Maximization of Finance for Development (MFD) · Maximization of Finance for Development (MFD) : Using Fit-for-Purpose Procurement Strategies - for Practitioners 2 nd Global Procurement

Maximization of Finance for Development (MFD): Using Fit-for-Purpose Procurement Strategies - for Practitioners

2nd Global Procurement Summit, New Delhi

February 8-9, 2018

Structure

• Infrastructure Delivery: Menu of Procurement Options

• Risk Management, PPPability & PPP Environment

• Supply Positioning

• Case of Water Sector

• Further References

Infrastructure Delivery: Menu of Procurement Options

Responsibilities in Contracts

Source: Pekka Pakkala. Innovative Project Delivery Methods for Infrastructure – An International Perspective.

Finnish Road Enterprise, Helsinki, 2002

Contracting Options:

Choose the Best Fit for Purpose

D-B-B

(Item Rate) D-B EPC

Output Based Contract

- Service Contract

- Management Contract

- Performance Based Cont.

BOT, BOOT & Variants

- User Charges

- Annuity

- Viability Gap Funding (VGF)

PPPability, Risk Management & India - PPP Environment

EIRR

FIRR

Contracts Amenable to PPP

1. PPP with VGF or

2. Output Based, D-B, EPC & IRC

Financially Viable

projects – can use PPP

FIRR: Financial IRR (Financially Viable)

EIRR: Economic IRR

EIRR

FIRR

• A structured and pro-active risk

management process in place

• Risks evaluated against 3 criteria:

Risk Management

.

1. Identify Risks

.

.

3. Identify mitigation,

allocation & reduction

.

5. Monitor

.

4. Implement

Risk

Likelihood of

the risk

occurring

The impact

resulting

from the risk

The duration

of the event

if it occurs

2. Assess and Prioritize

8

0

20

40

60

80

100

RegulatoryFramework

Institutionalframework

Operationalmaturity

Investmentclimate

Financialfacilities

Sub-nationaladjustment

Highest score

India score

Australia, Japan Australia

UK, Australia

UK, Australia

India

Australia

India PPP Environment compared to Asia-Pacific & UK

Source: Evaluating the environment for PPP in Asia-Pacific, The Economist Mar 2015

9

Supply Positioning

• Segment suppliers

• Appropriate performance and relationship management approach

High

Strategic

Security

Strategic

Critical

Tactical

Acquisition

Tactical

Advantage Low

Low Value

Ris

k

High

Supply Positioning

High

Strategic Security Strategic Critical

Tactical Acquisition Tactical Advantage

Low

Low Value

Ris

k

High

Supply Positioning - Example

• Administrative support

• PCU office

establishment

• Highly specialized expert

consultants

• Supply and install of highly

specialized equipment

• Design and supervision of

complex works

• Public Private

Partnerships (PPP)

• Design–Build-

Operate (DBO)

• EPC

• Routine civil works

• Aerial mapping

High

Strategic Security

Strategic Critical

Tactical

Acquisition

Tactical Advantage

Low

Low Value

Ris

k

High

Supply Positioning – Relevant to PPPs

• Understanding Economic Operators/ Suppliers

• Detailed Agreed Cost Models

• Total Cost of Ownership (TCO) Focus

• Comprehensive Risk Management Plan

• Suppliers see IA as ‘Core to their Business’ • Supplier Relationship & Development Plans

Some Deliverables: • Clearly Defined Outputs based Delivery

• EO/Supplier’s Performance Standards

• Considerable scope for innovation by EO

• Agreed Long Term Relationship Measures

Case of Water Sector

Why mobilize more private finance?

.

Subsidy

$114 billion/ year

Total Capital Investment per year required to meet SDGs*

$18 bn/yr

Current Financing

• This is just for water and sanitation • Includes public, private and donor financing

Financing gap > 6 times

* SDGs: Sustainable Development Goal

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Technical and financial efficiency?

Operating

• Water produced

and wastewater

processed per

employee

• NRW and

sewer

overflow rate

• O&M cost per

unit

• Energy

consumption

per unit

Financial • Debt/Equity

ratio

• Return on

assets

• Debt-service

coverage ratio

• Operating ratio

• Credit rating

Customer Service

• Complaints per

unit

• Call center

indicators

• Service

disruption

frequency and

response time

• Tariff

affordability

• Billing accuracy

Organizational • Customer

accounts per

employee

• Training hour

per employee

• Management

turnover

• Employee

turnover

16

Operating efficiency and impact on financial viability

15%

29% 41%

65% 77%

Currently Viable

Step 1 Collection rate increased to 100%

Step 2 Non-labor cost reduced by 15%

Step 3 With reduction of Non-Revenue Water to 25%

Step 4 Increase revenue by 10%

% o

f U

tilit

ies d

eem

ed fin

ancia

lly v

iable

Note: Sample 690 utilities operating in selective emerging markets Note: Financial viability is utilities with an operating ratio > 120% Source: IBNET 2016

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How to move forward on commercial finance: blending opportunities

Fully Creditworthy

Unviable / Loss Making

Pay-As-You-Go Recovery of Cash Outlays

Operating Cost Recovery

Financially Sustainable

Becoming Creditworthy

Service Providers

Grants

Commercial Finance

Do

no

r/Pu

blic

Cre

dit

En

ha

nc

em

en

ts

Financing Sources

Mo

re C

om

me

rcia

l Le

ss C

om

me

rcia

l

Hig

he

r Bo

rrow

ing

Cost

Lo

we

r Bo

rrow

ing

Cost

18

Kenya: mobilizing commercial bank finance

0

5

10

15

20

25

Co

mm

erc

ial f

ina

ncin

g to

W u

tilit

ies*

($M

)

$6m in

commercial loans to Nairobi WSC for 10 years

*Commercial financing includes commercial loans from domestic banks, which may be supported by partial credit guarantees from development partners.

$2.5m for OBA

Kenya Water Act 2002 separates responsibilities for asset

ownership and operation, and

introduces ring fencing

Seven formal credit ratings undertaken (2008)

• AfDB/IDA/IBRD/EIB/AFD >$600m

LEGAL & REGULATORY FRAMEWORK

SUPPORT FOR LOCAL BANKS

FINANCIAL MARKETS

$20m in pipeline

for 8 utilities

ASSET IMPROVEMENT

RESULTS • $12.7 million commercial financing

mobilized to improve services in low income areas, with $20 million in pipeline

• Tenor of loan increased from 5 years in pilot phase to 10 years

KUWAS supporting

$12m pipeline & $2.5m of closed deals

Tariff reform 2009 Water Act of 2016 actively encourages debt

financing

ASSET IMPROVEMENT

Shadow credit ratings for 43 WSPs (2011)

Shadow credit ratings for 54 WSPs (2015)

IBRD K-Rep Bank

program scaled up w/EU support (2010)

IBRD Pilot w/K-Rep

Bank (2007)

Kenya Pooled Water Fund (under

development by GoK with

support from Dutch govt)

Institutionalizing MFD on commercial finance

POLICY

Technical & Financial Efficiency

Governance, Policy Institutions & Regulation

PILOT TRANSACTIONS

Supplier Finance Loans & Bonds

PPPs in water - trends

Global trends over the past 15 years:

• Very few general concessions for water utilities (there are financing risk

and are unpopular)

• more focus on specific activities (NRW performance based contracts)

• hybrid affermages (O&M of utility and overseeing capex programs)

• Significant increase in bulk supply arrangements where private sector

builds finances and operates (and in some case eventually transfers) water

treatment plants – especially for complex technology such as desalination

• Use of long term DBO for wastewater treatment plants (using public

finance) where clients lack capacity to manage new technologies

• BOT for wastewater treatment plants (with public subsidies) - Ganga

program

• More domestic and regional players emerging

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PPPs in water: what is happening? some examples…..

• China – water and wastewater bulk supply/ treatment BOT and

DBOO structures – wastewater treatment has been expanded

significantly and up to 40% is private/ SOE financed and operated

• Cambodia – private schemes in most parts of the country other than

Phnom Penh, Siem Reap and some provincial towns

• Philippines – concessions in Manila and a few other large cities

BUT significant increase in joint ventures between private providers and

municipalities (ULBs), for private developments

• Singapore – extensive use of DBOO for desalination and water

reuse

• Vietnam – equitization of water service providers, significant

investment and interest in bulk supply from private investors

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What does MFD mean for water utilities?

• We need to ask the question, could infrastructure (pipes, dams, plants, pumps) be financed (in whole or partially) or supported by the private sector with or without public sector support?

• For utility capacity building, can we support components in projects that will:

– lead to increased sustainable private sector solutions - private finance (crowding-in) and/or private delivery - for development projects; [such as credit worthiness, PPPs, partially accessing co-financing from the private sector]

– Address binding constraints (e.g. physical, operational, regulatory or enabling environment) in a way that is expected to unlock private solutions where appropriate [financial and technical efficiency, regulation, legal enabling environment]

• Money and access to expertise is not a constraint

Proposed Vietnam Mekong Regional Water Security Project

Challenges

• Deterioration of water resource, utilities facing resource constraints

• High NRW, low tariffs, being pushed to equitize but not at all credit worthy

Solution – an MFD enabling project

• Regional bulk supply with treatment and transmission [can some components

be delivered by private supplier or via PPP?] [if not, should there be long

term private sector operation – DBO?]

• Support to utilities for expansion and repair of distribution networks [would it be

appropriate to suggest a performance based NRW contract for one or more

utilities?]

• Capacity support and credit worthiness (training to 10 utilities) + utility turnaround

support for Can Tho + other support to be determined [help utilities to move to

being credit worthy and attract commercial finance]

• Look at broader sector reform – on tariff, transparency for equitization process

etc.

Further References

Materials/ tools - PPPs

• PPPIRC (PPP in Infrastructure Resource Center) that features a toolkit for developing small scale water PPPs and sample laws, contracts, ToRs and checklists;

• the PPP Knowledge Lab

• WB Procurement – developed a suite of standard procurement documents for design build and operate projects (DBO) for water and wastewater treatment facilities

• Developing this FY a think piece on how to tap private sector to help achieve the SDGs (combined with new case studies on PPP in water supply, wastewater treatment, desalination etc)

Design, Build and Operate (DBO) Water and Wastewater Treatment Plants

Initial Selection [October 2017]

Guidance Note [July 2017]

Request for Proposal [Otober 2017]

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SPD for DBO for Water/ Wastewater Treatment Plants

- Increase in demand for integrated and long term solutions for water and wastewater treatment (low capacity of clients to manage new technologies)

- Guidance note sets out:

- Output not input based approach

- Focus on outline design and Employer Requirements

- Templates for Employer Requirements

- Terms of reference for consultant – technical and financial feasibility

- Currently being tried in Tanzania, Ethiopia, India and [Bangladesh]

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Thank You