. Jackson WISA Africa 2007 nov07
Mar 30, 2015
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Jackson WISA Africa 2007 nov07
Improving Prospects for Improving Prospects for FinancingFinancing
Water Water ServicesServicesWISA Africa 2007WISA Africa 2007
Barry M. JacksonDevelopment Bank of Southern Africa
www.dbsa.org
Improving Prospects for Improving Prospects for FinancingFinancing
Water Water ServicesServices• Introduction
• Typical sources of funds
• Constraints to raising finance
• Where to begin change?
• Improving the prospects for Private Sector Finance.
Introduction: raising capitalIntroduction: raising capital• Continued need for expansion: “lumpy”
investments• Limited government resources• Reduced donor funding• Increased availability of private sector
funding (money seeking investments), • but
– Banks want to see good projects and well run, financially sound institutions
– or ring-fenced quality projects.
Typical sources of financeTypical sources of finance
• Government grants
• DFI loans via Government
• DFI loans direct to utility or local government [focus on utility here]
• Private sector: local or foreign capital – loans, bonds
• Private equity.
Constraints to raising financeConstraints to raising finance• Key Question: Where would you like
your pension funds placed? • Fund administrator need “Investment
Grade” credit ratings• Strong, competent, reliable borrowers
in a stable environment• Foreign or Local Capital?
– FOREX risk and ability to repatriate funds & profits
– Income in local currency
• What can the utility influence?
Constraints to raising finance (2)Constraints to raising finance (2)• Water utilities work in a difficult
environment• Lack of autonomy:
– Interference in the business– Tariff control– Hire & fire– Capital investment decisions
• Neglect by central government:– Poor performance tolerated– Unpredictable cash injections– Non-payment by govt. agencies
• Poorly developed capital market– But not without prospects.
Where to begin change?Where to begin change?
• Entrench a commercial approach
• Clarify relationships
• Increase private sector participation
• Borrow & invest incrementally.
A Commercial ApproachSee WSS as a business; selling a desired
product at an affordable price.
Realistically assess affordability and demand for LOS
Build a financial model and estimate user charges
Test affordability & political acceptability.
Revisit assumptionsCapex, Sources,
Sustainable Subsidies
O & M, Tariffs
A Commercial Approach (2)• Reduce Losses (UAW, leaks, over-
staffing)
• Increase Revenues (cost-reflective tariff, improve billing & collection)
• Improve financial management
• Improve customer relations
• Manage assets for reliability.
Informal connection?
A Commercial Approach (3)• Manage assets for reliability:
– systematic infrastructure asset management– risk management approach– start budgetting for maintenance etc
• Plan & manage investment streams:– Incremental CAPEX (opposite of public sector)– Limit debt exposure– Use grants & TA creatively– A careful roll-out strategy…
Careful services roll-out
Free or heavily subsidised - for “beneficiaries”
The chosen few.
Gap between wants and affordability
Not just affordability, but willingness to pay.What Level Of
Service are customers willing and able to pay for?
A challenge for extension worker, health educators etc.
A Commercial Approach (3)• Manage assets for reliability:
– systematic infrastructure asset management– risk management approach– start budgetting for maintenance etc
• Plan & manage investment streams:– Incremental CAPEX (opposite of public sector)– Limit debt exposure– Use grants & TA creatively– A careful roll-out strategy.
• Obtain a Credit Rating.
Typical credit rating scaleTypical credit rating scaleAAA Extremely strongAA Very strongA StrongBBB Adequate----------------------- Limit of Investment GradeBB Very low degree of speculationB Low degree of speculationCCC Moderate degree of speculationCC High degree of speculationC Capital payment is impairedD Default
“Obtaining a Municipal Credit Rating”
Lowers cost of borrowingLowers cost of borrowing
Useful management toolUseful management tool
Objective benchmarkObjective benchmark
May highlight political issuesMay highlight political issues
Need not be expensive Need not be expensive (intermediate options)(intermediate options)
External agencies interested External agencies interested in supporting these.in supporting these.http://www.clgf.org.uk/index.cfm/pageid/79/Research+reports
Clarifying relationshipsClarifying relationships• Customer charter etc• Arms-length relationship with Govt.• Performance contracts with
responsibilities of EACH party (incl govt); well publicised
• Need for consistent supportive environment
• Consequences of political interference should be clear.
Government agencies and revenue
Government Policy on Cost Recovery
Government Practice on Cost Recovery
+
Lack of income
Poor service
Reluctance to pay
Use contract to show Govt. inconsistency; Lobby at right time in budget cycle.
Increasing PSPIncreasing PSP• Drastic might be needed but incremental
might be better – lower “transaction cost”• Outsourcing:
• Meter reading• Billing & collecting• Comprehensive revenue management• Rehabilitation, UAW, WDM (shared risk & incentives)
• Management contracts• Investment-linked contracts• Clear performance contract (seek advice)
-> reduction of interference -> customer appreciation -> improved creditworthiness.
Improving prospects for Improving prospects for private sector financeprivate sector finance
• Start small– WDM/UAW (Sida project soon)– Aim to boost revenue …
Improving prospects for Improving prospects for private sector financeprivate sector finance
• Start small– WDM/UAW (Sida project soon)– Aim to boost revenue
• A good business plan– Phased investments/ line of credit– Identifying revenue streams
• Include Co-finance
• Seek credit enhancement.
ConclusionsConclusions
• Encouraging signs that private finance for WSS is feasible
• We need to build up experience
• Some major obstacles remain ...
ConclusionsConclusions
• Some major obstacles remain …– gap between aspirations and
affordability– inconsistent government policies &
practice, especially with respect to cost recovery
– under-developed capital markets and – the lack of enabling regulatory
frameworks.
ConclusionsConclusions
• Encouraging signs that private finance for CWSS is feasible
• We need to build up experience
• Some major obstacles remain
• African Water Utilities can take the African Water Utilities can take the initiative and start real changeinitiative and start real change..
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WISA Africa Nov 07
PPPs - For & Against (1)PPPs - For & Against (1)
• Positive side:– efficiency gains– latest technology– raise capital– train staff– career opportunities– treat consumers as paying customers.
• To realise benefits you must deal with potential problems.
PPPs - For & Against (2)PPPs - For & Against (2)
• Negative perceptions:– “Prices will rise– quality will fall– jobs will be lost– the poor will not be served– excessive profits from a monopoly– unchecked because of corruption.”
• To realise benefits you must deal with potential problems.
• Reasons why prices do sometimes rise:– existing service under-priced (hidden
subsidies, political pressures etc)– to pay for overdue investments (so plan)
• Quality is a function of contracts and monitoring
• So is serving the poor– but make sure it is affordable (so plan).
• Jobs will probably be created, not
lost, in a developing country:– jobs can be protected by contract– system expansion
• Profiteering in the eye of the beholder– win-win situation is needed– evenly matched negotiators
• Corruption can be anywhere– Monopoly + Discretion - Accountability =
Corruption– Transparency, competition, monitoring, &
empowered public.
Main Forms and Potential Benefits of PPPs
Private Sector Provides Servicecontract
Managementcontract
Lease Concession/ BOT
FullPrivatisation
Specific task expertise Management expertise Revenue collection Working capital Risk of revenue collection Investment capital Ownership of assets