Financing local public services: counterparts, financial framework and impact on user charges

Transcription

1 Financing local public services: counterparts, financial framework and impact on user charges Examples from the water and waste sector Lars Anwandter Turin, 15 September 2009

2 Agenda Definition of local public services The regulatory framework The key counterparts The tariff dilemma The impact on user charges Financing options Suggested reform Conclusions

3 Definition of local public services Revenues of key Italian Local Public Services (2008) Local gas distribution Integrated water services Local public transport EUR million Energy distribution Waste collection Not available Local monopolies with direct interface with user Public regulation of service quality/tariffs required

4 Capital intensity Relative Capital to Revenue ratio 4 3,5 3 2,5 2 1,5 1 0,5 0 Water Gas Pipelines Gas distribution Electric Source: Guido Borsani, Finlombarda, April 2008

5 The regulatory framework: water sector Regulation Regulated monopoly Delegated operation Local public enterprise A combination «UK model» «French model» «German model» «Italian model» Ownership Private Public Public Public Operation Private Leasing / Service contracts Private law public companies -Private - Mixed -Public Private sector risks Investment + Operations Market (part) + Operations Not applicable Investment+ Market+ Operations Public sector risks Regulator takes market risk Investment risk (e.g. Agences de l Eau) Full cost recovery Price cap mechanism Source: Prof. Massarutto, «La legge Galli alla prova dei fatti»

6 The key counterparts Ownership structure: - Fully private - Mixed public private - Fully public Other important criteria: - Size (economies of scale/density) - Multi- or mono-utility (economies of scope) - Track record / experience - Rated or non-rated Public vs. Private should not matter. Efficient risk allocation and incentive structure is key

7 Examples from the Italian water sector: on ownership ATO Affida me nt i In-house Mist e Alt re Ga ra Concession awards in Optimal Territorial Areas ATOs: 55 awards, of which 31 in-house 13 mixed companies 8 safeguarded concessions Only 3 fully private companies Source: Blue Book, 2008

8 Examples from the Italian water sector: other criteria Type of operator Rated companies Unrated corporate Mixed public/private SPVs Fully public SPVs Examples Public / private multi-utility: ACEA, Hera, rated A Public mono-utility: Acquedotto Pugliese, rated BBB Multi-utilities: Iride, Enia Nuove Acque (Arezzo), Publiacqua (Firenze), Acque (Pisa), Acqua Latina Smat (Torino), Acquedotto Lucano (Basilicata)

9 The tariff dilemma A public good Inefficiencies Low performance A political objective Political interference in technical choices A vicious circle A political instrument Low tariffs Low service quality High opex Low Willingness-to-pay Need for high tariffs Low tariffs

10 Tariffs or taxes? BANK CONSTRUCTOR OPERATOR CLIENT ENVIRONMENT GOVERNMENT CLIENT SERVICES SUBSIDIES INVESTMENTS CONSTRUCTION TAXES TARIFFS POPULATION DEBT SHAREHOLDER SERVICE REVENUES OPERATIONS ENVIRONMENTAL MAINTENANCE SERVICES DIVIDENDS C A S H F L O W

11 The tariff formula EU Directive 2000/60 «full cost recovery» - C= Operating and maintenance costs (personnel, materials, energy, chemicals) - A=Depreciation (extraordinary maintenance and life cycle costs) - R=Return on invested capital (WACC) Italian water tariff Price cap (Xefficiency factor) Technical life or Concession term? 7% nominal return - Scarcity or shadow value of the resource Not applied Unit tariff depends on volume projections The rules / timing for updating tariffs need to be clear

12 Water tariffs across Europe: Average cost per household EUR/year Source: IWA

13 Water tariffs across Europe: % of household income Source: IWA

14 The impact on user charges Effect of Return on capital on water tariffs (Lombardy region) 6,0% 5,0% 4,9% % Household income 4,0% 3,0% 2,0% 3,1% 2,8% % Water exp. / average hh income % Water exp. / average hh low income 1,2% 1,0% 0,7% 0,7% 0,0% 2 % old, 7% new 7% all 2% all Return on capital Source: Prof. Massarutto, «La legge Galli alla prova dei fatti»

15 Financing options Public sector loan / public guarantee Corporate finance multiutility Corporate finance monoutility Project / Concession finance SPV Increase risks / pricing Regulatory uncertainty increases WACC

16 Corporate finance: Rating levels Purely indicative Financial ratios AA A BBB Available Cash Flow / interest expenses Available Cash Flow / Debt (%) 30-40% 13-25% 8-16% Debt / Total Assets 20-40% 40-60% 55-80% Besides the regulatory framework, the cash flow and the debt/equity ratio are key rating parameters Source: Standard&Poor s, 2004

17 Project / Concession finance AATO Security package -Shares -Receivables -Accounts -All assets Operator Banks Concession Finance contract EPC contract O&M contract Advantages: Tailor-made, high leverage, long term Needed: Certain size, water-tight documentation, risk allocation, DSCR > 1.5

18 Project finance: Cash flow based Available cash flow Debt amount Tail Term loan End concession Time Example: Long availability period (6 years) and 3 year tail

19 Example PPP: Delfland WWTP DBFO - Holland 30-year wastewater treatment plant construction and operation contract 27 year loan Fixed payments with construction and performance risk 10% equity, WACC 7% Investment: 320m 1.2 million people

20 Concession Finance Cornwall Ring-fencing: Collection and disposal of municipal waste (not hazardous waste) Economies of scale: population of 500,000 people producing 320,000 tons of municipal solid waste

21 Risk matrix Cornwall Type of risk Cosntruction (cost/time) Permits / expropriation Change of law / strikes / earthquake / Force majeure Volume Waste quality Revenues Penalties O&M costs Early termination Private Fixed EPC contract Best effort basis Insurance Cap on maximum volume Flexible plants <20% from third parties O&M contract O&M contract Step-in of banks, change Concessionaire Public X X Minimum volume guarantee Rules on collection >80% availability payment If public reason/fault: Termination indemnity covers debt

22 The Italian PF experience in the water sector Borrower Year of award Financial close ATO population Private Loan Term Grace period Nuove Acque SpA June 1999 December 2004 ATO 4 Alto Valdarno 293,130 Suez EUR 70 m 17 years 7 years Acque SpA December 2001 October 2006 ATO 2 Basso Valdarno 751,050 Acea EUR 255 m 15 years 7 years Acqualatina SpA August 2002 May 2007 ATO 4 Lazio Meridionale Latina 574,860 Veolia EUR 115 m 25 years 5 years Key factors: ATOs of a certain size Promoter with proven track record 4-5 years start-up phase Long grace period

23 The financing dilemma in the Italian water sector Corporate Finance Project Finance Irisacqua (Feb 2008) SMAT Arezzo PPP (Dec 2004) A2A - Milan and Brescia IRIDE ENIA HERA Acque Pisa PPP (Oct 2006) Acqualatina PPP (May 2007) ACEA - Rome Acquedotto Pugliese Type of companies In house Mixed public-private Private only Other (transitory, multi-utility) Not assigned Only 4 PF operations and the rest of the country especially the South?

24 Summary of issues for financing - Regulatory framework characterized by conflict of interest - Changing rules on awards of local public services / on in--house - High degree of fragmentation: diseconomies of scale - Low equity level - Non solid financial ratios and few companies with external rating - Non-bankable Concessions

25 Non bankable Concessions - Need for due diligence on the Economic and Financial Plans - Debt remaining at the end of the Concession - Unfair/inefficient risk allocation - Unclear tariff review mechanisms - Unclear service targets and penalty mechanisms - Risk of early termination without adequate compensation

26 Conclusions: Suggested reform 1. Independent regulator 2. Clarity on Concession awards and back-up for termination payments 3. AATO as Conceding party Autorità di Ambito Territoriale (AATO) Tariff method 4. Review tariff method: update from 1996, premium for smaller companies Concession 5. Concession model Economic and financial plan Technical adviser 6. Financial model. Set rules for re-negotiation with independent technical adviser Operator Banks

27 Regional financing mechanism: example USA Leverage public funds through bond emissions Source: EPA/ Michael Curley, 2004

28 Conclusions: Advantages of regional financing mechanism - Financial economies of scale: reach smaller companies - Prepare standard Concession and financial model - Provide regional first loss guarantee - Provide incentives / create competition for public funds

29 Questions?