Session I – Track 4

 Building Sustainability:
Partnerships and Finance
  Global Environment Facility –
      International Waters

  Second Biennial Conference
      Thursday, September 26, 2002

             14:00 – 18:00

 Overview of the Sector from the Private
  Investor’s Point of View
 Presentations
 Selection of Focus Groups/Themes
 Focus Group Meetings
 Focus Group Presentations
 Global Environment Facility – International Waters
                   Second Biennial Conference

         Private Investment in
       Pollution Control Projects
Issues for Financial Institutions
                         (and the GEF)

Jerome Esmay, Principal Engineer                    Dalian, China
                                                25-29 Sept. 2001

   IFC Experience in Water Supply Transactions

   Partnerships with the Private Sector

   Models of Private Investment

   GEF and the Role of the Private Sector

   Lessons Learned
                   What is IFC?

   The Largest Multi-Lateral Source of Project Finance
    Exclusively for the Private Sector

   A Profit-Oriented Supporter of Economic
    Development Providing Equity and Loans

   An Institution that Takes Full Market Risk with
    Sponsors in Projects that are NOT Backed by Central
    Government Guarantees of Repayment
      IFC - The GEF’s Primary Private
        Sector Implementing Agent

To promote private sector investment in
developing countries which will reduce
poverty and improve people’s lives

  Member of    World Bank Group - owned by 174
  IFConly invests in private-sector projects which are both
  commercially viable and promote sustainable development
       IFC/GEF Strategy

Match the type of support to the obstacles or
risks blocking achievement of GEF objectives
Prefer non-grant financing

      Focus   on near-commercial projects
         Minimize use of GEF resources
         Maximize leverage of GEF resources
      Where    possible, co-finance with IFC
     IFC Targets GEF Support

   Matches support to the obstacle/risks blocking
    achievement of GEF Objectives

   Focuses on near-commercial ventures

   Minimizes use/Maximizes leverage of GEF Resources

   Co-Finances, whenever possible, with GEF
    implementing or executing agency

   Prefers non-grant financing
Partnerships with the

   Private Sector
    Private Investor Perspective
            INCREASED                  COUNTRY RISKS
    OTHER                                      SECTOR RISKS

                                                 PROJECT RISKS


        Larger Risk
Larger Required Reward ($$)
           Public Sector--Buyer

   Wants private capital without making the
    necessary fiscal/managerial reforms

   Chooses between negotiated or
    competitively-bid transactions

   Has unrealistic risk/reward concepts
           Private Sector--Seller

   Eager to win the contract

   Is not sufficiently critical of a weak project
   Wants:
    – Long-term commitments
    – Fair contracts
    – Upside potential
      Financial Institutions--Capital
   Transparent and open process
   Investor resources
   Experienced and Qualified Management
   Pari Passu rights with other obligations
   Step-in Rights
   Coverage for Municipal Risk
   Indemnification for Force Majeure and Contract
  Sustainable Partnerships
Transparent bidding/negotiations
   – Objective ranking/selection criteria
      e.g. Lowest Tariff

Service-oriented, output-driven contracts
   – “What” controlled by buyer
   – “How” controlled by seller
   – Responsibilities and ownership are clear
Key Elements in Partnerships
   with the Private Sector

 Early collaboration and consultation
 Committed partnership between
  national, local/regional government,
  multilateral organizations and GEF
 Learn by doing
 Create pilot/demonstration projects
       IFC Investment Experience (1)

   Buenos Aires: privatized 30-year privatized
    water/sanitation concession ($4 billion total investment)

   Puerto Vallarta (Mexico): 15-year private wastewater
    treatment BOT($33MM total investment)

   Aquas de Limeira (Brazil): 30-year privatized water/
    wastewater concession ($50-70MM investment)

   Binh An (Vietnam): 1.5 m3/sec bulk water BOT ($35MM
    total investment)
    IFC Investment Experience (2)

   Aguas de Illimani (Bolivia): privatized 30-year
    water/sanitation concession ($500MM total
   AG Concessions (Brazil): - Participation in
    water/toll road operation Company (US$30
   IPWC (Egypt): Participation in local utility
    services company
   Beijing WTP #10: BOT Bulkwater Supply Plant
             IFC Advisory Experience (1)

   Manila: splitting of water/sanitation services into two geographical
    zones and concession awarded to separate private operators

   Gabon: full concession for water and electricity

   Romania: concession of integrated water/sanitation services covering
    metropolitan Bucharest

   Lagos, Nigeria (on-going): concession of one service area,
    affermage/contract management for remainder
           IFC Advisory Experience (2)

   Senegal: 3.0 m3/sec bulk water BOT to provide
    drinking water for Dakar

   Brazil (São Paulo): 4.5 m3/sec bulk water BOT to
    provide treated water to SABESP (Sao Paulo State
    Water Company)

   Brazil (Fortaleza) 5.5 to 7.5 cum/sec, 20 year ROT-
    upgrade for CAGECE principal WTP ($15 million)
    IFC Project Development Experience

   Cancun (Mexico): 25-year Water/Wastewater
   Cartagena (Colombia): Mixed Enterprise
    Water/Wastewater company
   Santa Cruz (Bolivia): Water/Wastewater Utility
    Cooperative - SAGUAPAC
   Bangalore (India): 25 year 500 Mld BOT Bulk
    Water Supply
   Plava Voda (Bosnia-Herzegovina): 25 year
    BOT Bulk Water Supply
    Models of

Private Investment
         Private Investment Models (1)

   Contract Operations - Little or no private sector

   Leasing/Affermage - Private Sector pays for use of
    system. Public system pays operations fees/capital

   Turnkey Construction - Private Sector Finances and
    Constructs Facility. Public Sector Operates and
    Assumes Debt Obligation
     Privatize Investment Models (2)

   Build-Own-Operate-Transfer/Build-Operate Transfer
    (BOOT/BOT)-Private Sector Finances and Owns New
    Facility or Facilities

   Concession - Usually Significant Private Sector
    Investment with Public Sector Retaining Ownership

   Sale of Assets (English Model) - Public Sector sells
    System Ownership to Private Sector and Retains
    Regulatory Authority
     Choosing a Private Investment

When the Public Sector is financially weak, there are few funds
   – Contract operations
   – Leasing/Affermage
   – Turnkey Contracts


   – BOT (most popular with Public Sector)
   – Concession (most popular with Private Sector)
   – Asset Sale (unpopular with public due to perceived “loss of
     control” issues)
Let’s look at some issues with BOT’s
          and Concessions...
          Basic Issues in Financing
                 BOT Projects

   Is the Project Needed?

   Can it Serve the Customers?

   Can the Buyer Afford It?
    The Concession Model is
 Preferred by Private Investors
   and Financial Institutions

 Brings Efficiency and Innovation to
  entire system
 Investments can be “tuned” to
  revenues, inflation, and devaluation
GEF and the Role of the
    Private Sector
Ways that GEF can Engage
   the Private Sector
   Remove Barriers: to the creation, entry or
    transformation of markets
   Provide non-Grant Financing with: concessional/
    contingent finance, loans, and guarantees
   Fund Pre-Investment Studies in Alternative/
    Innovative Technologies: feasibility/market studies
   Promote Progressive Partnerships: long-term, shared
    information, quicker decision making
   Demonstrate actual project risks

It is NOT obligatory to give “free”
  money directly to the private sector in
  order to stimulate investment.

Funds spent to reduce investment/sector
  risks can result in the highest multiples
  of investment.
   Remove Barriers: to market
creation, entry or transformation


 Establish “nutrient trading credits” for
  threatened aquatic ecosystems, e.g.
  The Black Sea*
 * Carbon trading is showing signs of succeeding beyond the most
    optimistic projections.
  Provide non-Grant Financing with:
concessional/contingent finance, loans,
    and loan/payment guarantees


1.   Cover perceived risk of long-term
     lending by national/local private
2.   Establish a “Coastal Zone Management
     Fund” for projects, let market define
  Fund Pre-Investment Studies in


Determine the feasibility of/Quantify
 demand for - a nutrient trading
Promote Progressive Partnerships: long-
   term, shared information, quicker
           decision making


GEF takes a passive but direct role in the
 partnership as the honest broker.
 Assumes role of contract administrator/
 arbitrator, assists in supervisory
 missions, and ties enforcement to
 sovereign obligations.
     Demonstrate actual project risks


Jordan Gateway Industrial Estate Project
  Perceived risks of 100% recycle,
  reducing water demand by 80-90% is
  likely quite low – but no one has done it
  yet and investors are wary of costs/
  benefits and have no risk capital.
Benefits to Business of GEF
   GEF Funds – reduce risk and catalyze new
   Co-financing from GEF Partners
   Share know-how, partners
   Access markets and technology
   Stakeholder support
   Strengthens business’ image regarding
    concern for and management of
    environmental management
GEF Implementing Agencies
  can Assist Companies

    Give quick answers on eligibility/issues
    Explain funding alternatives
    Advise on project design
    Guide project sponsors through the GEF
     approval process
    Monitor implementation
    Document progress/setbacks
Perceived Disadvantages of
    Working with GEF
   Bureaucratic
   Learning Curve adds cost
   Potential for project redesign
   Slow
   Involves diverse, sometimes hostile,
   Disclosure of project/financial information to
    public and competitors
    Potential GEF Private
    Investment Projects
 Wastewater treatment plants
 Tradable water pollution permits
 Land use controls
 Biodiversity/watershed protection
 Wetlands management
 Cleaner ind. production technologies
 Ship/Oily waste treatment facilities
 Three Initial Indicators of Probable Success

1.   Support at Highest Levels of Government and

2.   Private Sector Company is Qualified, Experienced,
     and Committed

3.   Clear Regulatory Framework With International
      Public Project Partners

Water/Sanitation are generally municipal
functions BUT most cities/municipalities
have the least financial resources of any
governmental Body.

     Result: They are the weakest of
Potential Partners and need the most project

   Do NOT wave the “free money” flag

   Insist on sound Project Finance fundamentals

   GEF support can provide significant additional project benefits by catalyzing
    investments through:

        Addressing local political/financial risks
        Supporting adequate Returns on Investment
        Financing the development of transparent, balanced, and fair transactions
        Innovative project finance support mechanisms

Anything that GEF resources can do to:

 Increase the number of transactions
 Increase the ERR and IRR of PPPs
 Lower the risk of disputes and failures

will result in lowering the risk to IWs.
Thank You
             Suggested Focus
              Group Themes
1.   Should GEF resources be used to support the
     Private Sector, directly or indirectly?
2.   Is there a real need to consider alternative delivery
     mechanisms for environmental infrastructure and
     services at the local government level, or is it just a
     case of lack of political will and commitment to
     finance such projects?
3.   Do governments make good partners? How can
     governments ensure sustainable partnerships with
     the private sector?
            Suggested Focus
             Group Themes

4.   Is there a role for IFI’s, donors, and the
     international agencies in public-private
5.   Are local governments able to access
     national and international investors and
     operating companies? What are the
6.   ?
7.   ?

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