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PRIVATE - PUBLIC PARTNERSHIPS IN INFRASTRUCTURE DEVELOPMENT IN ASIA by Edwin Khew Chairman

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PRIVATE - PUBLIC PARTNERSHIPS IN INFRASTRUCTURE DEVELOPMENT IN ASIA by Edwin Khew Chairman Singapore Association for Environmental, Occupational Health & Safety Companies (SAFEco) & Executive Director Vivendi Universal Asia Pacific. Contents. Infrastructure Development Sources of Funding

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PRIVATE - PUBLIC PARTNERSHIPS IN INFRASTRUCTURE DEVELOPMENT IN ASIA

by

Edwin Khew

Chairman

Singapore Association for Environmental, Occupational Health & Safety Companies (SAFEco)

&

Executive Director

Vivendi Universal Asia Pacific

contents
Contents
  • Infrastructure Development
  • Sources of Funding
  • Why Involve Private Sector ?
  • How Private Sector can be involved
  • Formula for Successful Private - Public Sector

Cooperation

  • Why PPP in Water Sector
  • Examples of Structures for Private Sector participation in Water
  • Risks faced by Private Sector in PPP
  • Problems faced by Private Sector in PPP
  • Solutions for Success in PPP for Private Sector
  • Examples of successful PPPs
  • Conclusion
1 infrastructural development
1) Infrastructural Development

OECD classifies Infrastructure into two

broad categories :-

  • “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
2) Sources of Funding
  • Public Sector
  • Multilateral Agencies (World Bank, ADB, etc.)
  • Private Sector
3 why involve the 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 capacity
  • Large resource of funding available from Private Sector investors worldwide
  • Rapid and proactive execution of projects
  • Improved level of service and efficiency
  • More responsive to changes and needs of users -> greater flexibility
  • Reduced cost to Government
4 how private sector can be involved
4) How Private Sector can be Involved
  • Service Agreements
    • O&M
    • Planning and Design
    • Revenue collection

(risk borne by Public Authority)

  • 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
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 d1
4) How Private Sector can be Involved Cont’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
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
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
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
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WATER needs are URGENT and

Municipalities do not have the budget

7 examples of structures for private sector participation in water
7) Examples of Structures for Private Sector participation in Water

A. Service and Management contracts

  • of specific existing equipment
  • of 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
7) Examples of Structures for Private Sector participation in Water (Contd)

B. Concessions or lease contracts

  • of existing equipment or of the full utility water company
  • BOT 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 contd1
7) Examples of Structures for Private Sector participation in Water (Contd)

C. Assets sales

  • The 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
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
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
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
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
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
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
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 costs
  • Staffing 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
10) Solutions for Success in PPP for Private Sector
  • Structure contract to balance risk & rewards
  • Reduction 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 consumption
  • Repair all visible leaks
  • Eliminate & Police illegal connections (legislate against illegal connections)
  • Ensure every utility is able to measure its own performance
11 examples of successful ppp
11) Examples of Successful PPP

In 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.
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In Malaysia

Selangor 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
Vivendi Water in Asia-Pacific (Contd)

In Australia

Vivendi 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 Queensland
  • A 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 contd1
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
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 conclusion
12) Conclusion
  • PPP is necessary for the development of Asia
  • Private sector financed projects are the most appropriate instruments for developing economies, particularly in Asia
  • A 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 support
  • As 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
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