assessing financing options

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ASSESSINGFINANCING OPTIONS

Session 3

ADB – Viet Nam Sanitation Dialogue16-17 April 2009Thanh Hoa



Topics to Be Covered

Economic and financial challenges

Financing sources

Cost recovery mechanism

Revenue generation



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



How are sanitation projectsfinanced?



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



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



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.



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



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



Financing Mechanisms



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



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



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)



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



Cost-recovery Mechanism



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



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.



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.



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.



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



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



THANK YOU.

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