outline of presentation -...

1

Jamal SaghirDirector Energy and Water

The World Bank

Vienna

2-3 July, 2003

Private Sector Participation in Municipal Private Sector Participation in Municipal Water Services in Central and Eastern Europe Water Services in Central and Eastern Europe

and Central Asiaand Central Asia

Outline of PresentationOutline of Presentation

Financing WaterFinancing Water

The changing role of the World BankThe changing role of the World Bank

The changing role of ODAThe changing role of ODA

Addressing the ChallengesAddressing the Challenges

Water Supply and Sanitation ChallengesWater Supply and Sanitation Challenges

My Perspective on ConferenceMy Perspective on Conference

MDG & WSSD targets:“Reducing by 1/2 the proportion of population without sustainable access to safe drinking water & sanitation”

Reality check:~ Less than 1 in 5 countries on track for WSS~ Less than 1 in 10 low income countries on track~ Proxy indicators – proximity to “hardware”

0

100,000

200,000

300,000

400,000

91-00 01-15*

water supplysanitation

*needed for MDG

# of new people with access to W SS per day

-50%

0%

50%

100%

Primaryschool

completion

Childmortality

HIV/AIDSprevalence

Access towater

Access toSanitation

Very Unlikely Unlikely Possible Very Likely No Data

% of countries “on track” to reach MDGs

MDGs MDGs challenge for Water Supply & challenge for Water Supply & SanitationSanitation The challenge The challenge –– Beyond the NumbersBeyond the Numbers

Sustainable access to safe drinking water and adequate sanitation key to improved health, education, and environmental outcomes

Girl’s school enrolment?

Environmental sustainability?

Official statistics use proxy indicators – proximity to hardware……..far fewer countries on track for:

Health benefits?

More than one challenge: Regional More than one challenge: Regional SpecificitySpecificity

LAC

MNAECA

EAP

SAR

AFR

Population to be served each year to reach MDGs (million people)

Sanitation (rural/urban)

Water supply (rural/urban)

24

22

9

37 31 35

39

2410

7

2

# of population centres(increasing as size falls)

rural (<500)

cities (>1m)

villages (>500)

Size

of p

opul

atio

n ce

ntre

towns (>10k)

secondary cities (>100k)

The Sector is Segmented With Different The Sector is Segmented With Different Consumer Needs And ChallengesConsumer Needs And Challenges!

2

Size

of p

opul

atio

n ce

ntre

# of population centresattractiveness

moremost

medium less least

high potential for private financingmedium potential for private financinglow potential for private financing

Household &micro-financingNeed for public investment

Water Supply & Sanitation Market MDGs and Unique Problems of ECA

• Definition:– Access to Safe Drinking Water – 20 liters/capita/day

within one kilometer– Access to Improved Sanitation – pit latrines

• Unique Problems in ECA:– Highly developed urban systems and high service

coverage in rural areas that are beyond current income level

– Collapsing infrastructure (over 40 years old and no maintenance over at least last 10 years)

– Declining provision and safety of water– MDG problems concentrated in eastern and southern

part of ECA, particularly in secondary cities and rural

MDGs and Unique Problems of ECA

• Soft Landing versus System Collapse or (Rehabilitation versus Reconstruction)

• How to Reach MDGs:– Reforms to generate internal cash (O&M) and increase

central government transfers (Rehabilitation)– Bank and Donors:

• Focus on the most vulnerable – secondary cities and rural• Scale up assistance - programmatic approach and CDD

Lessons Learned – Voices of Our Clients in ECA

• Minister of Finance – eliminate quasi-fiscal deficit and need for operating subsidies

• Governors and Mayors – deal with city planning/ finance and other infrastructure at the same time

• Governors – rural infrastructure is collapsing• Everybody – deal with more cities at the same

time• Everybody – limited number of players, why not

home grown solution? We need to discuss this question here.

• Everybody – faster delivery of projects by the Donors

Voices of the Private Sector in ECA

• Needs World Bank help on reforms to reduce political and social risks:

• Governance• Regulations• Pricing

• Prepared to risk their own capital in few countries (first tier accession countries)

• But more and more asking capital investments to be financed by donors, governments

• Not interested in buying assets?







OutlineOutline

3

Investment Alone without reform will be ineffectual

• Ensure the most cost-effective use of resources • Ensure allocation of resources to highest priority investment needs • Increase resource mobilization from all sources

Water Supply & Sanitation Reform The Regulatory Challenge (1): Protect Existing Users

0

50

100

150

200

250

Costs Incurred fromTechnical Ineffiency

Annual Investment

$bn

Power RoadsRailways Water

The Regulatory Challenge (2): Protect Investors

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

Telecoms Gas Power Water

Price/Cost Ratio

Source: WDR 1994

The Regulatory Challenge (3): Protect Government Interests

0 50 100 150 200 250 300 350

Latin America and the Carribean

East Asia and the Pacific

Europe and Central Asia

South Asia

Middle East and North Africa

Sub-Saharan Africa

(US$ 1999 billion)Fiscal Receipts

Investments

Source: Izaguirre and Rao, 2000

Current Consumers(non-poor)

reduce tariffs

Excluded Households(Poor)

expand coverage

In sum:The Regulatory Challenge - Balancing Different Interests

State

maximize sale/concession value; protect influent users; reduce state

subsidies

- -

Service Provider

maximize profitsMaintain priveleges


• Money for the Treasury• Front-load the investment

program• Facilitate investment by

giving out guarantees, incl. commercial risks

• Avoid strong regulatory commitments

• Keep tariffs affordable • Raise productivity• Spread out cash needs

to avoid tariff hike• Reduce Government

exposure and provide strong efficiency incentives

No One Can Have It All! No One Can Have It All! Some Tradeoffs for Policy MakersSome Tradeoffs for Policy Makers

4

In the New Environment There is The In the New Environment There is The Need to Better Allocate RisksNeed to Better Allocate Risks

National Govt.

Utility

Local Govs.

Private Sector

Banks

Banks

NationalGovt.

UtilityLocalGovs.

PrivateSector

Today! Where to Go!

Management

Fina

nce

Public Private

Publ

i c

Priv

ate

Municipal department

Leases/Affermage

Concessions

DivestituresMixed company

Mgnt. Contracts

BOTs

Corporatizedmun. service

Operating company plc

Unbundle Finance And Management!Unbundle Finance And Management!Looking at Sustainable Hybrid Solutions Looking at Sustainable Hybrid Solutions

OutlineOutline







ODA: Need for involvement in all stages of reform

Policies in right direction, local

capacities uneven

High need –nascent reform

status

Policies in place/institution

al readiness

lendingTA & policy dialogue

Long term engagement patience required!

Increased call for Monitoring of Results

OutputsPolicy reform

Institution building

Physical investment

donor inputsTA

Dialogue

Lending

WSS outcome% sustainable access to safe water & % access to sanitation

Development impact

Improved healthEconomic growthReduced povertyEnvironmental sustainabilityEducation

Country outcomes:UN mandated Joint Monitoring Program (WHO/Unicef)Performance: city/utility level benchmarking Effectiveness of donor inputs: individual donor responsibility

MDGsMDGs: Implications for ODA: Implications for ODA

• The MDGs have raised expectations• Countries define local goals & strategies• ODA must adapt & respond to country

goals

– Increased financing – Focus resources to countries both ready and

committed– Attend to poverty pockets in midst of progress– Adapt and respond to long term engagement– Re-engage in high risk/high reward projects

5






OutlineOutline







World Bank World Bank –– WSS LendingWSS Lending

Water & Sanitation Component(s) in WB Operations - Annual Approvals (US$m)

0

500

1,000

1,500

2,000

2,500

3,000

FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05

Total

Dedicated

941

2,155

1,182

591

651

559

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY03

South Asia

Middle East & NorthAfricaLatin America

Eastern Europe & CentralAsia

East Asia

Africa

Net Commitments under Supervision (US$ m)

World BankWorld BankFY03 Water & Sanitation OperationsFY03 Water & Sanitation Operations

Need to scale up current efforts through:

• Increasing effectiveness of ongoing Bank support (ESW + dialogue + lending)

• Increasing the volume of effort (ESW + dialogue + lending)

• Changing focus to countries where potential for impact is highest

• Working across sectors• Working with and through external

partners

The changing role of the World BankThe changing role of the World Bankpreliminary outcomes

OutlineOutline







The Problem• Lack of investment in water supply and wastewater

treatment threatens:– poor quality of service provided to citizens;– decline in environmental and health standards– poor demand management – water losses

• Revenues and income for water companies are:– generally insufficient– not fully under own control; and– therefore unpredictable

• Banks reluctant to make long term loans available for investment

6

Degree of cost recovery

Telecom Gas Power Water Supply0%

50%

100%

150%

200%

Financial autonomy

Reasons NOT to invest in water…. Closing the Revenue Cycle

• Only if sustainable cashflows, investments for expanding services can be attracted

• Only few choices to finance investments– Tariffs (consumers)– Taxes (tax payers)– Private capital flow – limited extend– Bilateral and multilateral aid – limited extend

The Solution

• Commercial approach/financial discipline

• Focus on needs of the water company

• Improve creditworthiness through:– agreed programme of tariff increases, taking into account

social considerations

– clear / predictable allocation from central/local tax revenues

– improved operational management/collections

Predictable cash flow ⇒ secure debt service ⇒investment loan ⇒ better services

0

2 5

5 0

p re s e nt M D G ne e d sw a s te w a te r t re a tm e ntsa nita t io nw a te r sup p ly

?

?

(B USD)

Investment needs for Water Supply & Sanitation

Financing flows into water in 2000 (US$ Billions)

0

20

40

60

80

public private

internationaldomestic

Public is dominant ~85% Domestic is dominant ~ 85%

The water sector relies on private financing

Traditional Investors Demand/Capability Has Declined

AES Corp Energy 1.44 70.62 Oct-00 B+/ Credit Watch NegativeEnron Energy In Chapter 11Endesa Energy 9.62 26.60 Jan-99 A/NegativeCMS Energy Energy 6.56 40.45 Dec-98 BB/NegativeBritish Telecom Telecom 173.50 286.89 52 wk peak A-/StableWorldCom Telecom In Chapter 11Telefonica Telecom 24.74 86.55 Mar-00 A/ StableFrance Telecom Telecom 9.60 193.08 Mar-00 BBB-/StableVodafone T’com-Wireless 15.00 61.68 Mar-00 A/StableMillcomm Int’l Cell. T’com-Wireless 0.55 81.50 Feb-00 B+/StableAT&T Wireless T’com-Wireless 4.24 35.25 May-00 BBB/StableVivendi Environment Water 21.50 37.62 Oct-00 BBB+/StableSuez Water 15.92 33.48 52 wk peak A-/StableFluor EPC 21.49 61.08 May-01 A/Stable

StockDeveloper Sector Current Peak Peak Date S&P Rating

– The largest western infrastructure investors are struggling to restructure. Many are shedding their global portfolios.

– Project debt is downgraded daily, and debt investors are demanding higher and higher risk adjusted returns

7

Risk aversion in the market has increased…

• September 11

• Corporate bankruptcies have increased risk aversion

• Banks capital eroded• Reduced number of strategic investors

– Reconsideration of portfolios in emerging markets• Rating downgrades• Reduced availability of private PRI

Country, regulatory and project risk matters more than ever..

Inflows Into Developing Countries ((US$ Billions)

Source: UNCTAD

1995 1996 1997 1998 1999 2000 2001

60

120

180

240

0

Developing countries

Asia and the Pacific

China

AfricaLDC’s

With the downturn in investor appetite, other markets and opportunities are often not even being considered

Predictably, good projects in developing countries with large markets, strong growth potential and increasingly transparent legal and regulatory environments are preferred over others.

The Supply of “Easily” Bankable Projects Is Diminishing

• Large scale enterprise privatization/PPI projects has been accomplished in most of the middle income emerging markets, and many of the most bankable infrastructure projects have been identified and are under development.

• There are still significant enterprise privatization opportunities in FSR, Central Asia, the Mekong region and Africa, and substantial undeveloped infrastructure project opportunities in these nations.

• But macro economic, legal, regulatory and basic market performance concerns are dampening investor appetite

Trends Emerging? •Western capital markets and investors would be more selective into emerging markets infrastructure opportunities

• In EU accession countries, China, Mexico and selected other markets, interest will remain strong but there will be greater selectivity and different project structuring

• In lesser developed countries, commercial and country risk appetite is greatly reduced except in some special cases (e.g., some naturalresources)

• However, some Western investors remain interested under lower risk structure scenarios

•Mid market and, “West to West” “South to South” investment interest is increasing – Local and expatriated capital is seeking higher returns

Risks faced by Investors in the Water Sector

• Currency risk – Dollar debt and local currency earnings

• Regulatory risk– Regulatory framework not implemented

• Payment/performance risk– Government fails to pay amounts due

• Sub-sovereign risk– Water investments are often at the sub-sovereign level

• “Affordability risk”– Private operators and consumers will not do it all – role

of public investments and subsidies

Despite (or perhaps because of) Difficult Conditions, We are seeing. . .

New approaches to risk allocation and new risk instruments called upon and emerging– greater sponsor (government)

participation– increased efforts to secure local

currency (or expatriated) financing

– increased demand for risk insurance instruments

– reduced developer equity participation

Increased activity of mid-market and “South to South” investors– funds being formed, seeking

operator expertise– investors buying at steep

discounts to original investments– with less risk sophistication – but often with greater local

market “savvy”

8

An Evolving Model for Water Service Delivery

Targeted Subsidies OK• For Connections

• For Usage Charges

Cost Recovery CriticalBut At A

Realistic Pace

Combine InstrumentsIBRD/IDA Loans, Credits and Guarantees

IFC Loans and Investments

MIGA Guarantees

Engagement Anywhere Along the SpectrumPrivatePublic

FinancingFinancing WaterWater

The Camdessus panel

-Initiated after 2nd World Water Forum to look into how to close the financing gap-Chair: Michel Camdessus-Membership: 20 people with top-level experience: financing types rather than water sector professionals-Modus operandi: seven meetings in 2002 and early 2003 with water or financial specialists-A panel of “wise people”, not a consultative process

Starting point: annual investment needs to increase from USD75 B to USD180 B (World Commission on Water)

•Focus: mainly on water supply and sanitation

Twin challenge: improving governance and attracting new finance

87 recommendations: from broad propositions to specific proposals

The Camdessus ReportThe Camdessus Report Market segmentation, financingMarket segmentation, financing optionsoptions

Country or Municipality Risk Rating

Proj

ect S

ize

US$

AAA AA A BBB BB B CCC CC C

Micro Loans

ODA - Development Funds

Project Finance (clean) Project Finance (political insurance or guarantees)

Corporate Sector or Municipal

Corporate Sector (with PRI)

EXPOSED SEGMENT

1,000100

110

10,000100,000

1,000,00010,000,000

100,000,0001,000,000,000

Make project finance more reproducible

Enhance political

cover

Governments should be clear on their strategies and priorities for the water sector—and to plan accordingly:

– Preparation of water sector strategies– Detailed action programs for meeting MDGs– Inclusion of water policies in Poverty Reduction

Strategy Papers (PRSPs)

Priority 1Priority 1Set Local StrategiesSet Local Strategies

Priority 2Priority 2optimize use of existing financial vehiclesoptimize use of existing financial vehicles

Facilities that already exist should be used as financial vehicles, replenished and empowered as necessary:

– ODA for water to double – Donors to refocus aid and coordinate better– Greater use of guarantees– MFIs / donors to resume qualified lending for dams– MFIs to increase lending to subsovereigns– Export credit rules relaxed for water– NGOs with good project pipeline to be targeted for assistance– Private companies (local and international) to be used as contractors

and managers ~ but no ideological preference for private sector

9

Proposals for new agencies, funds and schemes should urgently be studied for their detailed feasibility, and their implementation mapped out, with sponsors identified:

– Devaluation Liquidity Backstopping Facility– Decentralised Fund for Local Initiatives– Revolving Fund for tender preparation and contract

awarding

Priority 3Priority 3Introduce new financial vehiclesIntroduce new financial vehicles Priority 4: longer term sector reformPriority 4: longer term sector reform

Policy changes and reforms to institutions likely to have longer lead times should be started now:

– Tariff reform (“sustainable” cost recovery)– Reforms of public water agencies– Measures to strengthen skills and financial powers of

sub-sovereigns– More freedoms, more rights for local providers

Public funds to public good infrastucture & the poor

Addressing the Financing Challenge

•Support the development of targeted and explicit subsidy policies for the poor

– To address the why and how public financing is being used in PPP transactions

– Directly linked to tariff policies

•Develop new financing, pricing and subsidy systems for “public good” infrastructure

Recent Trends in WBG Thinking

• Renewed focus on infrastructure– Responding to needs expressed by client countries– Local currency and subsovereign issues to be adressed – Use of guarantees

• Focus on service delivery to all including the poor– Refocus on poor– More emphasis on sanitation & hygiene– Pragmatic approach to private sector participation– Working on urban, rural AND towns– Smart subsidies and OBA

• The public-private dichotomy is a bit false– “public” service providers at a minimum use

private suppliers and often outsource many functions

– “private” service providers rely on public support (tax holidays, subsidies) and are always subject to some form of public regulation

– The focus therefore, should be on “efficient”public-private partnerships, not on ideological debates

Moving Beyond Public-Private Debate. It is about Giving Access to Water & Sanitation There are many traps to be avoided…

• Repeating the water decade (pipes with no water)

• Being too supply driven ~ not listening to client countries

• Lack of donor coordination and “cherry picking” by donors and private sector

• Being too detached from Private sector concerns

• Continuing to focus at global and regional level advocacy

• ….

10







OutlineOutline Priorities for ECA

• Prevent the collapse of existing infrastructure through reforms, rehabilitation, efficiency improvements and private sector involvement

• Increased focus on neglected areas – secondary cities and rural areas

• Protect the environment and water resources through greater attention to wastewater and solid waste management

• Assist in reducing quasi-fiscal deficit created by utilities


• ECA is important region, but also a region still in infrastructure development transition mode

• We want to better understanding the private sector perspective and strategies to the water sector for ECA given 9/11, international economic down turn, Argentina, etc.. Is it retreating? Is it holding steady? Becoming less risk averse? What are the focus countries, if any? What are the type of investments being sought?

• What we can do to make the environment more attractive?

My perspective on conferenceMy perspective on conference

Specific attention to:• How to get new entrants into the sector?• How to get the local private sector involved?• How to encourage new entrants into the market (be it,

Management Contract, Lease or Concession)?• What to do in smaller cities? What do we do for

secondary cities in our ECA client countries which are not attractive to foreign operators?

• How to develop domestic entrepreneurs to take over the task?

• What are the factors that attract entrepeneurs to come forward with offer to operate water utilities?

Thank you

1

EAP Task Force

OVERCOMING OBSTACLES TO PSPVIENNA, 2-3 JULY, 2003

Brendan GillespieOECD Environment DirectorateEAP Task Force Secretariat

EAP Task Force

Expenditure needs to operate and maintain functioning water Expenditure needs to operate and maintain functioning water and wastewater infrastructure in EECCA and total financing and wastewater infrastructure in EECCA and total financing

availableavailable

0

8

17

25

34

42

51

Pskov Ukraine Georgia Novgorod Kazakhstan Moldova Rostov Kaliningrad EasternKazakhstan

EUR

per

con

nect

ed in

habi

tant

per

yea

r

Expenditure needs Supply of finance

EAP Task Force

The costs of achieving the water MDGs in EECCA

0

2

4

6

8

10

12

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

.

Maintain current level Total new investmentsO&M&Re for new investments Current available financing

EAP Task Force

Existing sources of financing water and wastewater utilitiesExisting sources of financing water and wastewater utilities in in EECCA countriesEECCA countries

0%

20%

40%

60%

80%

100%

Novgorod Pskov Kaliningradoblast

Rostov Moldova Georgia Ukraine Kazakhstan EasternKazakhstan

User charges Public budgets Other

EAP Task Force

Affordability of Water Bills for HouseholdsAffordability of Water Bills for Households

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Novgorod Georgia Kaliningradoblast

Rostov EasternKazakhstan

Ukraine Pskov Moldova Kazakhstan

Potential affordability limit

wat

er b

ill a

s %

of h

ouse

hold

inco

me

EAP Task Force

Environmentally-Related Expenditure as a Share of

GDP,2000

0 1 2 3 4 5 6

Mo ldov a

Kaz akhs tan

Ukra ine

Rus s ian Fed.

Georg ia

Uz b ekis tan

A rmen ia

Turkmen is tan

K y rgy z Republic

A z e rba ijan

Es ton ia

Roman ia

B u lgar ia

La tv ia

L ithuan ia

S lov en ia

Cz ec h Republic

Poland

S lov ak Republic

Hungary

Germany

Portugal

%

2

EAP Task Force

Closing the Finance Gap

Adjust ambition of objectivesApply least-cost approaches: resources; technologies; operations; scaleUser charges: only long term option for O & M; demand managementTariff reform; better targetting of subsidies for the poorConcentrate public budgets and donor grants: rehabilitation/capital investments; social protection; facilitate access to capitalPS: management rather than financeIncrease resources; reform governance; build capacity

EAP Task Force

OECD/EAP Task Force

• Kiev: support and facilitate achievement of EECCA Environment Strategy objectives

• EECCA WSS network– tools, guidance, solidarity for reformers in

EECCA countries– promote partnerships between donors and

EECCA countries– work with Banks to overcome obstacles to

sustainable and broader investment

EAP Task Force

Dialogue with Private Sector

• 2nd meeting• Evident demand from PS, IFIs, donors• Summary but no attribution of views• Involving ECA country representatives for

first time• Broaden participation: NGOs?• Issues for future dialogue

EAP Task Force

Objectives

• Assess trends in PSP in ECA region; compare with global trends

• Opportunities and obstacles to further PSP in ECA

• Opportunities for new entrants– enhancing competition– addressing needs in secondary cities and

rural areas

EAP Task Force

Agenda

• Day 1 am: Lessons from PSP• Day 1 pm: PS perspectives• Day 2 am: Promoting competition

– domestic PS– external PS

• Day 2 pm: Report back and Conclusions

outline of presentation -...

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