Session I – Track 4Session I – Track 4

Building Sustainability:Building Sustainability:Partnerships and FinancePartnerships and Finance

Global Environment Facility – Global Environment Facility – International WatersInternational Waters

Second Biennial Conference Second Biennial ConferenceThursday, September 26, 2002Thursday, September 26, 2002

14:00 – 18:0014:00 – 18:00

AgendaAgenda

Overview of the Sector from the Overview of the Sector from the Private Investor’s Point of ViewPrivate Investor’s Point of View

PresentationsPresentations Selection of Focus Groups/ThemesSelection of Focus Groups/Themes Focus Group MeetingsFocus Group Meetings Focus Group PresentationsFocus Group Presentations

Global Environment Facility – International WatersGlobal Environment Facility – International Waters

Second Biennial ConferenceSecond Biennial Conference

Private Investment inPrivate Investment inPollution Control ProjectsPollution Control Projects

Issues for Financial Issues for Financial InstitutionsInstitutions

(and the GEF)(and the GEF)

Jerome Esmay, Principal Engineer Jerome Esmay, Principal Engineer Dalian, China Dalian, China 25-29 Sept. 200125-29 Sept. 2001

OverviewOverview

IFC Experience in Water Supply TransactionsIFC Experience in Water Supply Transactions

Partnerships with the Private SectorPartnerships with the Private Sector

Models of Private InvestmentModels of Private Investment

GEF and the Role of the Private SectorGEF and the Role of the Private Sector

Lessons LearnedLessons Learned

What is IFC?What is IFC?

The Largest Multi-Lateral Source of Project Finance The Largest Multi-Lateral Source of Project Finance Exclusively for the Private SectorExclusively for the Private Sector

A Profit-Oriented Supporter of Economic Development A Profit-Oriented Supporter of Economic Development Providing Equity and Loans Providing Equity and Loans

An Institution that Takes Full Market Risk with An Institution that Takes Full Market Risk with Sponsors in Projects that are NOT Backed by Central Sponsors in Projects that are NOT Backed by Central Government Guarantees of RepaymentGovernment Guarantees of Repayment

IFC - The GEF’s Primary Private IFC - The GEF’s Primary Private Sector Implementing AgentSector Implementing Agent

MISSION:

To promote private sector investment in developing countries which will reduce poverty and improve people’s lives

Member of World Bank Group - owned by 174 governments

IFC only invests in private-sector projects which are both commercially viable and promote sustainable development

IFC/GEF Strategy

Match the type of support to the obstacles or risks blocking achievement of GEF objectives

Prefer non-grant financingFocus on near-commercial projects

Minimize use of GEF resources

Maximize leverage of GEF resources

Where possible, co-finance with IFC

IFC Targets GEF SupportIFC Targets GEF Support

Matches support to the obstacle/risks blocking Matches support to the obstacle/risks blocking achievement of GEF Objectivesachievement of GEF Objectives

Focuses on near-commercial venturesFocuses on near-commercial ventures

Minimizes use/Maximizes leverage of GEF Minimizes use/Maximizes leverage of GEF ResourcesResources

Co-Finances, whenever possible, with GEF Co-Finances, whenever possible, with GEF implementing or executing agencyimplementing or executing agency

Prefers non-grant financingPrefers non-grant financing

Partnerships with thePartnerships with the

Private SectorPrivate Sector

RISKS

COUNTRY RISKS

SECTOR RISKS

PROJECT RISKS

Larger Risk=

Larger Required Reward ($$)

Larger Risk=

Larger Required Reward ($$)

REWARD

INCREASED

DEMAND

OTHEROPPORTUNTIES

Private Investor Private Investor PerspectivePerspective

Public Sector--BuyerPublic Sector--Buyer

Wants private capital without making Wants private capital without making the necessary fiscal/managerial reformsthe necessary fiscal/managerial reforms

Chooses between negotiated or Chooses between negotiated or competitively-bid transactionscompetitively-bid transactions

Has unrealistic risk/reward conceptsHas unrealistic risk/reward concepts

Private Sector--SellerPrivate Sector--Seller

Eager to win the contractEager to win the contract

Is not sufficiently critical of a weak project Is not sufficiently critical of a weak project

structurestructure

Wants:Wants:

– Long-term commitmentsLong-term commitments

– Fair contractsFair contracts

– Upside potentialUpside potential

Financial Institutions--Capital Financial Institutions--Capital ProvidersProviders

Transparent and open processTransparent and open process

Investor resourcesInvestor resources

Experienced and Qualified ManagementExperienced and Qualified Management

Pari Passu rights with other obligationsPari Passu rights with other obligations

Step-in RightsStep-in Rights

Coverage for Municipal RiskCoverage for Municipal Risk Indemnification for Force Majeure and Contract Indemnification for Force Majeure and Contract

RescisionRescision

Sustainable Partnerships Sustainable Partnerships Have:Have:

Transparent bidding/negotiationsTransparent bidding/negotiations– Objective ranking/selection criteriaObjective ranking/selection criteria

e.g. Lowest Tariffe.g. Lowest Tariff

Service-oriented, output-driven contracts Service-oriented, output-driven contracts – ““What” controlled by buyerWhat” controlled by buyer– ““How” controlled by sellerHow” controlled by seller– Responsibilities and ownership are clearResponsibilities and ownership are clear

Key Elements in Key Elements in Partnerships with the Partnerships with the

Private SectorPrivate Sector

Early collaboration and consultationEarly collaboration and consultation Committed partnership between Committed partnership between

national, local/regional government, national, local/regional government, multilateral organizations and GEFmultilateral organizations and GEF

Learn by doingLearn by doing Create pilot/demonstration projectsCreate pilot/demonstration projects

IFC EXPERIENCE IN IFC EXPERIENCE IN SUPPORT OF PRIVATE SUPPORT OF PRIVATE

SECTOR WATER PROJECTSSECTOR WATER PROJECTS

IFC Investment Experience (1)IFC Investment Experience (1)

Buenos Aires: privatized 30-year privatized Buenos Aires: privatized 30-year privatized water/sanitation concession ($4 billion total water/sanitation concession ($4 billion total investment) investment)

Puerto Vallarta (Mexico): 15-year private wastewater Puerto Vallarta (Mexico): 15-year private wastewater treatment BOT($33MM total investment)treatment BOT($33MM total investment)

Aquas de Limeira (Brazil): 30-year privatized water/Aquas de Limeira (Brazil): 30-year privatized water/

wastewater concession ($50-70MM investment)wastewater concession ($50-70MM investment)

Binh An (Vietnam): 1.5 m3/sec bulk water BOT Binh An (Vietnam): 1.5 m3/sec bulk water BOT ($35MM total investment)($35MM total investment)

IFC InvestmentIFC Investment Experience (2)Experience (2)

Aguas de Illimani (Bolivia): privatized 30-Aguas de Illimani (Bolivia): privatized 30-year water/sanitation concession ($500MM year water/sanitation concession ($500MM total investment)total investment)

AG Concessions (Brazil): - Participation in AG Concessions (Brazil): - Participation in water/toll road operation Company (US$30 water/toll road operation Company (US$30 million)million)

IPWC (Egypt): Participation in local utility IPWC (Egypt): Participation in local utility services companyservices company

Beijing WTP #10: BOT Bulkwater Supply Beijing WTP #10: BOT Bulkwater Supply PlantPlant

IFC Advisory Experience (1)IFC Advisory Experience (1)

Manila: splitting of water/sanitation services into two Manila: splitting of water/sanitation services into two geographical zones and concession awarded to separate geographical zones and concession awarded to separate private operatorsprivate operators

Gabon: full concession for water and electricity Gabon: full concession for water and electricity

Romania: concession of integrated water/sanitation services Romania: concession of integrated water/sanitation services covering metropolitan Bucharestcovering metropolitan Bucharest

Lagos, Nigeria (on-going): concession of one service area, Lagos, Nigeria (on-going): concession of one service area, affermage/contract management for remainderaffermage/contract management for remainder

IFC Advisory Experience (2)IFC Advisory Experience (2)

Senegal: 3.0 m3/sec bulk water BOT to provide Senegal: 3.0 m3/sec bulk water BOT to provide drinking water for Dakardrinking water for Dakar

Brazil (São Paulo): 4.5 m3/sec bulk water BOT to Brazil (São Paulo): 4.5 m3/sec bulk water BOT to provide treated water to SABESP (Sao Paulo State provide treated water to SABESP (Sao Paulo State Water Company)Water Company)

Brazil (Fortaleza) 5.5 to 7.5 cum/sec, 20 year Brazil (Fortaleza) 5.5 to 7.5 cum/sec, 20 year ROT-upgrade for CAGECE principal WTP ($15 ROT-upgrade for CAGECE principal WTP ($15 million)million)

IFC Project Development IFC Project Development ExperienceExperience

Cancun (Mexico): 25-year Cancun (Mexico): 25-year Water/Wastewater ConcessionWater/Wastewater Concession

Cartagena (Colombia): Mixed Enterprise Cartagena (Colombia): Mixed Enterprise Water/Wastewater companyWater/Wastewater company

Santa Cruz (Bolivia): Water/Wastewater Santa Cruz (Bolivia): Water/Wastewater Utility Cooperative - SAGUAPACUtility Cooperative - SAGUAPAC

Bangalore (India): 25 year 500 Mld BOTBangalore (India): 25 year 500 Mld BOT Bulk Water SupplyBulk Water Supply

Plava Voda (Bosnia-Herzegovina): 25 Plava Voda (Bosnia-Herzegovina): 25 year BOT Bulk Water Supplyyear BOT Bulk Water Supply

Models ofModels of

Private Investment Private Investment

Private Investment Models Private Investment Models (1)(1)

Contract OperationsContract Operations - Little or no private - Little or no private sector investmentsector investment

Leasing/AffermageLeasing/Affermage - Private Sector pays for - Private Sector pays for use of system. Public system pays operations use of system. Public system pays operations fees/capital investments.fees/capital investments.

Turnkey ConstructionTurnkey Construction - Private Sector - Private Sector Finances and Constructs Facility. Public Sector Finances and Constructs Facility. Public Sector Operates and Assumes Debt ObligationOperates and Assumes Debt Obligation

Privatize Investment Models Privatize Investment Models (2)(2)

Build-Own-Operate-Transfer/Build-Operate TransferBuild-Own-Operate-Transfer/Build-Operate Transfer(BOOT/BOT)-Private Sector Finances and Owns (BOOT/BOT)-Private Sector Finances and Owns New Facility or FacilitiesNew Facility or Facilities

ConcessionConcession - Usually Significant Private Sector - Usually Significant Private Sector Investment with Public Sector Retaining OwnershipInvestment with Public Sector Retaining Ownership

Sale of Assets (English Model)Sale of Assets (English Model) - Public Sector sells - Public Sector sells System Ownership to Private Sector and Retains System Ownership to Private Sector and Retains Regulatory AuthorityRegulatory Authority

Choosing a Private Choosing a Private InvestmentInvestment

Model...Model...

When the Public Sector is financially weak, there are few When the Public Sector is financially weak, there are few funds for:funds for:

– Contract operationsContract operations– Leasing/AffermageLeasing/Affermage– Turnkey ContractsTurnkey Contracts

Leaving:Leaving:

– BOT (most popular with Public Sector)BOT (most popular with Public Sector)– Concession (most popular with Private Sector)Concession (most popular with Private Sector)– Asset Sale (unpopular with public due to perceived “loss Asset Sale (unpopular with public due to perceived “loss

of control” issues)of control” issues)

Let’s look at some issues with Let’s look at some issues with BOT’s and Concessions...BOT’s and Concessions...

Basic Issues in FinancingBasic Issues in Financing BOT Projects BOT Projects

Is the Project Needed?Is the Project Needed?

Can it Serve the Customers?Can it Serve the Customers?

Can the Buyer Afford It?Can the Buyer Afford It?

The Concession Model is The Concession Model is Preferred by Private Preferred by Private

Investors and Financial Investors and Financial InstitutionsInstitutions

Brings Efficiency and Brings Efficiency and

Innovation to entire systemInnovation to entire system Investments can be “tuned” to Investments can be “tuned” to

revenues, inflation, and revenues, inflation, and devaluationdevaluation

GEF and the Role of the GEF and the Role of the Private SectorPrivate Sector

Ways that GEF can Engage Ways that GEF can Engage the Private Sectorthe Private Sector

Remove Barriers: to the creation, entry or Remove Barriers: to the creation, entry or transformation of marketstransformation of markets

Provide non-Grant Financing with: concessional/ Provide non-Grant Financing with: concessional/ contingent finance, loans, and guaranteescontingent finance, loans, and guarantees

Fund Pre-Investment Studies in Alternative/ Fund Pre-Investment Studies in Alternative/ Innovative Technologies: feasibility/market Innovative Technologies: feasibility/market studiesstudies

Promote Progressive Partnerships: long-term, Promote Progressive Partnerships: long-term, shared information, quicker decision makingshared information, quicker decision making

Demonstrate actual project risksDemonstrate actual project risks

Note:Note:

It is NOT It is NOT obligatoryobligatory to give “free” to give “free” money directly to the private sector in money directly to the private sector in order to stimulate investment.order to stimulate investment.

Funds spent to reduce Funds spent to reduce investment/sector risks can result in investment/sector risks can result in the highest multiples of investment.the highest multiples of investment.

Remove Barriers: to market Remove Barriers: to market creation, entry or creation, entry or transformation transformation

Example:Example:

Establish “nutrient trading credits” Establish “nutrient trading credits” for threatened aquatic for threatened aquatic ecosystems, e.g. The Black Sea*ecosystems, e.g. The Black Sea*

* Carbon trading is showing signs of succeeding beyond the * Carbon trading is showing signs of succeeding beyond the most optimistic projections.most optimistic projections.

Provide non-Grant Financing with: Provide non-Grant Financing with: concessional/contingent finance, concessional/contingent finance,

loans, and loan/payment guaranteesloans, and loan/payment guarantees

Examples:Examples:

1.1. Cover perceived risk of long-term Cover perceived risk of long-term lending by lending by national/local private banks.national/local private banks.

2.2. Establish a “Coastal Zone Establish a “Coastal Zone Management Fund” for projects, Management Fund” for projects, let market define demand.let market define demand.

Fund Pre-Investment Studies in Fund Pre-Investment Studies in Alternative/Innovative Alternative/Innovative

Financing/TechnologiesFinancing/Technologies

Example:Example:

Determine the feasibility of/Quantify Determine the feasibility of/Quantify demand for - a nutrient trading demand for - a nutrient trading programprogram

Promote Progressive Partnerships: Promote Progressive Partnerships: long-term, shared information, long-term, shared information,

quicker decision makingquicker decision making

Example:Example:

GEF takes a passive but direct role GEF takes a passive but direct role in the partnership as the honest in the partnership as the honest broker. Assumes role of contract broker. Assumes role of contract administrator/ arbitrator, assists in administrator/ arbitrator, assists in supervisory missions, and ties supervisory missions, and ties enforcement to sovereign enforcement to sovereign obligations.obligations.

Demonstrate actual project risksDemonstrate actual project risks

Example:Example:

Jordan Gateway Industrial Estate Jordan Gateway Industrial Estate Project Perceived risks of 100% Project Perceived risks of 100% recycle, reducing water demand by recycle, reducing water demand by 80-90% is likely quite low – but no 80-90% is likely quite low – but no one has done it yet and investors one has done it yet and investors are wary of costs/ benefits and are wary of costs/ benefits and have no risk capital.have no risk capital.

Benefits to Business of Benefits to Business of GEFGEF

PartnershipsPartnerships

GEF Funds – reduce risk and catalyze GEF Funds – reduce risk and catalyze new marketsnew markets

Co-financing from GEF PartnersCo-financing from GEF Partners Share know-how, partnersShare know-how, partners Access markets and technologyAccess markets and technology Stakeholder supportStakeholder support Strengthens business’ image regarding Strengthens business’ image regarding

concern for and management of concern for and management of environmental managementenvironmental management

GEF Implementing GEF Implementing Agencies can Assist Agencies can Assist

CompaniesCompanies

Give quick answers on eligibility/issuesGive quick answers on eligibility/issues Explain funding alternativesExplain funding alternatives Advise on project designAdvise on project design Guide project sponsors through the GEF Guide project sponsors through the GEF

approval processapproval process Monitor implementationMonitor implementation Document progress/setbacksDocument progress/setbacks

Perceived Disadvantages Perceived Disadvantages of Working with GEFof Working with GEF

BureaucraticBureaucratic Learning Curve adds costLearning Curve adds cost Potential for project redesignPotential for project redesign SlowSlow Involves diverse, sometimes hostile, Involves diverse, sometimes hostile,

stakeholdersstakeholders Disclosure of project/financial Disclosure of project/financial

information to public and competitorsinformation to public and competitors

Potential GEF Private Potential GEF Private Investment ProjectsInvestment Projects

Wastewater treatment plantsWastewater treatment plants Tradable water pollution permitsTradable water pollution permits Land use controlsLand use controls Biodiversity/watershed protectionBiodiversity/watershed protection Wetlands managementWetlands management Cleaner ind. production technologiesCleaner ind. production technologies Ship/Oily waste treatment facilities Ship/Oily waste treatment facilities

LESSONS LEARNEDLESSONS LEARNED

Three Initial Indicators of Probable Three Initial Indicators of Probable SuccessSuccess

1. Support at Highest Levels of Government and Labor

2. Private Sector Company is Qualified, Experienced, and Committed

3.3. Clear Regulatory Framework With International ArbitrationClear Regulatory Framework With International Arbitration

Water/Sanitation are generally municipal Water/Sanitation are generally municipal functions BUT most cities/municipalities functions BUT most cities/municipalities have the least financial resources of any have the least financial resources of any governmental Body.governmental Body.

Result: They are the weakest of Result: They are the weakest of Potential Partners and need the most project Potential Partners and need the most project support/financial.support/financial.

Public Project Partners

RecommendationsRecommendations

Do NOT wave the “free money” flagDo NOT wave the “free money” flag

Insist on sound Project Finance fundamentalsInsist on sound Project Finance fundamentals

GEF support can provide significant additional project benefits by GEF support can provide significant additional project benefits by catalyzing investments through:catalyzing investments through:

Addressing local political/financial risksAddressing local political/financial risks Supporting adequate Returns on InvestmentSupporting adequate Returns on Investment Financing the development of transparent, balanced, and fair transactionsFinancing the development of transparent, balanced, and fair transactions Innovative project finance support mechanismsInnovative project finance support mechanisms

RecommendationsRecommendations

AnythingAnything that GEF resources can do to: that GEF resources can do to:

Increase the number of transactionsIncrease the number of transactions Increase the ERR and IRR of PPPsIncrease the ERR and IRR of PPPs Lower the risk of disputes and failuresLower the risk of disputes and failures

will result in lowering the risk to IWs.will result in lowering the risk to IWs.

Thank You

Suggested FocusSuggested Focus Group Themes Group Themes

1.1. Should GEF resources be used to support the Should GEF resources be used to support the Private Sector, directly or indirectly?Private Sector, directly or indirectly?

2.2. Is there a real need to consider alternative Is there a real need to consider alternative delivery mechanisms for environmental delivery mechanisms for environmental infrastructure and services at the local infrastructure and services at the local government level, or is it just a case of lack government level, or is it just a case of lack of political will and commitment to finance of political will and commitment to finance such projects?such projects?

3.3. Do governments make good partners? How Do governments make good partners? How can governments ensure sustainable can governments ensure sustainable partnerships with the private sector?partnerships with the private sector?

Suggested FocusSuggested Focus Group Themes Group Themes

4.4. Is there a role for IFI’s, donors, and the Is there a role for IFI’s, donors, and the international agencies in public-private international agencies in public-private partnerships?partnerships?

5.5. Are local governments able to access Are local governments able to access national and international investors national and international investors and operating companies? What are and operating companies? What are the limitations?the limitations?

6.6. ??7.7. ??