Turning Around Public Water Utilities in Financial Stress Experience from East Asia by Aldo Baietti Water Week 2005 1
Financial Restructuring Differences Between Public Utilities and Private Enterprises Limited Involvement with Private Bankers - Finance Relationship is Mostly with Local or Central Governments - Few sanctions for default on debt. Certain Remedies of Typical Workout Situations are Not Realistic for Utilities Bankruptcy, Liquidation, Sale of Main Assets Either a financial solution is found or the utility is relegated indefinitely to life support conditions. Financial and Strategic Incentives of Main Actors May Be Quite Different Profit motives are typically not the overriding concern or objective. Lack of true ownership values. Resources May be Denied to a Utility Not Because of Its Own Limitations But Because of the Government s Overall Fiscal Position. The issue of fiscal space has important bearing on the amount of public debt a government can assume to clean up balance sheets or inject fresh capital or initiate expansion. 2
Why Utilities Get Into Financial Trouble Utility is Inherently Unviable as a Financially Self Sustaining Operation- Necessity for continued subsidies at operational level. Oversized or Over-Built System, Carrying an Unmanageable Debt Burden but Potentially Operationally Viable Concept of inappropriate costs. Cost Structure and Balance Sheet Position Have Materially Changed (i.e. Currency Shocks, Inflation ) - Inability to effect tariff adjustments in times of economic hardship. Utility is Fundamentally Mismanaged and Subject to Corrupt Practices. Combinations of the Above With No Corrective Intervention Taken from Stakeholders Except Pressure to Reduce Costs. Utility has gone into in a vicious downward spiral. 3
The Vicious Financial Spiral Consumers use water inefficiently Investment, maintenance are postponed Customers are ever less willing to pay Managers lose autonomy and incentives Subsidies often fail to materialize Motivation and service deteriorates further Low tariffs, low collection High usage and system losses drive up costs Services deteriorates Utility lives off state subsidies Efficiency keep dropping Utility can t pay wages, recurrent costs or extend system System assets go down the drain Crisis, huge rehabilitation costs 4
Elements of Utility Restructuring Policy Reform Institutional Development Performance Management Financial Restructuring Autonomy Ownership Values Economic Regulation Customer Orientation Capacity Building Reorganization & Mgnt Change Incentives Systems Management Systems Connection & UFW Programs Inventory & Receivables Mgnt. Fixed Asset Mgnt. Operating Cost Containment Liquidity Crisis Mgnt. Debt Restructuring Equity Infusion 5
The Utility Turnaround A Phased Approach I. Crisis Mgnt II. Recovery III. Stability IV. Expansion Leadership Change Crisis Cash Management Debt Restructuring Current Asset Management Organizational Restructuring Better Utilization of Existing Fixed Assets in Core Areas Tariff Restructuring Equity Infusions Introduce Systems & Mgnt. Improvements Capacity Building Institutional Development Expansion of Coverage to Less Attractive Areas Diversification in Sanitation and Sewerage Major Investments with New Debt 6
Cases in East Asia Two Cases of Utilities in Cambodia Under the Urban Water Supply Project Phnom Penh Water Supply Authority (PPWSA). Largest Water Supply Utility in Cambodia Serving Phnom Penh Metropolitan Area. Sihanoukville Water Supply Authority (SWSA). Water supply entity serving provincial capital of Sihanoukville. The Indonesian Rescue Program. Pilot the development of 17 financial Recovery Action plans. 7
PPWSA Performance Highlights Indicator 1997 Service Connections 39,000 2004 133,777 Connections for Poor -0-6,708+ Water Sold (000m3) 14,196 50,442 Total Revenues Net Income R 13.5 b R.742 m R 48.7 b R 8.6 b UFW 65% 16% Average Tariff Accounts Receivable R 895 m3 156 days R965 m3 30 days Operating Ratio 60% 35% Collection Ratio 89% 100% 8
PPWSA s Turnaround From Recovery to Expansion Leadership Change. New Management with incentive structure on both profit, collection sharing and reduction of UFW. Organizational Restructuring. Organized as autonomous public enterprise. Customer Orientation. Customer survey and automated billing. Laid off corrupt bill collectors and payment is now only made at PPWSA offices except for poor areas. Public Information campaign on paying bills. Performance Based Asset Utilization. Metered all water connections with heavy fines for illegal connections. Introduced innovative and high technology UFW approaches for reducing pressure Management Systems Development. Implemented fully automated accounting and management information system. Use of integrate long-term projection model for cost recovery scenarios. Tariff Structure. Increased and modified block tariff structure. Capacity Building. Twinning with Brisbane City Enterprises, Regulatory Training at for Govt, Seminars on Water Sector Reform. Expansion to Poor Areas. Pilot to serve poor communities following financial stabilization. Early Repayment of Debt. Is repaying debt early to improve cash flow even further. 9
PPWSA s Restructuring Policy Reform Institutional Development Performance Management Financial Restructuring Autonomy Ownership Values Economic Regulation Customer Orientation Capacity Building Reorganization & Mgnt Change Incentives Systems Management Systems Connection & UFW Programs Inventory & Receivables Mgnt. Fixed Asset Mgnt. Operating Cost Containment Liquidity Crisis Mgnt. Debt Restructuring Equity Infusion 10
SWSA Performance Highlights Indicator 1997 Service Connections 886 Water Sold (000m3) 510 2004 2,658 926 Total Revenues Net Income R 431 m R 92 m R 1,394 m R 62 m UFW 24.1% 26.3% Average Tariff Accounts Receivable R 868 m3 130 days R1,505 m3* 104 days Operating Ratio 117 60% Collection Ratio 95% 97.6% Equivalent to $.38 11
SWSA s Turnaround From Recovery to Expansion Ownership Values. Ministry assumed new ownership role as advocate of financial viability. Organizational Restructuring. Enterprise was ring-fenced with separate accounting. Next phase should consider conversion to autonomous public utility. Tariff Structure. Increased to R1,000 m3 immediately then R1,358 in 2002 and R1,500 in late 2004. Capacity Building. Regulatory Training of for Government officials on water sector reform and on governance. Expansion and System s Improvement. Capitalization of Debt. Following revenue stability, determined appropriate amount of debt and terms to be assumed by utility ( based on acceptable debt service coverage ration - 5 year grace, 2%next 10 years, 4% thereafter). 12
Success Factors From Cambodia Ownership Values Are Key Financial Autonomy with the Right Performance Incentives Up-Front Tariff Adjustments Appropriate Costs in Re-Capitalization for SWSA 13
The PDAM Rescue Program in Indonesia Background: 221 Utilities hard hit by the 1997 crisis facing severe financial difficulty due to: (i) overbuilding of capacity; (ii) reluctance of local governments to set cost recovery tariffs; and (iii) Financing Framework with no accountability. The Pilot Rescue Program: (i) Three-Party Agreement of Agreed Actions to Establish Discipline of Accountability; (ii) Rescheduling of Existing Deb; (iii) Small New Investments to Utilize Capacity; (iv) Quarterly Monitoring with Sanctions: (v) Opportunity for Expansion opportunity. 17 PDAMs went through the pilot activity. At the Heart of the Program: The Financial Recovery Action Plan - Projection Model (FINPRO) that following a diagnostic review allowed for a financial solution to be derived with the agreed actions of the three parties. Monitoring would recast projections based on actual outcomes and reset accountabilities. 14
Essential Tool of Financial Restructuring! 2002 2003 2004 2005 Major Actions Increase in Connections 20,000 20,000 20,000 20,000 Effective Tariff Increase (%) 70% 65% Tariff Rate Increase Effectivity (M onth #) 4 1 UfW (%) 37% 35% 33% 31% Average Usage/Connection (m3/month) 24 24 24 24 Accounts Receivable (M onths) 2.0 2.0 2.0 2.0 Staffing Ratio (per 1000 connections) 6.0 6.0 6.0 6.0 Investm ents - Rp m illion 16,805 22,439 41,385 18,013 Debt Service Payment 5,898 6,145 5,945 38,843 Selected Results N et Incom e (Loss) before D epn & Int- Rp m illion 23,985 (1,620) 78,482 64,644 Net Incom e (Loss) After Tax - Rp m illion 11,753 (317) 36,801 30,848 Debt service coverage ratio 5.0 4.2 11.0 1.6 Debt/Equity Ratio 3.4 3.4 2.2 1.4 Average tariff (Rp/m3) 1,371 1,371 2,262 2,262 Break-even tariff (Rp/m3) 1,424 1,597 1,993 2,210 Average monthly bill (Rp) 32,908 32,908 54,298 54,298 Operating Ratio 59% 70% 52% 62% Cash Surplus (Deficit) 1,693 (8,890) 9,290 (6,884) Short-Term Deposits 10,393 1,503 10,793 3,909 Additional Equity Needed - - - - W ater Surplus / (Shortage) (M illion m 3) 6.96 39.22 32.50 26.16 15
Lessons From Indonesia The Program established a new paradigm for local government accountability. The process highlighted that PDAM actions alone cannot resolve the problems of the sector Debt rescheduling may not be enough for the worst performing cases, but MOF unwilling to shoulder the debt burden on its own balance sheet. Each case is different. Across-the-board forgiveness of debt would send the wrong message. The negotiation process on each case must be respected! Sufficient Capacity is needed at the central level to implement a program more widely. 16