Engagement of Financial Advisory Services for the Soapberry Wastewater. Terms of Reference

Transcription

1 JAMAICA: FOUNDATIONS FOR COMPETITIVENESS AND GROWTH PROJECT Loan No.:8408-JM Component: 2A Assignment Title: Treatment Plant Engagement of Financial Advisory Services for the Soapberry Wastewater Reference No. (As per Procurement Plan): FCG/CON/038 I. Background Terms of Reference Governed by the National Water Commission Act (1980), the National Water Commission (NWC) is a statutory body charged with the responsibility of being the main but not exclusive provider of potable water supply and the collection, treatment and disposal of wastewater services in Jamaica. The Kingston Metropolitan Area (KMA) which includes the Urban Centres of Kingston, St Andrew, South East St Catherine (Portmore) and Greater Spanish Town are the largest population centers accounting for approximately 50% of the island population. The KMA also has the largest sewerage coverage of approximately 40%. The NWC in keeping with its Capital Development Programme intends to develop and implement key potable water and domestic sewage collection/treatment and disposal projects to increase access to potable water to 85% and sewerage connections to 50% by The Soapberry Wastewater Treatment Plant (SWTP) is currently owned and operated by Central Wastewater Treatment Company (CWTC) which was established as a special purpose company for the construction and operation of the facility. NWC has an 85% shareholding of CWTC with Ashtrom Building Ltd, the current operator, owning 15% of the shares. The NWC has identified the need to explore this project given: SWTP is required to be expanded from its current treatment capacity of 75,000 m3/day to 150,000 m3/day by year 2020, in order to meet the medium term requirement for treatment of wastewater collected by NWC in the Kingston Metropolitan Area (KMA). The current capacity is capable of serving about 256,000 persons; The Project aims to facilitate the expansion of the KSA sewer network and provide the opportunity for more residential and commercial infrastructure to be developed; The need to ensure that the output from the plant, meets or exceeds NEPA s guidelines for effluent quality; and It is envisaged that the output from SWTP is reused for agricultural purposes to offset the current use of potable water sourced from the Rio Cobre.

2 The NWC is desirous of reducing its shareholding in CWTC in order to achieve a two-fold objective: 1. Liquidation of the NWC s shares so the asset can be realised as cash for financing NWC s strategic investment plan; and 2. It is anticipated that the restructuring of the ownership of the CWTC will enable the new owners to garner additional capital investment to expand the capacity of the Soapberry wastewater facility as per the projected incremental increase in demand. The analysis of the legal implications of this transaction from both a policy, governance and corporate aspect will be undertaken under a separate Legal Consultancy Contract that will commence prior to this Financial Advisory Services. The outcome of Phase 1 of the Legal Consultancy will establish the framework for this share transfer and ensure that all policy, regulatory and corporate aspects of the CWTC are aligned with the object of transferring the NWC stock (or a portion thereof). The Legal and Financial Consultants will be contracted separately. This engagement represents the determination of the economic and financial valuation of the entity, CWTC in order to estimate the value of the shares. This valuation will be used to determine the price the new owners are willing to pay for the stock and the NWC are prepared to sell. The Foundations for Competitiveness and Growth (FCG) Project was approved by the International Bank for Reconstruction and Development (the World Bank) on July 25, The Government of Jamaica (GoJ) and the World Bank signed the loan agreement on September 3, The Project is being implemented by the Planning Institute of Jamaica in collaboration with the Jamaica Promotions Corporation and the Development Bank of Jamaica (DBJ). It is aimed at strengthening the business environment in Jamaica for private sector investment through four (4) components. Component 2 of the FCGP aims to facilitate strategic private investments through financing feasibility and other related studies and Technical Assistance (TA) to enable the government to prepare for and close investment transactions with private sector participation in a way that enables transformational growth impacts. The GoJ intends to apply a portion of resources obtained from the World Bank s Foundations for Competitiveness and Growth Project to conduct a Transactions Advisory Services for the engagement of a private investor in the CWTC. II. Objective The main objective of this assignment is to undertake a Business Valuation of the CWTC in order to estimate the financial value of the entity. This valuation will be used to determine the value of CWTC and price the buyer(s) is/are willing to pay for the portion of stock that the NWC is willing to sell in the CWTC. The consultant is required to prepare a comprehensive business valuation report for the NWC. The investigation, analysis, and recommendations of the study shall include all matters discussed in Tasks 1 through 5. The Consultant(s) will provide advisory support to the Government and the Enterprise Team throughout the transaction with the aim of successful completion of the share transfer process within the agreed time period. A3-2

3 III. Statement of Work It is anticipated that a consulting firm, hereafter referred to as Consultant, will be hired to undertake this project through to the conclusion of a share transfer agreement or agreement. The Consultant shall prepare a study for the CWTC that addresses each of the 5 tasks described in this Statement of Work. The Consultant shall make clear which personnel it is assigning to each task, as well as the specific activities and expected duration of each task. When undertaking the financial analysis, the Consultant shall give consideration to environmental management and sustainability of the SWTP and its expansion. The Consultant shall also remain cognizant of the following important factors, and their associated potential impacts: The long term objective to expand the SWTP as per the objectives defined above; That there are safeguards within the appropriate legal structure to ensure that the quality of the effluent from the plant meets or exceeds the NEPA standards at a minimum; The possibility of reserving a portion of CWTC shares for an eventual public offer. The following documents and/or reports will be made available to the consultant: The OUR Act; CWTC s Operating License, Shareholder s Agreement, Wastewater Treatment Agreement (with NWC), Operating and Maintenance Agreement (with WOMC) CWTC s 2013 Tariff Determination The Government of Jamaica s PPP Policy; Pre-Feasibility Study and Environmental and Social Scoping Study (Worley-Parsons 2014) Further Investigation Measures for the Extension of the SWTP (GOPA 2016); Upon completion of Tasks 1 through 5, the Consultant shall provide a mid-study oral presentation and written report to the Enterprise Team and other relevant stakeholders (including NWC, DBJ, PIOJ, AGC and Legal Advisors). Individual task deliverables, as described below, shall each constitute a separate chapter of the written report. It is anticipated that Phase I Tasks 1 through 4 of the study should be implemented within a period of three (3) months, and Phase II Task (negotiations) should be implemented within an additional period of six (6) months to conclusion represented by the formal agreement between the parties to sell/buy at agreed price. Phase I TASK 1: Legal Framework a) Review and analyse the results of Task 1 Report of the Legal Consultancy in order to ascertain that the transaction can be successfully concluded. That is there are no agreements or contracts, litigations and/or existing contracts of CWTC that would mitigate against the success of the proposed Transaction. b) Based on a) above propose the options available for engaging a private investor; Task 1 Deliverable: A3-3

4 Inception Report which establishes the framework for the transaction for the sale of the shares, including a determination of the following: i. Per Cent of stock sold that maximizes NWCs financial outcome and at the same time achieves the objective of expansion of the Soapberry Plant; ii. Type (Ordinary, Preference or Convertible) shares sold and whether any rights etc. can be assigned to them; iii. Analysis of all legal or contractual obligations of the entity established in Phase I Report from Legal Consultant; iv. Brief review of all other perceived risks, including, but not limited to: Environmental, administrative, Managerial and demand; v. Outline of the next steps in the Valuation exercise. TASK 2: Financial and Economic Analysis of CWTC Conduct a detailed financial and economic analysis of the CWTC on the options for structuring the transaction for private sector participation (including, building financial models) and identify and assess the transaction structures available to deliver the Project given the legal and regulatory framework established through Task 1 above. Specifically, the Financial and Economic Analysis shall consist of the following: i. Economic conditions - a description of national, regional and local economic conditions existing as of the valuation date, as well as the conditions of the industry in which the CWTC operates; ii. Prepare a risk assessment matrix which is critical to determine the discount rate and the selection of market multiples. iii. Preparation of a 20 year demand forecast for processing of sewage through the SWTP with at least two scenarios to capture possible variances in the forecast, including the detailed assumptions made for each scenario. The Consultant shall confer with existing studies and or development plans submitted to the KSAC and the National Environment and Planning agency (NEPA), examination of country statistical data and policy. In addition to sewerage processed, the projected demand for the irrigation brown water which is a potential source of revenue for the entity must be forecasted as it has revenue/cost implications. The forecasting methodology and the assumptions used by the Consultant must be articulated. iv. The Consultant shall determine the financial feasibility of the CWTC and recommend the best option for achieving the NWC s objective as defined above. Specifically, the Financial Analysis shall consist of the following: a) Review the demand projections and established tariffs and create financial models that assess the projects commercial viability based on the revenue potential. b) Determination of the costs to develop (CAPEX) and operate (OPEX) the SWTP, drawing from the capital investment costs calculated (including the use of effluent for reuse) ; c) Calculation of revenues to the shareholders, based on the Demand Forecast (Task 3a) ; d) Build a financial model to estimate the internal rate of return (IRR) to the project developer over a 20-year period. The model shall include: a) scenarios that can test the various effects on both investor profitability and IRR, investment and operating costs and A3-4

5 revenues under various development models; b) income statement and cash flow, showing detailed calculations and summary sheets; c) phasing plan, according to different levels of demand. e) The Consultant shall conduct sensitivity testing on the model. The model shall be linked to the Demand Forecast to reflect the same scenarios presented in the forecast; f) Analyze and rank the model output scenarios based on projected IRR to the investor / shareholder; g) Recommend a scenario that maximizes private developer IRR and minimizes the costs borne to the GoJ; h) Identify financial risks to the project, and suggest mitigation measures; i) Prepare a guide on how to use the models for the GoJ; Task 2 Deliverables: Project CAPEX, OPEX and revenues; financial model and cost-benefit model; model scenarios and outputs, financial recommendations in the form of Transactions Structuring Options Report with the best models to achieve the NWC s objectives. The recommended public-private arrangement should be demonstrated and reflected in the financial and cost-benefit model outputs. A description of financial risks; and guide on how to use the models is to be included in report. The Consultant shall deliver all model spreadsheets and a written report. TASK 3: Valuation Report Business value considerations must yield the fair market value of the Company as a whole. In addition the value of a minority, non-controlling interest in CWTC, must consider the applicability of discounts in order to reflect disparate controlling interests (i.e. minority vs. majority common stockholders). The report must conform to the International Financial Reporting Standards ( IFRS ) i in relation to the following valuation services rendered by the Consultant and shall undertake the following activities: i. Review the available legal, environmental, operational & technical information on the operations of the entity furnished by CWTC; ii. Assess the operations of CWTC; iii. Review the previous five (5) years audited financials for CWTC ; iv. Presentation of financial projections and the assumptions (demand, tariff etc.) on which they were derived; v. Prepare and present to the NWC, DBJ and Enterprise Team a detailed report, explain and setting out an IFRS-compliant valuation methodology and specifying the model inputs used in computing fair value. The business valuation takes into consideration the prospects and structure of CWTC in order to complete a comprehensive value for the firm the consultant must include (but not limited to) the three (3) different approaches: the income, the asset-based and market approach. A3-5

6 a. the income approaches determine value by calculating the net present value of the benefit stream ( developed in iv. above) generated by the business (discounted cash flow); b. the asset-based approaches determine value by adding the sum of the parts of the business (net asset value); and c. The market approaches determine value by comparing the subject company to other companies in the same industry, of the same size, and/or within the same region. The report must conform to the International Financial Reporting Standards ( IFRS )ii in relation to the following valuation services rendered by the Consultant. The estimate of share value that results from this valuation engagement is expressed as a conclusion of business value. The Report must contain (but not limited to) the following elements: Standards and Premise of Value Scope of the Report Information Sources Business Description Industry Overview Financial Statement Reconstruction, Forecasts and Assumptions Business valuation Summary determination of reasonable estimates of the fair market value of company for three scenarios of ownership: 100% ownership of common stock, minority shareholding and majority shareholding Task 3: Deliverable: Prepare and present to the NWC, DBJ and Enterprise Team a detailed Appraisal Report, explain and setting out an IFRS-compliant valuation methodology and specifying the model inputs used in computing fair Value for CWTC including (but not limited to) the following elements: i. Executive Summary ii. Introduction iii. Standards of Value - Firm Market Value to be utilised iv. Approach to Valuation v. General Economic, Environmental, technical and Legal overview vi. Financial Analysis vii. Comparative Industry analysis viii. Valuation of CWTC by Methodologies ix. Summary of Valuation: Assignment of weights to each methodology to arrive at selected conclusion price for the following sale scenarios: a. 100% of Ordinary shares b. Minority shareholder (unit price per ordinary share) c. Majority shareholder (unit price per ordinary share); or d. Alternate form of stock issue (Preference, Convertible etc.) A3-6

7 TASK 4: Support Negotiations The objective of this task is to help the Government hold successful negotiations with the bidder. The consultant will support the Project Team throughout the negotiation phase as required until its conclusion. This is defined as the completion of the Share Purchase Agreement between the parties on the type, quantity and unit price of the CWTC shares to be acquired by the investor. TASK 4 Deliverables: The deliverable of this task is the Negotiation Advice Report. The consultant will be required to support the NWC during negotiations with the preferred bidder. They are expected to provide comprehensive advice on how to address the points raised and attend related meetings where necessary. The fixed portion of the contract terminates at the end of 26-weeks from inception or upon acceptance of a Negotiation Advice Report documenting the transaction between the parties culminating in in-principal agreement to terms (draft contract) or mutually agreed termination of negotiations, whichever comes first. TASK 5: Financial Close The consultant will be required to complete the transaction to Financial Close. The financial advisors will ensure that the financial documentation and all supporting contracts are consistent with the project objectives - financial close. The Deliverable is the completion of all legal and financial agreements related to share transfer. The payment of this task is upon completion of the Share Agreement and submission of a billable hours report. IV. Stakeholder Engagement The Consultant shall remain engaged with the Enterprise Team throughout the project, and will agree with core stakeholders on a schedule of interim verbal briefings. The Consultant shall also adhere to the following: Stakeholder Engagement Initial meeting with Stakeholders: ET, NWC, MEGJC, DBJ, AGC & PIOJ etc. Meetings with stakeholders (and with the potential purchaser s of shares if required) to assist with the negotiations of the price per unit of stock. Timing Beginning of project and per Schedule aligned to deliverables of the Reports at a time agreed upon between Consultant and Enterprise Team. As determined (after presentation of Task 4) Brief oral consultation between Consultant and Enterprise Team as required during period of engagement. As determined A3-7

8 V. Schedule of Deliverables The Consultant shall prepare deliverables according to the following schedule. The Enterprise Team shall provide timely feedback to the Consultant within two weeks of submission of each deliverable. Name of Task Deliverable Deadline for Submission CUMM. WEEKS Per Cent of Fixed Portion TASK 1 Task 1 - Legal Framework Draft By the end of week 2 2 Review and approval of report ET, NWC, DBJ and PIOJ Review Period - 2 weeks 4 10% TASK 2 Draft Report Task 2 By the end of week 8 8 Review and approval of report ET, NWC, DBJ and PIOJ Review Period - 2 weeks 10 20% TASK 3 DRAFT Report Task 3 By the end of week Review and approval of report ET, NWC, DBJ and PIOJ Review Period - 2 weeks 14 20% TASK 3 Final Report Task 4 By the end of week Review and approval of report ET, NWC, DBJ and PIOJ Review Period - 2 weeks 18 20% TASK 4 The Financial Advisor must assist the Project Team throughout the negotiations phase to their successful conclusion, documented by a Negotiation Advice Report. Up to 26 weeks from inception or on conclusion of agreement (at 6.5 months) 26 Review and Approval of Negotiation Report (ET, NWC, DBJ and PIOJ) Review Period - 3 weeks 30% TASK 5 FINANCIAL CLOSE (Billable Hours) VI. Team Composition Key Expert - Economist (Master s Degree in economics, Finance, accounts, or similar) i) At least 10 years experience in conducting financial and economic analysis of infrastructure projects, particularly project financing of water & sewerage entities; ii) The Consultant must be an Accredited Senior Appraiser, Business Valuation or the equivalent professional qualification; and iii) Experience undertaking private placements and structuring share transfers. A3-8

9 The Consultant shall form a team of experts that includes, at minimum, a valuation consultant and financial consultant. The Consultant can add other positions as necessary to undertake the terms of reference. The Consultant shall designate one team member as the Team Leader, who will manage the team and act as the primary liaison between the consulting team and GoJ. VII. Project Coordination The Consultant will report directly to the NWC, through the Vice President - Vernon Barrett, and work closely with the following core stakeholders: MEGJC NWC PIOJ Legal Advisor Development Bank of Jamaica (DBJ), Finally, the Consultant will also work closely with all other public and private sector stakeholders, as appropriate, in undertaking the work of this project. i Uniform Standards of Professional Appraisal Practice (USPAP), International Valuation Standards and AICPA SSVS No. 1 or International Valuation Standards and AICPA SSVS No. 1. ii Uniform Standards of Professional Appraisal Practice (USPAP), International Valuation Standards and AICPA SSVS No. 1 or International Valuation Standards and AICPA SSVS No. 1. A3-9