PRIVATE PUBLIC PARTNERSHIPS IN INFRASTRUCTURE DEVELOPMENT IN ASIA

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PRIVATE - PUBLIC PARTNERSHIPS IN INFRASTRUCTURE
DEVELOPMENT IN ASIA by Edwin Khew Chairman Sing
apore Association for Environmental, Occupational
Health Safety Companies (SAFEco)
Executive Director Vivendi Universal Asia Pacific
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Contents

• Infrastructure Development
• Sources of Funding
• Why Involve Private Sector ?
• How Private Sector can be involved
• Formula for Successful Private - Public Sector
• Cooperation
• Why PPP in Water Sector
• Examples of Structures for Private Sector
  participation in Water
• Risks faced by Private Sector in PPP
• Problems faced by Private Sector in PPP
• Solutions for Success in PPP for Private Sector
• Examples of successful PPPs
• Conclusion

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1) Infrastructural Development

• OECD classifies Infrastructure into two
• broad categories -
• Economic Infrastructure
• Water, Sewerage, Stormwater, Drainage, Highways,
  Power Supply, Telecoms, Ports, Airports, etc.
• (b) Social Infrastructure
• Schools, Universities, Hospitals, Prisons, Public
  Housing, Sporting Facilities, etc.
• Infrastructure facilities general
  characteristics -
• High capital cost
• Long life span
• Critical to economic development and growth
• Critical to Sustainable Development

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2) Sources of Funding

• Public Sector
• Multilateral Agencies (World Bank, ADB, etc.)
• Private Sector

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3) Why Involve the Private Sector ?

• Increasing and urgent demand for infrastructure
  because of population growth, economic growth,
  migration to cities and vocal middle class.
  Budget constraints of Governments and their
  reduced borrowing capacity
• Large resource of funding available from Private
  Sector investors worldwide
• Rapid and proactive execution of projects
• Improved level of service and efficiency
• More responsive to changes and needs of users -gt
  greater flexibility
• Reduced cost to Government

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4) How Private Sector can be Involved

• Service Agreements
• OM
• Planning and Design
• Revenue collection
• (risk borne by Public Authority)
• Leasing (Affermage)
• BOT (Build, Operate, Transfer)
• Operation Management (OM)
• Repair/Replacement
• Full Administration of Plant (Private Sector does
  not finance or own the facility)
• DB (Design Build)
• Similar to BOT, no operation (except DLP period
  for training of staff)

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4) How Private Sector can be Involved Contd

• c) Franchising
• BOOT (Build, Own, Operate and Transfer)
• Similar to BOT except Private Sector provides
  financing (15-25 years operation)
• BOO (Build, Own and Operate)
• Similar to BOOT except no handover
• Award to Private Sector via a concession
• arrangement. Revenue collected by
• concessionaire based on pre-defined tariff
• formula (running cost or ROI or both)

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4) How Private Sector can be Involved Contd

• Divestiture
• Full Privatisation
• Service levels, efficiency and rates governed by
  one or more regulatory bodies encompassing
  interests of Customers, Government, Private
  companies and Shareholders
• Danger of being private monopolies
• Government reserves the right to terminate
  licence after 25 years or immediately if licensee
  defaults in meeting regulatory requirements

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5) Formula for Successful Private - Public Sector
Cooperation

• Government should position itself as a strong
  regulator and facilitator
• Private sector should provide items 4(a) (c)
  depending on local conditions
• Project must be financially sound (bankable),
  feasible (technically) and affordable to users
• Minimise Risk (political and economic)
  government guarantees to insure against payment
  defaults

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5) Formula for Successful Private -Public Sector
Cooperation contd

• Sound legal and administrative framework in place
  e.g. Laws and regulations on foreign investment,
  corporate law, taxation, sovereign guarantees,
  intellectual property, etc., must be developed,
  tried and tested
• Win-Win formula where convergence and coherence
• achieved between social motivation (government)
• and business motivation (private).

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6) Why PPP in Water Sector

• Rapid population growth
• Deterioration in quantity quality of raw water
• Increased affluence
• Municipalities face huge technical problems in
  meeting increased demand for water because of
• Shortage of raw water
• Polluted raw water, and poor water treatment
  standards
• Existing equipment requires upgrading and
  maintenance
• New treatment processes are more sophisticated
  and therefore require more skills training

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• WATER needs are URGENT and
• Municipalities do not have the budget

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7) Examples of Structures for Private Sector
participation in Water

• A. Service and Management contracts
• of specific existing equipment
• of specific services (repairs, metering,
  invoicing)
• BOT on new equipment
• The municipality controls the Water
• Distribution but outsource Treatment
• Management which will be done more
• efficiently by the Private Sector.
• Investments and tariff collection are by
• the municipality.

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7) Examples of Structures for Private Sector
participation in Water (Contd)

• B. Concessions or lease contracts
• of existing equipment or of the full utility
  water company
• BOT on new equipment
• The municipality keeps the ownership of the
• assets, but delegates the operations,
• maintenance and responsibilities to the
• Private Sector under a contractual scheme.
• The tariff, under the agreement, is collected
• by the private sector. Investments are paid
• by the concessionaire.

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7) Examples of Structures for Private Sector
participation in Water (Contd)

• C. Assets sales
• The entire water company, and its assets are sold
  out
• BOO on new equipment
• The municipality sells the water
• company and all its assets to a private
• partner subject to a regulatory regime. The
• Private Sector operates under a license that
• sets certain service levels and tariff rates.

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8) Risks faced by the Private Sector in PPP

• Market Political Risks
• Currency Cash Flow Risks
• Regulatory Risks
• Health Environmental Risks
• Corruption Risks

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Market Political Risks

• Will tariff be affordable for consumers ?
• What is local willingness to pay ?
• How stable is country politically ?
• What is demographic profile ?
• How will population change in longer term ?
• Affordability
• To bear the cost without major sacrifices

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Currency Cash Flow Risks

• What is the prognosis of currency stability ?
• What is the cost of capital locally ?
• What is the ability of municipalities and
  government to honour their financial obligations
  ?
• What is the potential for contract delays ?
• Can profits be repatriated ? If so, when how ?

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Regulatory Risks

• What is the potential for tariff revisions?
• Will competitive mechanisms be introduced after
  protective agreements ?
• Are there re-negotiation windows in the contract
  and if so, for which party ?
• Who is responsible for monitoring services, water
  quality and environmental performance ?
• Is there a potential conflict of interests
  between the regulator and the municipality ?

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Health Environmental Risks

• What are the countrys drinking water quality
  criteria ?
• Are these in line with WHO standards ?
• If not, is there a convergence timetable ?
• Who is responsible for monitoring water quality ?
• Who is responsible for monitoring environmental
  compliance ?
• What is the state of environmental laws
  enforcement ?
• How are its environmental laws evolving ?

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Corruption Risks

• Do you have a strategic local partner or a
  crony company ?
• How corrupt is target country ?
• Is it worth entering when to play fair is to lose
  ?

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9) Problems Faced by Private Sector in PPP

• Existing Difficulties
• Low coverage (25 to 85 in large Asian cities)
• High rate of unaccounted - for water (40 to
  60)
• Revenues cover only 35 of water costs
• Staffing levels (10 to 20 per 1000 connections
  vs. 2 to 3 per 1000 in an efficient undertaking)
• Current international funding
• available US2.5 billion
• Funds needed US400 billion

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10) Solutions for Success in PPP for Private
Sector

• Structure contract to balance risk rewards
• Reduction of UFW (unaccounted for water)
• Making the price of new connections affordable
  (or even free of charge under certain
  conditions)
• Introduce a formal policy for service to the
  urban poor (where the rich subsidise the poor)
• Ensure 100 metering of production and
  consumption
• Repair all visible leaks
• Eliminate Police illegal connections
  (legislate against illegal connections)
• Ensure every utility is able to measure its own
  performance

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11) Examples of Successful PPP

• In China
• Tianjin (3rd largest city in China), Generale des
  Eaux won the first 20 years contract concession
  in 1997 for an already existing installation.
  The plant (500,000m³/day capacity) serves 4
  million inhabitants
• Chendu (Sichuan), Generale des Eaux, with its
  Japanese partner Marubeni, won Chinas first BOT
  contract in water sector in July 1998 (3.2m
  inhabitants). Generale des Eaux is currently
  constructing the plant (400,000m³/day capacity)
  and will operate it for 18 years.

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• In Malaysia
• Selangor State
• Since 1987, Generale des Eaux operates 26 Water
  Plants (950,000m³/day) serving a population of
  4.1 million people
• Perak State
• In June 1998, Generale des Eaux took a 30 stake
  in Intan Utilities and now operates the water
  facilities for the city of Ipoh (600,000
  inhabitants), the capital of the Perak State
• In Indonesia
• - In April 1997, through its subsidiary, United
  Water (47.5 stake), Generale des Eaux won the
  first BOT contract in Indonesias water sector at
  Sidoarjo, a city east of Java with 500,000
  inhabitants. The contract calls for the
  construction of a new water treatment plant and
  its operation for 25 years.

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Vivendi Water in Asia-Pacific (Contd)

• In Australia
• Vivendi Water Australia, through Wyuna Water and
  United Water, provides water services to almost
  two million people e.g.
• A 15-year contract to operate the water and waste
  treatment facilities of Adelaide (six water
  plants and four wastewater plants). 1.2 million
  inhabitants served.
• Two Water Plants in Sydney Illawara and
  Woronora (500,000 people served)
• A 25-year DBO (Design, Build Operate) contract
  for the city of Noosa (35,000 people) in
  Queensland
• A BOT Contract for the first waste water
  treatment system in Australia awarded to a
  private sector company. The 20 years contract
  covers the waste water services of Gerringon and
  Gerroa, south of Sydney.

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Vivendi Water in Asia-Pacific (Contd)

• Vivendi Water also operates Privatised Water and
  Waste Water Plants in Vietnam, Thailand and
• New Zealand
• and
• Serves more than 20 million people in Asia Pacific

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Vivendi Water Worlds leading distributor

• Water treatment and distribution
• Collection and treatment of waste water
• Construction and operation of water and waste
  water treatment plants
• Installation and maintenance of piping
  (distribution) networks

• Merging of Generale des Eaux
• and US Filter in October 1999
• Vivendi Water
• 110 million consumers
• worldwide
• 6 billion cubic metres of
• drinking water supplied
• annually
• Waste water treated for 70
• million people
• ISO 9002 and 14001
• certifications

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12) Conclusion

• PPP is necessary for the development of Asia
• Private sector financed projects are the most
  appropriate instruments for developing economies,
  particularly in Asia
• A successful PPP project requires the packaging
  and facilitation of private sector funding, most
  appropriate technology, project management,
  engineering, training, legal support, etc.
  together with government support
• As graduates of this MEM course it is your
  responsibility if you are from a developing
  country to find out the most appropriate PPP
  formulation for your countrys infrastructure
  development and sustainable growth. If you are
  not from a developing country, you can look at
  bringing FDI into the less developed countries

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• Successful PPP Progress
  FDI
• Jobs
  S.D.

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• Thank You