OECD GLOBAL FORUM ON SUSTAINABLE
DEVELOPMENT
FINANCING
WATER INFRASTRUCTURE
FOR ALL
Financing water and environmental infrastructure for all
December 18th 2003, GSFD Conference
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Critical issues when financing water projects with private funding
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The limits experienced by ‘traditional’ project finance schemes:
BOT / Concession…
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Recent innovative schemes that may illustrate the way forward
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Financing water and environmental infrastructure for all
Critical issues for financing water projects with
private funding
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Some emerging countries lack long-term stability, a fundamental requirement
for private investors and creditors.
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Water projects are constrained not only by economic & financial feasibility
parameters, but also by political and social provisions: tariff as a key electoral
argument, affordability by end-users, long term political support.
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Projects are often promoted by local authorities, with long term-undertakings
and creditworthiness sometimes difficult to assess by private funders.
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Experience has shown that macro-economic risks ( foreign exchange in
particular) cannot be mitigated by contracts, when host countries face major
economic crises.
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Financing water and environmental infrastructure for all
From ‘classical’ project financing schemes…
The story so far: water project financing in emerging countries essentially based on
BOT and concession schemes
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BOT :
– The private sector is in charge of the construction and the operation of a single asset
(water or wastewater treatment plants). A long term “Take or Pay” contract with a
public off-taker mitigates volume and tariff risks;
– Political and tariff risks are born by the public sector, retaining interface with endusers;
– Major constraints: long term creditworthiness of public off-taker, potential
mismatch between gross and retail tariffs, limited availability of political risk
coverage for sub-sovereign off-takers…
•
Concession :
– From treatment to distribution, through billing and investment : the whole water
services chain is contracted out to the private sector;
– More built-in flexibility, allowing adjustment of investment roll-out to actual cashflow generation;
– High exposure to regulatory and political risks, insufficiently mitigated by
contractual arrangements such as tariff revision formula.
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Financing water and environmental infrastructure for all
… to new alternative public-private solutions
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‘Traditional’ BOT and concession financing have shown its limits in emerging markets
(especially in Latin America and South East Asia). Despite huge and urgent needs, only
very little could be delivered by the private sector (water represented less than 1% of the
global project financing market in 2002)
•
Private sector operators are more prudent and selective especially when projects involve
carrying substantial investment costs.
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A clear need to help the local public sector finance and implement its own share of the
infrastructure investment burden, alongside private sector participation.
 Alternative schemes are being tested to establish new ways of public-private
financings.
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Financing water and environmental infrastructure for all
Financing a municipal water company with a limited
recourse to the municipality
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Municipal water company raises long term financing on its own covenant
The ability of the company to cover its operating and financing needs by tariffs is secured
through a municipal support mechanism
The municipality undertakes to compensate the company if tariffs cannot be raised to
cover additional costs.
Merits:
– Suitable for municipalities facing
budgetary constraints
– Funding can be combined with
public subsidies
– May pave the way for private Public funds/
subsidies
sector participation.
Constraints :
– Minimum creditworthiness of the
municipality
– A clear regulatory and tariff setting
framework is essential.
Banks/
Mulilaterals
Loan
Water
Company
Support
Agreement
100%
Infrastructure
upgrade
Operation
Municipality
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Financing water and environmental infrastructure for all
Splitting the assets and the operations
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Assets remain under public control.
Operation and management are rented out to an O&M company to be sold to private sector
O&M Co pays rental fees for the use of the assets, allowing public sector to maintain the
assets.
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Merits :
– Gain operational efficiency through
private operators
– May attract more appetite from
private sector, and be a first step for its
further involvement in the asset
upgrade/maintenance.
•
Constraints :
– Establish rules allocating clear
responsibilities between asset
maintenance (public) and O&M
(private)
– For the public sector, access to long
term financing to upgrade the assets.
Private
Company
Municipality
Ownership
Water Co
Assets
Ownership
Lease,
Rental Fees
Water Co
O&M
Water
Fees
End Users
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Financing water and environmental infrastructure for all
Mexico, Tlalnepantla Project : opening access to local
municipal bond financing
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Dexia guarantees a 8M$ local currency bond issue, with a partial guarantee from IFC.
The Trust uses bond proceeds to finance the water infrastructure.
Interests on bonds are financed by end-users fees, flowing directly to the Trust.
Excess cash is transferred to the Municipality.
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The first municipal bond issue with
no federal government guarantee.
The transaction has been rated AAA
by S&P (local Mexican rating).
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A long-term (11 years) local currency
financing, leaving the project
unexposed to foreign exchange risks.
It is the first time that IFC takes
direct municipal risk.
Bond Holders
Water Fees
TRUST
Excess
cash
Municipality of
Tlalnepantla
Guar.
Dexia
Part.
IFC
Guar.
Finance
Water Co
Plant
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Financing water and environmental infrastructure for all
A few comments to conclude
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Whatever scheme is opted for, private sector participation can only be effective when
public sector is able to sustain and manage its own obligations in the public/private
partnership.
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Financing/guaranteeing sub-sovereign entities is crucial in a market where demand is
local.
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Blending public and private finance techniques proved to be instrumental in delivering
‘bankable’ projects.
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