Outline of Presentation. The challenge Beyond the Numbers

Transcription

1 Outline of Presentation Private Sector Participation in Municipal Water Services in Central and Eastern Europe and Central Asia Jamal Saghir Director Energy and Water The World Bank Vienna 2-3 July, 23 MDGs challenge for Water Supply & Sanitation The challenge Beyond the Numbers MDG & WSSD targets: Reducing by 1/2 the proportion of population without sustainable access to safe drinking water & sanitation % of countries on track to reach MDGs 1% 5% % -5% Primary school completion Child mortality HIV/AIDS prevalence Access to water Access to Sanitation Very Unlikely Unlikely Possible Very Likely No Data # of new people with access to WSS per day 4, 3, 2, 1, water supply sanitation * *needed for MDG Reality check: ~ Less than 1 in 5 countries on track for WSS ~ Less than 1 in 1 low income countries on track ~ Proxy indicators proximity to hardware Official statistics use proxy indicators proximity to hardware..far fewer countries on track for: Health benefits? Girl s school enrolment? Environmental sustainability? Sustainable access to safe drinking water and adequate sanitation key to improved health, education, and environmental outcomes More than one challenge: Regional Specificity The Sector is Segmented With Different Consumer Needs And Challenges! Population to be served each year to reach MDGs (million people) cities (>1m) LAC 9 1 MNA ECA 2 EAP SAR 24 AFR Water supply (rural/urban) Sanitation (rural/urban) Size of population centre secondary cities (>1k) towns (>1k) villages (>5) rural (<5) # of population centres (increasing as size falls)

2 Water Supply & Sanitation Market MDGs and Unique Problems of ECA Size of population centre # of population centres high potential for private financing medium potential for private financing low potential for private financing attractiveness most more medium less least Household &micro-financing Need for public investment Definition: Access to Safe Drinking Water 2 liters/capita/day within one kilometer Access to Improved Sanitation pit latrines Unique Problems in ECA: Highly developed urban systems and high service coverage in rural areas that are beyond current income level Collapsing infrastructure (over 4 years old and no maintenance over at least last 1 years) Declining provision and safety of water MDG problems concentrated in eastern and southern part of ECA, particularly in secondary cities and rural MDGs and Unique Problems of ECA Soft Landing versus System Collapse or (Rehabilitation versus Reconstruction) How to Reach MDGs: Reforms to generate internal cash (O&M) and increase central government transfers (Rehabilitation) Bank and Donors: Focus on the most vulnerable secondary cities and rural Scale up assistance - programmatic approach and CDD Lessons Learned Voices of Our Clients in ECA Minister of Finance eliminate quasi-fiscal deficit and need for operating subsidies Governors and Mayors deal with city planning/ finance and other infrastructure at the same time Governors rural infrastructure is collapsing Everybody deal with more cities at the same time Everybody limited number of players, why not home grown solution? We need to discuss this question here. Everybody faster delivery of projects by the Donors Voices of the Private Sector in ECA Needs World Bank help on reforms to reduce political and social risks: Governance Regulations Pricing Prepared to risk their own capital in few countries (first tier accession countries) But more and more asking capital investments to be financed by donors, governments Not interested in buying assets? Outline

3 - - Water Supply & Sanitation Reform Investment Alone without reform will be ineffectual The Regulatory Challenge (1): Protect Existing Users 25 2 Ensure the most cost-effective use of resources Ensure allocation of resources to highest priority investment needs Increase resource mobilization from all sources $bn Costs Incurred from Technical Ineffiency Power Railways Roads Water Annual Investment The Regulatory Challenge (2): Protect Investors The Regulatory Challenge (3): Protect Government Interests Price/Cost Ratio Telecoms Gas Power Water Source: WDR 1994 Sub-Saharan Africa Middle East and North Africa South Asia Europe and Central Asia East Asia and the Pacific Latin America and the Carribean Fiscal Receipts (US$ 1999 billion) Investments Source: Izaguirre and Rao, 2 In sum:the Regulatory Challenge - Balancing Different Interests Service Provider State No One Can Have It All! Some Tradeoffs for Policy Makers maximize profits Maintain priveleges Current Consumers (non-poor) reduce tariffs maximize sale/concession value; protect influent users; reduce state subsidies Excluded Households (Poor) expand coverage Money for the Treasury Front-load the investment program Facilitate investment by giving out guarantees, incl. commercial risks Avoid strong regulatory commitments Keep tariffs affordable Raise productivity Spread out cash needs to avoid tariff hike Reduce Government exposure and provide strong efficiency incentives

4 In the New Environment There is The Need to Better Allocate Risks Unbundle Finance And Management! Looking at Sustainable Hybrid Solutions Today! Local Govs. Private Sector National Govt. Utility Banks Where to Go! Banks Utility National Govt. Private Sector Local Govs. Finance Public Private Operating company plc Corporatized mun. service Municipal department Public Mixed company BOTs Mgnt. Contracts Management Divestitures Concessions Leases/Affermage Private Outline ODA: Need for involvement in all stages of reform Long term engagement patience required! TA & policy dialogue lending High need nascent reform status Policies in right direction, local capacities uneven Policies in place/institution al readiness donor inputs TA Dialogue Lending Increased call for Monitoring of Results Country outcomes:un mandated Joint Monitoring Program (WHO/Unicef) Performance: city/utility level benchmarking Effectiveness of donor inputs: individual donor responsibility Outputs Policy reform Institution building Physical investment WSS outcome % sustainable access to safe water & % access to sanitation Development impact Improved health Economic growth Reduced poverty Environmental sustainability Education MDGs: : Implications for ODA The MDGs have raised expectations Countries define local goals & strategies ODA must adapt & respond to country goals Increased financing Focus resources to countries both ready and committed Attend to poverty pockets in midst of progress Adapt and respond to long term engagement Re-engage in high risk/high reward projects

5 Outline 3, 2,5 2, 1,5 1, 5 World Bank WSS Lending Water & Sanitation Component(s) in WB Operations - Annual Approvals (US$m) Total Dedicated FY95 FY96 FY97 FY98 FY99 FY FY1 FY2 FY3 FY4 FY5 7, World Bank FY3 Water & Sanitation Operations Net Commitments under Supervision (US$ m) preliminary outcomes Need to scale up current efforts through: 6, 5, 4, 3, 2, 1, ,182 2, FY3 South Asia Middle East & North Africa Latin America Eastern Europe & Central Asia East Asia Africa Increasing effectiveness of ongoing Bank support (ESW + dialogue + lending) Increasing the volume of effort (ESW + dialogue + lending) Changing focus to countries where potential for impact is highest Working across sectors Working with and through external partners Outline The Problem Lack of investment in water supply and wastewater treatment threatens: poor quality of service provided to citizens; decline in environmental and health standards poor demand management water losses Revenues and income for water companies are: generally insufficient not fully under own control; and therefore unpredictable Banks reluctant to make long term loans available for investment

6 Reasons NOT to invest in water. Closing the Revenue Cycle 2% 15% 1% 5% % Financial autonomy Telecom Gas Power Water Supply Degree of cost recovery Only if sustainable cashflows, investments for expanding services can be attracted Only few choices to finance investments Tariffs (consumers) Taxes (tax payers) Private capital flow limited extend Bilateral and multilateral aid limited extend The Solution Investment needs for Water Supply & Sanitation Commercial approach/financial discipline Focus on needs of the water company Improve creditworthiness through: agreed programme of tariff increases, taking into account social considerations clear / predictable allocation from central/local tax revenues improved operational management/collections Predictable cash flow secure debt service investment loan better services (B USD) 5 25? present MDG needs wastewater treatment sanitation water supply? The water sector relies on private financing Public is dominant ~85% international domestic public private Financing flows into water in 2 (US$ Billions) Domestic is dominant ~ 85% Traditional Investors Demand/Capability Has Declined Stock Developer Sector Current Peak Peak Date S&P Rating AES Corp Energy Oct- B+/ Credit Watch Negative Enron Energy In Chapter 11 Endesa Energy Jan-99 A/Negative CMS Energy Energy Dec-98 BB/Negative British Telecom Telecom wk peak A-/Stable WorldCom Telecom In Chapter 11 Telefonica Telecom Mar- A/ Stable France Telecom Telecom Mar- BBB-/Stable Vodafone T com-wireless Mar- A/Stable Millcomm Int l Cell. T com-wireless Feb- B+/Stable AT&T Wireless T com-wireless May- BBB/Stable Vivendi Environment Water Oct- BBB+/Stable Suez Water wk peak A-/Stable Fluor EPC May-1 A/Stable The largest western infrastructure investors are struggling to restructure. Many are shedding their global portfolios. Project debt is downgraded daily, and debt investors are demanding higher and higher risk adjusted returns

7 Risk aversion in the market has increased September 11 Corporate bankruptcies have increased risk aversion Banks capital eroded Reduced number of strategic investors Reconsideration of portfolios in emerging markets Rating downgrades Reduced availability of private PRI Country, regulatory and project risk matters more than ever.. Inflows Into Developing Countries ((US$ Billions) Source: UNCTAD Developing countries Asia and the Pacific China Africa LDC s Predictably, good projects in developing countries with large markets, strong growth potential and increasingly transparent legal and regulatory environments are preferred over others. With the downturn in investor appetite, other markets and opportunities are often not even being considered The Supply of Easily Bankable Projects Is Diminishing Large scale enterprise privatization/ppi projects has been accomplished in most of the middle income emerging markets, and many of the most bankable infrastructure projects have been identified and are under development. There are still significant enterprise privatization opportunities in FSR, Central Asia, the Mekong region and Africa, and substantial undeveloped infrastructure project opportunities in these nations. But macro economic, legal, regulatory and basic market performance concerns are dampening investor appetite Trends Emerging? Western capital markets and investors would be more selective into emerging markets infrastructure opportunities In EU accession countries, China, Mexico and selected other markets, interest will remain strong but there will be greater selectivity and different project structuring In lesser developed countries, commercial and country risk appetite is greatly reduced except in some special cases (e.g., some natural resources) However, some Western investors remain interested under lower risk structure scenarios Mid market and, West to West South to South investment interest is increasing Local and expatriated capital is seeking higher returns Risks faced by Investors in the Water Sector Despite (or perhaps because of) Difficult Conditions, We are seeing... Currency risk Dollar debt and local currency earnings Regulatory risk Regulatory framework not implemented Payment/performance risk Government fails to pay amounts due Sub-sovereign risk Water investments are often at the sub-sovereign level Affordability risk Private operators and consumers will not do it all role of public investments and subsidies New approaches to risk allocation and new risk instruments called upon and emerging greater sponsor (government) participation increased efforts to secure local currency (or expatriated) financing increased demand for risk insurance instruments reduced developer equity participation Increased activity of midmarket and South to South investors funds being formed, seeking operator expertise investors buying at steep discounts to original investments with less risk sophistication but often with greater local market savvy

8 An Evolving Model for Water Service Delivery Public Private Engagement Anywhere Along the Spectrum The Camdessus panel Cost Recovery Critical But At A Realistic Pace Combine Instruments IBRD/IDA Loans, Credits and Guarantees IFC Loans and Investments MIGA Guarantees Targeted Subsidies OK For Connections For Usage Charges -Initiated after 2 nd World Water Forum to look into how to close the financing gap -Chair: Michel Camdessus -Membership: 2 people with top-level experience: financing types rather than water sector professionals -Modus operandi: seven meetings in 22 and early 23 with water or financial specialists -A panel of wise people, not a consultative process The Camdessus Report Market segmentation, financing options Starting point: annual investment needs to increase from USD75 B to USD18 B (World Commission on Water) Focus: mainly on water supply and sanitation Twin challenge: improving governance and attracting new finance 87 recommendations: from broad propositions to specific proposals 1,,, 1,, 1,, 1,, 1, 1, 1, 1 Project Size US$ Make project finance more reproducible 1 1 Project Finance (clean) Corporate Sector or Municipal Project Finance (political insurance or guarantees) Corporate Sector (with PRI) EXPOSED SEGMENT ODA - Development Funds Micro Loans Enhance political cover AAA AA A BBB BB B CCC CC C Country or Municipality Risk Rating Priority 1 Set Local Strategies Governments should be clear on their strategies and priorities for the water sector and to plan accordingly: Preparation of water sector strategies Detailed action programs for meeting MDGs Inclusion of water policies in Poverty Reduction Strategy Papers (PRSPs) Priority 2 optimize use of existing financial vehicles Facilities that already exist should be used as financial vehicles, replenished and empowered as necessary: ODA for water to double Donors to refocus aid and coordinate better Greater use of guarantees MFIs / donors to resume qualified lending for dams MFIs to increase lending to subsovereigns Export credit rules relaxed for water NGOs with good project pipeline to be targeted for assistance Private companies (local and international) to be used as contractors and managers ~ but no ideological preference for private sector

9 Priority 3 Introduce new financial vehicles Priority 4: longer term sector reform Proposals for new agencies, funds and schemes should urgently be studied for their detailed feasibility, and their implementation mapped out, with sponsors identified: Devaluation Liquidity Backstopping Facility Decentralised Fund for Local Initiatives Revolving Fund for tender preparation and contract awarding Policy changes and reforms to institutions likely to have longer lead times should be started now: Tariff reform ( sustainable cost recovery) Reforms of public water agencies Measures to strengthen skills and financial powers of sub-sovereigns More freedoms, more rights for local providers Addressing the Financing Challenge Public funds to public good infrastucture & the poor Support the development of targeted and explicit subsidy policies for the poor To address the why and how public financing is being used in PPP transactions Directly linked to tariff policies Develop new financing, pricing and subsidy systems for public good infrastructure Recent Trends in WBG Thinking Renewed focus on infrastructure Responding to needs expressed by client countries Local currency and subsovereign issues to be adressed Use of guarantees Focus on service delivery to all including the poor Refocus on poor More emphasis on sanitation & hygiene Pragmatic approach to private sector participation Working on urban, rural AND towns Smart subsidies and OBA Moving Beyond Public-Private Debate. It is about Giving Access to Water & Sanitation The public-private dichotomy is a bit false public service providers at a minimum use private suppliers and often outsource many functions private service providers rely on public support (tax holidays, subsidies) and are always subject to some form of public regulation The focus therefore, should be on efficient public-private partnerships, not on ideological debates There are many traps to be avoided Repeating the water decade (pipes with no water) Being too supply driven ~ not listening to client countries Lack of donor coordination and cherry picking by donors and private sector Being too detached from Private sector concerns Continuing to focus at global and regional level advocacy.

10 Outline Priorities for ECA Prevent the collapse of existing infrastructure through reforms, rehabilitation, efficiency improvements and private sector involvement Increased focus on neglected areas secondary cities and rural areas Protect the environment and water resources through greater attention to wastewater and solid waste management Assist in reducing quasi-fiscal deficit created by utilities ECA is important region, but also a region still in infrastructure development transition mode We want to better understanding the private sector perspective and strategies to the water sector for ECA given 9/11, international economic down turn, Argentina, etc.. Is it retreating? Is it holding steady? Becoming less risk averse? What are the focus countries, if any? What are the type of investments being sought? What we can do to make the environment more attractive? My perspective on conference Specific attention to: How to get new entrants into the sector? How to get the local private sector involved? How to encourage new entrants into the market (be it, Management Contract, Lease or Concession)? What to do in smaller cities? What do we do for secondary cities in our ECA client countries which are not attractive to foreign operators? How to develop domestic entrepreneurs to take over the task? What are the factors that attract entrepeneurs to come forward with offer to operate water utilities? Thank you

11 OVERCOMING OBSTACLES TO PSP VIENNA, 2-3 JULY, 23 Expenditure needs to operate and maintain functioning water and wastewater infrastructure in EECCA and total financing available Brendan Gillespie OECD Environment Directorate Secretariat EUR per connected inhabitant per year Pskov Ukraine Georgia Novgorod Kazakhstan Moldova Rostov Kaliningrad Eastern Kazakhstan Expenditure needs Supply of finance The costs of achieving the water MDGs in EECCA Existing sources of financing water and wastewater utilities in EECCA countries % 8% % 4% 2% Maintain current level O&M&Re for new investments Total new investments Current available financing % Novgorod Pskov Kaliningrad Rostov Moldova Georgia Ukraine Kazakhstan Eastern oblast Kazakhstan User charges Public budgets Other water bill as % of household income 4.5% 4.% 3.5% 3.% 2.5% 2.% 1.5% 1.%.5% Affordability of Water Bills for Households.% Novgorod Georgia Kaliningrad oblast Eastern Rostov Kazakhstan Ukraine Pskov Moldova Kazakhstan Potential affordability limit Environmentally-Related Expenditure as a Share of GDP,2 Moldova Kazakhstan Ukraine Russian Fed. Georgia Uz bekis tan A rmenia Turkmenistan Kyrgyz Republic Azerbaijan Estonia Romania B u lg ar ia Latvia Lithuania Slovenia Czech Republic Poland Slovak Republic Hungary Germany Portugal %

12 Closing the Finance Gap Adjust ambition of objectives Apply least-cost approaches: resources; technologies; operations; scale User charges: only long term option for O & M; demand management Tariff reform; better targetting of subsidies for the poor Concentrate public budgets and donor grants: rehabilitation/capital investments; social protection; facilitate access to capital PS: management rather than finance Increase resources; reform governance; build capacity OECD/ Kiev: support and facilitate achievement of EECCA Environment Strategy objectives EECCA WSS network tools, guidance, solidarity for reformers in EECCA countries promote partnerships between donors and EECCA countries work with Banks to overcome obstacles to sustainable and broader investment Dialogue with Private Sector 2nd meeting Evident demand from PS, IFIs, donors Summary but no attribution of views Involving ECA country representatives for first time Broaden participation: NGOs? Issues for future dialogue Objectives Assess trends in PSP in ECA region; compare with global trends Opportunities and obstacles to further PSP in ECA Opportunities for new entrants enhancing competition addressing needs in secondary cities and rural areas Agenda Day 1 am: Lessons from PSP Day 1 pm: PS perspectives Day 2 am: Promoting competition domestic PS external PS Day 2 pm: Report back and Conclusions