Market Finance for Large Service Providers. By: Dr. William T. Muhairwe Managing Director, NWSC-Uganda June, 2008

Transcription

1 Market Finance for Large Service Providers By: Dr. William T. Muhairwe Managing Director, NWSC-Uganda June, 2008

2 INTRODUCTION Parastatal set up in 1972 Currently responsible for WSS services in 22 large towns of Uganda (Popln 2.6 million, 200,000 customers, 72% piped water coverage) Corporate Vision To Be One Of The Leading Water Utilities In The World Corporate Mission The Mission of the Corporation to provide efficient and effective water and sewerage services, applying innovative managerial solutions to the satisfaction of our customers and other stakeholders in an environmentally friendly manner

3 OPERATIONAL STATUS: 1998 Monthly deficit - $ 300,000. Collection Efficiency 60-70%. UFW 60-65% Kampala 60% Other areas 65%. Staff Productivity 36/1000 connections High operating expenses (administrative, transport, medical) Low operating income. Loss after depreciation minus $ 400,000 High Debt Burden ($100,000)

4 TURN AROUND INTERVENTIONS POST 1998 Policy level Strategic level, change in Board & Management Operational level Operational framework through change management programmes (100 Days, Service and Revenue enhancement project (SEREP), Area Performance Contracts (APC), Internally Delegated Area Management Contracts (IDAMCS), One Minute Management Concept (OMM), Checkers system Organisational behaviour Customer care Cost reduction Revenue enhancement Technical and commercial performance Incentive mechanisms See our Website for details:

5 KEY ACHIEVEMENTS Performance. Indicator Service Coverage Water prodn/day Network coverage Staff per 1000 connections New connections per year Total connections Coll. Efficiency Unaccounted water Proportion metered accounts Annual turnover as at June Profit (After. Dep) as at June % 120, ,317 50,826 60% 51% 65% US$11 million US$3.0million loss % 166,173 Increased by > 50 % 7 25, , % 32.5 % (Global) 99.1% US$ 47 million US$ 4.8 million Surplus

6 FINANCIAL PERFORMANCE Annual Turn over/op Profit (millions) Financial Performance ,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, , Operating Profit Years Annual Turnover Turnover increased from Shs 21 billion (USD 13M) 1998 to Shs 80 billion(usd48m) in 2008 Growth in turnover of about 4% per annum. Operating profit (after dep) increased from loss in 1998 to surplus in NWSC has cultivated significant revenue growth resulting in strong operational cash flow

7 INVESTMENT PERFORMANCE Historically, most investments financed through Donor Grants and from the Government. Grants were used to rehabilitate the infrastructure which had been run down from during the period of turmoil in the 70 s. However to date, there is a dwindling Resource envelope from Government due to competing needs from other sectors e.g. health, Education, Roads, Energy. Competing needs also felt between rural versus urban priorities. Donor resources are also thinning.

8 NWSC UTILISATION OF INTERNALLY GENERATED FUNDS With operational and Financial improvements, NWSC is now able to cover: O&M costs Depreciation Costs Minor Investments from its cash flow However Tariff is still not a Full Cost Recovery Tariff. Therefore is not sufficient to cover all investments. Therefore need to augment own resources to be able to implement the five year investment plan estimated at about Shs 168 billion (US $ 101 million).

9 DEBT RESTRUCTURING In order to facilitate NWSC leveraging of its resources, Parliament passed a resolution to restructure the NWSC Long Term Debt Obligations to Government into Equity. A total of Shs 153 billion(usd 92m) was converted to equity Restructuring was aimed at: Enabling the Corporation access market Finance for critical and commercially viable projects. Enable the Corporation build a history of profitability and credit worthiness with a healthy balance sheet. Enable the Corporation finance from its internal resources key investments all aimed at expanding production and service coverage.

10 OPTIONS FOR MARKET FINANCE Source Funds of Advantages Drawbacks Risks Commercial Bank Loans Quick to obtain Easy to terminate through early payments More expensive (17%- 18%) Rigid payment terms Shorter loan tenors (5-7 years) Stringent supervision from lender High Interest rate risk Bond Issuance cheaper (10-14% interest rate) Longer tenor (10-12 years) and therefore matches the funding maturity profile to the asset life profile. Fixed interest rate over the debt service period giving certainty for planning purposes Greater flexibility for fund management Can be opened to financing a longer term investment programme Helps establish a credit curve and build a track record in the capital markets. More complex to develop First issue takes a longer time to realise Risk of issuing bond before project is ready, thereby encumbered with idle funds. Concessionary Finance from External Lending Agencies Relatively cheaper in cost 4% Foreign currency denominated loans. Complexity in utilisation of funds. Exchange rate risks

11 PREFERRED OPTION From the foregoing, the pursuance of the Capital Market Bond was preferred based on the advantages stated. The Uganda Bond Market is nascent with a lot of funding opportunities to offer A Local Bond will allow NWSC to: Raise sufficient capital for the planned investment programme on a sustained basis Mitigate interest rate risks and achieve flexibility in financing. Extend repayment periods to correspond to economic life of assets being created. Meet country level objectives of deepening the capital market and set an example for other utilities

12 OTHER FINANCING OPTIONS It should however be noted that the option of the Bond Financing does not in any way preclude the use other sources of Finance since the NWSC investment needs are enormous. The key guiding principle for the Corporation will be seeking finance which is favourable and cost effective for the NWSC and meeting the social goals. The Corporation therefore intends to use a cocktail of funding to meet its investment programme; bearing in mind the social mission investments, and the fact that the water tariff is not a full cost recovery tariff.

13 STEPS TAKEN IN BOND PREPARATION With assistance from the World Bank (WSP Nairobi), the following steps have so far been taken: Indigenous brokerage Firm M/s MBEA Brokerage Services (Uganda) Limited was appointed as the Lead Arranger for the NWSC Bond Issue. MBEA is responsible for the preparation of the prospectus. Internationally accredited firms were identified to carry out the Legal due-diligence, Accounting due-diligence, and the fiscal Agent &Registrar services. These are MMAKS Advocates, Ernst & Young, and Barclays Bank Uganda Limited, for the respective assignments. It is envisaged that the Bond will entail a Medium Term Note (MTN) of about Shs 100 billion(usd60m), which will be disbursed in tranches of about Shs 30 billion(usd18m) per annum over three years.

14 STEPS TAKEN IN BOND PREPARATION The Bond is envisaged to be a local Bond. However, feelers will be sought for interest within the East African region. Preliminary feelers have been made with prospective institutions such as the Pension funds and Insurance companies for purchase of the Bond. It is envisaged one major buyer e.g. NSSF, will buy up the majority of the Bond, say 60%, and the 40% could be let to other market players. It is envisaged that the entire process would be complete by end of the first quarter in the financial year 2008/2009.

15 FINAL STAGES OF BOND PREPARATION Approval from CMA and USE Negotiate structure of Bond with Institutional Investors. Commence investment program.

16 Conclusion NWSC has carried out worthwhile reforms Full cost recovery Tariff still a myth. Market finance helps leverage domestic resources. Bond Option preferable for long term commercially viable investments and has the dual advantage of promoting the domestic capital market. We would wish to single out and thank WSP for the tremendous professional support and assistance that they have rendered and continue to offer to us.

17 Conclusion Thank You

18 THANK YOU