assessing financing options
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8/6/2019 Assessing Financing Options
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ASSESSINGFINANCING OPTIONS
Session 3
ADB – Viet Nam Sanitation Dialogue16-17 April 2009Thanh Hoa
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Topics to Be Covered
Economic and financial challenges
Financing sources
Cost recovery mechanism
Revenue generation
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Economic and FinancialChallenges
Absence of knowledge of the economic costsand benefits to the country
Service provider unable to sustainably meetthe O&M costs
Absence of utility creditworthiness and
bankable projects
low interest of financing institutions and
private sectorConsumers unwilling to pay for poor services
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How are sanitation projectsfinanced?
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Business as Usual
PROJECTS
MEETING
CAPEX & OPEX
FUNDING:
MunicipalFunds
National / StateFundsCAPEX
OPEX Budgetary Allocation
Not fully
provided
ProjectIdentification
Multi-lateralagencies
Pension,HousingFunds
Govt. guarantees
Unsustainable model
Wasted asset investmentRepeated drain on Public Funds
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Business Unusual –Financing of Projects
PROJECTS
MEETINGCAPEX & OPEX
REFORMS
FUNDING:Municipal
Funds
National/ StateFunds
Multi-lateralagencies
Pension,Housing Funds
CapitalMarket,CarbonFund
CAPEX
OPEX Budgetary Allocation Project Revenues
TaxesCost
Reduction
EfficiencyGains
User Charges,
Targetedsubsidies
Administrative Political Will Community Participation
Policies/Laws, Accounting Practices, Asset Inventory,Capacity Building
ProjectIdentification
SustainableProject
Development
Reform-OrientedProject Structuring
Govt. guarantees
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Economic Regulation
Utility prepares a business plan showing operationaland capital funds required for the next period (sayfive years) and the demands for those services,
including compliance, risk management, assetmanagement, customer feedback.
Utility submits plan to economic regulator for
assessment.
Regulator audits plan and checks against historicalrecord and utility capacity.
Regulator approves plan and sets price.
Utility delivers plan, reporting progress annually to
regulator. Regulator uses performance indicators.
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Sanitation Business Plan
Cost Centers
Capital
Expenses(Grants, Loans,Equity, CarbonFunds)
OperatingExpenses(direct O&M,support services,taxes, financingcharges,depreciation andwrite-offs)
Revenue Centers
Income:
Taxes
User Charges
Targetedsubsidies
Carbon credits
Savings from:
Cost Reduction
Performanceefficiency savings
BusinessPlan forSustainable
Utility
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Regulatory Requirement
Economic regulation must require that a utilitybe sustainable and hence entitled to:
Recover its operating costs(minimum O&M if grant for capex, or else full cost includingcapex)
Achieve a return on its investment in theinfrastructure - profit – can be ploughed back
Return sufficient funds to be able to replace itsinfrastructure as it reaches the end of its useful life – depreciation of assets
Return sufficient funds to be able to pay its taxes
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Financing Mechanisms
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Financing Options
International sources:
Bilateral and donor agencies
International financial institutions
Non-profit environmental finance programs
National level mechanisms:
Public funds (from taxes and revenues of the
government)
Private sector partner (has access to financing)
Financial and credit institutions
Banks and other providers of debt finance
Equity investors
Site level mechanisms:
User fees, real estate taxes, other taxes
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Financing Options
Type of Financing Features Constraints
Grant financing Can partially cover capital
cost and help overcome highinitial investment cost
Less pressure to
identify efficientsolutions
Subsidized
Financing(loans fromgovernment andmultilateral agencies)
Long grace and repayment
period
Requires
governmentguarantee
Market Financing
(commercial banks)
Higher interest rate andshort repayment period
Requires gov’tguarantee & credit-rating of LGUs
Revolving Funds Debt repayment risk isspread out over a diversifiedpool of borrowers
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Variety of Financing Sources
Consumers through charges
Developers through levies
Lenders – Local and InternationalADB:
Loan – single or multi-tranche facility
Grant
Loan/Grant
Non sovereign public sector facility
Local currency loan
Private Sector – equity investments, loans,
guarantees, and B loan (complementaryfinancing scheme)
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Operations Funding the real issueto create bankable projects
Operating costs can be readily assessed
Likely revenues more difficult to judgeRevenue Risks high due to
Inconsistent regulation
User affordability
Effectiveness in collection performance
Much depends upon assumptions aboutincome stream from user charges and/or
government support
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Cost-recovery Mechanism
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Cost Recovery
Types of costs:
Capital or investment cost
Connection costs
Operating and maintenance
Interest payments, taxes
Economic and environmental externalities
SERVICECOST FULL
COST
• All types of costs can be recovered from possible sources,
such as:
– User fees (tariffs for the use of the facilities and services)
– Subsidies (from other taxes and other sources of revenues
of the government)
– Grants
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User Fees
The cost recovery strategy should consider:
the investment and operating and maintenance costs
quality of service
the tariffs or user fees that customers are willing and
able to pay
a reasonable rate of return to the investment.
User fees or tariffs for sanitation services should:
Be fair and equitable – have particular consideration forpoor communities;
Be easy to understand for the consumer;
Be easy to administer and enforce.
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Factors to Consider
Ability to cover the costs and ensure a stream of
revenue will increase available funds for investment
and sustain the service delivery.An efficient revenue collection system should be in
place.
A cost recovery mechanism requires arrangements
(technical, institutional, legal, and financial) for a good
monitoring system, including regulations and
legislation.
Users and polluters need to be willing to change their
behavior.
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Importance of Cost Recovery
Ability to cover the costs and ensure a stream of
revenue will increase available funds for
investment, and improve and sustain the servicedelivery.
Payments increase the sense of value and
commitment among users; can promote
conservation of water and/or reduction in waste
generation.
With users paying for services, they will also
demand that the utility deliver good services.
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Sewerage Utilities can be viable
Case of City West Water (Melbourne, Australia)
Customers 337,000Industrial 10%Asset (regulated) base 80 ml (replace 2.5 bil)Operating costs $56 ml (incl TP full costs)Depreciation (2%) $10 milProfit (before taxes) $30 mil - allowed 6.2%Revenue permitted $96 milProcess system Lagoon systemAverage tariff $285 per propertyAffordability ave is 0.72% of family income
Public Utility pays income tax equivalent to StateGovernment
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Sewerage Utilities can be viable
Case of South West Water (Melbourne, Australia)
Customers 615,000
Industrial 8%
Asset (regulated) base $1253 ml (replace 3.1 bil)
Operating costs $102 ml (incl TP full costs)
Depreciation (2%) $25 mil
Profit (before taxes) $75 mil - allowed 6.2%
Revenue permitted $227 mil
Process system Activated Sludge Plant
Average tariff $369 per propertyAffordability ave is 1% of family income
No cross subsidies between water and sanitation, norwithin the sanitation customer classes. Public Utilityobliged to pay income tax equivalent to State Government
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THANK YOU.
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