World Bank Experience in the Privatization Process

Presented at the Water Policy in the Americas Roundtable

21 September 2000by

Ventura Bengoechea

Outline

Situation Circa 1990 Reform Process in LAC The Role of the WB Achievements Unfinished Agenda Challenges Ahead Learning from Real Cases

Situation circa 1990

Politicians

Public UtilityStaff

PopulationConnected

Populationw/o Connection

Increasing

Employment Agency

(Over-staffing)

PoorServices

Low TariffsBad perception

Graphic adapted from V. Foster

ServePoliticalAgenda

Fiscal Transfers

Utility Officials

High TariffsBad Quality

EnvironmentalDegradation

Difficult

1990

AustriaChileGermanyUSA

France GuineaFranceSpainPoland

Cote d’IvoireFranceSpain

USAUK

BOO Divestiture

Concession BOT

Lease Managmt. Contracts

Service Contracts

PSP in Water circa 1990

The Reform ProcessPoliticians

Private/Public UtilityStaff

MorePopulationConnected

Populationw/o Connect.

Efficient Service

GoodServices Adequate Tariffs

Graphic adapted from V. Foster

Sector Strategy

Tariffs & ServiceQuality Regulation

Incentivesfor Connections

EnvironmentalImprovements

Regulators

The Role of the WB

Advise on Reform Issues Dissemination of Best Practices Study Tours for Policy Makers as

well as Labor Unions Financing of Transaction Advisers TA and Training for Regulators Financing and Equity to the PS

Achievements through PSP

Water Service Improvements Increased W&S Coverage Cash Flow Generation & Financing Increase in Sector Investments Customer Attention

2000

AustriaChileCosta RicaGermanyIndiaMexicoRussian F.TunisiaUSAVenezuelaAlgeria Bangladesh Burkina

FranceWest Bank,GazaPuerto RicoTrinidadUSAVenezuelaJordanGeorgiaArmeniaKazakhstanNepal

ColombiaCote d’IvoireCzech RepHungaryGuineaFranceMozambiquePolandSenegalSpainGhanaGuinea-BissauNigerTanzania

ArgentinaAustraliaBoliviaBrazilChinaColombiaFranceGabonGermanyIndonesiaHondurasMexicoMalaysiaMoroccoPeruPhilippinesSloveniaSouth AfricaSpainThailandTurkeyUruguayUSAVietnamGreeceGuyanaLebanonJordanLithuaniaNicaraguaNigeriaPanamaParaguayTunisiaIndia

ChileGermany (min)

UKUSAThailand

signedproposed

BOO Divestiture

Concession BOT

Lease Managmt. Contracts

Service Contracts

Year (Figures in millions) 2000 2015Population 500 650Access to Water 350 550Access to Sewer 200 400Access to WW Treatment 10 100Privatized Services 30 200Public Service 470 450

A Prospective View for Latin America

Investments through 2015 US$100 Billion or US$6-7 B/yr

Expected by Year 2030 Technological Changes ...

Private Sector’s Role as: Lenders, Operators, Investors

Limited Deal Flows Slow process w/ high transaction costs

Limited Investments low aggregate and geographically skewed

Transparency of Transactions Sole-source deals, renegotiations

Limited Number of Players Weak or Cumbersome Regulation

The Unfinished Agenda

Huge Investment Needs PS Services to the Poor PSP for Medium & Small Towns Increase Number of PSP, especially

small providers Targeted Subsidies Regulation of Services and Standards

The Challenges Ahead

Buenos Aires• strong Presidential-level support

• no subsidized alternative

• macro adjustment underway, currency board

• clear responsibilities between national, provincial and city government

• multi-agency steering group

• unions on board

• experienced advisors hired to prepare the transaction

• regulatory design done up-front

• near cost tariffs before bidding

$1B+ invested in 5 years

Buenos Aires• strong Presidential-level support

• no subsidized alternative

• macro adjustment underway, currency board

• clear responsibilities between national, provincial and city government

• multi-agency steering group

• unions on board

• experienced advisors hired to prepare the transaction

• regulatory design done up-front

• near cost tariffs before bidding

$1B+ invested in 5 years

Caracas

• support at Vice-Minister level

• oil country, subsidies culture

• macroeconomic policy unclear, weak currency

• 23 munis + 4 states in concession area, no clear agreement among them

• working group from one Ministry

• unions on the street

• transaction prepared “in-house”, no professional advice sought

• regulatory design postponed

• tariffs a fraction of O&M costs

No bid received

Caracas

• support at Vice-Minister level

• oil country, subsidies culture

• macroeconomic policy unclear, weak currency

• 23 munis + 4 states in concession area, no clear agreement among them

• working group from one Ministry

• unions on the street

• transaction prepared “in-house”, no professional advice sought

• regulatory design postponed

• tariffs a fraction of O&M costs

No bid received

Learning from experience

Case Study: The BA Concession

The Achievements made in 4 years:– Rehabilitation/Renovation– Water Quantity & Quality– Expansion of Water & Sewer Networks

Tariff Evolution & Financial Outlook The Concerns:

– Infrastructure Surcharge– New Environmental Objectives– Lack or Subjectivity of Regulations– Tariff Structure and Demand Management

Rehabilitation & Renovationof the Water Distribution Network(cumulative in kms)

Year 1 Year 4Year 3Year 2

TargetAchieved

1.000

800

600

0

400

200

252

134

427439

584633

796 817

Achievements in BA through 1996

5

Water quality in network

%

ChlorineChlorineTurbidity Bacteriological

50

40

30

20

0

10

Year 1Year 2Year 3Year 4

50 %

13%

4 % 4 %

31 %

6 % 4 % 3 %8 %

4 %

2 % 0 %

Achievements in BA through 1996

Water expansion population served(Thousans of

inhabitants served

cumulative)

TargetAchieved

1.500

1.200

900

0

600

300 180221

448569

761869

1.358

1.121

Year 1 Year 4Year 3Year 2

Achievements in BA through 1996

Sewerage expansionpopulation served(Thousans of inhabitants served cumulative)

TargetAchieved

400

300

0

200

100 25

281

62

342

114

387

471

550

Year 1 Year 4Year 3Year 2

500

600

Achievements in BA through 1996

145

Year 1 Year 2Year 3 Year 4

210

270

106

50

100

150

200

250

0

Revenues / Costs Cash Flow

Year 1 Year 2 Year 3 Year 4

Debt

223

230

330

458

3

188 182

362

103

42

148

96400

300

200

0

100

M$M$

M$ 12210

479

-10

M$

250

300

350

400

200

Costs Revenues

265

260

333

244

375

252

393

245

100

80

0

40

Year 1 Year 2Year 3 Year 4

42

Investments

STLP

Year 1Year 2 Year 3

Year 4

• Revenues• Costs• Cash Flow• Investments• Debt

BA Financial Outlook

Tariff vs Consumer Price Index Evolution in BA through 1996

0.50.60.70.80.91.01.11.21.31.41.5

August 92 May-93 July 94 December 96

Price index

Tariff

1.081.13 1.17

0.731

0.83

1996 - The BA Concerns

• Compulsory Expansion impaired by people’s inability to pay the Infrastructure Charge

• New Environmental Objectives & Standards

• Tariff Regime hampered rational water use and gave no incentives to expansion

• Limitations & Subjectivity of Cost Revisions

• Lack of Rules & Regulations

50

3

20 20

0

20

40

60

Water Connection Water Service

$/b

im

Billing (bimonthly)

Capacity to Pay ofPoor (bimonthly)

The BA Concerns• Infrastructure Charge

– One more case where the wrong subsidies were being applied:

Capacity to Pay computed as 4% of a $250/month family income, which is considered as the threshold for extremely poor family. Numbers do not include 21% VAT added to bill

TotalPopulation

(Millions)

Low income

Population

(Millions)

Ratio

Served Area 7,5 0,8 10%

Expansion Area 2,5 1,2 50%

The BA Concerns

Socioeconomic Outlook: 50% of the population to be incorporated belong to the lowest income group.

• Regulatory Issues– Need to incorporate new environmental

objectives (Matanza-Riachuelo) & standards– Cost Revision Trigger (7%) no longer valid– Definition and Measurement of Efficiency– Need for an appropriate Risk Allocation – Overall economic equilibrium of the concession

The BA Concerns

4 6

20 20

0

20

40

60

Water Connection Water Service

$/b

im

Billing (bimonthly)

Capacity to Pay ofPoor (bimonthly)

Solution: CI SUMA + CIS

Capacity to Pay computed as 4% of a $250/month family income, which is considered as the threshold for extremely poor family. Numbers do not include 21% VAT added to bill. SUMA and CIS values are now a 5.31% higher since they are indexed to the K factor.

• SU ~ $2.00/service (bimonthly)• MA ~ 1.00/service (bimonthly)• CIS ~ 4.00/service (30 bimonthly installments)

The Aguas Argentinas Case:New Economic Regulation

• From price-cap to benchmark model.

• Tariff Equilibrium:– Formalize relationship between Revenues,

Investments, Operating Expenditures and Capital Employed (Debt+Equity)

– Achieve Financial Equilibrium of the Concession.

• Financial ratios become a key reference.• Adequate Rate of Return for each 5-year

period will be a function of:• Country risk (long-term bond)• Business own risk (UK based)• Company’s projected financial structure

(Debt/Equity)

• Equilibrium position, subject to efficient operation:

Discounted value of Future Net Funds Flow equals 0

The Aguas Argentinas Case:New Economic Regulation