Cost recovery in environmental services

1
Cost recovery in environmental services

• Reconciling economic sustainability and political
  acceptability
• Jacques Labre
• VP Relations with Institutions
• jacques.labre_at_suez-env.com

2
SUEZ organization
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Suez Environnement , the water and waste
management division of Suez
Drinking water
Water treatment
Collection, processing
management and
engineering
and recycling of waste
sanitation
SITA
65,000
82 900
Si
è
ge SE
Divers
653
Number of employees
4
Suez Environment 79 of revenues in Europe, 8
in the US and Australia
Europe79
Asia3
North America 6
Middle East1
Africa5
South America 3
Oceania Polynesia3
5
Frequent misconceptions

• Investment in waste water treatment plants is the
  primary component of any action for depolluting
  the Mediterranean
• The primary interest of private water operators
  is in drinking water services, not in waste water
  management, since there is no willingness to pay
  for waste water services
• Private operators are urgently needed as sources
  of funding for water / waste water systems
• Total cost recovery through the water tariff is a
  prerequisite for private sector involvement in
  water and waste water services

6
Investing in treatment plants only would not
solve the problem

• The totality of waste water systems must be
  considered . Networks represent 85 of the asset
  value of a sewerage system
• The operation of a WWTP generates costs , and no
  revenue for the utility
• In utilities struggling for recovering their
  costs, there is a high risk of cutting costs on
  operation of WWTPs
• Donors and lenders have to check the economic
  sustainability of the waste water utility before
  granting funds

7
Waste water management is seen as a promising
business by private operators

• Huge improvement are needed to reach compliance
  with increasingly stringent standards
• Even on mature markets in OECD countries (France)
• Less restrictions to access of private operators
  (the Netherlands)
• Private involvement less subject to ideologic
  controversy
• Flexibility of PPP allows for solutions tailored
  to fit each sprecific context
• (contracts may associate sanitation with drinking
  water or not)
• Case 1 Management contract for the water waste
  water services in greater Amman (Jordan)
• Case 2 BOT contract for As Samra waste water
  treatment plant (Amman Zarka governorates -
  Jordan)
• Case 3 OM contract for Indianapolis (USA)
• The two largest contracts in Suez water portfolio
  in the US are  waste water only  contracts
  (Milwaukee , Indianapolis)

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Greater Amman Management contract (1999 2006)
Improvement of the operational cash flow of the
utility
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BOT contract for As Samra Waste Water Treatment
Plant (Jordan)

• 25 years contract to Samra Waste Water Treatment
  Plant Company
• Suez Environment 20
• Degremont Infilco 30
• Morganti (CCC group) 50
• Partial financing , Design , Construction ,
  Operation of a WWTP (267.000 m3/d - 2,2 million
  inhab)
• Financing
• USAid US92 M
• Jordanian banks US60 M
• Private Equity US17 M

10
Indianapolis (1m inhab.) a  waste water only 
 PPP based upon the  Operation and Maintenance 
model

• 5 years contracts for operations and asset
  management of the waste water system
• 2 WW treatment plants capacity 1,000,000 m3/d
• 4,800 km of sewers
• The municipality is responsible for financing the
  investments in infrastructure
• The operator is remunerated by the municipality
• Fixed fee bonus / penalties

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A typology of private players in water/ waste
water

• In past times, several functions have been merged
  within the services providers
• Operator Technical operation , asset management
  , customer management
• Investor Financing renewal and expansion of
  infrastructure
• Contractor and Equipment provider
• Whilst the market is maturing , those functions
  will be separated between distinct players
• International services providers are
  concentrating on the first business
• Provision of equity is not their primary
  objective
• Through improvements of operational efficiency
  and economic performance of the utility, they can
  make projects  bankable  for lenders and/ or
  attractive for other investors

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OUTLINE

• Frequent misconceptions
• Sustainable cost recovery
• Good practices in tariff systems
• What to expect from the private sector in
  environmental projects ?

13
Sources of Funds for Water Services

• 100 of costs must be covered !
• Permanent sources
• Tariff paid by users
• Local Taxpayers money (through government
  budget)
• Sustainability of subsidies not guaranteed !
• Temporary sources (facilities)
• Foreign taxpayers money (Donors subsidies for
  investment)
• Sources that should be repaid over time
• Bank loans
• soft loans
• commercial loans
• Private equities
• The only permanent sources are users , local
  taxpayers and reduction of costs
• Arbitration between the first two is of political
  nature

14
Full Cost Recovery vsSustainable Cost Recovery
Full cost recovery
Sustainable cost recovery
Full cost recovery and sustainable Cost Recovery
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What is sustainable cost recovery ?

• Since the tariff paid by the users is the only
  reliable source of funds over the long term , it
  should cover at least
• Operational expenditures (power , chemicals ,
  salaries , maintenance )
• Infrastructure renewal
• In low income countries with fast growth of urban
  population , recovery of the cost of new
  investments from the tariff may be very difficult
  to achieve
• other costs may be covered by local or
  international taxpayers money
• Expansion upgrading of the system
• In countries with mature economies and slow
  demographic growth, full cost recovery is
  achievable (objective of the Water Framework
  Directive)

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Effects of failure to achieve sustainable cost
recovery (source IWA Reference paper)

• Unfairness to future generations
• Jumps in tariffs
• Inability to do long term planning
• Inability to deal with unforeseen events (eg
  climate change)
• Loss of customer confidence
• Inability to attract capable human resources
• Adverse impact on the environment
• Inability to optimise the performance of the
  systems
• Becoming embroiled in political arguments

17
The Vicious Spiral of Low Funding (Low tariff
trap)
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OUTLINE

• Frequent misconceptions
• Sustainable cost recovery
• Good practices in tariff systems
• What to expect from the private sector in
  environmental projects ?

19
The conflictive objective of tariff systems

• Economic objective recover costs
• Social objective charge less than the cost to
  some consumers
• Cross subsidies are not a panacea
• Redistributive effect often questionable (ex
  Increasing block tariff)
• May put the income of the utility at risk (ex
  Cancun)
• Good practice for sound tariff systems
• Make sure sustainable cost recovery is met
• Consult stakeholders , explain the decisions
• Subsidize poor households directly rather than
  through the tariff (Chilean experience)
• Simulate the real redistributive effect of cross
  subsidies before implementation
• Maximize bill collection and minimize Unaccounted
  For Water

20
Smart transition from sustainable to total cost
recovery
Financing Gap
Full cost recovery
Sustainable cost recovery
Initial tariff
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OUTLINE

• Frequent misconceptions
• Sustainable cost recovery
• Good practices in tariff systems
• What to expect from the private sector in
  environmental projects ?

22
Unreasonable expectations from PSP in water

• PPP is not a panacea
• Private sector must not be a scapegoat for long
  overdue price hikes
• Private operators will not commit themselves on
  investments to be repaid by hypothetical future
  price hikes
• Successfull PPPs require time

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Reasonable expectations

• Efficiency improvements
• Non revenue water
• Payment of water bills
• Number of employees per connection
• ?Reduce subsidies to water utilities
• Technological innovation
• Human resources
• Improvement of the skills of staff through
  training and exchange of experience
• Motivation and autonomy
• Introduction of customer focus
• Progress in customer satisfaction

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Reasonable expectations financial aspects

• Rigorous and auditable financial procedures
• following budgetary and management controls
• Asset management
• OPEX/CAPEX optimisation
• optimisation of productive capacity of
  investments
• Financing through the private sector (only if
  prerequisites are met in terms of risk allocation
  and mitigation)
• a professional operator can improve the
  confidence of a financial investor

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Common features of successful PPPs

• Well designed contracts where both parties have
  honored their commitments
• shared willingness to adapt to unforeseen
  circumstances
• A public service contract cannot be a  one shot
  deal  mechanisms allowing for adaptation to
  unforeseen events , evolution of public policy
  should be planned
• guarantees should be balanced between parties in
  the contract
• Adherence of final users (licence to operate)
• A good contract is important , building trust is
  essential

26
PPP can provide effective solutions in low income
countries

• Public Private Partnerships can work very well in
  Developing countries (Ivory Coast , Morocco ,
  Macao , Senegal )
• Innovative arrangements can be set up to serve
  poor urban districts (Buenos Aires , Manila ,
  Manaus )
• Alliances can be established between local
  entrepreneurs and international groups (Mexico ,
  South Africa , Brasil .)
• Transfer of know how (North South and South
  South) is an essential part of the benefits of
  PSP

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The environmental benchmark company

• SUEZ Environment, a SUEZ business line, provides
  equipment and services that protect the
  environment and deliver the essentials of life.
  Its activities include drinking water production
  and distribution, wastewater collection and
  treatment, and waste treatment and recovery.
  Backed by its experience in the water and waste
  cycles, SUEZ Environment has a wide-ranging
  portfolio of know-how providing sustainable
  solutions to local authorities and businesses.