ppp international best practice and regional application
DESCRIPTION
PPP International Best Practice and Regional Application. Tegucigalpa, Honduras April 23 - 25, 2008. Sponsored by the Spanish Trust Fund. Case Study Session 5.2. Water & Sanitation. David Stiggers, Independent PPP Specialist. Session 5.2. Day 2 – Session 6 Readiness of Government. - PowerPoint PPT PresentationTRANSCRIPT
PPP International Best Practice and Regional Application
Tegucigalpa, HondurasApril 23 - 25, 2008
Sponsored by the Spanish Trust Fund
Water & Sanitation
Case StudySession 5.2
David Stiggers, Independent PPP Specialist
Private Sector View
Session 5.2
PPPApproach
PPPApproach
Day 1: Session 1.1Overview of
PPPDay 1:Session 1.2
Challenges: Latin America
Day 1:Session 1.3Considering
Private Participation
Day 1:Session 2.1Planning the
Process
Day 1:Session 2.3Involving
Stakeholders
Day 1:Session 3Case Study:
Transmission
Day 2:Session 5Case Studies:(1)Highways
(2)Water & Sanitation(3) Ports
Day 2 :Session 4.1Standards,
Tariffs, Subsidy, Financials
Day 2 :Session 4.2Selecting an
OperatorDay 1:Session 2.2
Regulation & Institutions
UpstreamPolicy
Readinessof
Government
CapacityBuildingFor PPP
Day 2 – Session 6Readiness of Government
Day 1- Session 5
Case Study:Water & Sanitation
Day 1- Session 5
Case Study:Water & Sanitation
Case Study: Armenia
1. Review Existing Management of the Water Sector in Armenia
2. Look at existing PPP models in Armenia, and their Performance
3. Consider an existing Management Contract (ending 2009) – with the regional company AWSC - and what to do after the current contract ends.
Cities
Armenia
• Population 3.1 Million:• 38% Rural : 62% urban
• Abundant Water Resource: 98% Groundwater
• Infrastructure in poor condition:$1billion to bring back to good condition
• Poor Water & Sanitation Services• 87% Urban connected but only 7 hours/day
• 32% Rural connected but only 2% in good condition
• 540 villages not served by any water provider
Armenia
• Population 3.1 Million:• 38% Rural : 62% urban
• Abundant Water Resource: 98% Groundwater
• Infrastructure in poor condition:$1billion to bring back to good condition
• Poor Water & Sanitation Services• 87% Urban connected but only 7 hours/day
• 32% Rural connected but only 2% in good condition
• 540 villages not served by any water provider
THE PROBLEM
o Poor quality of water and poor water and sanitation services
o Limited Access to drinking water
o Deterioration in Public Health
o The socially vulnerable groups are the most affected
Review Management Modes
Considered:
Institutional
Regulatory
Contractual
Lease (Veolia)1m. popn.
620,000 popn.
Management Contract (Saur)
540 Villages
‘
‘
Lease (Veolia)1m. popn.
620,000 popn.
Management Contract (Saur)
‘
‘
Lease (Veolia)1m. popn.
620,000 popn.
Management Contract (Saur)
Nor AkunqMunicipal/State CJSC59,440 popn.
‘
‘
Lease (Veolia)1m. popn.
620,000 popn.
Management Contract (Saur)
Yerevan DjurLease (Veolia)1m. popn.
620,000 popn.
AWSCManagement Contract (Saur) Lori WSC
Municipal/State CJSC118,500 popn.
Shirak WSCMunicipal/State CJSC149,600 popn.
.
Lease
Management Contract
Villages
Municipal Companies
Management Forms:
• Lease: – Yerevan Djur( Capital city ) 1m. popn
• Management Contract :– AWSC: National Management Contract
(Regional towns and villages) 620,000 popn
• 3 Municipal Companies– Shirak (149,600); Lori (118,500); Nor Akunq (59,440)
• 540 Village associations
Analysing Key Areas of Responsibility
MANAGEMENTOPERATIONS & MAINTENANCE
INVESTMENT & FINANCE
Direct staff
Set human resource Policy
Establish or improve business processes
Manage inventory
Maintain assets
Commercial responsibilities (e.g. billing & collection)
Issue demand and capacity forecasts
Arrange finance
Prepare technical designs
Construct assets
“We looked at three key areas of responsibility for utility management, and then the tasks for each area…………..”
Responsibilitiesin the main PPP models
Concession & Divestiture
Affermage & Lease
Management Contract
MANAGEMENTOPERATIONS & MAINTENANCE
INVESTMENT & FINANCE
Direct staff
Set human resource Policy
Establish or improve business processes
Manage inventory
Maintain assets
Commercial responsibilities (e.g. billing & collection)
Issue demand and capacity forecasts
Arrange finance
Prepare technical designs
Construct assets
“……and here we can see which Responsibilities are dealt with under each of the three typical PPP models”
Risks & Responsibilities:Armenia
Management & Operations
Commercial: Revenues / Profit
Investment & Finance
Asset Liability
Full Ownership (e.g. State or Private)
Concession
Lease
Management Contract
Key PPP Arrangement Risks
Operating Risk
Collection Risk
Investment Risk
All Risks – with Asset liability
Concession not viable for AWSC
• For the foreseeable future AWSC will not have sufficient income to meet capital costs and depreciation, as well as operating costs.
• International water operators do not currently have the desire/ability to make the necessary investments and finance the Concession model.
• We can look at some other PPP form that will allow improvement of AWSC towards Concession in the long term, if investment is still an issue at that time and operators view of concession risks improves.
“Concession is not viable under current circumstances”
Some of the ‘players’• SWCS: The state nominated company who manages sector policy,
PPP contracts and some asset ownership
• PRCS: the State Regulator: Controls Tariff
• The Private Operators: Veolia, Saur
• The 3 Municipal Companies• Independent auditor:
Technical and Financial audits
Lease Contract: Yerevan
Private Operator
Veolia “The Bidder”
Customers
Private Service ProviderYerevan Djur cjsc
“The Lessee”
Regulator PSRC
Payments
Management& Resources
TariffService
Independent Auditors
SWCS“The Lessor”
Contractual
State Lease Fee
Use of Facilities
Lease: Yerevan
• Originally a 5 year Management Contract
• Positive experience with the MC (data collection, general improvements)
• Since 1 year ago (after bid) a Lease, carried out by Private Operator (Veolia)
• Contract terms well established (Model for AWSC)
• Regulation clearly defined e.g. tariff reviews
• Performance improving as plan
• Management of a Comprehensive Capital Works Plan (Govt. Finance)
Management Contract: AWSC
Private operator
SAUR
Customers
Service ProviderAWSC
Regulator PSRC
Payments
Management
TariffsServices
AWSC Board
Independent Auditors
SWCS
Management Contract: AWSC (1)
• AWSC is a State company, managed by SAUR under a 4 year Management Contract (MC) won in open tender.
• Good planned results, with improvements designed to lead to next PPP arrangement
• Operator responsible for managing all operations, financial matters & personnel
• Base Fee + Incentive payment against 4 Performance Indicators
Management Contract: AWSC (2)
• SAUR bring management expertise through expatriate & local managers.
• AWSC/Government finance a capital works program.
• SAUR manage the construction of new and rehab works that affect their operations.
• AWSC bears risk of Tariff levels, collection and service delivery risks. Tariff levels do not affect SAUR’s fees.
The Municipal Companies
Customers
Water CompanyNor Akunq cjsc
Regulator PSRC
TariffService
Nor AkunqBoard
Consultancy services
SWCSState Shareholder
(51%)
Regional Shareholders
(49%)
Municipal Companies
• Municipal joint stock companies were formed, part owned by the State.
• Managers are helped to develop institutional & management improvements with help of external advisers
• Some investment and technical assistance provided under KfW funding
• Emergency works were a success, but long term operational improvement has yet to be seen.
Look at Performance
Established Base Data– Technical Performance– Financial
Used existing performance– Yerevan 10 year Lease Contract 2006 - 2016: – AWSC 4 year Management Contract 2004 - 2008: – Regional Companies.
Made forward performance projections (AWSC only)
Payment Performance Indicators
• Continuity of supply (Average hours/day)
• % subscribers metered• Bacteriological drinking water safety
(% samples)
• Company Working Ratio (Costs/Revenue)
18 Performance Indicators are used for Management Purposes, of which 4 are linked to Payment:
PPI’s over timePerformance Payment Indicators Baseline value
as of11/30/2004
Y2 Target Y2 Actual Valueas of
01/01/2007
End-of-project target
as of 11/19/2008
Increased weighted average number of daily hours of drinking water service (in hours) 6.04 7.84 10.02 13.22
Weighted average water bacteriological safety compliance
93.8 % 95.04 % 95.8 % 98.1 %
Percentage of subscribers billed on the basis of metered consumption 40.2 % 49.19 % 57.3 % 77.84 %
Company working ratio (Costs/Revenues) 194.9 % 181.6 % 137.9 % 118.0 %
AWSC - Performance Data & Projections 2004 - 2010 (current MC Service Area) 1 (in million AMD)
Audited Audited Provisional Estimated Estimated Estimated Estimated
2004 2005 2006 2007 2008 2009 2010
Total Revenue2 4,009 4,635 3509 2,981 3,099 3,188 3,296
Total Revenue Collected 1990 1834 2309 2656 2869 3010 3128
Collection rate - actual 59% ? 40% 66% 82.6%
Collection Rate [Planned] [59%] ? Start MC [79%] [89%] [92%] [93%] [94%]
Operating Expenses3,4 3429 3160 3320 4463.16 4151.33 4245.03 4323.99
Energy 1240 1151 996 960.81 860.00 840.00 830.00
Fuel 224 173 185 239 166 203 245
Personnel (inc social cost) No vat 1110 1377 1391 1575 1604 1716 1836
Maintenance (inc. repairs) 209 220 173 562 398 375 350
Other
Total Operating Expenses 3429 3160 3320 4463.16 4151.33 4245.03 4323.99
Working Ratio (expense/revenue) 0.58 0.58 0.70 0.60 0.69 0.71 0.72
% Energy in Operating expense 36.2% 36.4% 30.0% 21.5% 20.7% 19.8% 19.2%
% Fuel in op. expenses 6.5% 5.5% 5.6% 5.4% 4.0% 4.8% 5.7%
% Personnel (inc social cost) in op expense 32.4% 43.6% 41.9% 35.3% 38.6% 40.4% 42.5%
% Maintenance (inc. repairs)in op expense 6.1% 7.0% 5.2% 12.6% 9.6% 8.8% 8.1%
Domestic Tariff rate (AMD/m3) water 90.36 116.65
wwater 10.05 23.35
Total (AMD/m3) 100.41 140.00 140.00 140.00 140.00
Population 620,000
No. of Connections 259,900 262,800 267100
Number of employees 2,400 2,600 1850 1850 1850 1850 1850
Water production mln. m3 184.23 165.88 168.28 140.00 135.00 130.00 128.00
Water Consumption mln. m3 48.36 40.49 27.83 23.36 24.07 24.66 25.39
UFW % (total losses) 73.8 75.6 83.5 83.3 82.2 81.0 80.2
Meters Installed <40% 48% 52% 71% 81% 90% 95%
Subsidy mln AMD 952 1367 1381 1381 1318 ? ?
Managing Contractor (current contract only)
- Fixed Fee 1224.45 817.90 511.89 408.69
- Incentive Bonus5 - 35.70 [71.40] [89.25]
Depreciation6 1,337 1,568 1,583 1,662 1,746 1,833 1,924
Performance Data: 3 Regional Companies
Company
Area
Communities served
Ownership
2004 2005 2006 2005 2006 2005 2006
Total Revenue 147 208 204 843 722 325 360
Total Revenue Collected 135 188 172 419 429 201 247
Collection rate % 92.1 90 84.3 49.8 59.9 61.7 68.7
Operating Expenses 379 354 365 477 640 300 332
Working Ratio (collection/revenue) 0.36 0.53 0.47 0.88 0.67 0.67 0.74
Population 59,400 59,400 59,400 151,500 149,600 113,100 118,500
No. of Connections 14,209 14,523 14,971 63,100 63,100 38,623 40,880
Water production mln. m3 11.53 9.9 7.44 52.38 44.26 12.48 12.67
UFW % 82.1 79.4 76 92.8 90 83.5 82.5
Water Consumption mln. m3 1.15 3.57 2.04
(Paid Consumption= Collections/Tariff)
Meters Installed % 70 84 89 30 37 74 74
Number of employees 152 109 99 340 220
Subsidy mln AMD 212 193 117
Domestic Tariff(water & Sewage)
AMD/m3 100 / 150.2 150.2 150.2 120.14 120.14 121.16 121.16
Debt Servicing?
Nor Akunq CJSC
Armavir2cities +11villages
Lori WSC
Lori 1city +16 villages
Shirak WSC
Shirak 2cities + 36villages
Lease Costs (1) - Operational• Personnel Costs:
40% of cost;
22% reduction in workforce (5.2/1000 connections) in 4 years
• Electricity Costs:
30% of cost ;
assume 15% reduction in 4 years, but requires capital investment
• Other Expenses:
Similar to today, but increased throughput achieved under lease
• Sewage Plant Operation:
Similar to today
• Management overheads: Current expatriate staff costs reduced by 15 % under lease
Lease Costs (2) - Financial• Operating Capital:
$1m loan made available to Operator at preferential rate (5%)
• Operator’s Retained Profit:
This will only be determined at bid, but estimate made
• Debt/Capital Investment:
Planned Investment program determined, but funded by Government
• State Lease Fee:
Set at level to cover Govt. debt repayments
• Depreciation:
Taken as national accounting standard
Cost Recovery and Tariff
INCENTIVES
“To be viable: Tariffs + Subsidies = Total Cost of Service”
Service Quality
Service Coverage
COST OF SERVICE
TARIFF INCOME
SUBSIDY ??
Cost of Investment
Depreciation: Cost of replacement
My Simple Tariff Formula!!!
Tariff Rate
($/cubic meter)
Total Costs ($)
Total Billed Consumption
(cubic meter)
=
Tariff Level: Starting point
Note: $1 US = 309 Armenian Dram
Shirak 120.14
AWSC 140
Nor Akunq 150.2
Lori 121.6
Current Tariffs (AMD/m3)
Current Tariffs are seen as being low
They are inadequate to recover costs
Tariffs have to be within affordability limits
(approx 3% of average household income)
A ‘politically accepted. initial tariff is seen to be
around 100 – 110 AMD/m3
Tariff can be increased as service improves
AWSC Tariff Scenarios
TARIFF SCENARIOS
AMD/m3
State fee?
Depreciation? 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Basic 196 192 186 181 176 176 176 176 176 176
Base +State Fee 211 206 199 194 188 188 188 188 188 188
Base +Depreciation 271 268 263 260 256 260 264 269 273 278
Base +State Fee +Depr. 285 282 276 273 268 272 277 281 286 291
TARIFF SCENARIOS
AMD/m3
State fee?
Depreciation? 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Basic 196 192 186 181 176 176 176 176 176 176
Base +State Fee 211 206 199 194 188 188 188 188 188 188
Base +Depreciation 271 268 263 260 256 260 264 269 273 278
Base +State Fee +Depr. 285 282 276 273 268 272 277 281 286 291
Tariff Scenarios 2009 – 20012
[current AWSC Service Area]
(in million AMD) Adding the 3 Towns increases Basic Tariff
by approx 6%
Establish the Lease?
• Good experience from Yerevan model
• Likely Bidder interest• MC well prepared
– Data availability
– Operational Improvement
– Financial improvement
• No subsidy• Reasonable Tariff• Actual Tariff increase
can be phased
• It takes time to implement a PPP bid, so immediate start needed on preparation
• Should Lease be negotiated with the existing Operator or out to Open Tender?
• What to do about Depreciation?
Should we include 3 Towns?
• Brings economies of scale (size similar to Yerevan)
• Smooths Tariffs• Size more attractive to
manage, and more interest in larger urban element
• Private Operator expected to make immediate efficiencies
• Data not so reliable• Asset ownership issues
need resolving• Additional management
and reform costs to integrate 3 Towns
• Break even Tariff comparable, but Lori & Shirak have to increase a lot from existing
Detailed contract comments were proposed to be incorporated on using Yerevan contract as a model:
Tidy up customer contracts/municipal concessions/supply & service contract relationships
Special initial emphasis and funding for water balance issues to be included in Operator’s obligations (e.g. small works issues, customer cadastre, UFW reduction plan)
Regularize ways of dealing with the poor and disadvantaged customers (e.g. sort out voucher or other arrangement)
Resolve nonpayment issues related to Operator’s powers and sanctions.
Suggestions for Lease Contract
– Independent Auditor;
– Penalties;
– Ownership & Licence Issues;
– Role of PMU;
– Excess profits
– Employment conditions:
– Training;
– Lease Payments;
– Change of Scope;
– Economic Equilibrium;
– Extension of Contract:
– Management of Capital Works;
– Hand Back Provisions
Recommendations
• Follow on MC with a Lease• Decide timing:
– On balance, if ready to fast track, go straight to Lease:
• One time Tariff change• Keeps up momentum• Can make other changes at the same time
• Address issue of competition (e.g. is single operator for the major party of the country acceptable)
• Assume follow Yerevan contractual lease model, refining for the new arrangement.
• Consider benefits of inclusion of 3 Regional Companies in AWSC lease arrangement
Water & Sanitation
Case StudySession 5.2
David Stiggers, Independent PPP Specialist
THANK YOU!
Contacts
For comments or further details contact:
Junglim Hahm [email protected]
Richard Cabello [email protected]
Sabino Escobedo [email protected]
David Stiggers [email protected]
Water & Sanitation
Case StudySession 5.2
David Stiggers, Independent PPP Specialist
THANK YOU!