Session 6 Financing PPPs

1. PPPUE/Capacity 2015 Public-Private Partnership training Session 6Financing PPPs Sources of financing Cost recovery strategies

2. 1. Sources of financing • The key processes of financing PPP include: • Defining investment options / sources of funds • Business valuation • Bankability assessment • Investment management PPPUE/Capacity 2015 PPP training

3. A. Sources of funds • Equity - ownership in a private company or project • Debt - public or private obligation to repay loan • Grants - moneys that do not need to be repaid • Guarantees - third-parties protecting against specified risks PPPUE/Capacity 2015 PPP training

4. Equity • Share in profits, if any – dividends, capital gains • Say in major decisions, access to internal information • Who? • Private companies • Developers of the project (to share the risks), including IFIs • Funds: infrastructure, pension, venture capital funds PPPUE/Capacity 2015 PPP training

5. Debt financing • Commercial banks (WB/Croatia SMM) • Multilateral lending agencies – subsidized loan • World Bank <www.worldbank.org> • International Finance Corporation (IFC) <www.ifc.org> • European Bank for Reconstruction and Development (EBRD) <www.ebrd.org> • European Investment Bank (EIB ) <www.eib.org> • Bonds (municipal) • Syndicated loan - a pull of investor to finance a big project PPPUE/Capacity 2015 PPP training

6. Grants and subsidies 1/2 • National/sub-national government • Ear-marked environmental funds • National • International • Phare – an instrument to assist the applicant countries of Central and Eastern Europe in their preparations for joining the European Union. • ISPA - Instrument for Structural Policies for Pre-Accession (after recent accession only Ro and BU remain eligible for ISPA funding) • CARDS - Community Assistance for Reconstruction, Development and Stabilisation, focuses on the Balkan and SEE countries: for investments, institution building, and capacity development • Tacis programme focuses on the EECCA region • IFIs: WB, EBRD, EIB • Investment project preparation work PPPUE/Capacity 2015 PPP training

7. Grants and subsidies 2/2 • Bilateral donors - technical assistance • Usually to improve public administration, strengthen democratic institution, enhance capacity of civil societies, etc. • Municipal projects: • United Kingdom: DFID – Department for International Cooperation www.dfid.gov.uk • USA: USAID - United States Agency for International Development www.usaid.gov • Germany: GTZ - Gesellschaft fur Technische Zusammenarbeit and KfW, Kreditanstalt für Wiederaufbauwww.gtz.de • Denmark: DANIDA, DEPA • Italy: ICA – Italian Cooperation Agency • Sweden: SIDA – Swedish International Development Agency, www.sida.org • Japan: JICA – Japan International Development Agency www.jbic.go.jp PPPUE/Capacity 2015 PPP training

8. Guarantees • Contract performance • Political risks (war, expropriation) • MIGA – WB’s Multilateral Investment Guarantee Agency • “take-or-pay” contracts – end users pay a pre-established amounts for products/service, whether or not they are actually received PPPUE/Capacity 2015 PPP training

9. 2. Cost recovery strategies • How are cost recovered? • The key processes for cost recovery PPPUE/Capacity 2015 PPP training

10. How are cost recovered? • Capital (infrastructure) costs include building assets used for service and products production and in some cases costs for buildings and grounds. • Operational and maintenance (O&M) costs– the cost of actually operating and maintaining the system in order to produce and distribute service. • Connection costs – the cost of connecting an individual household to the system. PPPUE/Capacity 2015 PPP training

11. The key processes for cost recovery • Establishing cost recovery strategy • Tariffs and charges structuring • Subsidizing • Billing and collection PPPUE/Capacity 2015 PPP training

12. 1. Aspects of the cost recovery strategy • tariff and fee structure • forming an appropriate and feasible payment scheme (usually monthly charge) • designing appropriate payment options • increase or change payment points • work with a community group to collect money • customer relations/education • rewards and punishments, e.g. random prize drawing for houses that pay or service cut-off for non-payment • community mobilization and participation and communal billing, etc. PPPUE/Capacity 2015 PPP training

13. 2. Basic types of water tariff structures • Single-part tariff (single-tariff pricing) - a consolidates rates across multiple service territories owned and operated by a multisystem utility that may or may not be contiguous or physically interconnected. • Two-part tariffs - users pay a fixed sum for access to a service and pay another charge for each unit of the service they consume. PPPUE/Capacity 2015 PPP training

14. Single-part tariff • Fixed charge - monthly water bill is independent of the volume consumed (not based on measured water use) • Volumetric charge - made for the volume of water which is measured through a supply point • Uniform price volumetric tariff (unblocked) all units of water billed at same price. • Increasing block structures - two or more prices, each applies to use within a defined segment (block) of monthly use- unit charge is constant over a specified range of water use and then shifts as use increases • Decreasing block pricing (or declining-block pricing) – a pricing structure, in which both the average and marginal price per unit decreases as consumption increases. PPPUE/Capacity 2015 PPP training

15. Price, € Price, € Price, € Volume, l Volume, l Volume, l Decreasing block pricing Increasing block structures Uniform price volumetric tariff PPPUE/Capacity 2015 PPP training

16. 3. Subsidizing • Many public services projects need to be subsidized • Decision makers then need to decide: • What they prioritize for subsidy • What element/stage/aspect of the service to subsidise • How the subsidy should be delivered • Who the recipients of the subsidy should be PPPUE/Capacity 2015 PPP training

17. Subsidies come in two forms • Direct subsidisation used to cover the shortfall in supply costs by the injection of finance from outside the sector or industry • E.g. the financing of solid waste services or donor support to government undergoing sectoral reform • Advantages: direct subsidies are transparent, explicit, and minimize distortions in the behaviour of utilities and their customers. • Drawbacks: difficulty of defining suitable eligibility criteria as well as the administrative cost entailed in identifying eligible households. • Cross-subsidisation used to cover costs by shifting the burden from one consumer group to another within that sector or industry. • between different social, economic or regional groups of users • e.g. cross-subsidy of the poor, by charging richer users more PPPUE/Capacity 2015 PPP training

18. 4. Billing and collection • This is usually the most significant change introduced by private companies. • It is a technically and managerially simple process to create a comprehensive and up-to-date database of users, and issue invoices for the amounts owed. • Collection constraints: • Demand, e.g. of the poor • Income level • Affordability/willingness to pay PPPUE/Capacity 2015 PPP training