Winners and Losers in Argentina s Water Sector Reform Cost Benefit Analysis a tool to estimate the distributional impact of water sector reform

Transcription

1 Winners and Losers in Argentina s Water Sector Reform Cost Benefit Analysis a tool to estimate the distributional impact of water sector reform Caroline van den Berg 1

2 Outline of this Presentation 1. Background 2. Objectives of the Cost Benefit Analysis 3. Methodology 4. Results 5. Policy Implications 2

3 Background Argentina as a pioneer in water and sanitation concessions Buenos Aires concession serves more than 6 million people - one of the largest water concessions Since Buenos Aires, more provincial and municipal concessions have been awarded But. PSP is not without its problems 3

4 Emerging Issues Crisis of the Regulatory Model Failure to extend the services to the poor Slow improvement in environmental quality Argentina - Water Sector Reform Project US$260 million Loan Address the above issues in the second tier PSPs through TA, and initial financial support to newly privatized utilities. 4

5 The Project Environment Smaller Size (population - 25,000 to 250,000 with an annual revenue of US$ 2-11 million) Bid on Canon or License Fee Payments instead of Tariff Infrastructure charges (connection and secondary network costs) generally paid by the new customers 5

6 CBA Analysis in a Reform Project? Basic Premises: Conventional economic analysis is not not sufficient to capture the objective and impact of the reform project ; Possible set of investment programs Support for functioning regulatory framework Transaction cost of reform Basic question of analysis is to reform or not to reform 6

7 Objectives of CBA Analysis To determine whether reform/psp is a viable alternative to public sector management; To determine whether the net benefits from reform for the different stakeholders are positive To determine whether reform/psp will attract private investors 7

8 Methodology: A Road Map Step 1: conventional cost benefit analysis to determine the viability of a likely investment scenario Step 2: reform-oriented cost benefit analysis to determine the viability of water sector reform 8

9 Methodology: A Road Map (2) Step 3: analysis of stakeholders to determine the winners and losers of utility reform Step 4: business analysis to determine the financial viability of the proposed reform structure for the privately operated utility Risk and sensitivity analysis at each step of the analysis 9

10 Spreadsheet Model for the Financial and Economic Analysis Without Project Scenario With Project Scenario Input Data Capacity Input Data Capacity Consumption and Production Consumption and Production Revenues Investment Revenues O & M Cost Investment Financial Input Data O & M Cost Cost-Benefit Analysis Income Statement Flow of Funds Balance Sheet Cost-Benefit Analysis Incremental Cost-Benefit Analysis Stakeholder Analysis 10

11 CBA Analysis of Sector Reform no separation of project components appraisal according to equity point of view inclusion of externalities of sector reform 11

12 CBA Analysis Basic Set-Up (1) Type of Costs and Benefits Sales Consumer Surplus Benefits from Water Pollution Reduction Operating Costs Investment Costs Taxes and Subsidies Transaction Costs Costs of Regulation Increase in Working Capital Net Benefits before Financing Financial Analysis Excluded Excluded Excluded Excluded Economic Analysis Excluded 12

13 CBA Analysis Basic Set-Up (2) Type of Costs and Benefits Net Benefit before Financing Loans Equity Debt Service Payments Income Taxes Net Benefit after Financing and Taxes Dividend Payments Net Benefit after Financing, Taxes and Profit Distribution Financial Analysis Economic Analysis Excluded Excluded Excluded Excluded Excluded 13

14 Results Concession Economic Rate of Return Misiones Paraná Villa Mercedes 21% 17% 27% 14

15 Stakeholder Analysis Different stakeholders were identified: Government (at national, provincial and local levels) Consumers Society Shareholders 15

16 DISTRIBUTIVE ANALYSIS Incremental impact Without With Incremental Government Taxes: Municipal taxes 1,268 2, IVA taxes on sales 13,311 21,851 8,540 income taxes 1,132 12,435 11,303 Subsidies (10) (15,417) (15,407) Canon 0 2,741 2,741 Operational grant for company (incl. Working capital) (9,443) 0 9,443 Loan payment (3,718) (27,210) (23,491) Additional cost related to maintaining regulatory agency Transaction cost related to sector reform 0 (1,964) (1,964) Debt service receipts 3,120 25,170 22,051 Marginal cost of public funds Total 5,661 19,688 14,028 Customers Consumer surplus (109) 33,448 33,557 IVA taxes on sales (13,311) (21,851) (8,540) Lack of effective regulation Cost of connection (1,528) (31,225) (29,697) Total (14,948) (19,628) (4,680) Society Reduction of environmental costs due to treatment of wastewater (24,159) (11,826) 12,333 Total (24,159) (11,826) 12,333 Shareholders Equity payments (503) (7,411) (6,908) Dividend returns 0 14,317 14,317 Total (503) 6,906 7,409 Total Benefit (33,949) (4,859) 29,090 16

17 Stakeholder Analysis Fiscal Impact Fiscal Impact of Sector Reform is result of impact of subsidies and taxes impact of net income from PSP canon payments regulatory fees and costs transaction costs capital subsidies operational grants 17

18 Fiscal Impact taxes subsidy income PSP net impact Misiones Parana Villa M. Total 18

19 Impact on Consumers Consumer Impact of Sector Reform Consumer surplus IVA taxes on sales costs of secondary network and connection 19

20 Consumer Impact Poor Nonpoor Total Misiones Parana Villa M. Total 20

21 Overall Impact Stakeholder Analysis Govt. Total Consumer Society Sharehld. Misiones Parana Villa M. Total 21

22 Overall Impact Stakeholder Analysis (2) Government is definitely a winner ; Customers (especially poor customers) face large risks of being losers Society will be a winner Shareholders are sometimes winners, and sometimes losers 22

23 Risk Analysis Risk analysis uses Monte Carlo simulation (Crystal Ball software) Sensitivity analysis used to determine most critical risk variables: water consumption per capita investment cost overrun operating cost overrun unaccounted for water collection (in)efficiency 23

24 Example of risk in the business analysis Expected Values and Probabilities (Peso 000) Indicator Risk Indicator Misiones Parana Villa Mercedes NPV of net return Mean Expected 13, ,580 to the investors Value (Peso 000) Probability of >0 97% 57% 76% NPV of cashflow Mean Expected 10,630-3, Value (Peso 000) Probability of >0 90% 25% 62% (cont.) 24

25 Policy Implications Reform programs are beneficial to the economy; (Political) viability will be increased if none of the stakeholders faces significant losses from sector reform Poor consumers do not automatically benefit from sector reform Proper analysis of operational and financial targets is needed as governments tend to expect too much too soon 25

26 Options to Improve Viability of Concessions Shifting benefits more equally among stakeholders bid on tariff discounts instead of canon payments use canon payments to provide investment subsidies to the poor include the cost of secondary network expansion in the tariffs use appropriate technologies and service levels in the provision of services to the poor 26

27 Options to Improve Viability of Concessions (2) Adjusting financial and operational targets Expansion targets adjusted in the initial years of the concession Introduction of capital subsidies for sewage treatment 27

28 Tariff discounts instead of Canon Payments Investors Society Non-poor Poor Govt Canon Tariff discount 28

29 Canon Payments for Investment Subsidies to the Poor Investors Society Non-poor Poor Govt targeted subsidy base case 29

30 Cost of Network Expansion for the Poor included in Tariff Investors Society Non-poor Poor Govt with RoR limit without RoR limit base case 30

31 Cost of Network Expansion for All included in Tariff Investors Society Non-poor Poor Govt base case without RoR limit with RoR limit 31

32 Conclusions and Recommendations Poverty issue related to utility reform should be addressed upfront, when designing PSP contracts identifying the poor in the utility s service area; develop a clear strategy for addressing poverty issues (e.g., transparent mechanisms to provide subsidies to the poor, setting explicit targets for service expansion to the poor) This methodology is a starting point for doing a stakeholder and risk analysis More research is needed to improve the proposed methodology 32

33 Additional Research Improvements in basic dataset Willingness to pay studies, long-term trend analysis to get better insight in consumer behavior (Poverty) mapping of consumers to understand the extent and level of poverty in the service area Better modelling of impact of sector reform, esp. with transaction cost and regulation Better understanding of the without reform scenario Better modelling of tariff and subsidy policies 33

34 THE END 34