PRIVATE - PUBLIC PARTNERSHIPS IN INFRASTRUCTURE DEVELOPMENT IN ASIA

byEdwin Khew

ChairmanSingapore Association for

Environmental, Occupational Health & Safety Companies (SAFEco)

&

Executive DirectorVivendi Universal Asia Pacific

Contents1) Infrastructure Development2) Sources of Funding3) Why Involve Private Sector ?4) How Private Sector can be involved5) Formula for Successful Private - Public Sector Cooperation6) Why PPP in Water Sector7) Examples of Structures for Private Sector participation in

Water8) Risks faced by Private Sector in PPP9) Problems faced by Private Sector in PPP10) Solutions for Success in PPP for Private Sector11) Examples of successful PPPs12) Conclusion

1) Infrastructural DevelopmentOECD classifies Infrastructure into two broad categories :-(a) “Economic Infrastructure”

- Water, Sewerage, Stormwater, Drainage, Highways, Power Supply, Telecoms, Ports, Airports, etc.

(b) “Social” Infrastructure- Schools, Universities, Hospitals, Prisons, Public Housing,

Sporting Facilities, etc.

Infrastructure facilities – general characteristics :- - High capital cost

- Long life span

- Critical to economic development and growth

- Critical to Sustainable Development

2) Sources of Funding

Public Sector

Multilateral Agencies (World Bank, ADB, etc.)

Private Sector

3) Why Involve the Private Sector ?

Increasing and urgent demand for infrastructure because of population growth, economic growth, migration to cities and vocal middle class. Budget constraints of Governments and their reduced borrowing capacityLarge resource of funding available from Private Sector investors worldwideRapid and proactive execution of projectsImproved level of service and efficiencyMore responsive to changes and needs of users -> greater flexibilityReduced cost to Government

4) How Private Sector can be Involved

a) Service AgreementsO&MPlanning and DesignRevenue collection(risk borne by Public Authority)

b) Leasing (Affermage)BOT (Build, Operate, Transfer)

- Operation & Management (O&M)- Repair/Replacement- Full Administration of Plant (Private Sector does

not finance or own the facility)D&B (Design & Build)

- Similar to BOT, no operation (except DLP period for training of staff)

4) How Private Sector can be Involved Cont’d

c) Franchising

BOOT (Build, Own, Operate and Transfer)- Similar to BOT except Private Sector provides financing (15-25

years operation)

BOO (Build, Own and Operate)- Similar to BOOT except no handover

Award to Private Sector via a concession

arrangement. Revenue collected by

concessionaire based on pre-defined tariff

formula (running cost or ROI or both)

4) How Private Sector can be Involved Cont’d

d) Divestiture

Full Privatisation

Service levels, efficiency and rates governed by one or more regulatory bodies encompassing interests of Customers, Government, Private companies and Shareholders

Danger of being private monopolies

Government reserves the right to terminate licence after 25 years or immediately if licensee defaults in meeting regulatory requirements

5) Formula for Successful Private - Public Sector Cooperation

Government should position itself as a strong

regulator and facilitator

Private sector should provide items 4(a) – (c)

depending on local conditions

Project must be financially sound (bankable),

feasible (technically) and affordable to users

Minimise Risk (political and economic) – government

guarantees to insure against payment defaults

5) Formula for Successful Private -Public Sector Cooperation – cont’d

Sound legal and administrative framework in place e.g.

Laws and regulations on foreign investment, corporate

law, taxation, sovereign guarantees, intellectual

property, etc., must be developed, tried and tested

Win-Win formula where convergence and coherence

achieved between social motivation (government)

and business motivation (private).

6) Why PPP in Water Sector

Rapid population growth

Deterioration in quantity & quality of raw water

Increased affluence

Municipalities face huge technical problems in meeting increased demand for water because of :

- Shortage of raw water

- Polluted raw water, and poor water treatment standards

- Existing equipment requires upgrading and maintenance

- New treatment processes are more sophisticated and therefore

require more skills & training

WATER needs are URGENT and

Municipalities do not have the budget

7) Examples of Structures for Private Sector participation in Water

A. Service and Management contractsof specific existing equipmentof specific services (repairs, metering, invoicing)BOT on new equipment

The municipality controls the Water Distribution but outsource Treatment Management which will be done more efficiently by the Private Sector.Investments and tariff collection are by the municipality.

7) Examples of Structures for Private Sector participation in Water (Contd)

B. Concessions or lease contractsof existing equipment or of the full utility water companyBOT on new equipment

The municipality keeps the ownership of the assets, but delegates the operations, maintenance and responsibilities to the Private Sector under a contractual scheme. The tariff, under the agreement, is collected by the private sector. Investments are paid by the concessionaire.

7) Examples of Structures for Private Sector participation in Water (Contd)

C. Assets salesThe entire water company, and its assets are sold out BOO on new equipment

The municipality sells the water company and all its assets to a private partner subject to a regulatory regime. The Private Sector operates under a license that sets certain service levels and tariff rates.

8) Risks faced by the Private Sector in PPP

Market & Political Risks

Currency & Cash Flow Risks

Regulatory Risks

Health & Environmental Risks

Corruption Risks

Market & Political Risks

Will tariff be affordable for consumers ?

What is local willingness to pay ?

How stable is country politically ?

What is demographic profile ?

How will population change in longer term ?

Affordability :

To bear the cost without major sacrifices

Currency & Cash Flow Risks

What is the prognosis of currency stability ?

What is the cost of capital locally ?

What is the ability of municipalities and government to

honour their financial obligations ?

What is the potential for contract delays ?

Can profits be repatriated ? If so, when & how ?

Regulatory Risks

What is the potential for tariff revisions?

Will competitive mechanisms be introduced after

protective agreements ?

Are there re-negotiation windows in the contract and if

so, for which party ?

Who is responsible for monitoring services, water quality

and environmental performance ?

Is there a potential conflict of interests between the

regulator and the municipality ?

Health & Environmental Risks

What are the country’s drinking water quality criteria ?

Are these in line with WHO standards ?

If not, is there a convergence timetable ?

Who is responsible for monitoring water quality ?

Who is responsible for monitoring environmental

compliance ?

What is the state of environmental laws & enforcement ?

How are its environmental laws evolving ?

Corruption Risks

Do you have a strategic local partner

or a ‘crony’ company ?

How corrupt is target country ?

Is it worth entering when to play fair is

to lose ?

9) Problems Faced by Private Sector in PPP

Existing Difficulties

Low coverage (25% to 85% in large Asian cities)High rate of “unaccounted - for water” (40% to 60%)Revenues cover only 35% of water costsStaffing levels (10 to 20 per 1000 connections vs. 2 to 3 per 1000 in an efficient undertaking)

Current international funding

available : US$2.5 billion

Funds needed : US$400 billion

10) Solutions for Success in PPP for Private Sector

Structure contract to balance risk & rewardsReduction of UFW (unaccounted for water)Making the price of new connections affordable (or even : free of charge under certain conditions)Introduce a formal policy for service to the urban poor (where the rich subsidise the poor)Ensure 100% metering of production and consumptionRepair all visible leaksEliminate & Police illegal connections (legislate against illegal connections)Ensure every utility is able to measure its own performance

11) Examples of Successful PPPIn China

Tianjin (3rd largest city in China), Generale des Eaux won the first 20 years contract concession in 1997 for an already existing installation. The plant (500,000m³/day capacity) serves 4 million inhabitants

Chendu (Sichuan), Generale des Eaux, with its Japanese partner Marubeni, won China’s first BOT contract in water sector in July 1998 (3.2m inhabitants). Generale des Eaux is currently constructing the plant (400,000m³/day capacity) and will operate it for 18 years.

In MalaysiaSelangor State :

Since 1987, Generale des Eaux operates 26 Water Plants (950,000m³/day) serving a population of 4.1 million people

Perak State :In June 1998, Generale des Eaux took a 30% stake in Intan Utilities and now operates the water facilities for the city of Ipoh (600,000 inhabitants), the capital of the Perak State

In Indonesia- In April 1997, through its subsidiary, United Water (47.5% stake), Generale des Eaux won the first BOT contract in Indonesia’s water sector at Sidoarjo, a city east of Java with 500,000 inhabitants. The contract calls for the construction of a new water treatment plant and its operation for 25 years.

Vivendi Water in Asia-Pacific (Contd)

In AustraliaVivendi Water Australia, through Wyuna Water and United

Water, provides water services to almost two million people e.g.A 15-year contract to operate the water and waste treatment facilities of Adelaide (six water plants and four wastewater plants). 1.2 million inhabitants served.Two Water Plants in Sydney : Illawara and Woronora (500,000 people served)A 25-year DBO (Design, Build & Operate) contract for the city of Noosa (35,000 people) in QueenslandA BOT Contract for the first waste water treatment system in Australia awarded to a private sector company. The 20 years contract covers the waste water services of Gerringon and Gerroa, south of Sydney.

Vivendi Water in Asia-Pacific (Contd)

Vivendi Water also operates Privatised Water and Waste Water Plants in Vietnam, Thailand

and New Zealand

and Serves more than 20 million people in Asia

Pacific

Vivendi Water : World’s leading distributor

• Water treatment and distribution

• Collection and treatment of waste water

• Construction and operation of water and waste water treatment plants

• Installation and maintenance of piping (distribution) networks

• Merging of Generale des Eaux and US Filter in October 1999 Vivendi Water• 110 million consumers worldwide• 6 billion cubic metres of drinking water supplied annually• Waste water treated for 70 million people• ISO 9002 and 14001 certifications

12) ConclusionPPP is necessary for the development of AsiaPrivate sector financed projects are the most appropriate instruments for developing economies, particularly in AsiaA successful PPP project requires the packaging and facilitation of private sector funding, most appropriate technology, project management, engineering, training, legal support, etc. together with government supportAs graduates of this MEM course it is your responsibility if you are from a developing country to find out the most appropriate PPP formulation for your country’s infrastructure development and sustainable growth. If you are not from a developing country, you can look at bringing FDI into the less developed countries

Successful PPP Progress FDI

Jobs S.D.

Thank You