KEY INFRASTRUCTURE CONCEPTS KEY INFRASTRUCTURE CONCEPTS

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1 KEY INFRASTRUCTURE CONCEPTS KEY INFRASTRUCTURE CONCEPTS Dr. Allen Eisendrath Senior Infrastructure Finance Specialist Office of Infrastructure & Engineering, USAID/Washington 1

2 SOME THINK OF INFRASTRUCTURE AS JUST THE PHYSICAL FACLITIES THAT PROVIDE SERVICE 2

3 INFRASTRUCTURE IS MORE THAN JUST PIPES, WIRES, AND CONCRETE Infrastructure is not just physical facilities; it is often a set of businesses that own, operate and renew infrastructure facilities; Most infrastructure businesses have three main building blocks: physical assets, the enabling environment, & the businesses that operate and maintain the system; Infrastructure Reform means: (1) establishing an appropriate sector structure; (2) building an effective legal & regulatory environment; (3) for public infrastructure, establishing a framework for good corporate governance, and (4) in some cases, building a rational approach to sector financing. Increasing Creditworthiness through Utility Transformation $50,000 $47,080 Thousand US Dollars $40,000 $30,000 $20,000 $10,000 $0 $0 $33,911 $20,976 $7,808 Surplus cash flow Revenues Total costs Debt carrying capacity -$10,000 65% 55% 45% 35% 25% Total Commercial & Technical Losses 3

4 KEY FEATURES OF INFRASTRUCTURE Corporate Governance Enabling Environment Laws Regulation Infrastructure Facilities Customers Public Funding Infrastructure Business & Institutions Capital Markets 4

5 KEY FEATURES OF INFRASTRUCTURE Typical Infrastructure System: Infrastructure is also often a network business; it enjoys economies of scale, and it often has monopoly segments. Water Rights Market Bulk - Wholesale Market Retail Market Surface Water Supply Pumps Groundwater & stream bed supply Storage Pumps Water Treatment Individual Groundwater Wells Distribution Network Elevated service reservoirs W A T E R U S E R S Septic Tanks Sewerage Drains Water Resource Management Bulk Water Supply Distribution Services Sanitation Services 5

6 THE TYPICAL SITUATION WITH UNREFORMED INFRASTRUCTURE Declining levels of service Angry Customers Unwillingness to pay Assets deteriorate & expansion is difficult if full economic costs are not recovered. Service to the poor & costcenter businesses suffer Cycle of Physical & Commercial Decline Declining revenues Unpaid bills Inability to access financing Declining credit rating and investment Deteriorating assets Declining productivity Increasing operating costs 6

7 INFRASTRUCTURE IN DEVELOPING COUNTRIES HAS A COMPLEX WIRING DIAGRAM INFRASTRUCTURE BEFORE REFORM SHAREHOLDERS BOARD POLITICIANS REGULATORS UN- ORGANIZED CRIME ORGANIZED CRIME THE INFRASTRUCTURE BUSINESS CUSTOMERS 7

8 INFRASTRUCTURE IN DEVELOPING COUNTRIES HAS A COMPLEX WIRING DIAGRAM INFRASTRUCTURE AFTER REFORM SHAREHOLDERS BOARD POLITICIANS REGULATORS THE INFRASTRUCTURE BUSINESS CUSTOMERS 8

9 INFRASTRUCTURE COSTS INCLUDE OPEX AND CAPEX OPERATING COSTS Salaries Energy Cost of goods sold (fuel, bulk water) Maintenance IT + CAPITAL COSTS Debt (interest and principal) Equity (dividends and principal) = Cost of the Infrastructure Business There is capital cost to the business even if donors build the facilities on a grant basis!!! 9

10 Defunct wastewater treatment plant, Armenia CAPITAL IS PART OF THE INFRASTRUCTURE BUSINESS (even if facilities are granted by donors ) Broken secondary pipe, Romania Corroded pipes, chlorination station, Armenia Indonesian illegal water connections 10

11 EXAMPLE OF THE AFGHAN ELECTRICITY SYSTEM 11

12 THE AFGHAN NATIONAL ELECTRICITY UTILITY S CASH LOSSES WILL GROW DRAMATICALLY DABM Gross Profit (50.0) Million USD (100.0) (150.0) (200.0) (250.0) ICE Secretariat and AEIC And this doesn t include the huge underspend on maintenance & salaries! Base Case 12

13 A REFORM PROGRAM WOULD ENABLE THE AFGHAN UTILITY TO BREAK EVEN Net Revenue Per Kilowatt Hour Produced US Cents per KWh 2 - (2) (4) (6) (8) (10) (12) But, DABM can t afford to pay for imported electricity if it loses money on each unit purchased!!! (14) Base Case Add Uzbek Power Loss Reduction Program ICE Secretariat and AEIC 13

14 CAN LAGOS STATE WATER CORP PAY FOR MAINTENANCE & REPLACEMENT OF ITS CAPITAL ASSETS? N millions Comments Water Sales Cash basis accounting Risk of incomplete reporting State subvention No reconciliation Total revenues 925 1, % Total expenses 1,638 3, % Deficit of the year (712) (1,751) + 146% Deficit/Sales ~2 times ~3 times Source: Arthur Andersen Deficit is N 1,75 billion = approx. USD $14 million 14

15 DEFINING BANKABILITY WHAT IS A BANKABLE UTILITY? A UTILITY THAT: has enough cash to pay all its costs, including operational & capital costs has a predictable means of recovering its revenue requirements has sufficient financial strength & control to meet high standards of creditworthiness can deal with the financial risks that happen in the normal course of business 15

16 IN SUMMARY. Infrastructure is often a set of businesses that own and operate physical assets. These businesses enjoy economies of scale and have monopoly characteristics even in conflict environments; The enabling environment is critically important even in conflict environments; Cost recovery (bankability) requires recovering both operating and capital costs even in conflict environments; Reform involves fixing the corporate form and governance, getting the sector structure and enabling environment right. 16