Session I

1
Session I Track 4Building SustainabilityPart
nerships and Finance

• Global Environment Facility International
  Waters Second Biennial Conference
• Thursday, September 26, 2002
• 1400 1800

2
Agenda

• Overview of the Sector from the Private
  Investors Point of View
• Presentations
• Selection of Focus Groups/Themes
• Focus Group Meetings
• Focus Group Presentations

3
Global Environment Facility International
Waters Second Biennial Conference Private
Investment inPollution Control ProjectsIssues
for Financial Institutions(and the
GEF)Jerome Esmay, Principal Engineer
Dalian, China
25-29 Sept. 2001
4
Overview

• IFC Experience in Water Supply Transactions
• Partnerships with the Private Sector
• Models of Private Investment
• GEF and the Role of the Private Sector
• Lessons Learned

5
What is IFC?

• The Largest Multi-Lateral Source of Project
  Finance Exclusively for the Private Sector
• A Profit-Oriented Supporter of Economic
  Development Providing Equity and Loans
• An Institution that Takes Full Market Risk with
  Sponsors in Projects that are NOT Backed by
  Central Government Guarantees of Repayment

6
IFC - The GEFs Primary Private Sector
Implementing Agent
MISSION To promote private sector investment in
developing countries which will reduce poverty
and improve peoples lives

• Member of World Bank Group - owned by 174
  governments
• IFC only invests in private-sector projects which
  are both commercially viable and promote
  sustainable development

7
IFC/GEF Strategy
Match the type of support to the obstacles or
risks blocking achievement of GEF
objectives Prefer non-grant financing

• Focus on near-commercial projects
• Minimize use of GEF resources
• Maximize leverage of GEF resources
• Where possible, co-finance with IFC

8
IFC Targets GEF Support

• Matches support to the obstacle/risks blocking
  achievement of GEF Objectives
• Focuses on near-commercial ventures
• Minimizes use/Maximizes leverage of GEF Resources
• Co-Finances, whenever possible, with GEF
  implementing or executing agency
• Prefers non-grant financing

9
Partnerships with the

• Private Sector

10
Private Investor Perspective
INCREASED DEMAND
COUNTRY RISKS
OTHER OPPORTUNTIES
SECTOR RISKS
PROJECT RISKS
REWARD
RISKS
Larger Risk Larger Required Reward ()
11
Public Sector--Buyer

• Wants private capital without making the
  necessary fiscal/managerial reforms
• Chooses between negotiated or competitively-bid
  transactions
• Has unrealistic risk/reward concepts

12
Private Sector--Seller

• Eager to win the contract
• Is not sufficiently critical of a weak project
  structure
• Wants
• Long-term commitments
• Fair contracts
• Upside potential

13
Financial Institutions--Capital Providers

• Transparent and open process
• Investor resources
• Experienced and Qualified Management
• Pari Passu rights with other obligations
• Step-in Rights
• Coverage for Municipal Risk
• Indemnification for Force Majeure and Contract
  Rescision

14
Sustainable Partnerships Have

• Transparent bidding/negotiations
• Objective ranking/selection criteria
• e.g. Lowest Tariff
• Service-oriented, output-driven contracts
• What controlled by buyer
• How controlled by seller
• Responsibilities and ownership are clear

15
Key Elements in Partnerships with the Private
Sector

• Early collaboration and consultation
• Committed partnership between national,
  local/regional government, multilateral
  organizations and GEF
• Learn by doing
• Create pilot/demonstration projects

16
IFC EXPERIENCE IN SUPPORT OF PRIVATE SECTOR
WATER PROJECTS

17
IFC Investment Experience (1)

• Buenos Aires privatized 30-year privatized
  water/sanitation concession (4 billion total
  investment)
• Puerto Vallarta (Mexico) 15-year private
  wastewater treatment BOT(33MM total investment)
• Aquas de Limeira (Brazil) 30-year privatized
  water/
• wastewater concession (50-70MM investment)
• Binh An (Vietnam) 1.5 m3/sec bulk water BOT
  (35MM total investment)

18
IFC Investment Experience (2)

• Aguas de Illimani (Bolivia) privatized 30-year
  water/sanitation concession (500MM total
  investment)
• AG Concessions (Brazil) - Participation in
  water/toll road operation Company (US30 million)
• IPWC (Egypt) Participation in local utility
  services company
• Beijing WTP 10 BOT Bulkwater Supply Plant

19
IFC Advisory Experience (1)

• Manila splitting of water/sanitation services
  into two geographical zones and concession
  awarded to separate private operators
• Gabon full concession for water and electricity
• Romania concession of integrated
  water/sanitation services covering metropolitan
  Bucharest
• Lagos, Nigeria (on-going) concession of one
  service area, affermage/contract management for
  remainder

20
IFC Advisory Experience (2)

• Senegal 3.0 m3/sec bulk water BOT to provide
  drinking water for Dakar
• Brazil (São Paulo) 4.5 m3/sec bulk water BOT to
  provide treated water to SABESP (Sao Paulo State
  Water Company)
• Brazil (Fortaleza) 5.5 to 7.5 cum/sec, 20 year
  ROT-upgrade for CAGECE principal WTP (15
  million)

21
IFC Project Development Experience

• Cancun (Mexico) 25-year Water/Wastewater
  Concession
• Cartagena (Colombia) Mixed Enterprise
  Water/Wastewater company
• Santa Cruz (Bolivia) Water/Wastewater Utility
  Cooperative - SAGUAPAC
• Bangalore (India) 25 year 500 Mld BOT Bulk Water
  Supply
• Plava Voda (Bosnia-Herzegovina) 25 year BOT Bulk
  Water Supply

22
Models of Private Investment
23
Private Investment Models (1)

• Contract Operations - Little or no private sector
  investment
• Leasing/Affermage - Private Sector pays for use
  of system. Public system pays operations
  fees/capital investments.
• Turnkey Construction - Private Sector Finances
  and Constructs Facility. Public Sector Operates
  and Assumes Debt Obligation

24
Privatize Investment Models (2)

• Build-Own-Operate-Transfer/Build-Operate Transfer
• (BOOT/BOT)-Private Sector Finances and Owns New
  Facility or Facilities
• Concession - Usually Significant Private Sector
  Investment with Public Sector Retaining Ownership
• Sale of Assets (English Model) - Public Sector
  sells System Ownership to Private Sector and
  Retains Regulatory Authority

25
Choosing a Private InvestmentModel...

• When the Public Sector is financially weak, there
  are few funds for
• Contract operations
• Leasing/Affermage
• Turnkey Contracts
• Leaving
• BOT (most popular with Public Sector)
• Concession (most popular with Private Sector)
• Asset Sale (unpopular with public due to
  perceived loss of control issues)

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• Lets look at some issues with BOTs and
  Concessions...

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Basic Issues in Financing BOT Projects

• Is the Project Needed?
• Can it Serve the Customers?
• Can the Buyer Afford It?

28
The Concession Model is Preferred by
Private Investors and Financial Institutions

• Brings Efficiency and Innovation to entire system
• Investments can be tuned to revenues,
  inflation, and devaluation

29
GEF and the Role of the Private Sector

30
Ways that GEF can Engage the Private Sector

• Remove Barriers to the creation, entry or
  transformation of markets
• Provide non-Grant Financing with concessional/
  contingent finance, loans, and guarantees
• Fund Pre-Investment Studies in Alternative/
  Innovative Technologies feasibility/market
  studies
• Promote Progressive Partnerships long-term,
  shared information, quicker decision making
• Demonstrate actual project risks

31
Note

• It is NOT obligatory to give free money
  directly to the private sector in order to
  stimulate investment.
• Funds spent to reduce investment/sector risks can
  result in the highest multiples of investment.

32
Remove Barriers to market creation, entry or
transformation

• Example
• Establish nutrient trading credits for
  threatened aquatic ecosystems, e.g. The Black
  Sea
• Carbon trading is showing signs of succeeding
  beyond the most optimistic projections.

33
Provide non-Grant Financing with
concessional/contingent finance, loans, and
loan/payment guarantees

• Examples
• Cover perceived risk of long-term
  lending by national/local private banks.
• Establish a Coastal Zone Management Fund for
  projects, let market define demand.

34
Fund Pre-Investment Studies in Alternative/Innovat
ive Financing/Technologies

• Example
• Determine the feasibility of/Quantify demand for
  - a nutrient trading program

35
Promote Progressive Partnerships long-term,
shared information, quicker decision making

• Example
• GEF takes a passive but direct role in the
  partnership as the honest broker. Assumes role
  of contract administrator/ arbitrator, assists in
  supervisory missions, and ties enforcement to
  sovereign obligations.

36
Demonstrate actual project risks

• Example
• Jordan Gateway Industrial Estate Project
  Perceived risks of 100 recycle, reducing water
  demand by 80-90 is likely quite low but no one
  has done it yet and investors are wary of costs/
  benefits and have no risk capital.

37
Benefits to Business of GEFPartnerships

• GEF Funds reduce risk and catalyze new markets
• Co-financing from GEF Partners
• Share know-how, partners
• Access markets and technology
• Stakeholder support
• Strengthens business image regarding concern for
  and management of environmental management

38
GEF Implementing Agencies can Assist Companies

• Give quick answers on eligibility/issues
• Explain funding alternatives
• Advise on project design
• Guide project sponsors through the GEF approval
  process
• Monitor implementation
• Document progress/setbacks

39
Perceived Disadvantages of Working with GEF

• Bureaucratic
• Learning Curve adds cost
• Potential for project redesign
• Slow
• Involves diverse, sometimes hostile, stakeholders
• Disclosure of project/financial information to
  public and competitors

40
Potential GEF Private Investment Projects

• Wastewater treatment plants
• Tradable water pollution permits
• Land use controls
• Biodiversity/watershed protection
• Wetlands management
• Cleaner ind. production technologies
• Ship/Oily waste treatment facilities

41
LESSONS LEARNED
42
Three Initial Indicators of Probable Success

• Support at Highest Levels of Government and Labor
• Private Sector Company is Qualified, Experienced,
  and Committed
• Clear Regulatory Framework With International
  Arbitration

43
Public Project Partners
Water/Sanitation are generally municipal
functions BUT most cities/municipalities have the
least financial resources of any governmental
Body. Result They are the weakest of
Potential Partners and need the most project
support/financial.
44
Recommendations

• Do NOT wave the free money flag
• Insist on sound Project Finance fundamentals
• GEF support can provide significant additional
  project benefits by catalyzing investments
  through
• Addressing local political/financial risks
• Supporting adequate Returns on Investment
• Financing the development of transparent,
  balanced, and fair transactions
• Innovative project finance support mechanisms

45
Recommendations

• Anything that GEF resources can do to
• Increase the number of transactions
• Increase the ERR and IRR of PPPs
• Lower the risk of disputes and failures
• will result in lowering the risk to IWs.

46
Thank You
47
Suggested Focus Group Themes

1. Should GEF resources be used to support the
   Private Sector, directly or indirectly?
2. Is there a real need to consider alternative
   delivery mechanisms for environmental
   infrastructure and services at the local
   government level, or is it just a case of lack of
   political will and commitment to finance such
   projects?
3. Do governments make good partners? How can
   governments ensure sustainable partnerships with
   the private sector?

48
Suggested Focus Group Themes

1. Is there a role for IFIs, donors, and the
   international agencies in public-private
   partnerships?
2. Are local governments able to access national and
   international investors and operating companies?
   What are the limitations?
3. ?
4. ?