OECD GLOBAL FORUM ON SUSTAINABLE DEVELOPMENT

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OECD GLOBAL FORUM ON SUSTAINABLE
DEVELOPMENT FINANCING WATER INFRASTRUCTURE
FOR ALL
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December 18th 2003, GSFD Conference

• Critical issues when financing water projects
  with private funding
• The limits experienced by traditional project
  finance schemes BOT / Concession
• Recent innovative schemes that may illustrate the
  way forward

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Critical issues for financing water projects with
private funding

• Some emerging countries lack long-term stability,
  a fundamental requirement for private investors
  and creditors.
• Water projects are constrained not only by
  economic financial feasibility parameters, but
  also by political and social provisions tariff
  as a key electoral argument, affordability by
  end-users, long term political support.
• Projects are often promoted by local authorities,
  with long term-undertakings and creditworthiness
  sometimes difficult to assess by private funders.
• Experience has shown that macro-economic risks (
  foreign exchange in particular) cannot be
  mitigated by contracts, when host countries face
  major economic crises.

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From classical project financing schemes

• The story so far water project financing in
  emerging countries essentially based on
• BOT and concession schemes
• BOT
• The private sector is in charge of the
  construction and the operation of a single asset
  (water or wastewater treatment plants). A long
  term Take or Pay contract with a public
  off-taker mitigates volume and tariff risks
• Political and tariff risks are born by the public
  sector, retaining interface with end-users
• Major constraints long term creditworthiness of
  public off-taker, potential mismatch between
  gross and retail tariffs, limited availability of
  political risk coverage for sub-sovereign
  off-takers
• Concession
• From treatment to distribution, through billing
  and investment the whole water services chain
  is contracted out to the private sector
• More built-in flexibility, allowing adjustment of
  investment roll-out to actual cash-flow
  generation
• High exposure to regulatory and political risks,
  insufficiently mitigated by contractual
  arrangements such as tariff revision formula.

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to new alternative public-private solutions

• Traditional BOT and concession financing have
  shown its limits in emerging markets (especially
  in Latin America and South East Asia). Despite
  huge and urgent needs, only very little could be
  delivered by the private sector (water
  represented less than 1 of the global project
  financing market in 2002)
• Private sector operators are more prudent and
  selective especially when projects involve
  carrying substantial investment costs.
• A clear need to help the local public sector
  finance and implement its own share of the
  infrastructure investment burden, alongside
  private sector participation.
• Alternative schemes are being tested to establish
  new ways of public-private financings.

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Financing a municipal water company with a
limited recourse to the municipality

• Municipal water company raises long term
  financing on its own covenant
• The ability of the company to cover its operating
  and financing needs by tariffs is secured through
  a municipal support mechanism
• The municipality undertakes to compensate the
  company if tariffs cannot be raised to cover
  additional costs.

• Merits
• Suitable for municipalities facing budgetary
  constraints
• Funding can be combined with public subsidies
• May pave the way for private sector
  participation.
• Constraints
• Minimum creditworthiness of the municipality
• A clear regulatory and tariff setting framework
  is essential.

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Splitting the assets and the operations

• Assets remain under public control.
• Operation and management are rented out to an OM
  company to be sold to private sector
• OM Co pays rental fees for the use of the
  assets, allowing public sector to maintain the
  assets.

• Merits
• Gain operational efficiency through private
  operators
• May attract more appetite from private sector,
  and be a first step for its further involvement
  in the asset upgrade/maintenance.
• Constraints
• Establish rules allocating clear responsibilities
  between asset maintenance (public) and OM
  (private)
• For the public sector, access to long term
  financing to upgrade the assets.

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Mexico, Tlalnepantla Project opening access to
local municipal bond financing

• Dexia guarantees a 8M local currency bond issue,
  with a partial guarantee from IFC.
• The Trust uses bond proceeds to finance the water
  infrastructure.
• Interests on bonds are financed by end-users
  fees, flowing directly to the Trust.
• Excess cash is transferred to the Municipality.

• The first municipal bond issue with no federal
  government guarantee. The transaction has been
  rated AAA by SP (local Mexican rating).
• A long-term (11 years) local currency financing,
  leaving the project unexposed to foreign exchange
  risks.
• It is the first time that IFC takes direct
  municipal risk.

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A few comments to conclude

• Whatever scheme is opted for, private sector
  participation can only be effective when public
  sector is able to sustain and manage its own
  obligations in the public/private partnership.
• Financing/guaranteeing sub-sovereign entities is
  crucial in a market where demand is local.
• Blending public and private finance techniques
  proved to be instrumental in delivering
  bankable projects.