maximization of finance for development (mfd) · maximization of finance for development (mfd) :...
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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
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)
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
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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
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• 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
Why mobilize more private finance?
.
Subsidy
$114 billion/ year
Total Capital Investment per year required to meet SDGs*
$18 bn/yr
Current Financing
• This is just for water and sanitation • Includes public, private and donor financing
Financing gap > 6 times
* SDGs: Sustainable Development Goal
15
Technical and financial efficiency?
Operating
• Water produced
and wastewater
processed per
employee
• NRW and
sewer
overflow rate
• O&M cost per
unit
• Energy
consumption
per unit
Financial • Debt/Equity
ratio
• Return on
assets
• Debt-service
coverage ratio
• Operating ratio
• Credit rating
Customer Service
• Complaints per
unit
• Call center
indicators
• Service
disruption
frequency and
response time
• Tariff
affordability
• Billing accuracy
Organizational • Customer
accounts per
employee
• Training hour
per employee
• Management
turnover
• Employee
turnover
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Operating efficiency and impact on financial viability
15%
29% 41%
65% 77%
Currently Viable
Step 1 Collection rate increased to 100%
Step 2 Non-labor cost reduced by 15%
Step 3 With reduction of Non-Revenue Water to 25%
Step 4 Increase revenue by 10%
% o
f U
tilit
ies d
eem
ed fin
ancia
lly v
iable
Note: Sample 690 utilities operating in selective emerging markets Note: Financial viability is utilities with an operating ratio > 120% Source: IBNET 2016
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How to move forward on commercial finance: blending opportunities
Fully Creditworthy
Unviable / Loss Making
Pay-As-You-Go Recovery of Cash Outlays
Operating Cost Recovery
Financially Sustainable
Becoming Creditworthy
Service Providers
Grants
Commercial Finance
Do
no
r/Pu
blic
Cre
dit
En
ha
nc
em
en
ts
Financing Sources
Mo
re C
om
me
rcia
l Le
ss C
om
me
rcia
l
Hig
he
r Bo
rrow
ing
Cost
Lo
we
r Bo
rrow
ing
Cost
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Kenya: mobilizing commercial bank finance
0
5
10
15
20
25
Co
mm
erc
ial f
ina
ncin
g to
W u
tilit
ies*
($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
21
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.
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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