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

Villages

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 jhahm@worldbank.org

Richard Cabello rcabello@ifc.org

Sabino Escobedo sescobedo@tagfinancialadvisors.com

David Stiggers davidstiggers@comcast.net

Water & Sanitation

Case StudySession 5.2

David Stiggers, Independent PPP Specialist

THANK YOU!