Guerdane Project. Introduction of Private Sector Participation in Irrigation

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1 Guerdane Project Introduction of Private Sector Participation in Irrigation

2 Guerdane Project : Context In 2001, GOM decided to explore possibility of PSP in irrigation, beyond users association schemes Decrease public spending more efficient water management Innovative proper structuring was critical IFC was recruited in December 2001 to act as lead advisor for the structuring and implementation of a pilot PSP project in Guerdane In-house transaction managers and outsourced specialized consultants First bid failed due to lack of competition re-launched with key adjustments to pre-selection criteria Second bid was successful Competitive situation resulted in major savings for consumers

3 A Conservation Project Covers 10,000 hectares in Souss-Massa region (near city of Agadir) Cultivated with citrus groves (including export products) Over 100,000 people estimated to be earning a living (directly or indirectly) from citrus farming in the region Land owned by 670 farmers, noted for high-level productivity and innovative commercialization Private wells are currently the only source of irrigation water Due to over-exploitation, the groundwater table level is diminishing by 2.5 meters per year on average Several farms are abandoned every year as wells dry up or water pumping costs become unaffordable

4 The Project - Concept Delegation of public service to private sector 30-year concession Build-Transfer-Operate (BTO) scheme: Private sector will be responsible for construction (including its financing) Upon completion, infrastructure is transferred to the state Operation of infrastructure is delegated to private sector Surface water allocation of about 45 million m 3 Cost of infrastructure estimated at USD85 million (conveyance pipe + network)

5 Supply Risk Assessment Moderate supply risk for Project: 45 million m 3 of water allocated Based on historical analysis, water supply is likely to average 43 million m 3 due to 4-5 years of important drought by 30-year period Irregular drought pattern Regulation by contract to ensure water supply for Project Supply contract between conceding authority and Agence de Bassin Yearly revenue deficit from water shortages limited to 15% of normal volume Users partially assume demand risk though tariff surcharges (limited to 10% of tariff) Government will reimburse all deficit not covered by above mechanisms (i.e. beyond 22.75% of volume allocated to Project)

6 Demand Risk Assessment Linked to citrus groves produced in region 4000 m 3 /ha Demand risk is limited Demand based on farmers paying a price of up to USD 0.20/m 3 to extract ground water Public sector contribution would help maintain water tariffs at range of current pumping costs, making them affordable for farmers Demand expected to increase as depletion of ground water continues

7 Demand Risk Mitigation Mitigation mechanisms Initial subscription Subscribers have been identified Subscribers pay an initial fee (approx. USD800 per ha) Water is allocated among subscribers according to overall and individual demand Water (4000 m 3 per ha) that is not subscribed for is reallocated among farmers who need more Farmers who do not use part of their water lose their right to the unused volume, to the benefit of others If demand is insufficient, subscription will be open to other farmers in the area (outside target beneficiaries) Construction will not start until 80% of the water is subscribed for

8 Other Project Risks Construction (delays, flaws) Operation (efficiency, collection of payments, etc.) Force majeure Case of earthquake risk Fait du Prince E.g., change in the volume of water allocated to Guerdane

9 Tariff Structure Fixed and variable tariff components: Fixed: annual pre-payment of 20% of subscribed water volume determined at initial subscription Variable: based on water consumption during agricultural campaign Ability to suspend water provision for non-payments Subsequent non-distributed water made available as priority to farmers on waiting list

10 Public Sector Contribution Commercial tariffs based on the true economic cost of service may be too high relative to affordability/willingness to pay of farmers Public sector contribution (subsidies) could reduce the tariffs required for the private investor to realize its return on investment Balance is key between the public sector contribution and the incentives for economical use of water Public Sector Contribution Tariffs No incentives for economical use of water Actual Cost Pumping Ground Water Too high for farmers

11 Bid Structure GOM s objective is to obtain lowest tariff for a given amount of public contribution Public contribution amount was fixed with affordable tariff in mind Model was run to obtain a tariff range of Dh (USD0.15-USD2.2) per cubic meter Sensitivities on construction costs, water availability and demand, etc.

12 Financing Public sector contribution: 475 million Dh (about USD50) 50% direct subsidy 50% soft loans (30-year maturity, 20-year grace, 1% interest) Private sector contribution: the remaining construction costs, plus all operation and other costs Users are to pay a subscription fee which will amount to approx. USD8 million in total

13 Transaction Structure Agence de Bassin Water Supply ORMVA Delegating Authority Water Distribution Private Sector Concessionaire Users Tariff Payment Hassan II Funds Public Contribution

14 Pre-qualification of Investors Objective: pre-selection based on financial and technical criteria Expertise in irrigation network operations (operator) Expertise in construction of hydraulic infrastructure Financial Capabilities Resulting consortium structure (2 nd round of tender process): Led by local financial investors Teamed up with construction firms (local or international) Retaining the services of operators (local or international)

15 Bidding Process Government objective: obtain the least tariff possible Focus on competitive transparent bidding process Single criterion for bidding: based on proposed tariff (financial offer) Strict obligations/performance standards established in contractual documents ( Cahier des Charges ) All bidders bid on the same contractual documents with identical service obligations Apart from those obligations, concessionaire has flexibility in the technical design of Project, such as the choice of construction materials

16 Re-Launching of Tender In first attempt, few investors pre-qualified (local and international) Contractual documents finalized prior to tender, based on comments from potential bidders Shortly before the tender was launched, only one potential bidder remained After some discussion on whether to proceed with a negotiated deal with a single investor, a second attempt for a competitive tender began: Contractual documents based on finalized form from previous attempt Tender open to all investors wishing to participate (so long as they signed a confidentiality agreement) Qualification criteria reviewed based on changes in global economic environment Verification of technical and financial capabilities upon bid opening no prequalification

17 Results Bids received from 2 consortia, both led by local financial investors Both bidders met the criteria for technical and financial capabilities, and submitted responsive bids in accordance with the bidding procedures Results were outstanding, especially given the base price of Dh/m 3 estimated for the Project: The losing bidder s financial offer was 1.88 Dh/m 3 The winning bidder s financial offer was 1.48 Dh/m 3 ONA, CDG, InfraMan, BRL Farmers are thus set to enjoy a substantially favorable tariff, on top of the high quality of service expected from private sector operation The winning bidder, led by the Moroccan conglomerate Omnium Nord- Africain (ONA), will be Morocco s first ever domestic private infrastructure operator in irrigation projects