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World Bank Experience in the Privatization Process

World Bank Experience in the Privatization Process. Presented at the Water Policy in the Americas Roundtable 21 September 2000 by Ventura Bengoechea. Outline. Situation Circa 1990 Reform Process in LAC The Role of the WB Achievements Unfinished Agenda Challenges Ahead

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World Bank Experience in the Privatization Process

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  1. World Bank Experience in the Privatization Process Presented at the Water Policy in the Americas Roundtable 21 September 2000 by Ventura Bengoechea

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

  3. Situation circa 1990 Politicians Fiscal Transfers Utility Officials Serve Political Agenda Environmental Degradation Employment Agency Staff Public Utility (Over-staffing) Poor Services Low Tariffs Bad perception Population w/o Connection Increasing Difficult Population Connected High Tariffs Bad Quality Graphic adapted from V. Foster

  4. Service Contracts Lease Managmt. Contracts Concession BOT BOO Divestiture Austria Chile Germany USA France Guinea France Spain Poland USA UK Cote d’Ivoire France Spain PSP in Water circa 1990 1990

  5. The Reform Process Politicians Sector Strategy Regulators Tariffs & Service Quality Regulation Environmental Improvements Efficient Service Staff Private/Public Utility Good Services Population w/o Connect. Adequate Tariffs More Population Connected Incentives for Connections Graphic adapted from V. Foster

  6. 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

  7. Achievements through PSP • Water Service Improvements • Increased W&S Coverage • Cash Flow Generation & Financing • Increase in Sector Investments • Customer Attention

  8. Service Contracts Lease Managmt. Contracts Concession BOT BOO Divestiture Austria Chile Costa Rica Germany India Mexico Russian F. Tunisia USA Venezuela Algeria Bangladesh Burkina France West Bank,Gaza Puerto Rico Trinidad USA Venezuela Jordan Georgia Armenia Kazakhstan Nepal Colombia Cote d’Ivoire Czech Rep Hungary Guinea France Mozambique Poland Senegal Spain Ghana Guinea-Bissau Niger Tanzania Chile Germany (min) UK USA Thailand Argentina Australia Bolivia Brazil China Colombia France Gabon Germany Indonesia Honduras Mexico Malaysia Morocco Peru Philippines Slovenia South Africa Spain Thailand Turkey Uruguay USA Vietnam Greece Guyana Lebanon Jordan Lithuania Nicaragua Nigeria Panama Paraguay Tunisia India 2000 signed proposed

  9. 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

  10. The Unfinished Agenda • 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

  11. The Challenges Ahead • 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

  12. 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 Learning from experience

  13. 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

  14. Achievements in BA through 1996 Rehabilitation & Renovation of the Water Distribution Network (cumulative in kms) 1.000 Target Achieved 817 796 800 633 584 600 439 427 400 252 200 134 0 Year 1 Year 2 Year 3 Year 4

  15. 50 % 50 Year 1 Year 2 Year 3 40 Year 4 31 % 30 20 13% 8 % 10 6 % 4 % 3 % 4 % 2 % 0 % 4 % 4 % 0 Turbidity Bacteriological Chlorine Achievements in BA through 1996 % Water quality in network 5

  16. Achievements in BA through 1996 1.500 Water expansion population served (Thousans of inhabitants served cumulative) Target 1.358 Achieved 1.121 1.200 869 761 900 569 448 600 221 300 180 0 Year 1 Year 2 Year 3 Year 4

  17. Achievements in BA through 1996 Sewerage expansion population served (Thousans of inhabitants served cumulative) 600 Target 550 Achieved 471 500 387 400 342 281 300 200 114 62 100 25 0 Year 1 Year 2 Year 3 Year 4

  18. BA Financial Outlook Revenues / Costs Cash Flow M$ M$ 122 Costs • Revenues • Costs • Cash Flow • Investments • Debt 400 104 Revenues 393 100 375 79 350 333 80 300 265 244 252 40 250 260 245 -10 0 200 Year 1 Year 2 Year 3 Year 4 Year 1 Year 2 Year 3 Year 4 Investments Debt 458 M$ M$ 270 ST LP 400 223 96 250 210 330 200 300 145 230 148 362 150 200 42 42 100 106 188 182 100 50 103 3 0 0 Year 3 Year 1 Year 2 Year 3 Year 4 Year 1 Year 4 Year 2

  19. Tariff vs Consumer Price Index Evolution in BA through 1996 1.13 1.17 1.08 Tariff 0.83 0.731

  20. 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

  21. 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

  22. The BA Concerns • Socioeconomic Outlook: 50% of the population to • be incorporated belong to the lowest income group.

  23. The BA Concerns • 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

  24. Solution: CI  SUMA + CIS • SU ~ $2.00/service (bimonthly) • MA ~ 1.00/service (bimonthly) • CIS ~ 4.00/service (30 bimonthly installments) 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.

  25. 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.

  26. The Aguas Argentinas Case:New Economic Regulation • 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

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