How to Structure Better Water Sector Public

Transcription

MAY 2009
ABOUT THE AUTHOR
NICOLA R SAPORITI
is an Investment Officer in
IFC’s Infrastructure Advisory
Services Department. He has
eleven years of international
experience in infrastructure
finance, focusing on
hydropower, energy
distribution, water, and solid
waste transactions in Europe,
Africa, and Latin America.
APPROVING MANAGER
Richard Cabello, Principal
Investment Officer, Infrastructure Advisory.
How to Structure Better Water Sector PublicPrivate Partnership Transactions (and to Get
Others to Write a SmartLesson for You)
Who says that writing a SmartLesson requires
effort and time? Irresistibly attracted by the
possibility of winning a fat price in hard cash,
and even some “performance evaluation”
recognition for contributing to his department’s
knowledge
management
efforts,
an
Investment Officer with little time on his hands
(and no summer interns to leverage) gets his
clients to write a SmartLesson on his behalf,
and gathers first-hand, straightforward,
practical, and useful insights in the process.
Two months after the end of the tender
process to select the private investor in a Water
and Sanitation Sector Public-Private Partnership
(PPP) in the Caribbean, the short-listed
investors eagerly share their views on how to
improve future water and sanitation PPP
projects.
To quote one of the bidders, “After a period
of settlement of the lessons from the recent
past, the dialogue with local governments,
civil society, and other stakeholders has now
reached a new level of maturity that should
allow more and better water PPPs to come
about.... Current procurement methods are
often ill adapted to long-term PPPs and need
careful improvements: it remains particularly
challenging, case by case, to leave room for
creativity and to evaluate technical proposals,
to find the right balance between quality and
price in bid evaluations, and overall to assess
the expected long-term viability of a
partnership.”
It is in this spirit of collaboration and partnership for the water and sanitation sector that
all investors were invited to share their views
on how to improve the tendering process and
the contractual structure of a future PPP project.
An added incentive to formulating written
comments was the fact that IFC is developing a
pipeline of similar deals in neighboring countries, and it is therefore in the investor’s interest to develop improved, more sustainable PPP
models and more efficient tender processes.
Project
background
structure
The gratitude of the author goes to the private
investors who volunteered to contribute their
smarts for this lesson.
Getting feedback from investors
The initial idea for soliciting investor feedback
actually came before the conclusion of the
process from investors that did not expect to
submit offers. They voluntarily wrote to IFC
with comments and feedback explaining the
reasons behind their decision.
and
PPP
The Caribbean country in question has
approximately 160,000 inhabitants and 40,000
active water connections. The Water and
Sewerage Company (WASCO) is the stateowned incumbent that currently provides
water supply and services. The government
hired IFC in February 2008 as its lead transaction
advisor for the implementation of a water and
sanitation PPP.
A new company (NewCo) would be
incorporated to assume responsibility for the
provision of water and wastewater services on
IFC SMARTLESSONS — MAY 2009
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the island. The government would directly retain 20 percent of
the shares in NewCo in exchange for the lease on the existing
fixed assets and for the transfer of selected assets. A
government-owned pension fund and an institutional investor
would subscribe to 40 percent of NewCo’s shares in cash.
The tender was initially to be awarded purely to the bidder
which offered to pay the highest payment to the government.
However, following discussions with potential investors and
within the government, the process was changed to award the
tender through a combined score (80 percent - 20 percent) of
the proposed business plan and the
payment to the government.
All project agreements (Shareholder
Agreement, License, Subscription, Level
of Service Lease, etc.) were pre-negotiated
with investors during the bid process and
formed the base for the offers. This
process took longer than expected and
was one of the causes for
the
postponement of the bid submission
deadline from the end of June to midOctober (the other major cause was a
delay in the legislative approval of the
few missing pieces of the regulatory
framework). The minimum equity capital
of NewCo was set by the government
during the bidding process.
Contractual structure of the PPP
A private water sector investor to be selected through the
competitive tender orchestrated by IFC would subscribe to 40
percent of NewCo’s shares in cash; the shareholder agreement
granted the winning bidder operational and managerial
control over NewCo.
WASCO would be transformed into an asset holding company
that would sign with NewCo a 25-year non-onerous lease on
its infrastructure assets.
The National Water and Sewerage Commission (NWSC), the
sector regulator, would grant NewCo a license to provide
water and sewerage services on the island.
Regulatory structure
The government received two very
competitive financial and technical offers:
the best financial offer valued NewCo at almost US$300 per
connection and mobilized more than US$300 of new equity
capital (per connection).
Feedback from investors on the tender
process
The author received detailed feedback from the following
companies (in alphabetical order): Cascal, SAUR, Severn Trent
International, Suez Environnement, and Veolia North America.
Only two of the potential investors that carried out the due
diligence of the project did not provide feedback. The
feedback received contains valuable lessons that are
summarized in the pages that follow.
The Water Act establishes water and sanitation tariffs following
a “cost plus” regulation. Tariffs and service quality will be
regulated by the independent NWSC. In a triennial tariff
review, the NWSC will review the tariff structure and level of
tariffs in the service licensee’s tariff scheme, taking into
consideration new quality and expansion goals set by the
NWSC and the investment plan of the service licensee for the
ensuing triennial period.
NewCo will be responsible for financing water investments;
however, the NWSC would determine, in collaboration with
NewCo, the appropriate means to finance the realization of
sewerage infrastructure investments that could include tariff
adjustments, subsidized financing, and/or grants.
Tender process
The tender was structured as a single-stage process, with no
pre-qualification, in which only bidders meeting certain
minimum criteria of financial solidity could apply.
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The gratitude of the author goes to the bidders who contributed their
feedback.
Pre-marketing
All bidders highlighted the significance of contacting the key
potential investors before launching the official tender process
to present the project, describe the investment opportunity,
and collect early feedback. They felt this to be a very constructive
approach.
Prequalification
Some investors felt that having a list of minimum criteria for
submission of bids (technical and financial), as opposed to a
formal pre-qualification of bidders, produced a significant
level of interest from potential investors and an appropriate
list of bidding companies. Others, however, recommended
excluding non-water operators from the participation of such
tenders, because it is not in the government’s interest to
partner with purely financial investors with no established
corporate experience in the turnaround of water companies.
Due-diligence process
All investors highlighted the importance of having readily
available and comprehensive consultant reports in the data
room. In fact, these documents appear to have been the main
source of data for a lot of bidders.
On the other hand, the quality of information directly provided
by WASCO was poor and it was released slowly into the data
room in response to questions. It would have been preferable
if all information could have been provided from the outset,
because the drip feed of information created extra work.
For future tender processes, bidders stressed the importance
of clearly referencing questions and answers in a way to make
tracking easy.
With regard to site visits, they would have preferred to have a
well-defined program of visits, as opposed to the bidders
having the freedom to visit all sites and the need to dictate
what they wished to see.
The due diligence would have been smoother if a list of
individuals in WASCO who could be contacted had been
available, together with guidance on the information those
individuals could provide.
Pre-negotiation of contract documents
Investors viewed this phase as crucial because it made it
possible to amend some very important articles in the draft
contractual agreements and even add new contracts altogether.
In the specific case of this tender, some delay was caused by
the fact that the government did not avail itself of the support
of an international lawyer.
Tender procedure and instructions for bidders
As expected, some potential investors resented the fact that
the government made significant changes to the bid evaluation
process during the bid. This produced a need to reassess the
structure of the respective offers, and the additional expense
associated with the need to revisit the collection of duediligence data. The postponement of the bid date caused more
work for bidders, as work was stopped when there was a
deferment and then had to be refreshed and restarted when a
new date was announced.
evaluation process, the length of proposals was limited to 60
double-sided pages, including all illustrations and diagrams.
Investors generally liked the concept of limiting the page
length of the proposals, although we now have learned that
they would have preferred a word-length limitation: a wordbased approach would allow better layout and avoid
discrepancies between bidders caused by the use of different
typefaces.
Bid evaluation methodology
Requesting investors to submit both financial and technical
offers was unanimously felt to be a good concept. There is
disagreement, however, as to the appropriate weight that
should be given in the scoring of the technical and financial
offers.
Those bidders that carried out the most comprehensive due
diligence of the project felt that the 80 percent technical – 20
percent financial weight was balanced. On the other hand,
those bidders that had to perform a more hasty due diligence
(because of time, budget, or resource constraints) felt that the
scoring formula was too heavily skewed in favor of the
technical submission and suggest in their feedback that a 50:50
or 60:40 weighting would have been more appropriate.
Technical evaluation
Because of the government’s delay in appointing the NWSC
and the Evaluation Team, bidders did not have an opportunity
to make a face-to-face presentation of their business plan and
strategy. The feedback received from investors indicates that
some would have appreciated the opportunity to present their
technical offer directly to the government’s team. They also
felt that the quality of the oral presentation could have been
scored and accounted in the final evaluation.
Financial evaluation
Some investors suggested considering a combination of
financial parameters in future projects, rather than simply the
transaction fee payable to the government. They suggested
that the financial proposal should include:
• A transaction fee payable to the government
• The amount of proposed investments (for example, the
investment program of the first three years)
• The projected tariff increase
In their view, the two additional elements would lead the
bidders to reveal their vision of the new service and demonstrate
their commitment.
Ideally, the transaction fee should be subject to a maximum
cap (for example, the maximum amount needed by the
government to support the establishment of the PPP), so as to
avoid the submission of any overestimated fees that would
eventually be passed into the tariff. This would also be a way
for the government to increase its chance that its financial
objectives were met.
Bidders were required to submit a technical proposal which
consisted of a business plan. In the interest of simplifying the
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Feedback from investors on the
PPP structure
Regulatory framework, including
the tariff framework
Investors had words of praise for a regulatory
framework, which included the following
“very positive and realistic features”:
• The periodic performance and tariff
review, which took into account level of
service targets
• Annual tariff indexation for inflation
• A tariff review mechanism which took into
account capital expenditure
• An introductory period of 12 months during
which baseline performance criteria were
set, and during which NewCo and the
NWSC would agree on the initial investment
program
• The separation of ownership of WASCO’s
historic assets and liabilities from NewCo.
Contractual framework and risk
allocation
One of the suggestions received during the
tendering process was to add to the classical
PPP contractual structure a “framework
agreement” signed by all the parties, similar
to the implementation agreement used for
power sector’s Independent Power Producers.
This would enable:
• a better understanding of the links
between all the contracts
• a clearer allocation of risks between all the
parties
• the introduction of mitigation mechanisms
so that solutions could be more easily found
in case one of the parties defaults
Ownership and governance
Most investors would have preferred to hold a
controlling interest in NewCo, but they
recognized that this is not always a politically
acceptable option. The key reason for wanting
ownership of the majority of shares was to
bring the contractual obligations of the private
sector investor in line with its liabilities.
really difficult to ensure the financial
sustainability of NewCo because of the initial
tariff freeze imposed by the government. They
strongly felt that the project could have been
much more successful for the government, the
users, and the investors without this excessively
stringent requirement.
Management fee
The management fee payable by NewCo to
the private investor, in exchange for a welldefined scope of services, was pre-negotiated
together with the other draft contracts before
the bid submission deadline. The amount of
the fee was of critical importance to guarantee
the desired economic return of investors, and
was one of the most heavily negotiated
issues.
Investors felt that the pre-set management fee
was a good arrangement which avoided
debate and disagreement with other
shareholders during the operations phase.
Role of the government and the
public sector
Investors generally liked the idea of the
government’s becoming a minority shareholder
through a transfer of assets. In particular, they
felt having the government as minority
investor was appropriate, as it would facilitate
its understanding of the issues in its capacity of
regulator and potential financier of some of
the future capital works.
On the other hand, some investors criticized
the mechanism for attribution of shares to the
government in exchange for the transfer of
assets; they saw the valuation of the transferred
assets as a potentially contentious issue. In
fact, the preparation of the simple list of assets
to be transferred caused delays in the tender:
future transactions may have to give proper
consideration to the fact that state-owned
water sector utilities do not often have
sufficiently sophisticated accounting and
bookkeeping systems to account for and value
the buried assets they own.
Role of IFC as investor
Given the circumstances, most bidders liked
the Shareholders Agreement and control
structure because they felt it gave as much
protection as possible to the minority
ownership position of the operator.
The possibility of IFC being the “institutional
investor” with 20 percent of the shares in
NewCo was seen as a positive risk mitigant and
a catalyst for cooperation between the public
and private sector.
Financial
project
The issue of a potential conflict of interest
between IFC’s role as transaction advisor and
as potential investor and did not emerge as a
concern.
sustainability
of
the
Despite their best efforts, investors felt it was
DISCLAIMER
IFC SmartLessons is an awards
program to share lessons learned
in development-oriented advisory
services and investment
operations. The findings,
interpretations, and conclusions
expressed in this paper are those
of the author(s) and do not
necessarily reflect the views of IFC
or its partner organizations, the
Executive Directors of The World
Bank or the governments they
represent. IFC does not assume
any responsibility for the
completeness or accuracy of the
information contained in this
document. Please see the terms
and conditions at www.ifc.org/
smartlessons or contact the
program at [email protected].
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How to Structure Better Water Sector Public

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