TCTA Raw Water Resource Infrastructure Model Portfolio Committee Workshop March 2010 1
Content of presentation 1. Who s TCTA and Its Contribution Towards Water Sector Strategic Goals 2. Project Implementation Methodology ( PIM ) 2.1 Project Finance & Structuring Model 3. Projects Implemented with TCTA PIM 4. Sources of funding and debt management strategies for projects implemented 5. Sources of funding for new mandates & impact of changes in the financial markets 6. Challenges impacting on the implementation model 7. Possible remedies to the challenges 8. Discussion and Questions 2
1. Who s TCTA & its contributions towards water sector strategic goals 3
TCTA s Mission TCTA is a specialised liability management body for bulk water supply development in the most cost-effective manner to the benefit of the water consumer 4
TCTA the Organisation Who is TCTA? Established in 1986 to fund and implement RSA portion of LHWP Mandate expanded to undertake liability management on LHWP and fund & implement bulk raw water infrastructure in RSA State-owned Water Resource entity Non profit-making Schedule 2 Public Entity - PFMA What do we do? Project implementation Project funding and tariff setting Debt management Financial advisory services Board appointed by Minister of Water Affairs Report via Minister of Water Affairs to Cabinet and Parliament 5
National Raw Water Resource Infrastructure DWA Water Supply Value Chain TCTA Water Boards Distribution of water Municipality Treat raw water to potable level End User 6
TCTA s Contribution to Water Sector Strategic Goals Critical role-player in the provision of water, particularly in support of government s policy to seek off-budget funding for strategic infrastructure projects that are commercially viable. Has matured into a center of excellence for planning, financing & implementing bulk water infrastructure in a multi-project setting, establishing best practice approaches. All project activities facilitate social transformation and build sustainable communities by providing jobs and empowering women and youth. Positioning to leverage its knowledge and advisory capability to support other sector institutions, in pursuit of greater efficiencies in the water delivery value-chain. Will initiate and lead innovative studies and collaborative platforms that address water security issues and the supportive chain of project finance and implementation. 7
High level Financial Status Unqualified audit report 31 March 2009 No fruitless and wasteful expenditure findings by external auditors Actual/forecast costs up to 31March 2010 lower than original budget Negative equity arises due to the business model which results in a deficit by design for the first number of years of each project, in order to ensure tariff affordability, Thus, expenditure strictly controlled 8
PFMA Compliance Annual report always submitted to DWA within 5 months of year end Corporate Plan always submitted to NT and DWA on within agreed deadlines Budgets for three year period submitted as part of the Corporate Plan 9
Financial obligation of DWA under the current TCTA model LHWP was explicitly Government guaranteed as required per the Treaty between Lesotho and RSA DWA is responsible for tariff collections to TCTA through recovery from waterusers Currently DWA collect approximately R300million per month on behalf TCTA funded projects TCTA uses tariffs received from DWA to repay loans related to commercially funded projects (LHWP, BERG,VRESAP) Where DWA would not be able to perform under its obligations, both the implicit and explicit guarantee will be called on 10
2. TCTA Project Implementation Methodology (PIM) 11
Implementation Principles TCTA/DWA Governance Stakeholder involvement - consultative approach Environmental framework DWA remains accountable to DEA in terms of ROD Implementation TCTA solely responsible for implementation, funding, acquiring ownership of land and land-rights and adequately insuring the project Ring fencing of projects Post construction DWAF to operate and maintain Income Repayment of project cost within a reasonable period (20 Years) Annual tariff review DWA implied guarantee 12
Project Governance Framework PROJECT COMMITTEE AND GOVERNANCE STRUCTURE Implementation/Funding Directive to TCTA Project Committee (PC) DWA, TCTA, Project Partners Chair: Project Manager Executive Manager: Project Management and Implementation TCTA EXCO Minister of Water Affairs TCTA Board TCTA Board TCTA Board Technical Committee Technical Committee Intergovernmental Intergovernmental Relations Act & Relations Act & Arbitration Arbitration Board Chairs Chairs Committee Committee Project Independent Review Panels Dispute Resolution Committee Committee: Project Manager, CEO: TCTA, Project Manager, CEO & Executive Manager: Project Head: Capital Investments: TCTA & Management and Implementation: TCTA, & DWA and DWAF, ESKOM Representatives Project Partners 13
Project Implementation Methodology 14
2.1 Project Finance and Structuring Model 15
Project Packaging and Risk Management: Off-budget projects Integrated Water System Water Sales End Users DWA Water income Risk Mitigation: Income agreement: - Annual adjustment to tariff linked to CPI(x) - Negotiated adjustment to tariff to reflect changes in water demand etc Water Sales Water income Design & Supervision DWA O & M TCTA Funding & Implementation Construction Risk Mitigation: - O & M agreement Ownership Land & Structure Limited Recourse Financing Project Rating Project Credit Rating (Fitch) Investors Credit rating based on the sum of all agreements and risk allocation / mitigation Risk Mitigation: - Liquidated damages - Performance bonds - Transfer design risk (PI) - Principal construction insurance - Retentions 16
Institutional Arrangements TCTA Water Delivery Supply of water to DWA Operations and maintenance Supply of water from system to the users Conditions of supply Implementation Agreement DWA Water Supply Agreement Implementation Agreement Payment of tariffs Collection of Income Payment of water incl water user tariffs due to TCTA Payment of Tariffs USERS 17
Key Project Finance Principles Ring-fence projects model Limited recourse funding to income stream of specific project Agreements, costs, funding and revenue streams Implied government guarantee Agreements with DWA per project Sound institutional arrangements AA+(zaf) credit ratings from Fitch Ratings which substantially reduces cost of funding No funding on TCTA balance sheet SPV on behalf of DWA report to Minister of Water and Environmental Affairs Risk transfer To parties best suited to manage risks No reserves, no profits can t absorb any risks Flexible income stream tariff triggers Project agreements allow for adjustment in tariffs to achieve cost break-even 20-years after completion of construction 18
TCTA Risk Transfer Matrix Risk Transferred Method Revenue collection Income agreement DWA risk Funding risk Income agreement Strength of Income Agreement i.e. Central Government offtaker Income agreement DWA step-in Operations and Maintenance Construction risk design, delay etc Income agreement DWA risk Liquidated damages, insurance, performance bonds and retentions Yield of the system Income agreement trigger Demand risk Income agreement trigger Inflation Income agreement trigger Base case data change Income agreement trigger 19
Project Funding Process Secure bankable off-take agreements DWA and off-takers Negotiate implementation agreement DWA and TCTA Obtain borrowing limit from National Treasury Credit rate project Competitive procurement of construction contracts Appoint DWA as O&M agent DWA manage infrastructure on integrated system basis Secure long-term funding Quantitative and qualitative assessments Set annual tariff Cost/revenue breakeven over specified period Debt management and repayment of debt over specified period Treasury activities Transfer asset and land to DWA once debt is repaid 20
Tariff Categories in Pricing Strategy Commercial Users Social Users Off-budget Funding Capital Unit Charge (CUC) Repay debt + 20 years Full economic cost of water Water management tariff after CUC Operations and Maintenance Betterments and Refurbishment Statutory charges in Pricing Strategy Funding Source Capital Recovery Other Charges Government Funding Return on Asset Charge (ROA) Refund Government for its investment Lower than CUC Not reflective of economic cost Operations and Maintenance Betterments and Refurbishment Statutory charges in Pricing Strategy 21
High level Tariff Principles and Implication DWA and TCTA designed a tariff profile that is constant in real terms i.e. increases annually with inflation TCTA can not assume any risk by nature of its design and therefore have provided for tariff trigger adjustments over an above inflation should any input assumptions change e.g. demand, interest rates etc TCTA consults with SARB and NT annually on tariff adjustments in terms of administered prices but are not bound to inflationary increases only Short-term: TCTA can agree on a lower than required adjustment in a specific year with the proviso that we can make up for it in following year or two Long-term: TCTA would have to increase over and above inflation at some stage to achieve repayment of debt at an agreed point in time Administered prices in the long-term will not be commercially viable for off-budget projects unless large reserves are built up at the start of a project which will impact on tariff affordability by end-users This strategy was tested with the end-users in the Vaal River System which did not support it The users prefer actual costs to be transferred and rather take the risk of increases over and above inflation when required 22
3. Projects Implemented under this Model 23
Funded Projects Completed and Ongoing Projects LHWP BWP VRESAP Revenue Recourse Explicit Government Guaranteed Income stream of BWP Implied government guarantee Income stream of VRESAP Implied government guarantee Mandate Activities Fund Risk management Operation & Maintenance of assets Implement Fund Risk management Implement Fund Risk management Peak of debt R 20 billion R 1,4 billion R 3,3 billion Construction Period 1986-2001 2003-2008 2005-2012 Repayment of debt 2025 2028 2028 24
LHWP Debt Curve and tariff profile LHWP Debt Curve and tariff 20.000 4.50 18.000 4.00 16.000 3.50 14.000 3.00 Rand million 12.000 10.000 8.000 6.000 2.50 2.00 1.50 Rand per m 3 4.000 1.00 2.000 0.50-2005 2007 2009 2011 2013 2015 2017 2019 2021 - Financial Year Debt Curve Water Tariff (FV) Water Tariff (PV) 25
VRESAP Debt Curve and tariff profile VRESAP - Eskom and Sasol Combined Based on Total Demand from VRESS 5,000 2.00 4,500 4,000 Constr ucti on Period Repayment Per iod - Max of 20 year s with Capitalisation of Inter est capped at 5 year s 1.50 3,500 Rand million 3,000 2,500 2,000 1.0 0 Rand per m 3 1,50 0 0.50 1,000 500-2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 - Total Liability Curve Capital charge FV Capital charge PV 26
BWP Debt Curve and tariff profile 1,400 BWP Forecast Cumulative Net Liabililty Curve And Annual Capital Charge 1.50 1,200 Construction Period Repayment Period - 20 years 1.30 1,000 1.10 Rand m illion 800 600 400 0.90 0.70 0.50 0.30 Rand p er m 3 200 0.10 - Mar-03 Mar-06 Mar-09 Mar-12 Mar-15 Mar-18 Mar-21 Mar-24 Mar-27-0.10 Total Liability Curve Capital charge FV Capital charge PV 27
LHWP: Katse Dam 28
VRESAP: Boschkop Pump Station 29
VRESAP: Surface Structures 30
BWP: Dam Basin Before 2004 After 31 2008
BWP: Flood Releases 32
4. Sources of funding & debt management strategies for projects implemented 33
TCTA Funding Sources Current Projects LHWP RSA money market RSA capital market Development Bank of Southern Africa Foreign funding Export credit loans Commercial loans Bi-lateral and multilateral loans Concessionary loans VRESAP and BWP RSA money market RSA commercial bank loans Development Bank of Southern Africa International development funding (EIB) 34
Loan Evaluation Criteria Quantitative Assessment: All-in IRR cost including all fees etc Qualitative Assessment: Risk management objectives Asset / liability matching Flexibility within loan Achievable conditions precedent Ease of management and impact on financial statements Relationship with financiers Value added by development banks Socio-environmental issues 35
Debt Management Strategies Defined by funding requirement for each year Asset liability matching Debt repayment over specified period 20 years Drawdown mix based on market conditions, drawdown conditions (e.g., expiry dates) Funding Requirements are met through: Capital Markets and Commercial Paper Programmes Committed loan facilities through DFI s and local banks 2% = foreign loans 36
5. Sources of funding for new mandates & impact on recent changes in the financial markets 37
New Projects Unfunded Projects MMTS-2 KWSAP ORWRDP-2 MCWAP Phase 1 MCWAP Phase 2 Revenue Recourse Income stream of MMTS2 Implied guarantee Income stream of KWSAP Implied guarantee Income stream of ORWRDP2 Implied guarantee Income stream of MCWAP-1 Implied guarantee Income stream of MCWAP -2 Implied guarantee Mandate Activities Implement Fund Risk management Implement Fund Risk management Implement Fund Risk management Implement Fund Risk management Implement Fund Risk management Peak of debt + R 2.7 billion + R 2.7 billion + R 8 billion (BDS) + R 4 billion + R 16 billion Construction Period: Commence Completed Jun 2010 July 2012 Feb 2010 Sept 2011 Dam: 07 11 BDS: July 2010 Nov 2012 Jan 2011 Nov 2012 Aug 2011 July 2015 Repayment of debt 20 years after construction 20 years after construction 20 years after construction 15 years after construction 15 years after construction 38
Potential long-term Sources of Funding Local Commercial Banks Preferred borrower - local banks still have appetite to fund TCTA Projects Development banks Assessed MMTS-2 for full funding during September DBSA assessing funding possibilities IDC credit guarantees to small mines in ORWRDP ECA (Export Credit Agencies) Currently assessing possibilities Might require explicit government guarantee Capital markets Require explicit government guarantee Pooled bond programme possible with increased liquidity combined bond for all mandates Concessionary funding Explore possibilities 39
Impact of recent changes in the financial markets and global trends Local Commercial Banks Limited tenure - introduces refinancing risk Costly - with Basel II liquidity premiums Terms and conditions unfavorable onerous market fluctuation clauses, breakage costs on floating loans etc banks prefer floating rates (high volatility) Prefer water and sanitation targeted projects in water sector Timing of raising funding Funding structure should take cognisance of current market conditions Committing to long-term funding during liquidity crisis that should ease out in 5-year s time Tight deadlines all projects funded almost simultaneously Tenor Longer term loans more costly Less than 15 years available where projects repay 20-years after completion of construction Development banks Prefer water and sanitation targeted projects in water sector includes MMTS-2 and indirectly ORWRDP Prefer environmentally friendly projects excludes KWSAP and MCWAP 40
Interest capitalisation Impact of recent changes in the financial markets and global trends (cont.) Not preferred project profile for financiers but increases tariff affordability Crowding out effect Competing with government guaranteed entities for funding Concentration risk in banks to Eskom and Government Capital market limitations Possible saturation of infrastructure bonds in capital market 41
6. Challenges impacting on the implementation Model 42
Implementation model challenges Upfront commitment required by off-takers Constitution commits Government to provide infrastructure Infrastructure risk should therefore be carried by Government Through current model, risk is transferred to end-users Willing to pay for water used and to repay infrastructure costs Not willing to take risk on take-or-pay principle payment regardless of use where user-base is small or off-take is uncertain (ORWRDP, MCWAP) Government could provide bridging capital funding To stimulate economy Initial infrastructure risk taken by the government Recover investment from commercial users on actual use Government could provide guarantees for shortfall in debt repayments in the early years of a project To grow economy Correctly place infrastructure risk with government Recover shortfall from commercial users once volume justifies debt repayment including government funding 43
Implementation model challenges (cont.) Tariff affordability Infrastructure costs increased substantially due to Input cost (capex) Operational costs-pumping costs due to increased electricity tariffs Funding cost Cheapest sources fully utilized Tariffs based on higher infrastructure value more expensive Capital Unit Charge (off-budget funding) Take-or-pay expensive if off-takers economic activity is not aligned with implementation date of water infrastructure (mines paying for water before inception of mining activity) Municipalities struggle to pass-on increases to users (even with phase-in) due to affordability and political pressure on tariff increases Possible tax implications for end-users if water tariffs are linked to capital repayment and not water use as is intended Return on Asset Charge (on-budget funding) Unaffordable tariffs even though infrastructure is funded on-budget Existing grants including MIG, BIG and Equitable share not sufficient to cover growth in infrastructure requirements ROA unaffordable Smaller user base limited cross-subsidization opportunities Free water provision to end-users - still ROA due to DWA against zero income 44
Implementation model challenges (cont.) Combined projects (off-budget and social components) Uncertainty of timing and availability of MTEF funding through full implementation cycle MTEF 3-year window construction period longer Possible review of committed funding amounts and timing Banks require upfront commitment from NT that full social funding is committed when required Possible under provision by Government Social component not always certain at inception 45
Pricing Strategy Challenges Pricing strategy Systems tariff challenges Huge tariff differentiation in water pricing across systems No uniformity in application of augmentation costs Cost shared by all users (Vaal System) Costs carried by specific end-users (VRESAP) No uniformity in risk sharing Take-or-pay based on license volume (ORWRDP) Actual use (Vaal System) 46
7. Possible Remedies to Challenges 47
Possible Remedies to Some Challenges Government could provide explicit government guarantees for the initial project finance loans Increase access to funding options Decrease tariffs Increase tenor of loans available Supports economic growth through lower water cost Review of Water Sector Funding and Pricing Strategy to consider: national type of tariff structure Increase uniformity in water costs Based on national grid of water provision to the country as a whole Eskom model for energy pricing Sector differentiation Domestic separate from industrial etc Water thirsty industries charged a premium in water scarce areas Systems becoming largely inter-linked with cross system and cross border transfers difficult to determine true cost on system s basis 48
Thank you Discussion. TCTA James Ndlovu : Chief Executive Officer Zodwa Mbele: Executive Manager; Project Finance & Structuring Johann Claassens: Executive Manager; Project Management and Implementation Halima Nazeer: Chief Financial Officer Ola Busari: Executive Manager; Knowledge Management e-mail: zmbele@tcta.co.za Telephone: (012) 683 1200 Website: http://www.tcta.co.za 49