Financial Sustainability, PSP and Affordability

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Financial Sustainability, PSP and Affordability
PricewaterhouseCoopers
Presentation to the International Conference on
Freshwater, Bonn, 4 December 2001

• John Gibbs, PwC Project Finance Privatisation,
  London

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Agenda

• - Public sector objectives
• - Achieving financial sustainability
• - PSP options
• - Tariffs and affordability
• - Financing
• - Bridging the gap

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Public Sector Objectives
Improved Efficiencies
Cost Recovery
Financing
Deliver Service Needs
System Expansion
Investment backlog
Reliable (24-hour) supply
Public health Environment
Commercial Users
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Achieving Financial Sustainability
Tariff
Full Cost Recovery Tariff
TFCR
Cashflow Deficit
Extension / Expansion
OperatingDeficit
Renewal Rehabilitation
Current Tariff
To
Operations Maintenance
t
t
t
0
2
Time

1
Source World Bank
Equilibrium
Full cost recovery
?World Bank 2001
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Utilisation of PSP Models

Lease / operate
Concession/Divestiture
Philippines, Indonesia, Malaysia Argentina,
Bulgaria, UK
Guinea, Niger, Mozambique, Poland
Scope of Business
Turkey, Vietnam, Malaysia China, Thailand,
Scotland,
Trinidad Tobago, Gaza J ordan, South Africa,
BOO/BOT
Service/Management
Investment need
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PSP Models - Key Characteristics
Management Contract
Lease/operate Contract
BOO/BOT
Concession
Public
Capital investment
Public/(Private)
Private
Private
Tariff Collection
Public/(Private)
Private
Private
Public
Typical Duration
20-30 years
10-12 years
2-5 years
20-30 years
Risk transfer to private sector
Low
Medium
Medium
High
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Tariffs and Affordability
Affordable Tariff
Existing Average Domestic Tariff
Lease/ Operate
Public Utility
Full Concession
Management Contract (Operator Fees only)
FCR Full Cost Recovery
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Sources of Finance

• Private Sector Finance
• Sponsor equity
• International banks
• limited recourse debt
• corporate debt
• Local banks
• term finance
• working capital

• Public Sector Finance
• Government
• grant finance
• loan finance
• International Financial Institutions
• direct support
• co-financing
• credit enhancement

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Financing Issues
Project Economics
Business Environment
Risk Profile Allocation
Market/Funder Interest
Tariffs Affordability
Bidding costs
Legal Regulatory Framework
Transaction Size
Contract Enforceability
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Sources of Finance for Water PSP
Financing by source, 1994-98
Financing cover, 1994-98
Total US7,351m
Total US4,238m
MLAs
MLAs
Equity
ECAs
Commercial banks and B loans
Other (including government guarantees)
Capital markets
Other (including Government loans)
Source Project Finance Ware Database
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Bridging the Gap

• Government support should be
• transparent
• targeted and
• time limited.
• Possible support mechanisms include -
• a basic minimum needs tariff
• targeted transitional subsidies to cushion tariff
  increases and
• concessionary financing.

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Achieving Financial Sustainability
Tariff
Full Cost Recovery Tariff
TFCR
Cashflow Deficit
Extension / Expansion
OperatingDeficit
Renewal Rehabilitation
Current Tariff
To
Operations Maintenance
t
t
t
0
2
Time

1
Source World Bank
Equilibrium
Full cost recovery
?World Bank 2001