1. PPP International Best Practice and Regional Application Tegucigalpa, Honduras April 23 - 25, 2008 Sponsored by the Spanish Trust Fund

2. Water & Sanitation Case Study Session 5.2 David Stiggers, Independent PPP Specialist

3. Private Sector View Session 5.2 PPP Approach PPP Approach Day 1: Session 1.1 Overview of PPP Day 1:Session 1.2 Challenges: Latin America Day 1:Session 1.3 Considering Private Participation Day 1:Session 2.1 Planning the Process Day 1:Session 2.3 Involving Stakeholders Day 1:Session 3 Case Study: Transmission Day 2:Session 5 Case Studies: (1)Highways (2)Water & Sanitation (3) Ports Day 2 :Session 4.1 Standards, Tariffs, Subsidy, Financials Day 2 :Session 4.2 Selecting an Operator Day 1:Session 2.2 Regulation & Institutions Upstream Policy Readiness of Government Capacity Building For PPP Day 2 – Session 6 Readiness of Government Day 1- Session 5 Case Study: Water & Sanitation Day 1- Session 5 Case Study: Water & Sanitation

4. Case Study: Armenia 1.Review Existing Management of the Water Sector in Armenia 2.Look at existing PPP models in Armenia, and their Performance 3.Consider an existing Management Contract (ending 2009) – with the regional company AWSC - and what to do after the current contract ends.

6. Cities

7. Villages

9. Armenia Population 3.1 Million: 38% Rural : 62% urban Abundant Water Resource: 98% Groundwater Infrastructure in poor condition :$1billion to bring back to good condition Poor Water & Sanitation Services 87% Urban connected but only 7 hours/day 32% Rural connected but only 2% in good condition 540 villages not served by any water provider

10. Armenia Population 3.1 Million: 38% Rural : 62% urban Abundant Water Resource: 98% Groundwater Infrastructure in poor condition :$1billion to bring back to good condition Poor Water & Sanitation Services 87% Urban connected but only 7 hours/day 32% Rural connected but only 2% in good condition 540 villages not served by any water provider THE PROBLEM oPoor quality of water and poor water and sanitation services oLimited Access to drinking water oDeterioration in Public Health oThe socially vulnerable groups are the most affected

11. Review Management Modes Considered: Institutional Regulatory Contractual Lease (Veolia) 1m. popn. 620,000 popn. Management Contract (Saur) 540 Villages ‘ ‘ Lease (Veolia) 1m. popn. 620,000 popn. Management Contract (Saur) ‘ ‘ Lease (Veolia) 1m. popn. 620,000 popn. Management Contract (Saur) Nor Akunq Municipal/State CJSC 59,440 popn. ‘ ‘ Lease (Veolia) 1m. popn. 620,000 popn. Management Contract (Saur) Yerevan Djur Lease (Veolia) 1m. popn. 620,000 popn. AWSC Management Contract (Saur) Lori WSC Municipal/State CJSC 118,500 popn. Shirak WSC Municipal/State CJSC 149,600 popn.. Lease Management Contract Villages Municipal Companies

12. Management Forms: Lease: –Yerevan Djur( Capital city ) 1m. popn Management Contract : –AWSC: National Management Contract (Regional towns and villages) 620,000 popn 3 Municipal Companies –Shirak (149,600); Lori ( 118,500); Nor Akunq ( 59,440) 540 Village associations

13. Analysing Key Areas of Responsibility MANAGEMENT OPERATIONS & MAINTENANCE INVESTMENT & FINANCE  Direct staff  Set human resource Policy  Establish or improve business processes  Manage inventory  Maintain assets  Commercial responsibilities (e.g. billing & collection)  Issue demand and capacity forecasts  Arrange finance  Prepare technical designs  Construct assets “We looked at three key areas of responsibility for utility management, and then the tasks for each area…………..”

14. Responsibilities in the main PPP models Concession & Divestiture Affermage & Lease Management Contract MANAGEMENT OPERATIONS & MAINTENANCE INVESTMENT & FINANCE  Direct staff  Set human resource Policy  Establish or improve business processes  Manage inventory  Maintain assets  Commercial responsibilities (e.g. billing & collection)  Issue demand and capacity forecasts  Arrange finance  Prepare technical designs  Construct assets “……and here we can see which Responsibilities are dealt with under each of the three typical PPP models”

15. Risks & Responsibilities: Armenia Management & Operations Commercial: Revenues / Profit Investment & Finance Asset Liability Full Ownership (e.g. State or Private ) Concession Lease Management Contract Key PPP Arrangement Risks Operating Risk Collection Risk Investment Risk All Risks – with Asset liability

16. Concession not viable for AWSC For the foreseeable future AWSC will not have sufficient income to meet capital costs and depreciation, as well as operating costs. International water operators do not currently have the desire/ability to make the necessary investments and finance the Concession model. We can look at some other PPP form that will allow improvement of AWSC towards Concession in the long term, if investment is still an issue at that time and operators view of concession risks improves. “Concession is not viable under current circumstances”

17. Some of the ‘players’ SWCS: The state nominated company who manages sector policy, PPP contracts and some asset ownership PRCS: the State Regulator: Controls Tariff The Private Operators: Veolia, Saur The 3 Municipal Companies Independent auditor: Technical and Financial audits

18. Lease Contract: Yerevan Private Operator Veolia “The Bidder” Customers Private Service Provider Yerevan Djur cjsc “The Lessee” Regulator PSRC Payments Management & Resources Tariff Service Independent Auditors SWCS “The Lessor” Contractual State Lease Fee Use of Facilities

19. Lease: Yerevan Originally a 5 year Management Contract Positive experience with the MC (data collection, general improvements) Since 1 year ago (after bid) a Lease, carried out by Private Operator (Veolia) Contract terms well established (Model for AWSC) Regulation clearly defined e.g. tariff reviews Performance improving as plan Management of a Comprehensive Capital Works Plan (Govt. Finance)

20. Management Contract: AWSC Private operator SAUR Customers Service Provider AWSC Regulator PSRC Payments Management Tariffs Services AWSC Board Independent Auditors SWCS

21. Management Contract: AWSC (1) AWSC is a State company, managed by SAUR under a 4 year Management Contract (MC) won in open tender. Good planned results, with improvements designed to lead to next PPP arrangement Operator responsible for managing all operations, financial matters & personnel Base Fee + Incentive payment against 4 Performance Indicators

22. Management Contract: AWSC (2) SAUR bring management expertise through expatriate & local managers. AWSC/Government finance a capital works program. SAUR manage the construction of new and rehab works that affect their operations. AWSC bears risk of Tariff levels, collection and service delivery risks. Tariff levels do not affect SAUR’s fees.

23. The Municipal Companies Customers Water Company Nor Akunq cjsc Regulator PSRC Tariff Service Nor Akunq Board Consultancy services SWCS State Shareholder (51%) Regional Shareholders (49%)

24. Municipal Companies Municipal joint stock companies were formed, part owned by the State. Managers are helped to develop institutional & management improvements with help of external advisers Some investment and technical assistance provided under KfW funding Emergency works were a success, but long term operational improvement has yet to be seen.

25. Look at Performance Established Base Data –Technical Performance –Financial Used existing performance –Yerevan 10 year Lease Contract 2006 - 2016: –AWSC 4 year Management Contract 2004 - 2008: –Regional Companies. Made forward performance projections (AWSC only)

26. Payment Performance Indicators Continuity of supply (Average hours/day) % subscribers metered Bacteriological drinking water safety (% samples) Company Working Ratio (Costs/Revenue) 18 Performance Indicators are used for Management Purposes, of which 4 are linked to Payment:

27. PPI’s over time Performance Payment IndicatorsBaseline value as of 11/30/2004 Y2 TargetY2 Actual Value as of 01/01/2007 End-of- project target as of 11/19/2008 Increased weighted average number of daily hours of drinking water service (in hours) 6.047.8410.0213.22 Weighted average water bacteriological safety compliance 93.8 %95.04 %95.8 %98.1 % Percentage of subscribers billed on the basis of metered consumption 40.2 %49.19 %57.3 %77.84 % Company working ratio (Costs/Revenues) 194.9 %181.6 %137.9 %118.0 %

28. AWSC - Performance Data & Projections 2004 - 2010 (current MC Service Area) 1 (in million AMD)

29. Performance Data: 3 Regional Companies

30. Lease Costs (1) - Operational Personnel Costs: 40% of cost; 22% reduction in workforce (5.2/1000 connections) in 4 years Electricity Costs: 30% of cost ; assume 15% reduction in 4 years, but requires capital investment Other Expenses: Similar to today, but increased throughput achieved under lease Sewage Plant Operation: Similar to today Management overheads: Current expatriate staff costs reduced by 15 % under lease

31. Lease Costs (2) - Financial Operating Capital: $1m loan made available to Operator at preferential rate (5%) Operator’s Retained Profit: This will only be determined at bid, but estimate made Debt/Capital Investment: Planned Investment program determined, but funded by Government State Lease Fee: Set at level to cover Govt. debt repayments Depreciation: Taken as national accounting standard

32. Cost Recovery and Tariff INCENTIVES “To be viable: Tariffs + Subsidies = Total Cost of Service” Service Quality Service Coverage COST OF SERVICE TARIFF INCOME SUBSIDY ?? Cost of Investment Depreciation: Cost of replacement

33. My Simple Tariff Formula!!! Tariff Rate ($/cubic meter) Total Costs ($) Total Billed Consumption (cubic meter) =

34. Tariff Level: Starting point Note: $1 US = 309 Armenian Dram  Current Tariffs are seen as being low  They are inadequate to recover costs  Tariffs have to be within affordability limits (approx 3% of average household income)  A ‘politically accepted. initial tariff is seen to be around 100 – 110 AMD/m 3  Tariff can be increased as service improves

35. AWSC Tariff Scenarios Adding the 3 Towns increases Basic Tariff by approx 6%

36. Establish the Lease? Good experience from Yerevan model Likely Bidder interest MC well prepared –Data availability –Operational Improvement –Financial improvement No subsidy Reasonable Tariff Actual Tariff increase can be phased It takes time to implement a PPP bid, so immediate start needed on preparation Should Lease be negotiated with the existing Operator or out to Open Tender? What to do about Depreciation?

37. Should we include 3 Towns? Brings economies of scale (size similar to Yerevan) Smooths Tariffs Size more attractive to manage, and more interest in larger urban element Private Operator expected to make immediate efficiencies Data not so reliable Asset ownership issues need resolving Additional management and reform costs to integrate 3 Towns Break even Tariff comparable, but Lori & Shirak have to increase a lot from existing

38.  Detailed contract comments were proposed to be incorporated on using Yerevan contract as a model:  Tidy up customer contracts/municipal concessions/supply & service contract relationships  Special initial emphasis and funding for water balance issues to be included in Operator’s obligations (e.g. small works issues, customer cadastre, UFW reduction plan)  Regularize ways of dealing with the poor and disadvantaged customers (e.g. sort out voucher or other arrangement)  Resolve nonpayment issues related to Operator’s powers and sanctions. Suggestions for Lease Contract – Independent Auditor; – Penalties; – Ownership & Licence Issues; – Role of PMU; – Excess profits – Employment conditions: – Training; – Lease Payments; – Change of Scope; – Economic Equilibrium; – Extension of Contract: – Management of Capital Works; – Hand Back Provisions

39. Recommendations Follow on MC with a Lease Decide timing: –On balance, if ready to fast track, go straight to Lease: One time Tariff change Keeps up momentum Can make other changes at the same time Address issue of competition (e.g. is single operator for the major party of the country acceptable) Assume follow Yerevan contractual lease model, refining for the new arrangement. Consider benefits of inclusion of 3 Regional Companies in AWSC lease arrangement

40. Water & Sanitation Case Study Session 5.2 David Stiggers, Independent PPP Specialist THANK YOU!

41. Contacts For comments or further details contact: Junglim Hahmjhahm@worldbank.org Richard Cabellorcabello@ifc.org Sabino Escobedo sescobedo@tagfinancialadvisors.com David Stiggers davidstiggers@comcast.net

42. Water & Sanitation Case Study Session 5.2 David Stiggers, Independent PPP Specialist THANK YOU!