assets business

Philippines Comprehensive Asset Management in Water Supply and Sanitation WBI South East Asia Water Sector Support Program SEAWUN Manila, Philippines, October 2 - 6, 2006 The views expressed in this paper are the views of the authors and do not necessarily reflect the views or policies of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent. ADB does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms. Session L Asset Management Business Planning by Jan G. Janssens, WBI 1 Introduction - 1 Utilities should plan their water supply services as a business. Asset Management, Business Planning 3 Introduction - 2 The business planning process: In the past, often been overlooked. Helps to identify problems / solutions and prioritize projects. Often required by the financier: the creditworthiness challenge A tool to help to train town administrators and utility managers. Asset Management, Business Planning 4 2 Business Planning, What is it ? Links to the Strategic Plan - vision of the utility. (Typically) a one-year period of the strategic vision, on a rolling basis. Initiated by a discussion of past Executive Board Resolutions affecting the coming Business Plan. Asset Management, Business Planning 5 A Vision for Surabaya ? Vision Surabaya: World-Class City Outcomes Health No water-borne Disease -- quality of life -- environmental health Growth Sustained GSDP Equitable Growth Output 24-hour water supply Uninterrupted supply Clean, high-quality -- water access by the poor Asset Management, Business Planning 6 3 Business Planning, What is it ? It addresses key elements of the organization: The objectives for the past year and how/if they were achieved The aims/objectives of the utility for the coming year OPEX and CAPEX program (e.g. growth related, replacement/rehabilitation, operational requirements, design and construction) Key projects to be initiated in the year ahead The staffing, including hires Funds committed and required funds to be committed Asset Management, Business Planning 7 Business Planning: a definition Business planning is a process to help utilities to plan operations, investments and finance in a sustainable way. Asset Management, Business Planning 8 4 Business Planning, Why do it ? No business, whether public or private, can legitimately operate without forecasting its way forward It provides a benchmark, when considering the past year, e.g. why did we not achieve our capital program expectations ? It provides a means of both reporting to the Executive Board and seeking its approval for the coming year’s budget Asset Management, Business Planning 9 Framework Management Business Plan Work plan Budgeting Asset Management, Business Planning 10 5 The Business Plan, a blueprint for implementing the CAM Plan Funding Plans Investments O&M Capacity building Studies Financial Plans Tariffs Subsidies Borrowings Debt service Depreciation Business Plan Targets Budgets Staffing Action Plan Stakeholder Communication Consumers, Civil Society Politicians, Regulator Asset Management, Business Planning 11 CORPORATE PLAN TOTAL MANAGEMENT PLAN Financial Management Financial Management Plan Business Development Plan Asset Management Asset Evaluation Plan Asset Maintenance Plan Operations Management Plan Energy Management Plan Water Source Management Plan Infrastructure Procurement Plan Infrastructure Optimisation Renewal Plan Asset Management, Business Planning 12 Infrastructure Planning Water Demand Management Plan Sewer I/I Management Plan Works Programming Plan Environmental Management Effluent Management Plan Biosolids Management Plan Trade Waste Management Plan Environmental Coordination Plan Management Support Information Management Plan Human Resources Plan Risk Management Plan Performance Assessment Plan 6 Business Plan Inclusions - 1 Performance targets Customer service, environmental protection, efficiency, maintenance of assets and development of the utility An investment (infrastructure assets) plan To meet performance targets Affordability, Sustainability Access to improved and expanded service A financing plan How and from whom the money to finance the investment plan will be raised Asset Management, Business Planning 13 Business Plan Inclusions - 2 An operations plan Management and staffing arrangements including professional support and training A procurement strategy To identify professional support needed, and the contract options best suited to local needs A financial management and reporting plan To monitor performance and meet regulatory obligations A marketing and communications plan To offer informed choices to consumers, including the implications of alternative levels of service, and to keep decisions transparent Asset Management, Business Planning 14 7 The Business Planning Process (1) The business planning process requires extensive continuous consultation Asset Management, Business Planning 15 The Business Planning Process (2) Business planning is best understood as an iterative process. If the cost of initial plans is too high, customers will not be able to afford the system and the utility will be financially unviable. Asset Management, Business Planning 16 8 The Business Planning Process Review external pressures Identify existing utility performance and any problems Clarify Utilities objectives and vision Analysis Annual cycle of review Planning Implementation Create a plan of activities to address problems Create a plan of activities to develop the business Implement plan Measure against KPI’s Adjust and improve Asset Management, Business Planning 17 Developing the OPEX & CAPEX Program Should be based on a holistic view of the utility building on effective demand from customers, technical master-plans and prioritization of investment program using reports, studies, financial analysis including ‘pros & cons’, and risks, of alternative project delivery methods/models Asset Management, Business Planning 18 9 Funding OPEX and CAPEX Need to identify the source of funds What loan/grant sources may be planned, and how dependent is the capital program on these sources of funds The financial analysis should follow the General Accounting Procedures for depreciated assets, i.e. to allow planned asset replacement Asset Management, Business Planning 19 Funding CAPEX Asset Management, Business Planning 20 10 Long-Term Financing Has A Significant Effect on Tariff Levels Effect of Loan Maturities on Tariffs 90 80 70 60 Tr f aif 50 40 30 20 10 0 0 5 10 15 20 25 Ma turity in Ye a rs Sugbon Bohol Malabuyoc OBA Cambodia Asset Management, Business Planning 21 Financial management Managing a utility is a long term business. Gaining access of external capital by demonstrating that the utility is being managed in a responsible and cost efficient manner. It is essential that authorities respond by: Cost efficiency Prioritized critical capital investment needs Communication plan to all stakeholders concerned Tariff structures with cost recovery strategy Asset Management, Business Planning 22 11 Two guiding principles for financial management Water demand management, linked with efficiency & equity measures Efficiency in operations and investment, a must in any viable service expansion scenario Asset Management, Business Planning 23 Controlling costs affordable standards consumers informed, asked what they want and are willing to pay for avoid pushing rich-country standards onto lower-income communities stage environmental improvements competition (for the market, for inputs, bulk, inset, comparative) transparent incentive regulation public-sector: autonomous utilities, owned at arm’s-length, market tested focus on asset longevity Asset Management, Business Planning 24 efficient delivery 12 The Problem of Subsidies COSTS Realized loss if subsidies cannot be sustained Taxpayer have to pay APPROPRIATE COSTS LEVEL TARIFFS User Need to Pay TIME Asset Management, Business Planning 25 Financial Management Building A budget for a Water Business Revenue Requirement 40,000 Revenue Building Blocks • 35,000 30,000 25,000 $'000 Return on Capital (blue) provides a return on investment in the business Return of Capital (red) accounts for assets depreciation over the relevant period Operating, Maintenance & Administration Costs (yellow) 20,000 15,000 • 10,000 5,000 0 W ater W astew ater Total Return on Capital Return of Capital OM&A • Asset Management, Business Planning 26 13 The Financial Model - 1 The key output of the financial model will be a cash flow projection and a set of financial and operational performance indicators The financial model is the central planning tool Asset Management, Business Planning 27 The Financial Model - 2 In the model, initial tariffs may need to be increased over a specified period of time (say 3-5 years). The projection period should be long enough to ensure that cash flows are sufficient to meet debt service obligations. Asset Management, Business Planning 28 14 The Financial Model - 3 Financial Viability: all stakeholders to accept that the financial model is an important tool for reviewing and adjustment of water tariffs. Different Scenarios: management tool to assess impact of investment program on tariff. Asset Management, Business Planning 29 Financial Target Performance Options Return on net fixed assets (a) difficult to determine objectively what is the real value of fixed assets (b) might give a wrong signal Annual cash equilibrium Useful but often not achievable in the short term Reducing the accumulated cash deficit to zero Asset Management, Business Planning 30 15 Tariff and Subsidy a Cost Recovery Strategy Short term: Recovering O&M and renewal? Medium term: Including debt service? Long term: Full cost recovery? The ultimate aim being a sustainable business Asset Management, Business Planning 31 Tariff and Subsidy a Subsidy Strategy Tariff level: Subsidize transitional operational deficit? Subsidize capital investments? Tariff structure: Service level Subsidize access, not consumption (Subsidize low-income house connections?) Cross subsidization to low-income households Asset Management, Business Planning 32 16 A Logical Framework ? Average Consumer Tariff Level Financial Restructuring Subsidies (Taxpayers / Donors ) Debt Overhang Utility Margin Utility Operations Current Tariff Level Tariff level with subsidies Cost Recovery Tariff 1 2 Asset Management, Business Planning 3 time 33 Tariff/m3 Annual Water Tariff Adjustments to reach Full Cost Recovery Cash Deficit Extension / Expansion Operating Deficit Renewal Operation & Maintenance t0 t1 Asset Management, Business Planning t2 Time 34 17 Financial Modeling: Why ? To calculate the financial and economic rates of return of a project To conduct a sensitivity analysis of different scenarios, in view for a policy briefing To determine the annual tariff increase which would be necessary to reach sector financial equilibrium within a reasonable period of time. To determine the size and profile of the cash deficit which would accumulate during the initial years. To test alternative options to minimize that deficit and estimate the corresponding temporary financing requirements. Asset Management, Business Planning 35 There is No Magic Solution Someone Has to Pay! Who Pays How Financed User Tariffs (Earnings Borrowings) Consumers Taxpayers Government Subsidies Asset Management, Business Planning 36 18 Funding Infrastructure Example – Wide Bay Water Corporation Australia Developer Contributions 12% Loans 35% State Government 36% Internal (Customers) 17% Infrastructure Funding 2006 Asset Management, Business Planning 37 At the roots, Explicit Versus Implicit Charges Explicit Charges Implicit Charges Recovery of Investment Costs O&M Currency Risk Water Resources O&M Not Done Principal & Interest Payments On Debt Bad Debts Environmental Profits Asset Management, Business Planning 38 19 Don’t Base Tariffs Purely on Explicit Charges Experience shows financial trouble is guaranteed if water utilities base their Tariffs purely only on Explicit Charges because Implicit (or Hidden) charges often have a way of becoming Explicit and, Water Tariffs are politically charged and cannot be adjusted easily Asset Management, Business Planning 39 Developing Operational Contracts from Business Plans - 1 Contracts are linked to business plans, and the process of business planning helps build capabilities to understand and manage contracts Asset Management, Business Planning 40 20 Operational Contracts as part of the Business Plan - 2 Allow for a level of flexibility in terms of increasing delegation of responsibility compensation of the operator Need for sound legal basis with mechanism for contractual adjustments. Asset Management, Business Planning 41 Conclusion: Business Planning Is a method of sharing information with staff and stakeholders Allows investment decisions which meet the needs of customers Allows to check whether revenues are adequate and the business is financial sustainable Allows monitoring of financial and technical performance Supports performance monitoring and constant improvement Asset Management, Business Planning 42 21 Important Characteristics of Business Plans Clear objectives: what to be achieved how, when Living document: periodically updated Stakeholder approved: Investment plans Tariff policy, increases Utility development Comprehensive: takes into account all aspects of CAM; funding choices, enabling conditions Realistic: not just wishful thinking; all elements are “in synch”, acknowledges constraints and obstacles Transparency: important information published Asset Management, Business Planning 43 Thank you Asset Management, Business Planning 44 22