the municipal government.

PPP Trend

Since the first BOT project, PPP has been seen as an effective means to address ever-increasing infrastructure needs. Primary cities have completed flagship large-sized BOT projects. Guarantee from the central/ local governments are no more available. High demand exists in a series of small-medium sized green and brown fields projects which involve unproportionally high transaction costs and substantial project preparation time.

Text book type project finance does not fill in the financial gap in the current market.

Case Study 2: Water Distribution Program

ADB offers a portfolio approach to support multiple water distribution in second- and third-tier cities in the PRC, which are often too small and time-consuming for international banks to finance on stand-alone basis. ADBs loans have two components:

A: USD/ RMB dual currency loan of up to $100million equivalent B: USD loan of up to $100 million funded by commercial banks

The loans will be channeled to subprojects to improve water distribution coverage, develop related infrastructure, and increase the quality and reliability of the water supply.

Case Study 2: Structure

ADB USD Loan International banks syndication
100%

Project Sponsor

ADB CNY Bond

ADB CNY Loan

PRC Hold Co

Local Banks CNY Loan

WPC

WPC

WPC

WPC

WPC

WPC

WPC

WPC

Concession Agreements with municipal governments

Various Municipal Entities

WPC: Water Project Company

Discussion Points

The Challenge

Lack of capacity and knowledge, deficient regulation, unclear pricing policies, lack of private sector authority to penalize users for nonpayment of tariffs, financial constraints, and lack of transaction experience so far have conspired against the realization of PPP contracts and have made international operators and financiers hesitant to engage

Structuring a Water PPP Project

Appropriate Funding Structure Equitable risk sharing : risk should reside with party most able to manage it. Commercial Issues such as tenure, termination regime and step-in rights. Economic fundamentals: Business and financial viability and

Tarif f

According to the national tariff guidelines, water tariffs are to be set on a cost-plus basis, including the costs of treated water, costs of distribution, specified rates of returns, and taxes. In practices, the timing and magnitude of tariff increases depend on municipal authorities, who balance the interests of end-users with requirements of PRC tariff regulations. Typically the tariff revision process takes 6 months from application to decision.

Application Water Affaires Bureau Review Public hearings Decision and announcement

Non-Revenue Water

Main source of up-side. PRC has relatively compact water distribution systems with an average of more than 1,000 people per kilometer of distribution network, which is almost triple the rate of Russia and Brazil. This results in the average non-revenue water percentage is low (below 20%) but actual leakage per kilometer is high (more than 50 cubic meter per kilometer), 10 times of UK. How to manage non-revenue water?

Meter installation Pressure/flow monitor Sound monitor 24/7 helpline services

Finance

For small-medium sized projects, it is more efficient to finance the projects collectively than individually when the stakeholder is skilled at assessing business risks and has an integrated business model. How to aggregate the projects?

Project sponsor Province Partner financial institution

Portfolio approach with pre-agreed criteria can set up systems and framework among the stakeholders that will generate a flow of PPP projects.

Discussion points

Existing water infrastructure as a new asset class

Decouple water business and equity investment Majority of tap water is used for cleaning purpose. Should tap water be drinkable? Waste water as a new water resources (Singapore: NEWater) Distributed community sized treatment facility vs large scale facility Energy choice review from water use view point

Variation of water quality for specific purpose

Water efficiency throughout water chain

Water and energy nexus

What is ADB doing?

Public sector projects Private sector projects Water Fund Knowledge (e.g. Toolkit for PPP) Capacity building Long term strategy Future of Water in Asia Country Water Assessments

A Way Forward

In 2011, and future years, we are looking into the merits of new area of private sector participation that could improve efficiency. We focus on models involving an enhanced role for the private sector, with private sector entity taking responsibility for most aspects of service provisions for a given project, which could yield an improved allocation of risk. We aim to offer unique financial solution with wide range of financial options loan, equity, guarantee, private equity fund, etc to ensure successful launching of projects.