JUNE 2010 56457 Local Financing of Water Utilities: Challenges and Opportunities The Case of Peru Public Disclosure Authorized THE WORLD BANK GROUP The United Nations Secretary General's Advisory Board on Water and Sanitation Table of ConTenTs Acknowledgements.................................................................................................................................................................................................. iv Abbreviations and Acronyms ............................................................................................................................................................................v 1.. PurPose And Context of this rePort..............................................................................................................................1 2.. exeCutive summAry...............................................................................................................................................................................3 3.. WAter utilities in Peru.......................................................................................................................................................................5 3.1. Market.Structure...............................................................................................................................................................................5 3.2. Institutional.Framework...............................................................................................................................................................6 3.3. Tariff.Setting.&.Tariff.Levels.........................................................................................................................................................7 3.4. Operational.Performance............................................................................................................................................................8 3.5. Financial.Performance...................................................................................................................................................................9 3.6. Investment.Decision.Making.................................................................................................................................................10 3.7. Summary.of.Water.Utilities.in.Peru.....................................................................................................................................11 4.. loCAl finAnCing of infrAstruCture ProjeCts in Peru............................................................................13 4.1. . Main.Sources.of.Funding.in.the.Peruvian.Financial.Market...............................................................................13 4.2. Commercial.Banks........................................................................................................................................................................13 4.3. Private.Pension.Funds,.Balance.Sheet.and.Project.Based.Finance.of.Infrastructure.Projects........14 4.3.1. PPFs.Balance.Sheet.Financing.in.Infrastructure.for.Public.Service.Companies....................14 4.3.2. PPFs.Project.Based.Financing.in.Infrastructure.for.Public.Services.in.Peru.............................15 . 4.3.2.1. Allocation.of.Risks.in.Infrastructure.Projects..............................................................................................17 4.4. Public.Private.Partnerships.in.the.Water.and.Sanitation.Sector.......................................................................19 4.5. . The.Impact.Peruvian.Debt.Investment.Grade.rating.............................................................................................20 4.6. Summary.of.Local.Financing.of.Infrastructure.Projects.in.Peru.......................................................................20 5.. finAnCing WAter utilities...........................................................................................................................................................21 5.1. Investment.Activity.in.the.Urban.Water.Sector..........................................................................................................21 5.2. . Multilateral.and.Bilateral.financing....................................................................................................................................21 5.3. Financing.through.the.Financial.Market........................................................................................................................22 5.4. Investment.Demands.of.the.Water.Utility.Sector.....................................................................................................22 5.5. The.Economic.Cost.of.Underperforming.LWU.and.the.Gains.of.Commercializing.Them..............22 5.6. Summary.of.Financing.Water.Utilities..............................................................................................................................23 6.. BArriers for loCAl PrivAte finAnCing........................................................................................................................25 . 6.1. Capacity.and.Performance.of.Utilities..............................................................................................................................25 6.2. Capacity.of.Local.Governments...........................................................................................................................................26 6.3. Coordination.of.Central.Government.Agencies,.Plans.and.Strategies........................................................26 i Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) 6.4. Confidence.of.Investors............................................................................................................................................................26 6.5. Enforcement.and.Compliance.to.Legal.Framework...............................................................................................27 7.. oPPortunities And ChAllenges..........................................................................................................................................29 7.1. Framework.of.Analysis...............................................................................................................................................................29 7.2. Options.for.Local.Financing.of.Water.Utilities.in.Peru............................................................................................30 Option.1:. Publicly.Managed.LWU.Obtain.Loans.with.GoP.Guarantees....................................................30 Option.2:. Publicly.Managed.LWU.Restructured.to.Become.Financially.Viable.and.. Get.Local.Financing.without.GoP.Guarantees....................................................................................31 Option.3:. Public.Private.Partnerships.to.Get.Local.Financing.with.. GoP.Sovereign.Guarantees.............................................................................................................................32 Option.4:. Privately.Managed.LWUs.(or.parts.of.it).Obtain.Loans.from.Local.Capital.Market.. using.IFC.Partial.Risk.Credit.Guarantee....................................................................................................32 7.3. Discussion.of.the.Options.for.Facilitating.Local.Financing.of.LWU................................................................33 8.. reCommendAtions And next stePs..................................................................................................................................35 8.1. Recommendations.for.Peruvian.Utilities........................................................................................................................35 8.2. . Recommendations.for.the.Peruvian.Private.Sector.­.Financial.&.Non.Financial..................................36 8.3. Recommendations.for.Donors.............................................................................................................................................36 8.4. Next.Steps..........................................................................................................................................................................................36 8.4.1.. Next.Steps.in.Peru.......................................................................................................................................................36 . 8.4.2.. Next.Steps.in.Other.Countries............................................................................................................................36 8.4.3.. Next.Steps.in.the.International.Community..............................................................................................37 8.4.4.. Future.Action.by.UNSGAB.....................................................................................................................................37 APPendiCes 1.. Local.Water.Utilities,.Ranked.by.Number.of.Connections,.Year.2007...........................................................39 2. Formulas.for.the.Estimation.of.Tariffs.of.WS&S.Utilities.........................................................................................41 3. Tariff.of.Water.Utilities.in.Peru................................................................................................................................................43 4. Access.to.Safe.Water.in.Urban.Centers.in.Peru,.by.Utilities.Service.Area...................................................45 5. Water.Utility.Operating.Performance.Indicators.......................................................................................................47 6. Peruvian.Water.Utilities.Financial.Statements.............................................................................................................49 7. Bank.Deposits.and.Loans.in.Peru.(million.of.indicated.currency)..................................................................51 8. Peruvian.Pension.Funds.Investments.(million)...........................................................................................................53 9. Estimation.of.Investment.Needs.2009­2015.to.Achieve.MDGs.in.Peru.....................................................55 10. Peruvian.Pension.Funds.Investments.(million)...........................................................................................................57 11. Agenda.of.Mission.and.List.of.Interview.Persons.....................................................................................................59 Boxes Box.1:.KfW.Rapid.Impact.Measures.Program.(Programa.de.Medidas.de.Rapido.Impacto,.PMRI)................11 Box.2:.ENERSUR,.PPFs.Equity.&.Bond.Investments,.and.PPPs.Activist.Behavior.......................................................15 ii Table.of.Contents. Box.3:.Direct.Observations.from.the.Field.......................................................................................................................................28 Box.4:.Suggestions.to.Facilitate.LWUs'.Access.to.Local.Financing....................................................................................35 figures . Figure.1:.Urban.WS&S.Utilities.Sector.Structure.............................................................................................................................6 Figure.2:.Peru.Average.WS&S.Revenues.(USD.and.Soles.per.m3),.1996­2007.............................................................7 Figure.3:.Average.Revenue.for.WS&S.between.2002­2007.(in.USD/m3)........................................................................8 . Figure.4:.Lost.Revenues.through.High.Levels.of.Unaccounted.for.Water,.in.Soles.mil..2007.........................10 Figure.5:.PPFs.Investments.in.Public.Services.Infrastructure,.1999.and.2009.(USD).............................................14 Figure.6:.Analytical.Framework.for.Local.Financing.of.Water.Utilities.in.Peru...........................................................29 tABles Table.1:.Local.Water.Utilities,.Population.in.Service.Area.and.Number.of.Connections.......................................5 . Table.2:.Average.Tariffs.in.Water.Utilities.in.Peru............................................................................................................................8 Table.3:.Simplified.Water.Utilities.Income.Statements,.2007..................................................................................................9 Table.4:.Water.Utilities.Debt/Revenue.Ratios,.2007...................................................................................................................10 Table.5:.PPF's.Project.Based.Financing.in.Infrastructure.Project.in.Peru.......................................................................16 Table.6:.Risk.Matrix.and.Risk.Mitigation.Instruments.in.Sample.Project.Based.Finance.....................................18 Table.7:.Investment.Activity.in.Urban.Water.Utilities.Service.Areas.(Million.of.US$)............................................21 . Table.8:.Funding.Sources.of.Investment.in.the.Urban.Water.Utilities.(millions.of.US$).....................................22 Table.9:.Urban.Water.Sector.Investment.Needs.2009­2015.(Millions.US$)...............................................................23 iii aCknowleDgemenTs This.report.is.the.joint.product.of.the.Energy.Transport.and. inputs.from.Gérard.Payen.(UNSGAB),.Richard.Torkelson. Water.department.of.the.World.Bank,.the.water.and.urban. (UNSGAB),.Ivo.Imparato.(Senior.Infrastructure.Specialist,. group.of.the.Latin.America.and.Caribbean.Region.of.the. LCR),.Maria.Angleica.Sotomayor.(Senior.Water.Specialist,. World.Bank.and.the.United.Nations.Secretary.General's. LCR),.Livia.Benavides.(Senior.Social.Sector.Specialist,.LCR),. Advisory.Board.on.Water.and.Sanitation.(UNSGAB)..The. Emmy.Yokohama.(Country.Officer,.LCR),.Glenn.Pearce.(Se- authors.of.this.report.are.Sixto.Requena.(Consultant).and. nior.Regional.Team.Leader,.WSP),.Iris.Marmanillo.(Senior. Laura.French.(ETWWA)..This.report.has.been.written.under. Water.and.Sanitation.Specialist,.WSP).and.Jorge.McGregor. the.guidance.of.Abel.Mejia.(Sector.Manager,.ETWWA).with. (Consultant). DisClaimer The.findings,.interpretations,.and.conclusions.expressed.in.this.study.are. entirely.those.of.the.authors.and.should.not.be.attributed.in.any.manner.to. UNSGAB.nor.to.the.World.Bank,.to.its.affiliated.organizations,.or.to.members. of.its.Board.of.Executive.Directors.or.countries.they.represent. The.World.Bank 1818.H.Street,.NW Washington,.DC.20433.USA www.worldbank.org United.Nations.Secretary-General's.Advisory.Board.on.Water.and.Sanitation. 2.United.Nations.Plaza.DC2-2136 New.York,.NY.10017.USA. www.unsgab.org iv abbreviaTions anD aCronyms APT. Agua.para.Todos.(Water.for.All.Program) INVERSAN. Water.Infrastructure.Fund BoD. Board.of.Directors IPO. Initial.Public.Offering BVL. Lima.Stock.Exchange LG. Local.Government CAA. Concession.Agua.Azul LWU. Local.Water.Utilities CG. Central.Government MDG. Millennium.Development.Goals COFIDE. National.Development.Bank MEF. Ministry.of.Economy.and.Finance COLFONAVI. National.Housing.Fund.Liquidation.. MoT. Ministry.of.Transport Commission MVCS. Ministry.of.Housing.Construction.and.. CONASEV. National.Council.of.Enterprises,.Stocks.and.. Sanitation Values O&M. Operations.and.Maintenance CRPAO. Certificados.de.Reconocimiento.de.Pagos. ODA. Overseas.Development.Assistance Anual.por.Obras PMO. Optimized.Master.Plan CTO. Concession.Trasvase.Olmos PMRI. Rapid.Results.Program DBO. Design,.Build,.Operate.and.Maintain.contract PPF. Private.Pension.Funds DCP. Directorate.of.Public.Debt PPP. Public.Private.Partnership DFBO. Design,.Finance,.Build,.Operate.and.Maintain. PRONAP. National.Program.for.Drinking.Water contract RG. Regional.Government DNS. National.Water.Directorate RPI. Capital.Investment.Tariff.component.. DPP. Directorate.of.Public.Budget (Remuneracion.por.Inversion) EPS. Water.Utility.(Empresa.Publica.. SUNASS. National.Superintendence.of.Sanitation.. de.Saneamiento) Services GDP. Gross.Domestic.Product TA. Technical.Assistance GoP. Government.of.Peru UNSGAB. United.Nations.Secretary-General's.Advisory. IFC. International.Finance.Corporation Board.for.Water.and.Sanitation IIRSA. South.American.Regional.Integrated.. VMS. Vice.Ministry.of.Sanitation Infrastructure.Initiative WS&S. Water.Supply.and.Sanitation v 1. PUrPose anD ConTeXT of THis rePorT This.report.identifies.opportunities.and.challenges.for.local. from.UNSGAB,.Mr.Gerard.Payen.and.Mr.Richard.Torkelson.. financing.of.water.utilities.in.Peru.and.suggests.recom- The.mission.was.also.joined.by.Iris.Marmanillo.(WSP).and. mendations.for.removing.barriers.and.creating.incentives. Jorge.McGregor.(Consultant). for.scaling-up.local.financing.to.local.water.utilities..It.was. developed.with.an.understanding.that.meeting.the.MDGs. in.water.and.sanitation.in.Peru.will.require.scaling.up.local. Unsgab background financing.for.the.sector.and.that.efficiency.and.effective- ness.can.be.enhanced.by.greater.involvement.of.local.insti- The.United.Nations.Secretary.General's.Advisory.Board.on. tutional.investors.and.other.parties. Water.and.Sanitation.(UNSGAB).is.an.independent.body. established.in.March.2004.by.the.former.UN.Secretary.Gen- In.May.2009.the.World.Bank.and.two.members.of.UNSGAB. eral,.Mr..Kofi.Annan.and.continued.by.Mr..Ban.Ki-Moon..The. embarked.on.a.joint.study.mission.to.examine.the.legal,. Board's.mission.is.to.give.advice.to.the.UN.Secretary.Gen- regulatory.and.governance.framework.surrounding.local. eral,.provide.input.to.global.dialogue.on.water.and.sanita- water.utilities.in.the.country.of.Peru..The.mission.examined. tion.issues.and.to.influence.global,.regional,.national.institu- the.current.access.to.capital.markets.and.the.potential. tions.at.the.highest.level..Chaired.by.His Royal Highness the creditworthiness.of.these.utilities.to.determine.whether. Prince of Orange,.the.Board.is.composed.of.a.wide.range.of. there.was.availability.of.financing.in.the.local.debt.capital. dignitaries,.technical.experts,.and.individuals.with.proven. market.for.water.and.sanitation.obligations. experience.in.providing.inspiration,.moving.the.machinery. of.government,.and.working.with.the.media,.the.private. This.mission.was.supported.and.undertaken.by.the.World. sector.and.civil.society. Bank.following.a.meeting.between.the.President.of.the. World.Bank.and.the.Chair.of.UNSGAB,.which.confirmed. The.Board's.2006.Hashimoto.Action.Plan's.(HAP).focus.on. their.common.interest.in.identifying.obstacles.to.access. financing.was.included.because.it.is.a.major.challenge.to. to.borrowing.in.concrete.cases..Peru.was.selected.as.a.test. achieving.satisfactory.access.to.water.and.sanitation.and.the. case.for.the.diversity.of.local.situations.under.a.decentral- related.MDGs..The.Board.takes.no.position.on.utility.organi- ized.system..UNSGAB.developed.its.view.that.more.financ- zation.and.ownership..It.affirms.that.water.operators.must. ing.is.needed.to.accomplish.the.water.and.sanitation.MDG. be.operationally.capable.and.financially.viable..The.Board. targets.and.that.access.to.local.financing.by.the.entities. recognized.the.necessity.for.municipalities.and.water.utili- responsible.for.water.and.sanitation.services.is.a.major.way. ties.to.have.better.access.to.borrowing.and.capital.markets.. to.quantum.leap.those.infrastructure.improvements..UN- Its.2006.HAP.has.identified.actions.involving.national.policy. SGAB.stressed.the.need.to.improve.knowledge.of.the.cred- makers;.the.financial.and.donor.community;.and.those.in- itworthiness.of.local.water.utilities.which.are.responsible.for. volved.in.decentralizing.water.and.sanitation.services.to.the. the.delivery.of.water.and.sanitation.services.in.cities.other. district.and.municipal.levels,.including.the.following: than.the.economical.or.political.capitals. a.. Bilateral donors and IFIs should allocate Official Develop- The.study.was.conducted.as.a.way.for.the.mission.mem- ment Assistance (ODA) to build institutions, to prepare for bers.to.gain.a.quick.but.accurate.assessment.of.the.status. infrastructure projects, and to increase the capacity of de- of.local.water.utilities.in.Peru..The.mission.was.composed.of. veloping countries' water operators to attract new finan- Ivo.Imparato,.Sr..Urban.Specialist.(LCSUW).and.Maria.Angeli- cial resources and draw on existing commitments. ca.Sotomayor,.Sr..Economist.(LCSUW),.mission.leaders,.Sixto. b.. Bilateral donors, IFIs, and technical assistance providers Requena.(Consultant),.Laura.French,.(ETWWA),.and.partners. should give high priority to capacity improvements that 1 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) will help local communities and water operators.tap into ·. Securing currency risks; capital markets,.including pension funds. ·. Developing loans to sub-sovereigns with long- c.. IFIs should accept a major role in enabling water operators term maturities and affordable interest rates; to make their operations more efficient, more transparent, ·. Identifying or creating pooling mechanisms al- and more financially viable through local financial mar- lowing local governments to get better credit kets taxes, and contributions by users. They should provide ratings; advice to sub-sovereigns on.how to access internal and ·. Securing ability of municipalities to reimburse external funding. loans; and d.. Bilateral donors and IFIs should review their ODA practices ·. Providing transparency and good legal environ- to assess the extent to which they accommodate: ment. ·. Priority to funding for countries not on track for achieving the MDGs. This.concern.about.a.better.access.for.municipalities.and. ·. Grants for technical assistance and maintenance utilities.to.borrowing.and.capital.markets.was.reinforced.by. and services. the.work.done.with.OECD,.which.resulted.in.differentiating. ·. Funding designed to leverage non-ODA sourc- clearly.the.ultimate.funding.sources,.the.3Ts.(Tariffs,.Taxes. es toward the water sector. and.Transfers),.from.the.temporary.ones.(public.and.private. e.. National governments must create arrangements that loans,.equity.investment)..This.work.showed.that.these. allow local governments and local water operators to get latter.sources.are.appropriate.to.fund.the.necessary.invest- easier and cheaper access to local.and--where appro- ment.programs.at.the.time.they.are.needed..In.contrast,.the. priate--international capital markets. inability.of.many.municipalities.and.water.utilities.to.access. f.. National governments, with the help of ODA, should.facil- capital.markets.appeared.to.be.a.major.obstacle.to.the.de- itate municipalities' access to borrowing, especially by: velopment.of.water.and.sanitation.infrastructure.in.many. ·. Developing local financial markets; parts.of.the.world. ·. Advising local governments about the tools and appropriate ways to get funds; 2 2. eXeCUTive sUmmary The water Utility sector in Peru perience.in.financing.infrastructure.projects,.both.through. balance.sheet.and.project.based.transactions. Since.the.early.1990s,.water.supply.and.sewerage.services. (WS&S).in.urban.areas.have.been.provided.by.51.utili- Assuming.that.PPFs.continue.allocating.16%.of.their.portfo- ties.organized.under.private.company.law.and.owned. lio.to.long.term.infrastructure.investment.instruments,.they. by.locally.elected.municipal.governments,.except.in.the. would.be.capable.of.investing.about.US$0.8.billion/year.in. case.of.Lima,.where.the.central.government.retained. the.infrastructure.sectors..The.water.sector.could.be.attrac- ownership.and.created.SEDAPAL..The.legal.and.regulatory. tive.to.local.financiers,.since.it.is.estimated.that.investment. framework.of.water.utilities,.established.in.1994,.is.consid- needs.over.the.next.seven.years.will.total.about.US$.3.0. ered.sound.and.provides.opportunities.for.local.financing. billion.(US$.420.million/year). of.investments..Despite.this,.the.sector.remains.heavily. dependent.on.public.financing. options to remove barriers and facilitate A.number.of.barriers.stand.in.the.way.of.moving.the.sector. water Utilities access to local financing from.its.dependence.on.direct.public.financing.or.central. government.guarantees.to.a.more.sustainable.model..First. The.availability.of.local.financing.through.PPFs.and.others,. and.foremost,.private.investors.have.little.confidence.in. and.their.interest.in.the.infrastructure.sector,.offers.an.op- the.sector.due.to.the.weak.financial.and.operational.per- portunity.for.water.utilities.to.reduce.their.dependence.on. formance.of.local.water.utilities..In.2007,.most.reported.a. public.funding.and.become.financially.solvent..To.achieve. negative.operating.margin,.on.average.-5%..Unable.to.meet. this,.a.number.of.steps.must.be.taken,.including:.(a).a.gov- their.financial.obligations,.the.average.local.water.utility. ernment.commitment.to.address.the.insolvency.of.water. depends.on.the.central.government.to.intervene.by.paying. utilities;.(b).the.fulfillment.of.conditions.for.local.financing,. most.debt.obligations.to.bilateral.organizations.and.forgiv- including.a.governance.structure.that.enables.local.inves- ing.tax.liabilities..In.addition,.most.local.water.utilities.ex- tors.to.retain.appropriate.oversight.over.their.investments;. perience.high.levels.of.unaccounted.for.water,.on.average. (c).the.regulatory.oversight,.including.tariff.reviews.and. 48%..Other.major.barriers.to.accessing.local.private.financ- penalties,.needed.for.balance.sheet.and.project.based. ing.include.political.interference.in.management.of.local. financing.of.water.and.wastewater.projects;.and,.(d).the. utilities,.poor.coordination.of.sector.strategies.and.weak. removal.of.barriers.to.local.financing.of.water.utilities.ac- compliance.to.the.existing.legal.framework. cording.to.contractual.and.management.arrangements. defined.by: The local financing market in Peru i.. Whether loans or other funding instruments will carry guarantees from the central government.­.Sovereign. Sweeping.reforms.in.the.financial.and.capital.markets.in.the. guarantees.reduce.the.cost.of.long-term.financing. 1990s.have.enabled.local.financing.of.public.infrastructure. but.obscure.the.true.value.of.projects.for.investors.. projects..Private.Pension.Funds.(PPFs),.a.major.institutional. Without.a.guarantee,.financing.costs.rise.but.investors. investor,.have.been.channeling.financial.resources.to.the. have.a.greater.incentive.to.evaluate.the.true.value.of. infrastructure.sector.since.2001..Currently,.PPFs.investment. the.project. in.infrastructure.for.public.services.is.valued.at.US$2.9.bil- ii.. Whether management of the utility, or parts of it, is per- lion.(16%.of.total.holdings).mainly.in.energy,.telecom,.and. formed by the existing public management, or outsourced roads..Accordingly,.PPFs.and.other.local.financiers.have.ex- to private contractors.­.In.Peru,.institutional.and.private. 3 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) financiers.tend.to.accept.greater.risk.from.private. assessing barriers to access to local sector.borrowers.in.infrastructure,.particularly.when. financing in other Countries the.borrower.can.present.a.track.record.of.technical. experience.and/or.support.from.banks..That.said,.inter- This.joint.study.exposes.many.of.the.barriers.to.local.private. national.experience.demonstrates.that.public.utilities. financing.facing.the.urban.WS&S.sector.in.Peru..In.short,. can.often.achieve.a.high.investment.grade.and.raise. the.majority.of.local.water.utilities.cannot.meet.credit.rat- funding.in.capital.markets. ing.and.governance.standards.required.to.access.private. financing..Consequently,.loans.from.financial.markets.are. rare. The.main.challenge.remain.to.demonstrate.that.the.objec- tives.of.the.Water.for.All.Program.(Agua.para.Todos).can.be. These.findings.are.probably.not.specific.to.Peru..According- achieved.sooner.and.in.a.more.sustainable.way.in.urban. ly,.there.is.great.value.for.central.governments.to.undertake. areas.through.a.radical.overhaul.of.the.balance.sheet.of. similarly.detailed.studies.to.identify.the.obstacles.prevent- water.utilities.and.reforms.in.their.governance.framework.. ing.access.to.local.financing.unique.to.their.country's.WS&S. Both.are.considered.feasible.within.the.existing.legal.and. sector. regulatory.framework,.but.carefully.crafted.policies.will.be. needed.for.facilitating.it. 4 3. waTer UTiliTies in PerU This.section.introduces.the.market.structure,.institutional. million).is.served.by.23.large.and.medium.water.utilities;.the. framework,.tariff.setting.and.tariff.levels,.operational.and. rest.(1.1.million).are.served.by.27.small.water.utilities.(See. financial.performance.and.investment.decision.making.at. Table.1,.and.full.list.in.Appendix.1). local.utilities.in.Peru. The.combined.number.of.customers.served.by.water. utilities.through.piped.connections.is.2.7.million;.42%.are. 3.1 market structure served.by.SEDAPAL,.the.rest.by.the.50.local.WS&S.utilities.. Excluding.SEDAPAL,.there.are.1.6.million.water.connections,. since the early 1990s, local municipal governments of.which.9.water.utilities.have.a.59%.share,.14.water.utilities. have been responsible for the provision of water sup- have.a.27%.share;.and.27.small.water.utilities.have.the.re- ply and sewerage (Ws&s) services, except in lima, maining.14%.share..These.shares.are.not,.properly.speaking,. the capital city..As.part.of.the.devolution.process,.Pe- market.shares.as.each.water.utility.is.a.natural.monopoly.in. ruvian.Local.Municipalities.received.in.ownership.WS&S. its.respective.service.area. infrastructure.and.were.mandated1.to.organize.urban. water.utilities.as.autonomous.ring-fenced.corporations. Until.recently,.LWUs'.Boards.of.Directors.(BoD).were.com- under.private.company.law..For.Lima,.the.central.gov- posed.of.local.government.representatives.only.With.the. ernment.(CG).retained.ownership.of.infrastructure.and. Chief.Executive.Officer.appointed.by.the.largest.local.gov- created.SEDAPAL.under.private.company.law.as.well..All. ernment.and.changed.every.three.years..The.law.has.re- water.utilities'.costs.are.expected.to.be.financed.by.tariff. cently.been.amended.and.the.BoD.now.has.5.seats;.two.for. revenues. Local.Governments,.one.for.the.Regional.Government,.one. for.Professional.Associations,.and.one.for.the.Local.Chamber. At present there are 51 Ws&s utilities in Peru, serving of.Commerce. 17.2 million people living in main urban areas..Local. water.utilities.(LWU).serve.more.than.50%.(8.8.million).of. this.urban.population,.the.rest.is.served.by.SEDAPAL.(8.4. million)..Excluding.the.service.area.of.SEDAPAL,.we.can.also. .Law.26338,.Ley.General.de.Servicios.de.Saneamiento.(WS&S. 1. see.that.the.great.majority.of.urban.population.(about.7.7. General.Water.and.Sanitation.Law.in.this.document). Table 1: Local Water Utilities, Population in Service Area and Number of Connections Local WS&S Utilities* Large Medium Small Total SEDAPAL Number.of.water.utilities 9 14 27 50 1 Population.in.service.area.(million) 5.4 2.3 1.1 8.8 8.4 Number.of.connections.(million) 0.93 0.42 0.22 1.57 1.16 Sources: SUNASS.2007.Water.Supply.and.Sewerage.Utility.Indicators. *.By.number.of.connections:.Large.more.than.50,000,.medium.less.than.50,000.but.more.than.20,000;.small.less.than.20,000. 5 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) 3.2 institutional framework ·. The Ministry of Economy and Finance (MEF) ­.MEF.Di- rectorates.of.Public.Budget.(DPP).and.Public.Debt. The.urban.LWU.sector.structure.is.defined.by.its.interac- (DCP).determine.to.some.extent.the.financing.policies. tion.with.various.agencies.at.the.central,.regional,.and.local. of.water.utilities..They.do.so.by.setting.limits.on.their. government.levels.as.well.as.with.autonomous.agencies. indebtedness.and.by.guaranteeing.their.debts.before. (sees.Fig..1). local.and.international.lenders..In.practice.MEF.has. been.paying.most.local.WS&S.utilities'.debt.obligations. Central government Agencies: to.bilateral.organizations;.it.has.also.paid.or.pardoned. water.utilities'.tax.liabilities. ·. Ministry of Housing, Construction and Sanitation (MVCS). ·. Ministry of Health and the Ministry of Environment.­.The. ­.Its.Vice.Ministry.of.Sanitation.(VMS).does.national. Ministry.of.Health.sets.and.monitors.quality.standards. strategic.planning.and.policy.making.for.the.develop- of.potable.water.supplied.by.the.local.WS&S.utilities.. ment.of.water.utilities..The.MVCS.also.implements. The.Ministry.of.Environment.sets.and.monitors.the. investments.in.the.service.areas.of.the.water.utilities. quality.of.waste.water.discharged.by.the.local.WS&S. through.its.Water.for.All.Program.(Agua.Para.Todos,. utilities.to.natural.courses. APT)..At.present,.the.VMS.is.planning.to.strengthen. the.strategic.planning.and.policy.making.role.of.its. local and regional governments: National.Water.Directorate.(DNS).and.to.integrate.APT. and.other.programs.into.a.Financing.Fund.for.Water. ·. Local government (LG) ­.To.comply.with.their.public. (INVERSAN)..INVERSAN.is.envisioned.as.a.leverage. WS&S.service.obligations,.LGs.award.an."exploitation. financing.mechanism.to.strengthen.local.WSS.utility. contract".to.LWU..LWU.contractual.obligations.in.the. corporate.governance. exploitation.contract.are.defined.by.specific.service. Figure 1: Urban WS&S Utilities Sector Structure Ministry of Economy and Ministry of Housing, Other Ministries Finance Construction & Water DCP DPP DNS APT Health Environment Foreign Budget Policy & Drinking Waste water debt arrears for special WS&S Strategic water discharges programs Planning standards Autonomous Agencies & Private Associations Unconditional Local Governments Investment (WS&S utility equity) COLFONAVI Local debt grants arrears Operation Contract Province Districts SUNASS, regulator Tari s Investments Local WS&S Utility 2 board members Professional Associations Board member Board member Regional Government Board member Chamber of Budget Commerce 6 Water.Utilities.In.Peru improvement.targets.in.an.Optimized.Master.Plan. Tariff.setting.principles.are.consistent.with.sound.economic. (Plan.Maestro.Optimizado,.PMO)..Also,.LGs.participate. criteria.and.financial.viability.of.water.utilities..Volumetric.tar- in.the.BoD.with.two.seats..Until.very.recently,.LGs.fully. iffs.should.be.estimated.using.long.term.average.incremen- controlled.the.BoD.without.good.results. tal.cost.(a.proxy.for.long.term.marginal.cost).using.invest- ·. Regional governments (RG) ­.RGs.are.expected.to.play.a. ments.and.operating.costs.as.per.a.30.year.PMO..Medium. role.as.a.financier.of.LWU..Unlike.LGs,.which.are.finan- term.average.cost.tariffs.are.linked.to.actual.implementation. cially.weak,.most.RGs.receive.mining.royalties..RGs.also. of.five.year.investment.programs,.the.attainment.of.perfor- have.one.seat.on.LWUs'.BoD. mance.targets,.and.indexed.to.inflation.(See.Appendix.2). Autonomous Agencies and Private Associations While tariffs were increased following reforms of the 1990s, there has been little change in tariffs charged ·. National Housing Fund Liquidation Commission (COLFO- by lWus over the past ten years..In.practice,.in.the.early. NAVI).­.Water.utilities.have.debt.obligations.with.COL- stage.of.reforms.SUNASS.approved.tariff.increases.for.all. FONAVI.as.a.result.of.both.loans.made.to.them.and.to. urban.water.utilities,.without.applying.the.principles.and. their.customers.by.a.Housing.Fund.(FONAVI).during.the. procedures.just.described..This.was.done.during.an.18. 1990s..The.loans.were.used.to.build.WS&S.infrastructure. month.period.beginning.1994,.in.which.both.urban.WS&S. in.the.utilities'.service.areas..COLFONAVI.claims.the.val- utilities.and.SUNASS.were.expected.to.build.up.their.capac- ue.of.such.debt.is.about.US$800.million;.water.utilities. ity.to.implement.their.new.mandates..In.this.period.tariffs. claim.it.is.1/3.that.figure..This.contentious.issue.affects. increased.almost.600%,.from.about.US$0.06/m3.in.1994.to. the.creditworthiness.of.most.water.utilities. about.US$0.40/m3.in.1996;.this.tariff.increase.was.supposed. ·. Economic Regulator, Super Intendencia Nacional de Ser- to.increase.revenues.to.cover.O&M.costs.and.to.contribute. vicios de Saneamiento (SUNASS) ­.Set.up.in.the.early. to.financing.of.investments..Since.these.reforms,.tariffs.for. 1990s.as.an.independent.economic.and.quality.of.ser- water.utilities.have.been.maintained.at.virtually.the.same. vice.regulator,.SUNASS.is.expected.to.set.tariffs.consis- level.in.dollar.terms.(US$0.39/m3),.except.for.SEDAPAL,. tent.with.consumers'.willingness.to.pay.and.with.finan- whose.tariff.increased.from.US$0.42/m3.in.1996.to.US$.0.56/ cial.viability.of.the.water.utilities..In.principle,.tariffs.are. m3.in.2007.(Figure.2,.Table.2.and.Appendix.3)..Tardiness.in. linked.to.the.water.utilities'.investment.programs.and. to.the.progress.of.investments.they.make. ·. Professional Associations ­.According.to.current.legisla- Figure 2: Peru Average WS&S Revenues (USD and tion,.local.professional.associations.should.have.rep- Soles per m3), 1996­2007 resentation.in.the.water.utilities'.BoD..This.gives.them. some.power.to.shape.water.utilities'.corporate.gover- 2 nance.and.participate.in.top.level.water.utility.decision. making. 1.5 ·. Chamber of Commerce ­.The.local.Chamber.of.Com- merce.is.also.represented.in.the.Board.of.Directors,.and. it.is.expected.to.voice.the.interest.of.the.economic. 1 sectors.with.the.aim.to.ensure.that.utility.service.policy. also.responds.to.the.needs.of.the.economic.sectors. 0.5 3.3 Tariff setting & Tariff levels 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 sunAss has the mandate to set tariffs and all related Tariff in Soles Tariff in USD regulations according to specific formulas..Separate.tariffs. must.be.estimated.for.both.Water.and.Sewerage.Services.. Source: SUNASS,.2007.Water.Supply.and.Sewerage.Utility.Indicators 7 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) Table 2: Average tariffs in water utilities in Peru Local WS&S Utilities Large Medium Small Total SEDAPAL Soles/m3 $/m3 Soles/m3 $/m3 Soles/m3 $/m3 Soles/m3 $/m3 Soles/m3 $/m3 Year.1994 0.1 0.05 0.1 0.04 0.08 0.04 0.09 0.05 0.14 0.07 Year.1996 1.06 0.44 0.81 0.34 0.69 0.29 0.94 0.39 1.02 0.42 Year.2007 1.32 0.41 1.18 0.37 0.80 0.25 1.21 0.38 1.79 0.56 Source: SUNASS,.2007.Water.Supply.and.Sewerage.Utility.Indicators.for.years presenting.their.PMO.might.explain.lower.increases.for.lo- 3.4 operational Performance cal.utilities. Common.measures.of.operational.performance.of.utilities. As compared to other countries in the region, tariff lev- including.access.to.safe.water,.productive.efficiency,.cost.of. els in Peru are low. While.it.should.be.acknowledged.that. water.billed,.number.of.staff.per.thousand.connections.and. input.prices.are.different.in.Peru.than.they.are.in.neighbor- quality.of.service.show.that.improvements.can.be.made.at. ing.countries,.it.should.also.be.pointed.out.that.there.are. both.LWUs.and.at.SEDAPAL. significant.differences.in.tariff.levels..Average.revenue.per. m3.sold.is.about.2.and.half.times.higher.in.Brazil.and.about. Access to safe water, mostly through piped networks double.in.Colombia.than.average.revenues.per.m3.sold.in. and household connections, has significantly improved Peru.(Figure.3.) from 1996 to 2007..According.to.SUNASS.indicators,.ac- cess.to.safe.water.in.the.LWU.service.areas.have.increased. from.71%.in.1996.to.82%.by.2007;.from.74%.to.84%.in.the. case.of.SEDAPAL.(see.Appendix.4)..However,.out.of.an.urban. Figure 3: Average Revenue for WS&S between population.of.17.1.million.people,.there.are.at.present.about. 2002­2007 (in USD/m3) 3.1.million.without.access.to.piped.water;.1.8.million.in.lo- 1.2 cal.WS&S.utilities.service.areas.and.1.3.in.SEDAPAL's..With.an. urban.population.projected.to.increase.by.3.8.million.over. 1 the.next.10.years,.this.number.is.expected.to.grow. 0.8 operating performance measured by productive ef- ficiency is poor..Productive.efficiency.refers.to.the.number. 0.6 of.cubic.meters.of.potable.water.produced.for.each.cubic. meter.billed.to.customers,.or.m3/m3_billed..In.the.case.of. 0.4 SEDAPAL,.this.has.not.changed.over.the.period.of.analysis,. remaining.at.1.58m3/m3_billed..Productive.efficiency.has. 0.2 worsened.in.the.case.of.LWU,.passing.from.1.72.m3/m3_ 0 billed.in.1996.up.to.1.91.m3/m3.billed.in.2007..From.inter- Brazil Colombia Peru national.experience,.well.managed.water.utilities.produce. Source: IB-NET,.Country.Report.for.Brazil,.Colombia.and.Peru,. between.1.05m3/m3_billed.(Public.Utility.Board,.Singapore). 2002­2007 and.1.33.m3/m3_billed.(EMOS,.Chile,.before.1998.privatiza- 8 Water.Utilities.In.Peru tion)..Had.SEDAPAL.improved.its.m3/m3_billed.from.1.58. efficiency.as.measured.by.quality.of.service.is.expressed.by. to.1.31,.it.would.have.generated.about.213,000.m3/day.of. the.number.of.hours.of.service.per.day..In.the.case.of.LWU,. water,.enough.for.almost.1.million.persons;.385,000.m3/day. the.number.of.hours.of.service.only.increased.from.about. in.the.case.of.LWU. 14.hours.per.day.in.1997.to.15.hours.per.day.in.2007..How- ever,.SEDAPAL.has.made.significant.improvements.in.quality. the cost of water billed to customers has increased of.service,.from.an.average.13.55.hours.per.day.in.1996.to. between 1996 and 2007..In.terms.of.cost.per.m3.of.water. about.21.3.hours.per.day.during.2007. billed.to.customers,.operating.performance.deteriorated. in.the.case.of.SEDAPAL;.its.costs.went.from.about.US$0.33/ m3.in.1996.up.to.about.US$0.44/m3.in.2007..LWU.costs.re- 3.5 financial Performance mained.the.same.at.US$0.40/m3..In.local.currency,.the.cost. of.m3.water.billed.increase.in.79%.for.SEDAPAL.and.33%.for. financial performance of the average local water util- LWU.(Figures.in.Appendix.5). ity is very weak..Most.of.them.show.a.negative.operating. margin,.as.they.are.using.their.depreciation.allowances.to. the number of staff per thousand connections has de- cover.operating.expenses..The.2007.operating.margin.of. creased in the case of lWus, while staff per connection large.LWU.as.a.group.is.­3%;.­8%.for.medium.size.LWU,. has increased at sedAPAl..In.the.case.of.LWUs,.operating. and.­15%.for.small.LWU.(Table.3)..As.such,.the.average.lo- performance.as.measured.by.staff.per.connection.has.im- cal.water.utility.was.not.able.to.pay.its.financial.obligations. proved.over.the.past.ten.years.with.staff.per.thousand.con- during.2007..Similar.or.worse.results.were.obtained.during. nections.decreasing.from.5.65.in.1997.to.3.46.in.2007..This. previous.years..In.such.circumstances,.financial.obligations. is.in.contrast.to.SEDAPAL.where.staff.per.thousand.connec- guaranteed.by.the.central.government.had.to.be.paid.by. tions.has.increased,.going.from.1.61.up.to.2.45.over.the.same. the.MEF,.specifically.those.obligations.with.international. period..However,.in.relation.to.water.billed.per.staff,.SEDAPAL. lenders.such.as.KfW.or.JICA. still.performs.better.than.LWUs,.as.it.billed.144.thousand.m3/ staff.compared.with.local.utilities.which.billed.66.thousand. By.contrast,.SEDAPAL.had.a.20%.operating.margin.for.2007,. m3/staff.during.2007..Nevertheless,.both.SEDAPAL.and.LWU. a.positive.result,.though.it.has.large.financial.obligations. perform.poorly.compared.with.EMOS'.achievement.(232. (Table.3.and.Appendix.6)..Had.water.utilities.reduced.their. thousand.m3/staff ).by.1998,.before.it.was.privatized. high.levels.of.Unaccounted.for.Water.to.a.25%.average,. SEDAPAL.would.have.increased.its.revenue.during.2007.in. Quality of service at lWus is poor though significant Soles.145.M.and.LWU.in.Soles.170.M;.changing.significantly. improvements have been made at sedAPAl. Operating. the.results.presented.in.Table.3.and.illustrated.in.Figure.4. Table 3: Simplified Water Utilities Income Statements, 2007 Local WS&S Utilities Large Medium Small Total SEDAPAL Operating.revenues.(Soles.M) 277.18 101.87 40.13 419.18 866.82 Earnings.before.interest.&.taxes.(Soles.M) ­7.73 ­8.14 ­6.10 ­21.98 174.86 Operating.Margin.(including.depreciation) ­3% ­8% ­15% ­5% 20% UfW 46% 49% 54% 48% 37% Source: Authors.with.figures.from.SUNASS,.indicators.2007,.and.utilities.financial.statements.when.available. 9 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) Figure 4: Lost Revenues through High Levels of If.reimbursable.contributions.were.included.in.the.balance. Unaccounted for Water, in Soles mil. 2007 sheets.no.water.utility.in.Peru.would.be.creditworthy,.as. all.of.them.would.have.a.debt/revenue.ratio.greater.than. 900 two,.SEDAPAL.included.(See.balance.sheets.in.Appendix. 800 145 6)..Without.including.COLFONAVI.reimbursable.obligations. 700 SEDAPAL's.debt/revenue.ratio.would.be.smaller.than.two. 600 and.that.of.the.average.local.water.utility.greater.than.three.. 500 With.a.debt/revenue.ratio.equal.to.1.87.SEDAPAL.is.in.the. 400 borderline.of.creditworthiness. 300 104 200 55 100 0 9 3.6 investment decision making Large Medium Small SEDAPAL Potential increase in revenues Operating Revenues in principle, investment planning at lWus occurs in through reducing UfW to 25% several stages and can involve a number of sector Source: Authors.with.figures.from.SUNASS,.indicators.2007,.and. agencies..According.to.current.legislation.in.place.since. water.utilities.financial.statements.when.available. 1994,.investment.programs.within.the.water.utilities'.ser- vice.area.are.to.be.approved.by.their.Board.of.Directors.. Poor.financial.results.are.confirmed.by.information.in.the. After.they.are.so.approved,.the.investment.program--as. utilities.balance.sheets..As.most.LWU.could.not.pay.their. part.of.the.PMO--must.be.discussed.with.SUNASS.to. debts,.accrued.principal,.interest.and.penalties.were.added. determine.the.tariff.implications..Tariff.increases--if.any-- to.their.liabilities.2.However,.water.utilities'.balance.sheets. would.need.to.be.linked.to.progress.in.the.implementation. might.not.always.show.these.figures,.especially.when.such. of.investment.programs..In.the.case.of.a.water.utility.under. liabilities.become.part.of.a.collective.dispute..This.is.illus- a.concession.contract.(e.g.,.Tumbes).the.investment.pro- trated.by.the."Reimbursable.Contributions".owed.by.water. gram.has.to.be.approved.by.the.institution.that.signed.the. utilities.to.COLFONAVI.by.virtue.of.Law.27045,.1998..This. contract.on.behalf.of.the.government..Also,.if.the.program. Law.forgave.debt.of.individuals.who.had.taken.loans.with. has.financing.from.the.central.government,.it.would.need. FONAVI,.a.housing.fund,.to.increase.their.access.to.WS&S. to.be.authorized.by.the.Directorate.of.Multi-Annual.Pro- and.instead.placed.it.on.the.books.of.water.utilities..While. gramming,.at.MEF. the.utilities.went.to.court.to.argue.article.2.of.this.law.as. unconstitutional,.it.was.dismissed.on.the.basis.that.the.gov- ernment.(ie:.local.government.owned.utilities).could.not. .Financial.problems.of.water.utilities.are.extensively.documented. 2. legally.dispute.laws.passed.by.the.government.(ie:.central. in.the.World.Bank.Publication."Opportunities for a Different Peru". government). Chapter.on.Potable.Water.and.Sanitation,.by.Iris.Marmanillo. Table 4: Water Utilities Debt/Revenue Ratios, 2007 Local WS&S Utilities Large Medium Small Total SEDAPAL Debt/revenue.ratio.with.COLFONAVI 5.13 8.61 7.61 6.21 2.62 Debt/revenue.ratio.without.COLFONAVI 2.80 3.93 3.14 3.11 1.87 Source: Authors.with.figures.from.SUNASS,.indicators.2007,.and.water.utilities.financial.statements.when.available. 10 Water.Utilities.In.Peru in practice, investment activities occur outside of the is.at.present.also.working.actively.to.overcome.these.prob- current legislation..During.the.1990s,.a.national.water. lems,.through.the.creation.of.INVERSAN. supply.program.(PRONAP).implemented.investments.in. most.LWU.service.areas.without.consulting.with.the.wa- ter.utilities..Recently,.the.program.Water.for.All.has.been. 3.7 summary of water Utilities in Peru implementing.investments.in.a.similar.manner..In.such.a. situation,.although.water.infrastructure.investment.may. The.current.market.structure.for.Local.Water.Utilities.is.a. be.badly.needed,.many.LWU.might.not.be.prepared.to.as- result.of.reforms.in.the.early.1990s..More.recently,.changes. sume.responsibility.for.the.newly.installed.infrastructure.. to.the.governance.structure.of.LWUs.represent.a.significant. Also,.as.such.investments.are.done.without.approval.of.the. improvement.and.might.help.prevent.political.cronyism. commercial.governance.structure.of.the.water.utilities.and. and.management.instability..The.institutional.framework.of. SUNASS,.tariff.increases.to.operate.and.maintain.the.new. the.sector.is.complex.and.harmonization.between.agen- infrastructure.may.not.be.granted. cies.could.be.improved..Formulas.to.determine.tariff.levels,. while.in.principle.set.by.the.regulator.based.on.economic. In.the.midst.of.this.reality,.the.KfW.financed.PMRI.program. principles,.have.not.been.widely.applied.and.tariffs.are.low- is.trying.to.help.LWU.work.as.financially.viable.concerns. er.than.those.in.neighbouring.countries..Operational.and. following.the.procedures.outlined.in.the.Peruvian.law.(see. financial.performance.of.utilities.is.weak.with.the.exception. Box.1)..A.similar.attempt.was.tried.in.the.late.1990s.(Pro- of.SEDAPAL.which.has.made.significant.improvements.over. grama.de.Acciones.Immediatas),.but.with.no.investment. the.past.decade..Finally,.investment.planning.decisions.do. component.as.an.incentive..The.Vice.Ministry.of.Sanitation. not.always.follow.current.legislation. box 1: kfw rapid impact measures Program (Programa de medidas de rapido impacto, Pmri) The.program.includes.a.grant.and.a.loan.from.KfW.to.MEF,.who.will.transfer.it.to.participating.local.water.utilities.(LWU). grant portion.finances.TA.to.LWU.to.help.them.work.as.commercially.viable.entities.in.line.with.current.legislation,.including:. (i).preparation.of.PMO.and.approval.by.SUNASS,.(ii).develop.model.of.exploitation.contract.between.local.municipalities.and. water.utilities.in.line.with.existing.regulations;.(iii).improve.governance.of.LWU.by.structuring.BoD.according.to.amended.. regulations. loan portion finances.investments.of.participating.LWUs..Investment.cost.recovery.will.be.reflected.in.new.tariffs..Loans.will. be.added.to.the.LWU.balance.sheet,.and.will.be.repaid.by.an.earmarked.portion.of.LWU.tariff.revenue.captured.by.a.trust.fund. (Fideicomiso).based.on.contractual.agreement.between.LWU.and.MEF. Source: Based.on.discussion.with.PMRI.manager. 11 4. loCal finanCing of infrasTrUCTUre ProJeCTs in PerU This.section.describes.the.market.for.infrastructure.invest- dicating).loans.to.large.corporations.or.special.purpose.en- ment.in.Peru,.including.the.main.sources.of.funding.in. tities..Leading.commercial.banks.are.interested.in.financing. financial.market,.an.overview.of.commercial.banks.and. infrastructure.projects,.provided.borrowers.are.creditworthy. private.pension.funds,.public.private.partnerships.and.the. and/or.use.special.purpose.loan.recovery.vehicles,.includ- impact.of.debt.investment.grade.rating. ing.trust.funds.(fideicomisos).and.other.credit.risk.mitiga- tion.instruments..Banco.de.Credito.group.has.experience.in. ports.and.BBVA.has.international.experience.in.most.infra- 4.1 main sources of funding in the structure.sectors. Peruvian financial market Bank deposits and savings have increased substan- Main.sources.of.funding.in.the.Peruvian.financial.markets. tially over the past decade..In.the.last.10.years.bank. include.the.Banking.Sector,.Private.Pension.Funds.(PPFs),. deposits.have.increased.by.about.US$.17.billion,.from. Insurance.Companies,.and.a.National.Development.Bank. US$13.billion.in.1998.to.US$30.billion..Savings.channeled. (COFIDE)..At.present.the.Peruvian.financial.market.is.char- by.banks.grew.from.about.21%.of.GDP.in.1998.to.about. acterized.by.its.high.liquidity.relative.to.the.domestic.de- 30%.3.What.is.also.relevant,.as.applied.to.the.discussion. mand.for.financing,.in.both.local.and.foreign.currencies,. in.this.note,.is.that.during.the.1998­2008.period.deposits. and.in.short.and.long.term.tenors;.e.g.,.up.to.18.years.for. denominated.in.national.currency.have.passed.from.25%. infrastructure.projects.and.30.years.for.government.bonds.. of.total.savings.to.45%..Increased.confidence.in.the.local. Overall,.private.suppliers.of.funding.in.the.Peruvian.financial. currency.is.the.result.of.good.macroeconomic.conditions,. market.handle.at.present.a.portfolio.of.investments.in.Peru. including.stable.exchange.rates.in.a.free.floating.market;. of.about.US$56.billion.or.45%.of.the.Peruvian.GDP,.and. e.g.,.last.ten.year.Soles.against.the.US.dollar.had.2%.varia- have.been.issuing.financing.instruments.of.about.US$.10. tion,.at.about.S3.0/US$. billion.per.year.over.the.last.four.years. leading banks could be ready to issue medium term loans to infrastructure provided that borrowers are 4.2 Commercial banks creditworthy..Most.funding.for.the.banking.sector.comes. from.saving.and.checking.accounts.held.by.nationals.(92%). sweeping reforms during the early 1990s opened the and.to.a.lesser.extent.from.foreign.sources.(8%)..Also,.debt. commercial banking sector in Peru to international held.by.Peruvians.and.the.Government.to.foreigners.makes. competition and leading commercial banks are now less.than.20%.of.GDP..As.a.result,.the.Peruvian.banking. looking to invest in infrastructure..Despite.competition,. system.seems.to.be.less.vulnerable.to.current.international. the.banking.sector.has.become.highly.concentrated.in.four. financial.turmoil.than.other.countries'.banking.sectors..The. banks.which.at.present.capture.more.than.86%.of.public. banking.system.was.issuing.an.average.of.US$5.5.billion/ savings..Banco.de.Credito.(a.Peruvian.Bank).with.35%.share. year.in.financing.instruments.over.the.last.4.years,.includ- is.the.largest;.Banco.Continental-BBVA.(Peruvian/.Spanish). ing.US$.1.2.billion/year.in.medium.and.long.term.financing. with.26%.is.the.second,.Scotia.Bank.(Canada).with.16%.is. (See.Appendix.7)..Interviewed.banking.executives.assert. the.third,.and.Interbank.(Peruvian).with.10%.is.the.fourth.. that.leading.Banks.are.ready.to.issue.loans.with.5­7.year. These.banks,.and.most.of.their.smaller.counterparts,.have. developed.highly.sophisticated.banking.practices.to.handle. their.investment.portfolio,.including.the.routine.use.of.local. .The.US.has.a.bank.deposit/GDP.ratio.equal.to.70%,.source:.McK- 3. and.international.risk.rating.agencies.when.issuing.(or.syn- insey.Institute.Global.Financial.Stock.Database. 13 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) maturities.to.infrastructure.projects--including.water--in. Figure 5: PPFs Investments in Public Services Peru.provided.borrowers.are.creditworthy. Infrastructure, 1999 and 2009 (USD) 3000 4.3 Private Pension funds, balance 2500 sheet and Project based finance of 2000 infrastructure Projects 1500 since the early 1990s, the goP has undertaken far 1000 reaching reforms in the pensions system..As.a.result,. pensions.of.both.public.and.private.sector.employees.are. 500 managed.by.private.companies.4.Privately.administered. 0 pension.funds'.(PPF).investments.in.Peru.have.grown.from. 1999 2009 none.in.1992.to.US$.2.4.billion.by.1999.and.to.US$18.4.bil- Water and sanitation Telecoms Transport Energy lion.by.April.2009;5.i.e.,.during.the.last.10.years.PPFs.invest- Source: Monthly.report.of.Peruvian.Private.Pension.Funds,.Nov. ments.in.Peru.increased.by.about.US$16.billion.becoming.a. 1999.and.April.2009.and.authors'.calculations. solid.source.of.incremental.financing.for.both.the.national. government.(US$4.5.billion).and.the.private.(US$11.5.bil- significant.PPF.funding.(US$0.5.billion).mainly.through. lion).sectors..Peruvian.PPFs.have.also.invested.in.overseas. project.based.financing,.by.involving.the.private.sector. markets.(US$2.2.billion,.12%.of.total)..Growth.of.such.funds. through.concession.contracts.and.using.guarantees.by.the. is.the.result.of.both.employees'.payroll.contributions.and. central.government,.and.partial.credit.risk.guarantees.from. financial.returns.on.PPF's.investments;.both.make.at.present. multilaterals. about.US$5.billion/year..(See.Appendix.8). PPFs.long.term.financing.in.infrastructure.for.public.services. the PPfs have become the most important institu- through.balance.sheet.financing.is.about.US$1.9.billion.and. tional investors in Peru, with an investment portfolio through.project.based.financing.is.about.US$1.billion..In. close to us$20 billion by june 2009. At.present.the.aver- both.cases,.obtaining.financing.from.PPFs.has.proven.to.be. age.age.of.contributors.is.between.30.and.40.years.and. challenging,.as.illustrated.in.the.following.examples. most.retirements.will.occur.only.after.15­20.years.time..As. a.consequence,.PPF.fund.managers.need.investment.in- struments.that.match.their.high.revenue.and.low.expense. 4.3.1 PPFsBalanceSheetFinancingin profile;.i.e.,.over.the.next.15­20.years.they.will.be.receiving. InfrastructureforPublicService increasing.contributions.plus.returns.from.their.portfolio.of. Companies investments.that.will.need.to.be.allocated.to.a.mix.of.instru- As.balance.sheet.investors,7.PPFs.have.invested.in.private. ments.of.various.risks.and.returns..To.increase.the.options. and.public.equity.and.bonds.issued.by.companies.man- of.PPFs.investments,.beginning.in.2001,.the.private.pension. funds.regulator.has.issued.regulations.to.allow.PPFs.manag- ers.to.allocate.financing.to.infrastructure.investments.6.By. 4. .Private.Pension.System.created.in.1992.(Law.Decree.25897).as.an. April.2009,.PPFs.investment.in.infrastructure.for.public.ser- alternative.to.the.government.National.Pension.System.(SNP). 5. .There.are.four.Private.Pension.Funds;.Horizonte.with.23%.market. vices.was.about.US$.2.9.billion. share,.Integra.32%,.Prima.31%,.and.Profuturo.14%. 6. .Lorena.Masias.Quiroga.and.Luis.Paz.Delgado.­.Inversion.de.los. PPfs investments in infrastructure are at present Fondos.de.Pensiones.en.Proyectos.de.Infrastructura,.April.2009. dominated by energy and telecoms (us$2.4 billion) 7. .Financing.that.will.appear.in.the.Balance.Sheet.of.the.company. (either.as.debt.or.equity).and.is.secured.with.its.assets.and.its.cash. using both balance sheet and project based financing.. flow.as.source.of.debt.payment.to.bondholders.and.other.lenders. Investments.in.transport.infrastructure.have.also.attracted. or.distribution.of.profits.to.equity.holders. 14 Local.Financing.of.Infrastructure.Projects.in.Peru aging.infrastructure.for.public.services..As.private.equity. box 2: enersUr, PPfs equity & bond investors--i.e.,.investing.in.shares.of.the.infrastructure. investments, and PPPs activist behavior companies.before.they.are.traded.publicly.in.the.stock. exchange--PPFs.have.participated.actively.in.a.private.in- Founded.in.1996.in.Peru.as.an.electricity.producer,.owned. frastructure.company.board.of.directors,.influencing.both. 100%.by.Suez.Tractebel,.ENERSUR.opened.its.shareholding. improvements.in.its.corporate.governance.and.profitabil- by.issuing.shares.through.a.private.equity.(PE).offering.for. about.US$55M.in.2004,.acquired.by.the.PPFs..Thereafter. ity..This.was.the.case.of.ENERSUR,.an.electricity.company.in. ENERSUR.had.its.initial.public.offering.(IPO).in.2005..By.this. Southern.Peru.(see.Box.2)..This.activist.experience--which. time.the.PPFs.holdings.were.valued.at.US$140M..PPFs.also. rests.on.the.belief.that.corporate.governance.is.imposed. funded.ENERSUR.purchasing.its.bond.issues.beginning. with.the.investor's.check.book--although.not.a.general. 2007. policy.in.the.PPFs,.might.be.needed.to.turnaround.corpo- When.PPFs.first.became.ENERSUR.PE.investors.they.be- rate.governance.and.operational.efficiency.of.water.utilities. haved.as.activists,.demanding:.(i).to.participate.in.the.board. in.Peru.8 of.directors.(BoD);.(ii).to.participate.in.the.auditing.commit- tee;.(iii).authority.to.appoint.the.internal.auditors..PPFs.used. their.leverage.in.the.BoD.to.push.ENERSUR's.IPO.in.2005. PPF.have.also.invested.in.publicly.traded.equity.(shares). knowing.that.their.shareholdings.acquired.privately.were. and.bond.(debt).issues.of.infrastructure.companies.listed.in. going.to.appreciate..By.2007.PPFs.holdings.were.valued.at. the.Lima.Stock.Exchange.(BVL)..To.be.listed.in.the.BVL,.infra- US$293. structure.companies.have.to.be.risk.rated,.so.investors.can. be.fully.informed.before.investing.on.their.equity.or.buying. Source: Summary.of.case.by.L..Masias.and.L..Paz.Delgado:.AFPs. Inversion.Proyectos.de.Infrastructura their.debt.instruments..There.are.a.number.of.infrastructure. companies,.privately.(energy.and.telecoms).and.publicly. owned.(e.g.,.ELECTROPERU),.listed.in.the.BVL.and.raising. financing.there;.but.no.water.utility.is.listed.in.the.BVL.yet.. ·. The.issuer.has.a.track.record.of.solvency.and.creditwor- SEDAPAL,.has.initiated.the.process.for.being.listed.4.years. thiness,.as.certified.by.a.risk.rating.agency.and.backed. ago.but.it.still.needs.to.complete.all.financial.disclosures.at. by.the.banking.sector; the.satisfaction.of.the.National.Council.of.Stocks.and.Values. ·. The.operating.partners.in.the.infrastructure.project. (CONASEV).and.has.to.get.the.opinion.of.two.risk.rating. should.have.demonstrated.successful.experience. agencies.working.in.Peru.9 As.a.result,.PPFs.have.allocated.significant.amounts.of.financ- ing.to.the.infrastructure.sectors.in.Peru,.through.project. 4.3.2 PPFsProjectBasedFinancingin based.finance,.most.of.it.during.the.last.four.years..At.pres- InfrastructureforPublicServices ent,.PPFs'.project.based.financing.is.dominated.by.the.toll. inPeru road.concession.projects.under.the.South.American.Region- Aware.that.infrastructure.for.public.services.projects.re- al.Integrated.Infrastructure.Initiative.(Iniciativa.de.Integracion. quired.large.amounts.of.financing.at.long.maturity.terms. and.that.PPFs.were.in.need.of.long.term.maturity.invest- 8. .When.asked.whether.they.were.aware.about.the.activist.investor. ment.instruments.to.match.their.revenue/expense.profile,. role.played.by.CALPERS.(California.Pension.Fund).in.improving. the.Peruvian.policy.makers.and.the.PPFs.regulator.set.the. corporate.governance.of.companies.they.invest.in,.PRIMA.PPF. following.conditions.for.PPFs.to.invest.in.project.based10. investment.officers.replied.they.were.not.at.that.stage.yet. 9. .Risk.rating.agencies.of.publicly.listed.companies.in.Peru,.include. financing.instruments: Apoyo./.FitchRating.and.Equilibrium.Clasificadora.de.Riesgos. 10. .Project.(based).finance.involves.the.creation,.by.a.sponsor,.of.a. ·. Concession.contracts.are.awarded.through.competi- separate.legal.and.economic.organizational.structure.to.obtain.fi- tive.bidding; nancial.resources.to.develop.and.manage.a.project..Repayment.of. debt.(loans.and.bonds).and.return.to.equity.rests.on.the.capacity. ·. Projects.should.be.above.US$10.million.or.equivalent. of.the.project.to.generate.cash.with.no.recourse.to.the.sponsor's. in.local.currency; balance.sheet.or.assets. 15 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) Regional.de.Sud.America,.or.IIRSA);.but.they.have.also.invest- quired.various.series.of.CAA.bonds.beginning.2001.for.about. ed.in.other.infrastructure.projects,.including.drinking.water,. US$10.million;.by.2003.PPFs.holding.of.CAA.bonds.were.US$. hydro-energy.inter-basin.systems,.and.electricity.networks. 18M..The.revenue.from.issuance.of.bonds.was.used.to.pay. (See.Table.5)..Waste.water.and.energy.projects.in.Peru.are.in. infrastructure.investments.for.the.project.and.to.pay.princi- the.pipeline.of.projects.of.potential.interest.for.PPFs. pal.and.interest.of.a.bridge.loan.and.other.related.expenses. A.review.of.a.sample.of.infrastructure.projects.financed.by. Consorcio.Agua.Azul.(CAA).took.full.design,.financing,.con- PPFs.shows.that.they.have.taken.actions.to.ensure.all.pos- struction.and.operation.and.maintenance.risks..PPF's.took. sible.conditions.to.recover.their.investments.are.in.place.. the.credit.(or.debt.default).risks..Both,.CAA.and.the.PPFs. Some.of.these.conditions.were.embedded.in.the.rules. felt.comfortable.taking.these.risks.because,.as.part.of.the. issued.by.the.PPFs'.regulator,.but.projects.seeking.fund- concession.contract,.CAA.got.a.take.or.pay.agreement.with. ing.had.to.include.special.contractual.arrangements.to. a.GoP.sovereign.guarantee.that.resulted.in.an.almost.cer- enhance.likelihood.of.the.project.expected.cash.flow.and. tain.cash.flow..Also,.CAA.offered.debt.seniority.status.to.its. the.payment.of.its.debts..The.inclusion.of.these.arrange- bonds.and.created.a.collecting.and.debt.reserve.accounts. ments.are.illustrated.by.Concession.Agua.Azul.(CAA,.2001),. controlled.by.its.creditors.12 Concession.Trasvase.Olmos.(CTO,.2004),.and.the.Toll.Road. Interoceanica.Segment.IV.concession.(2007).11.More.details. Concesion Trasvase Olmos (CTO) ­ A Regional on.these.arrangements.can.be.found.in.Appendix.10. Government Project Regional.Government.of.Lambayeque.awarded.a.US$242. Concession Agua Azul ­ A Water Utility Project M.technically.complex.inter.basin.transfer.project.to.CTO. SEDAPAL.awarded.a.concession.contract.for.a.2.m3/sec. drinking.water.production.plant,.near.Lima..Based.on.a.27. 11. .Overtime,.PPFs.financing.in.infrastructure.for.public.services. year.concession.contract.won.on.2000,.and.the.technical. presents.an.increasing.level.of.sophistication;.i.e.,.in.the.late.1990s. and.corporate.reputation.of.its.sponsors,.CAA.as.a.special. and.early.2000s.they.did.it.mostly.through.balance.sheet.finance. transactions,.more.recently.through.project.finance. purpose.company,.went.public.and.issued.bonds.in.the.Lima. 12. .CAA.and.CTO.Cases.are.presented.by.L..Masias.and.L..Paz.Del- Stock.Exchange.for.a.maximum.of.US$.45.million..PPFs.ac- gado.in.AFPs.Inversion.en.Proyectos.de.Infrastructura. Table 5: PPF's Project Based Financing in Infrastructure Project in Peru PPFs Total cost, financing, Maturity Name of project Year US$M US$M years Cost Concesion.Agua.Azul.(Potable.water) 2001 60 12 8 8.7% Olmos.Inter-Basin.Transfer.Concession 2004 240 60 13­18 N/A Toll.Road.Concession.Projects 2006­08 1,360 496 18 8% National.Energy.Network.Concession N/A 250* 51 18 N/A Other.infrastructure.projects.using.project.based. Various 1,000* 380 18 N/A financing Total 2,910 1,000 Sources: SBS.reports,.April.2009..Other.various.business.public.sources.. * Estimated.based.on.rules.for.PPF.investment.rules. 16 Local.Financing.of.Infrastructure.Projects.in.Peru in.2004.as.a.20.year.concession.contract..Based.on.its.con- independent.of.performance.of.any.kind..As.such,.a.market. tract,.CTO.as.a.special.purpose.company.planned.to.issue. has.been.created.where.the.DFBO.contractor.can.take.their. US$100.M.corporate.bonds.to.finance.its.concession.con- CRPAOs.and.exchange.them.for.cash.to.finance.their.invest- tract,.the.balance.was.to.be.financed.by.the.GoP.US$77.M,. ment.program..Investors.buy.CRPAOs.bearing.in.mind.that. CAF.US$45.M,.and.US$20.M.equity..PPFs.acquired.various. it.is.the.GoP.that.will.pay.when.they.are.due..Fitch.and.S&P. series.in.private.offerings.for.a.total.of.about.US$60.M.all. have.qualified.CRPAOs.as.not.materially.different.from.the. during.2006;.insurance.companies.and.other.public.agen- GoP.sovereign.debt.which.at.present.is.investment.grade.. cies.purchased.US$40.M..The.revenue.from.issuance.of. As.such.the.cost.of.financing.for.the.DFBO.contractors.can. bonds.has.been.used.to.pay.infrastructure.investments.for. be.as.cheap.as.the.GoP.sovereign.debt. the.project.and.to.pay.principal.and.interest.of.bridge.loans. and.other.financial.expenses.during.construction. 4.3.2.1 Allocation of Risks in Infrastructure Projects This.subsection.deals.with.the.allocation.of.risks.in.the. CTO.took.full.design,.financing,.construction.and.operation. sample.of.projects.described.in.the.previous.subsection.. and.maintenance.risks..PPFs.and.other.lenders.took.the. Table.6.outlines.the.key.information.of.the.contracts,.main. credit.risks..CTO.felt.comfortable.taking.its.share.of.risks.be- project.risks,.and.risk.mitigation.instruments.used.to.entice. cause.it.got.the.construction.contract.and.take.or.pay.con- risk.takers.to.take.the.risks.they.have.taken..All.contracts.in. tract.with.a.sovereign.guarantee..The.lenders.felt.comfort- the.sample.are.Design,.Build,.Finance.and.Operate.(DBFO). able.because.of.various.credit.risk.mitigations.instruments. Concession.Contracts;.where.concessionaires.have.to.raise. attached.to.the.concession.contract,.including.sovereign. the.funds.using.either.equity.or.loans,.do.the.construction. guarantee.of.the.GoP,.CAF's.Partial.Credit.Risk.Guarantee,. of.the.project,.and.operate.and.maintain.it.during.the.life. and.the.creation.of.a.trust.fund.to.ensure.payments.of.debt. of.the.concession..The.awarding.criteria.in.all.contracts.are. clear.and.simple;.i.e.,.lowest.tariff,.lowest.capital.subsidy,. The IIRSA Model and the Value of CRPAOs and.lowest.present.value.of.annual.remuneration..Source. The.South.America.Regional.Integration.Initiative.(IIRSA, Ini- of.funds.to.pay.debt.are.tariff.revenues.in.CAA.and.CTO.and. ciativa de Integracion Regional de Sud America).includes.the. central.government.in.the.case.of.Interoceanica. development.of.roads.connecting.various.South.American. Countries,.including.Interoceanica..Interoceanica.is.a.2,600. In.all.three.contract.risks.seem.to.be.allocated.to.the.party. km.toll.road.under.the.IIRSA,.linking.ports.in.the.Pacific. that.is.best.qualified.to.deal.with.the.them,.as.follows: (Peru).with.ports.in.the.Atlantic.(Brazil)..More.than.1,000.km. of.Tnteroceanica.will.be.developed.in.Peru.through.25.year. ·. Construction risks ­.In.all.three.contracts.construction. Design-Finance-Build-Operate.(DFBO).contracts.signed.by. risks.are.allocated.to.the.private.contractors;.however,. the.Ministry.of.Transport.(MoT).and.Private.Contractors. private.contractors.dealt.with.the.risk.differently,.for. example.CAA.took.full.risk,.while.in.the.cases.of.CTO. Although.forecast.traffic.volumes.justify.the.toll.roads,.full. and.Interoceanica.IV.the.contractors.were.allowed. cost.recovery.through.tolls.is.not.expected..As.such.the. to.use.Turn.Key.Contracts.for.the.construction.of.the. GoP.will.pay.for.Capital.Costs,.and.bidding.for.the.DFBO. infrastructure.(which.generally.are.more.expensive). contracts.was.done.on.a.minimum.capital.subsidy.basis,.to. awarded.to.a.partner.in.the.consortia.that.won.the. be.reimbursed.by.the.GoP.over.a.15.year.period,.once.the. contract. concession.gets.into.operating.phase..However,.according. ·. Demand Risks.­.In.all.three.contracts.demand.risks. to.the.concession.contract,.the.GoP.will.issue.Certificados. were.taken.by.the.private.contractors..In.CAA.and. de.Reconocimiento.de.Pagos.Anual.por.Obras.(CRPAOs). CTO.private.contractors.were.entice.to.take.this.risk.by. as.construction.progresses..The.CRPAO--denominated.in. including.a."Take.or.Pay".agreement.as.part.of.the.con- nominal.US$--is.defined.in.the.concession.contract.as.a. cession.contract..In.both.cases.the.take.or.pay.agree- GoP.irrevocable.payment.obligation,.freely.transferable,. ment.was.guarantee.by.the.central.government..In.the. 17 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) Table 6: Risk Matrix and Risk Mitigation Instruments in Sample Project Based Finance Concession Agua Azul (CAA) trasvase olmos (Cto) interoceanica iv Key concession contract information Type.and.cost DBFO.Contract DBFO.Contract DBFO.Contract US$60.million US$242.million US$300.million Awarding.criteria Lowest.tariff/m3 Lowest.Capital.Subsidy Lowest.present.value.of.annual.. remuneration Term 25 25 25 Source.of.debt. Tariff.revenues Tariff.revenues Tariff.revenues.no.linked.to.payment.. payment of.debt Risk Risk Main project Risk mitigation Risk mitigation Risk Risk mitigation risks taker instruments taker instruments taker instruments Construction.risk PC N/A PC ·. TKC.awarded.to. PC ·. TKC.awarded.to.consortia consortia ·. Equity.less.than.20% ·. Equity.less.than. 10% Demand.Risk PC ·. Take.or.Pay. PC ·. Take.or.pay. PC ·. High.profit.potential.as.only. SEDAPAL/CAA agreement O&M.paid.with.toll.revenues ·. MVC.guaran- ·. GoP.guarantees. tee.take.or.pay. TP.agreement contract Credit.or.debt. Local.PPFs,. Collecting.. Local. ·. Collecting.ac- Local. ·. GoP.CRPAO.irrevocable.pay- default.risk other.pri- account.. PPFs,. count.handled. PPFs,.. ment.obligation vate.inves- handled.by. other. by.creditors. other. ·. Trust.fund.to.handle.CRPAOs. tors creditors private. trust private. revenues investors investors ·. GoP.sovereign. ·. Goldman.Sachs'.credit.risk. guarantee and.total.return.swaps ·. CAF.PRC.. guarantee List.of.Acronyms.in.Table.6:.DBFO.­.Design,.build,.finance,.and.operate.contract;.PC.­.Private.Concessionaire;.MVC.­.Ministry.of.Housing. and.Construction;.TKC.­.Turn.Key.Contract;.CRPAO.­.Certificates.of.Payment.for.Avance.de.Obras. case.of.Interoceanica.IV,.demand.risk.was.taken.based. with.the.risks.differently..In.the.case.of.CAA,.the.finan- on.expected.profits.during.operation.and.maintenance. ciers.demanded:.(i).a.higher.financial.commitment.to. phase,.which.will.be.determined.by.toll.revenues.net. the.project.from.the.contractor,.who.contributed.25%. of.O&M.expenses.only. of.total.cost.of.project.as.equity;.and.(ii).to.handle.the. ·. Credit or debt default risk ­.In.all.three.contracts.the. entirety.of.the.concession.revenues.(through.the.col- credit.risks.were.taken.by.financiers,.which.include. lecting.account).in.such.a.way.that.they.made.sure. PPFs.as.a.main.local.provider.of.financing.for.infrastruc- payments.to.bond.holders.had.priority..In.the.case. ture.project;.however,.each.financing.structure.dealt. of.CTO,.as.per.the.concession.contract.the.financiers:. 18 Local.Financing.of.Infrastructure.Projects.in.Peru (i).created.a.Trust.Fund.to.handle.most.flow.of.funds. lic Private Partnerships (PPPs) in various infrastructure of.the.project.during.construction.(including.payment. sectors including water..PROINVERSION.(ex-COPRI).began. of.debt);.(ii).got.a.GoP.guarantee.for.debt.(corporate. activities.in.the.early.1990s.and.successfully.arranged.PPPs. bonds).to.be.issued.by.the.concessionaire;.(iii).got.a. in.infrastructure.sectors.ranging.from.outright.privatization. CAF.Partial.Risk.Credit.Guarantee..In.the.case.of.Inter- (telecoms.and.production.of.energy).to.BOTs,.to.concession. oceanica.IV,.as.per.the.concession.contract:.(i).GoP. contracts..Main.options.for.PPPs,.duly.supported.by.relevant. issue.an.irrevocable.payment.obligation,.CRPAOs.that. legislation,.are.grouped.in.three.main.categories: will.generated.funds.to.pay.principal.and.interest.of. bonds.bought.by.financiers;.(ii).CRPAOs.revenues.will. ·. Concession contracts based on final design (Licitaciones be.deposited.into.a.Trust.Fund.with.the.Bank.of.New. Publicas).­.Bidders.are.given.final.design.of.infrastruc- York.as.a.trustee;.(iii).Goldman.Sachs.issued.a.Credit. ture.projects,.upon.which.they.prepare.their.technical. Risk.Swap.to.cover.events.of.nonpayment.of.CRPAOs. and.financial.proposals.for.construction,.operating.and. by.the.GoP,.and.a.Total.Return.Swap.to.cover.the.event. maintenance.of.infrastructure..The.government.(vari- of.non.compliance.with.the.construction.contract. ous.infrastructure.ministries).believes.this.option.takes. too.long.to.mature.and.might.be.too.costly.if.it.does. From.the.sample.of.projects.analyzed,.it.seems.that.PPFs. not.materialize. have.accumulated.increasingly.sophisticated.experience.in. ·. Concession contracts based on preliminary designs ­.Bid- providing.long.term.local.financing.for.large.infrastructure. ders.are.given.main.technical.parameters.of.technolo- projects.in.Peru..As.such,.based.on.this.experience.it.seems. gies.to.be.used.and.quality.of.service.to.be.attained. that.PPFs.can.provide.financing.for.infrastructure.projects. based.on.preliminary.system.design.and.planning.. with.various.degrees.of.risk.provided.sound.risk.mitiga- With.this.information,.bidders.present.their.technical. tion.instruments.go.as.part.of.the.concession.(or.project. and.financial.proposals.for.doing.final.design,.construc- finance.contracts)..Sovereign.guarantees,.partial.credit.risk. tion.and.operation.and.maintenance.of.the.proposed. guarantees,.and.control.of.flow.of.funds.(using.Trust.Funds. infrastructure. with.sound.loan.recovery.mandates).seem.to.be.the.most. ·. Concession contracts based on private initiative proposal.­. common.risk.mitigation.instruments.that.can.facilitate.PPF. Private.sector.can.identify.projects.that.it.believes.are. financing.for.infrastructure.projects. needed.to.solve.infrastructure.problems..Based.on.this. identification.it.can.present.a.proposal.to.a.ministry.or. Assuming.the.PPF.have.reached.their.ceiling.for.investments. other.relevant.agency,.which.can.(or.cannot).accept,. in.infrastructure.(at.16%.of.their.portfolio),.and.assuming.they. in.a.written.notice,.as.being.of.interest.for.the.govern- will.have.about.5.billion/year.to.invest.over.the.next.several. ment..Based.on.this.acceptance.notice.the.private.pro- years,.then.PPFs.investment.managers.will.look.to.allocate. ponent.develops.a.design,.build,.operate.and.maintain. US$800.million/year.on.infrastructure.projects..Allocating.this. (DBO).proposal..Once.the.DBO.proposal.is.presented,. amount.in.infrastructure.project.in.Peru.will.not.be.an.easy. the.government.opens.a.public.tender.process,.in. task.because:.(i).PPFs.are.not.allowed.to.finance.100%.of.a. which.a.third.party.tenderer.can.participate..If.a.third. project,.and.(ii).those.infrastructure.projects.in.need.of.financ- party.tenderer.offers.a.more.competitive.bid,.the.origi- ing.might.not.be.ready.to.arrange.the.sound.risk.mitigation. nal.private.proponent.of.the.project.has.the.right.to. instruments.demanded.by.experienced.financiers. re-bid.13.Under.this.option,.if.the.private.sector.finances. 100%.of.the.deal,.it.does.not.have.to.pass.the.approval. 4.4 Public Private Partnerships in the .This.option.was.originally.conceived.for.very.localized.service. 13. water and sanitation sector infrastructure.projects.like.malls.(e.g.,.Larco.Mar.Mall.concession). public.parking.lots.etc..However,.it.began.to.be.utilized.for.pre- senting.the.recent.waste.water.treatment.plants.in.Metropolitan. the Peruvian government has an independent agency Lima..A.new.law.(DL.1012).had.to.be.passed.to.make.a.sound.use. (Proinversion) with ample experience arranging Pub- of.this.option.in.infrastructure.projects. 19 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) of.the.National.System.of.Investment.(SNIP),.as.the. Local.Banks.seem.to.be.ready.to.finance.this.PPP.waste.wa- government.does.not.need.to.allocate.budget.for.it. ter.project..A.second.waste.water.treatment.plant.project.is. in.the.pipeline.(Chira,.6.5.m3/sec). Within.this.PPP.framework,.PROINVERSION.awarded.a. concession.contract.for.a.water.supply.production.plant.in. Lima,.Concession.Agua.Azul.(CAA).in.the.early.2000s..CAA. 4.5 The impact Peruvian Debt investment sells.potable.water.to.SEDAPAL.who.pays.for.it.using.tariff. grade rating revenues..In.this.concession.contract.the.contractor.was. responsible.for.arranging.100%.of.the.financing.through. Peruvian debt instruments in the international market equity.and.loans..As.outlined.in.Table.6,.the.PPFs.and.other. currently have investment grade..Both.Fitch.Rating.(April. local.financiers.took.substantive.financing.risks..At.present. 2008).and.then.Standard.and.Poor's.(July.2008).upgraded. CAA.has.an.AAA.APOYO/Fitch.risk.rating.in.the.Peruvian. Peruvian.issues.of.debt.(bonds).in.foreign.currency.to. market. investment.grade..As.a.consequence.the.cost.of.debt.to. Peru.became.more.competitive.in.both.international.and. more recently, private operators active in the water, local.markets,.in.both.local.currency.and.foreign.currency. sewerage and waste water treatment sectors are try- denominations..The.CRPAOs.issued.recently.to.finance.toll. ing to act as originators of concession contracts, fully road.projects,.as.irrevocable.GoP.payment.obligations,. financed by them using the "private initiative proposal" although.not.defined.as.public.debt.enjoys.a.risk.rating. option for PPPs. The.concession.contracts.are.to.be.award- equal.to.the.GoP.Debt.as.Fitch.Rating.and.Standards.and. ed.to.the.winning.proposal.by.the.MVCS.(as.a.guarantor. Poor's.qualify.them.as.materially.equivalent.to.Peruvian. on.behalf.of.the.GoP).together.with.SEDAPAL.(as.payer.for. Debt..CRPAOs.could.be.used.to.issue.debt.to.finance.infra- the.infrastructure.services)..As.the.source.of.payments.will. structure.projects.at.the.same.cost.as.that.obtained.by.the. be.tariff.revenues.collected.by.SEDAPAL,.it.is.thought.that. GoP..According.to.a.law.related.to.the.Peruvian.Debt.Law. SEDAPAL.can.issue.Irrevocable.Certificates.of.Payments.for. (Ley.28880),.the.GOP.cannot.issue.CRPAOs.in.excess.of.0.5%. Capital.Investments.whose.value.is.to.be.estimated.using. of.the.GDP.each.year,.which.results.in.an.annual.ceiling.of. the.fixed.portion.of.the.tariff.that.remunerate.capital.invest- about.US$600.million/year.for.Peruvian.CRPAOs. ments.(Remuneracion.por.Inversion,.RPI)..The.certificate. of.payment.is.conceived.to.be.freely.transferable.and.with. no.link.to.performance,.similar.to.the.CRPAO.issued.by. 4.6 summary of local financing of the.GoP.in.the.IIRSA.projects..The.private.sector.has.also. infrastructure Projects in Peru requested.a.guarantee.from.the.GoP,.stating.that.it.will.pay. in.case.SEDAPAL.cannot.pay..Proponents.of.this.guarantee. In.recent.years,.private.pension.funds.have.become.the. call.it."Nil Guarantee",.as.future.certificate.payments.will.be. most.important.institutional.investors.in.Peru.and.have.ex- in.SEDAPAL.budget.rather.than.in.MVCS.budget..With.a."Nil perience.in.financing.infrastructure.through.project-based. Guarantee".of.the.GoP,.private.investors.in.the.waste.water. and.balance.sheet.financing..PPFs.may.be.willing.finance. sector.believe.they.will.get.cheap.financing.in.the.financial. the.WS&S.sector.provided.that.sound.risk.mitigation.instru- market,.as.they.will.be.using.the.investment.grade.risk.rat- ments.are.included.in.contracts.and.could.have.up.to.$800. ing.of.the.GoP. million/year.to.allocate.to.infrastructure.projects..Most.PPPs. in.infrastructure.projects.have.been.arranged.through.PRO- One.project.has.already.been.awarded.using.the.private. INVERSION..The.upgrading.of.Peruvian.issues.of.debt.has. initiative.PPP.option,.the.13m3/sec.Taboada.Waste.Water. made.the.cost.of.debt.more.competitive.in.both.interna- Treatment.Plant..Financing.is.to.be.raised.by.the.private.in- tional.and.local.markets..CRPAOs.issued.recently.to.finance. vestors.in.local.currency..Total.financing.is.estimated.at.the. a.tool.road.project.as.irrevocable.GoP.payment.obligations. equivalent.of.US$200.million.(600.million.soles)..PPFs.and. were.given.the.same.rating.as.GoP.debt. 20 5. finanCing waTer UTiliTies This.section.addresses.the.current.status.of.investment. Investments.handled.by.the.APT.program.are.not.done.ac- activity.in.the.urban.water.sector,.multilateral.and.bilateral. cording.to.the.plans.of.the.water.utilities,.as.they.are.not. financing,.financing.through.the.private.financial.market,. included.in.their.PMOs,.except.perhaps.in.the.case.of.SEDA- investment.demands.of.the.water.utility.sector.and.the.eco- PAL..APT.program.does.investment.programming.for.all.its. nomic.costs.of.the.business-as-usual.scenario. investments.and.gets.them.approved.by.the.MEF. 5.1 investment activity in the Urban 5.2 multilateral and bilateral financing water sector At.present.most.investment.in.the.water.utilities'.service. Investment.activity.in.the.Urban.Local.Utilities'.service.areas. area.is.financed.through.capital.subsidies.from.the.Water.for. was.paralyzed.from.the.early.2000s.to.2006,.with.the.excep- All.program.of.the.central.government.(75%)..The.source.of. tion.of.SEDAPAL..Recently,.investment.activity.has.dramati- this.funding.is.government.tax.revenue,.complemented.by. cally.increased,.from.US$89.million.in.2006,.more.than.dou- loans.from.the.World.Bank.(e.g.,.Pronasar),.IADB,.KFW,.JBIC. bling.in.2007.(US$.184.million).and.increasing.to.US$556. and.other.donors..Tariff.revenue.also.plays.a.role,.dominated. million.in.2008..This.increase.is.explained.by.the.launch.and. by.SEDAPAL.that.contributed.19%.of.total.funding.(3%.tariff. implementation.of.the.Water.for.All.program.(APT),.started. income.and.16%.FONAFE.reinvested.profits)..Financing. in.February.2007..Between.2007.and.2008,.APT.channeled. with.loans.to.water.utilities.makes.6%;.this.figure.might.be. investments.for.about.US$467.million.in.most.urban.areas. underestimated.as.it.only.includes.loans.to.SEDAPAL..Loans. serving.the.water.utilities..By.the.year.2008,.APT.program. to.LWU.are.included.in.the.item."ODA.loans.to.the.Central. dominated.the.investment.activities.in.the.urban.water.sec- Government". tor,.handling.investment.projects.for.about.US$412.million. or.74%.of.all.investments.implemented.in.the.urban.water. Most.loans.to.the.water.utilities.are.from.development. utilities.service.areas..Compared.with.APT.program,.LWU's. organizations,.and.as.such.they.include.concessional.con- own.investment.programs.have.been.very.limited.over.the. ditions,.including.a.considerable.grace.period,.very.com- last.three.years,.although.they.have.been.reactivated,.be- petitive.rate.of.interest.(IBRD,.IADB).or.subsidized.rates.of. ginning.2007.(Table.7.and.Appendix.9). interest,.long.repayment.periods,.and.disbursement.criteria. Table 7: Investment Activity in Urban Water Utilities Service Areas (Million of US$) 2006 2007 % 2008** % Water.for.All.Program.(APT)* 0 55.00 33% 411.67 74% Water.Utilities.Inv..(excludes.APT) 88.67 129.27 70% 144.67 26% .-.Sedapal 74.33 87.93 48% 99.67 18% .-.Local.Water.Utilities 14.33 41.33 22% 45.00 8% total 88.67 184.27 100% 556.33 100% Sources: Sunass.indicators.2006.&.2007;.SEDAPAL.Memoria.Annual.2007..FONAFE.reports.2008.. *Includes.Sedapal,.**.preliminary. 21 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) linked.to.investment.program.milestones.rather.than.to. ment.needs.would.be.US$.3.billion.or.about.US$420.million. financial.soundness.of.the.water.utilities..Despite.all.these. per.year.(see.Table.9.and.Appendix.7). conditions,.most.LWU.find.it.difficult.to.repay.them.because. of.their.precarious.financing.conditions..Only.in.recent.years. has.SEDAPAL.been.serving.its.debt.to.ODA.lenders.(Table.8. 5.5 The economic Cost of and.Appendix.10). Underperforming lwU and the gains of Commercializing Them 5.3 financing through the financial The.LWU.sector.has.imposed.a.sizeable.economic.cost.to. market the.Peruvian.society..This.cost.is.shouldered.in.part.by.the. central.government.and.in.part.by.customers. As.this.report.was.being.written,.a.large.concession.con- tract.in.the.water.and.sanitation.sector.was.being.awarded,. Central Government share of the economic cost of underper- the.Taboada.waste.water.management.project..As.outlined. forming utilities.­.The.central.Government.(MEF),.using.tax- above,.the.winner,.ACS.from.Spain,.is.expected.to.raise. payers'.money.has.repeatedly.bailed.out.all.LWUs.paying. funding.for.about.US$200.million.in.the.local.financing. their.debts.to.multilateral.and.bilateral.organizations.(by. market..Aside.from.this,.as.also.explained.above,.in.the.early. virtue.of.the.sovereign.guarantees).and.issued.decrees.to. 2000s,.a.2m3/sec.potable.production.facility.was.awarded. forgive.water.utilities'.value.added.tax.debts,.collected.by. which.was.financed.with.private.sector.financing.for.about. them.but.not.transferred.to.the.tax.authority..Also,.centrally. US$.60.million.(US$.15.M.equity.and.US$45.M.bonds). funded.autonomous.agencies,.under.the.sector.ministries. (MVC),.have.financed.water.and.sewerage.infrastructure. investments.in.the.water.utilities'.jurisdictions;.US$.2.billion. 5.4 investment Demands of the during.the.1990s,.and.about.US$0.5.billion.during.the.last. water Utility sector three.years. It.is.estimated.that.to.achieve.the.MDG.targets.in.water.and. LWU's Customers share of the economic cost of underperform- sewerage,.Peru.would.need.financing.in.the.order.of.US$. ing utilities.­.Local.governments,.responsible.for.provision. 1.8.billion.over.the.period.2006­2015,.about.US$250.mil- of.local.public.services.since.the.late.1980s,.after.receiving. lion/year..If,.in.addition,.waste.water.treatment.plants.are. in.ownership.LWUs.used.them.to.pay.political.favors.rather. included.for.pressing.environmental.reasons,.total.invest- than.strengthening.them.to.work.according.to.commercial. table 8: funding sources of investment in the urban Water utilities (millions of us$) 2006 2007 % 2008* % CG.tax.revenue.and.ODA.loans.to.CG 14.33 66.27 36% 416.67 75% Tariff.generated.funds.(SEDAPAL) 15.00 15.00 8% 18.70 3% ODA.loans.to.SEDAPAL 59.33 57.33 31% 32.97 6% CG.transfers.to.SEDAPAL.(includes.FONAFE) -- 45.67 25% 88.00 16% total 88.67 184.27 100% 556.33 100% Sources: SUNASS.indicators.2006.and.2007,.SEDAPAL.Memoria.Annual.2007..FONAFE.reports.2008.. *.preliminary. 22 Financing.Water.Utilities Table 9: Urban Water Sector Investment Needs 2009­2015 (Millions US$) Water and Sewerage Waste Water Treatment Plants Expansion Rehabilitation Total New Rehabilitation Total Total SEDAPAL 852 100 952 367 0 367 1,319 Other Utilities 603 227 831 765 32 797 1,628 Total 1,455 327 1,783 1,132 32 1,164 2,947 Source: Ministry.of.Housing,.Construction,.and.Sanitation.­.Plan.Nacional.de.Saneamiento.2006­2015,.updated.deducting.investments. during.2006,.2007,.and.2008. principles.to.comply.with.their.public.service.obligations.. markets.would.be.equal.to.the.tremendous.economic.cost. As.a.result,.most.LWUs.have.imposed.a.heavy.cost.to.the. identified,.as.MEF.would.stop.paying:.(a).LWU.financial.obli- customers.in.their.jurisdictions,.by.extreme.rationing.of. gations.with.bilateral.and.multilateral.organization;.(b).LWU. services.in.large.urban.centers.in.the.Coastal.Region.(e.g.,. tax.obligations;.and.(c).LWU.infrastructure.investments,.and. Piura,.Lambayeque,.La.Libertad,.Ica,....).and.by.forcing.them. as.customers.would.be.receiving.full.service.commensurate. to.build.water.storage.facilities.in.their.houses;.by.having.a. to.the.tariffs.they.pay..Of.course,.enabling.LWU.to.cover. large.proportion.of.customers.in.their.service.areas.without. their.full.cost.will.not.happen.overnight.and.will.not.hap- absolute.access.to.safe.water.in.all.regions;.and,.by.forcing. pen.without.intense.special.purpose.policy.making..The. those.without.access.to.the.network.to.pay.high.prices.for. focus.of.such.policy.making.will.need.be.completing.the. water.they.purchase.from.private.vendors..Also,.as.most. full.commercialization.of.LWU..The.options.to.facilitate.local. LWU.face.financial.difficulties,.they.hardly.cover.their.op- financing.for.LWU.presented.in.section.7.1.and.7.2.could.fit. erating.costs.leaving.their.infrastructure.without.proper. as.policy.instruments.of.such.policy.making.effort. maintenance,.which.imposes.the.additional.economic.cost. of.rapid.infrastructure.deterioration.and.need.for.rehabilita- tion.investments..High.levels.of.unaccounted.for.water.also. 5.6 summary of financing water Utilities impose.additional.economic.costs. Investment.activity.in.the.WS&S.sector.has.dramatically. The.outlined.economic.costs.are.estimated.to.be.net.of.the. increased.in.the.past.few.years,.mainly.due.to.the.launch. benefits.received.by.customers,.which.are.mostly.reflected. and.implementation.of.the.Agua.para.Todos.program..Mul- in.the.tariff.they.pay.for.water.services.received.from.the. tilateral.and.bilateral.donor.funding.is.channelled.through. LWUs..Tariffs.were.increased.to.cover.O&M.costs.plus.invest- the.APT.program.but.there.are.also.ODA.loans.to.water.utili- ment.cost.of.those.utilities.being.financed.by.Multilateral. ties.and.several.concessions.in.the.WS&S.sector.have.been. and.Bilateral.organizations. financed.privately..It.is.estimated.that.Peru's.investment. needs.to.meet.the.MDG.are.in.the.order.of.$420.million. Gains of having a LWU model of superior performance able per.year..Meanwhile,.the.cost.of.underperforming.utilities. to raise financing in the local Capital markets.­.The.gains.of. poses.a.significant.burden.on.both.the.government.and.on. enabling.LWUs.to.finance.capital.expenses.through.capital. consumers. 23 6. barriers for loCal PrivaTe finanCing Based.on.the.review.of.water.utilities.in.Peru.and.current. management capacity and instability weakens the financing.arrangements.for.infrastructure,.a.number.of. confidence of lenders. The.2008.change.in.regulations. barriers.have.been.identified.which.stand.in.the.way.of. regarding.LWUs'.boards.of.directors.should.improve. moving.the.sector.from.its.dependence.on.direct.public. management.stability..However,.even.with.clear.policies. financing.or.guarantees.to.a.more.sustainable.model. for.improving.the.commercial.governance.of.LWU,.such. in.which.local.water.utilities.get.the.financing.based.on. governance.changes.take.time..Management.capacity. their.own.creditworthiness..Issues.which.would.need.to. may.also.be.a.problem.which.is.linked.to.poor.salaries.and. be.addressed.include:.capacity.and.performance.of.local. high.turnover.when.trained..Further,.LWU.management's. utilities;.capacity.of.local.governments;.coordination.of. capacity.to.map.the.interests.of.various.stakeholders.and. the.central.government's.agencies,.strengthening.of.na- numerous.fragmented.decision-makers.and.to.design. tional.strategic.planning.and.policy.making;.confidence.of. strategies.to.negotiate.with.them.according.to.own.inter- investors;.and.enforcement.and.compliance.to.the.legal. ests.is.limited. framework. lWus capacity for planning and procurement needs strengthening..Most.LWUs.have.not.yet.built.a.sound. 6.1 Capacity and Performance of Utilities long-term.Investment.Plan,.which.is.the.basis.for.prepar- ing.five.year.investment.programs.and.for.negotiating.tariff. Most.water.utilities.in.Peru.have.a.poor.track.record.of. increases.with.SUNASS..There.is.limited.capacity.to.arrange. financial.and.operating.performance,.which.has.limited. procurement.processes.and.financing.strategies..Water. their.attractiveness.to.financiers..This.includes.an.uneven. utilities.have.limited.experience.in.arranging.activities.to. economic.capacity.to.borrow.and.weaknesses.that.limit.the. identify,.prepare.and.process.investments.proposals.before. confidence.of.lenders. relevant.authorities..They.have.less.experience.in.tendering. and.contracting..There.may.also.be.some.bad.memories. Weak cash-flows limit the water utilities' access to fi- regarding.the.reluctance.to.change.even.in.the.middle.of. nance..Under.the.present.scenario.of.business.as.usual,. financial.collapse,.as.demonstrated.by.the.case.of.EPS.Grau. with.current.tariffs.levels,.high.volume.of.unaccounted. in.Piura. for.water.remaining.unchanged.and.increasing.operating. costs,.most.utilities.have.no.capacity.to.borrow.as.they.can- most lWu lack experience of using fiduciary ar- not.generate.a.positive.cash.flow..Though.tariff.increases. rangements that might help them access financing and.efficiency.improvements.would.likely.improve.the. from local investors..The.experience.of.infrastructure. financial.performance.of.utilities,.complementary.improve- finance.in.Peru.shows.that.institutional.investors.may. ments.in.corporate.governance.would.be.needed.to.attract. be.willing.to.provide.financing.to.local.water.utilities. private.local.lenders..Also,.the.local.utilities.financial.obliga- provided.sound.fiduciary.arrangements.to.recover.their. tions.derived.from.the.FONAVI.debt.of.reimbursable.contri- investments.are.in.place..For.the.time.being,.most.local. butions.weaken.their.ability.to.become.creditworthy..LWUs'. water.utilities.lack.experience.with.fiduciary.instruments. debts.are.large.and.disproportionate.to.their.tariff.revenues.. to.secure.revenue.and.service.debt.and.small.utilities. Policy.makers.will.need.to.find.ways.to.restructure.debts.of. have.less.capacity.to.sort.out.financial.processes.and.may. LWU--especially.those.owed.to.COLFONAVI--in.parallel. need.specific.treatment. with.improvements.in.corporate.governance.and.opera- tional.and.financial.efficiency. 25 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) 6.2 Capacity of local governments ·. Capacity.to.implement.policies.and.plans.needs. strengthening..This.is.manifest.in.the.low.number.of. improvements to the capacity of local governments to permanent.staff.to.undertake.national.strategies.and. act as directors for local utilities and to plan provision policies.to.enable.local.utilities.improve.their.perfor- of public services are needed..It.is.perceived.that.politi- mance.and.become.key.vehicles.to.achieve.improve. cal.interference.in.management.of.LWUs.still.exists.despite. access.to.water.and.sanitation.services.in.Peru. governance.changes.decided.in.2008..Policy.makers.will. need.to.find.ways.to.overcome.political.pressures.and.gov- in parallel, the government would need to address ernance.issues.with.the.purpose.of.improving.capacity.to. sector regulation through sunAss. Although.theoreti- comply.with.laws.and.regulations..The.policy.challenge.will. cally.fixed.for.5.years,.tariff.increases.are.not.predictable. be.needed.to.do.so.through.minimal.alterations.of.the.legal. enough.since.they.can.be.deferred.by.SUNASS.as.a.mat- framework,.perhaps.enabling.a.possible.temporal.takeover. ter.of.penalty..Similarly,.there.is.a.perception.in.the.sector. of.water.utilities.to.revert.to.local.government.after.full. of.a.regulatory.risk.due.to.uncertainties.in.the.regulatory. commercialization.and.full.coverage.of.service.is.achieved.. process. Avoiding.alteration.of.the.legal.framework.is.not.because. the.laws.are.perfect,.but.because.current.administration-- moreover, the government should consider that grants without.qualified.majority.in.the.Congress--has.found.it. may act as a barrier for other sources of financing. difficult.to.pass.far.reaching.laws. Grants.through.the.Agua.para.Todos.program.led.by.the. government's.MVCS.are.the.cheapest.source.of.finance.. local governments have a limited ability to develop Grant.financing.without.a.clear.link.to.LWUs'.performance. indicative plans for improving provision of public ser- improvement.objectives.may.prevent.them.from.making. vices in their geographical jurisdictions..Urban.planning. efforts.to.secure.other.sources.of.finance..Overall,.increased. experience.of.local.infrastructure.for.public.services.(e.g.,. integration.in.PMOs,.investment.grants.and.operational. water,.drainage,.solid.waste,.and.local.roads).and.design.of. budgets.seems.necessary.for.consistency.and.to.prevent. financing.strategies.at.the.local.government.level.is.weak.. inflated.perception.of.regulatory.risks. When.urban.planning.is.weak.and.without.well.defined. milestones,.the.local.government.will.be.ill.positioned.to. properly.negotiate.its.exploitation.contract.with.the.LWU. 6.4 Confidence of investors despite market liquidity, a number of barriers stand in 6.3 Coordination of Central government the way between the lWus demand for financing and agencies, Plans and strategies local supply..Major.institutional.and.other.investors.in.the. financial.market.are.active.in.the.infrastructure.sector.and.it. While the goP has put a focus on increasing access to seems.that.the.financial.market.is.very.liquid,.relative.to.the. water through the Water for All program, there are a size.of.the.local.market..However,.confidence.of.investors.in. number of areas that require improved coordination relation.to.the.LWU.sector.is.weak..There.is.a.poor.percep- to meet the ambitious sector objectives..These.areas. tion.of.water.utilities'.corporate.governance,.including.fear. include: of.political.interference,.lack.of.corporate.accountability.and. management.instability..This.is.compounded.by.poor.finan- ·. Sector.strategic.planning.and.policy.needs.strengthen- cial.track.records.at.many.utilities. ing..At.present,.reforms.to.the.National.Water.Director- ate.(DNS).to.improve.its.strategic.planning.and.policy. As.a.consequence,.there.is.a.perception.that.any.finan- making.role.are.planned..It.is.hoped.that.this.would. cial.arrangement.with.water.utilities.will.require.a.GoP. streamline.APT.and.other.programs.according.to.the. guarantee..Meanwhile,.local.governments.seem.unable. water.sector.strategic.goals.and.objectives. to.issue.guarantees.as.these.can.be.challenged.by.new.lo- 26 Barriers.for.Local.Private.Financing cal.authorities.that.are.elected.in.three.years.term..Policy. 6.5 enforcement and Compliance to legal makers.will.need.to.find.ways.to.shift.financing.risks.away. framework from.the.Ministry.of.Finance.and.direct.them.toward.local. institutional.and.other.financiers..The.rational.is.that.once. there are no legal constraints for water utilities to ac- the.institutional.investors.take.the.risk,.they.will.push.for.a. cess financing in the local markets..The.WS&S.Law.(Ley. dramatic.improvement.in.LWU.corporate.governance,.as. 26338,.1994).and.its.recently.amended/enhanced.bylaws. the.recovery.of.their.investment.will.depend.on.it. (DS.23­2005.MV).provide.a.modern.framework.for.the.com- mercialization.of.water.utilities.according.to.private.com- None.of.the.utilities.in.Peru.have.been.rated.by.an.inde- pany.law..The.regulations.which.have.been.in.place.since. pendent.risk.rating.agency,.though.several.such.agencies. 1994.are.clear.in.relation.to.cost.recovery.and.tariff.setting.. are.currently.active.in.the.infrastructure.sector..Yet,.a.rating. Similarly,.contractual.arrangements.between.the.local.mu- alone.would.likely.not.help.a.water.utility.secure.financing. nicipalities.and.water.utilities.are.clearly.defined. from.the.private.market;.PPFs,.the.most.important.institu- tional.investors.in.Peru,.would.require.bonds.to.hold.an.AA. however, the experience of the lWu sector in Peru minus.rating..Without.substantial.restructuring,.water.utili- shows that there is weak compliance to the legal frame- ties.in.Peru.would.likely.be.below.this.rate. work overall and that laws are not adequately enforced. This.is.highlighted.through.the.fact.that.the.regulator.has. not.been.able.to.set.tariffs.based.on.long.term.average. costs.of.optimized.master.plans..Further,.despite.the.clear. legal.framework,.concession.contracts.between.most.mu- nicipalities.and.utilities.have.not.been.signed. 27 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) box 3: Direct observations from the field The.study.exposed.the.reality.of.the.Peruvian.water.supply.and.sewerage.sector..In.Peru,.all.51.municipal.water.supply.and. sewerage.utilities.are.publicly.owned..However,.the.contrast.between.the.financial.and.operational.performance.of.the.capital. city,.Lima,.and.other.municipalities.is.striking..Besides.SEDAPAL,.the.water.utility.operating.in.Lima,.no.other.water.utility.in.the. country.is.able.to.finance.investments.with.medium-term.loans.from.private.banks..In.addition,.SEDAPAL.possesses.a.more.in- novative.financial.scheme,.allowing.it.to.capture.the.majority.of.loans.from.international.donors. Peruvian.utilities.benefit.from.several.favorable.conditions: ·. There.is.local.financial.capacity.in.the.country,.in.particular.thanks.to.the.Peruvian.pension.system,.with.no.liquidity.con- straint. ·. Loans.and.bonds.are.available.in.the.Peruvian.currency,.Soles. ·. There.is.no.legal.constraint.preventing.utilities.from.borrowing.cash. However,.with.the.exception.of.SEDAPAL,.very.few.municipal.water.utilities.meet.the.credit.rating.or.governance.standards.that. would.entice.the.capital.markets.to.lend.to.them. The.legal,.economic.and.institutional.barriers.to.local.financing.differ.from.one.local.water.utility.to.the.next..The.main.obstacles. are: ·. Insolvency.of.many.utilities.due.to.the.regular.failure.of.revenue.to.recover.costs..On.average,.the.50.local.utilities.run.a.defi- cit.of.5%.which.results.in.progressive.central.government.bailouts. ·. Weak.cash-flows.resulting.from.sub-optimal.operational.efficiency.and.insufficient.tariffs. ·. Lack.of.predictability.of.the.central.government.which.creates.uncertainty.into.balance.sheets. ·. Financial.sustainability.threatened.by.lack.of.coordination.between.investments.directly.funded.by.the.central.government. and.the.commercial.and.financial.management.of.the.local.water.utility. ·. Existence.of.a.massive.grant.program.funded.by.the.central.government.which.makes.all.other.financial.sources.unattract- ive..Lack.of.clear.link.between.grant.financing.and.water.utility.performance.improvement.objectives.deters.efforts.to.secure. alternative.sources.of.finance. ·. Lack.of.confidence.of.potential.investors.and.lenders.in.corporate.governance,.transparency,.and.management.of.local.wa- ter.utilities. This.situation.has.resulted.in.the.majority.of.investment.in.municipal.water.supply.and.sewerage.infrastructure.originating.di- rectly.from.the.central.government.budget.without.much.influence.of.local.stakeholders..It.is,.however,.vital.to.recognize.the. remarkable.financial.effort.of.the.Government.of.Peru..The.GoP's.investment.in.water.infrastructure.has.increased.at.an.impres- sive.rate.in.recent.years...That.said,.the.financial.sustainability.of.local.water.utilities.is.still.a.matter.of.concern..The.World.Bank. has.developed.a.set.of.detailed.recommendations.that.should.significantly.improve.this.situation. --Gérard Payen.and.Roy.Torkelson,.United.Nations.Secretary-General's.Advisory.Board.on.Water.and.Sanitation 28 7. oPPorTUniTies anD CHallenges This.section.addresses.opportunities.and.challenges.for.fi- water,.controlling.unjustified.operational.costs,.and.increas- nancing.of.local.utilities..A.framework.for.the.analysis.of.in- ing.tariffs..This.would.result.in.improved.cash.availability. vestment.opportunities.is.presented,.followed.by.a.discus- provided.the.right.commercial.governance.conditions.are. sion.of.four.basic.options.and.their.respective.milestones.. in.place..International.experience.shows.that.the.right.gov- Challenges.for.facilitating.local.financing.through.these. ernance.conditions.can.be.attained.under:.(i).an.effective. options.have.been.identified.and.topics.for.future.study.are. public.management.model;.or,.(ii).a.private.management. proposed. model,.using.concession.contracts.or.outright.privatization. as.in.the.Telecoms.sector.in.Peru. 7.1 framework of analysis The.review.of.local.financing.of.infrastructure.in.Peru.shows. that.institutional.and.other.local.investors.have.substantial. A.simplified.framework.for.the.analysis.of.investment.op- experience.financing.large.infrastructure.projects..In.the. portunities.in.the.local.water.utilities.sector.in.Peru.has. past,.GoP.guarantees.have.played.a.key.role.in.financing. been.prepared.by.considering.the.following.analytical. through.risk.mitigation..However,.access.to.local.financing. inputs:.(i).a.review.of.the.water.utility.sector.and.its.current. is.also.possible.without.GoP.guarantees,.as.is.the.case.in.the. operating.and.financial.situation;.(ii).a.review.of.recent.local. energy.and.telecoms.infrastructure.sectors. financing.of.infrastructure.experience.in.Peru,.including.bal- ance.sheet.and.project.based.finance;.and.(iii).a.preliminary. Thus,.the.framework.of.main.options.for.water.utilities.to. assessment.of.barriers.for.local.financing.of.water.utilities. access.local.financing.includes.both.the.availability.of.GoP. guarantees.and.the.utility.management.model..The.review. The.review.of.the.LWUs.operating.and.financial.perfor- of.main.barriers,.as.perceived.by.various.stakeholders,.will. mance.provides.evidence.that.they.have.ample.room.to. define.the.specific.features.of.each.option.summarized.in. improve.their.cash.flows.through.reducing.unaccounted.for. figure.6. Figure 6: Analytical Framework for Local Financing of Water Utilities in Peru OPTION 2: Restructuring Fund (INVERSAN) restructures LWU: OPTION 4: Local capital market nance using concession contracts: (i) Gets seed funding once and for all; (i) LWU de-integrates in production plants, distribution areas (DIPs), etc; (ii) Issues irrevocable payment notes; (ii) LWU issues PPP contracts for DIPs Without (iii) Takes control of BoD; (iii) Contracts allows local nancier to set Fideicomiso to collect LWU revenue; GoP (iv) Hires new management +auditors; (iv) Fideicomiso securitize future revenue Guarantee (v) Restructures LWU to make them nancially viable and issue shares; (v) IFC issues PRC guarantee on security; (vi) LWU able to list in Stock Exchange; (vi) Fidecomiso gets cash to fund PPP inv plan and to pay for IFC PRC. (vii) Float shares of LWU in stock market; (viii) LWU issues bonds to get nance. OPTION 1: Loans to LWU based on securitization of their cash ows: OPTION 3: PPP lease/concession contracts to raise local nancing: With (i) Fideicomisos captures LWU revenue; (i) Investment to be nanced by tari s; GoP (ii) Fideicomiso issues bonds backed by prospective captured revenues; (ii) Tari for capital investment goes to deicomiso controlled by nanciers; (iii) GoP issues a sovereign guarantee for the bonds issued by deicomiso; (iii) Fideicomiso issues bonds backed by Prospective tari revenues; Guarantee (iv) Local nanciers buy bonds; (iv) GoP provided sovereign guarantee for bond issue ("nil guarantee"); (v) Fideicomiso handles nancing for investment projects in LWU according (v) Financier buy bonds, proceed goes to nance investment program of PPP to investment plan. Publicly Managed Privately Managed 29 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) Within.such.a.framework,.four.main.options.are.identified. Option1:PubliclyManagedLWUObtain as.follows: LoanswithGoPGuarantees This.option.builds.upon.the.LWUs'.experience.in.the.KfW. ·. option 1:.Publicly.managed.LWUs.obtain.financing. funded.PMRI.program.and.on.the.existing.legal.framework. from.local.investors.securitizing.a.portion.of.their.cash. for.securitization.of.utilities'.cash.flows14..PMRI.includes.com- flow.and.using.GoP.sovereign.guarantees; ponents.to.improve.operational.and.financial.performance. ·. option 2:.Publicly.managed.LWUs.are.restructured.to. of.water.utilities. become.financially.viable.and.obtain.loans.without. government.guarantees.using.its.own.balance.sheet.. At.the.outset,.most.LWUs.in.the.program.had.a.poor.credit. IFIs.can.still.provide.partial.risk.credit.guarantees.of. history..To.overcome.this,.LWUs.created.Fideicomiso.with. other.risk.mitigation.instruments.at.a.cost.to.the.local. the.legal.mandate.to.capture.their.revenues.and.to.ensure. water.utilities. that.KfW's.loans.are.paid.when.due..However,.KfW.has.re- ·. option 3:.Privately.managed.LWUs.(lease/concession. quested.a.GoP.sovereign.guarantee.to.cover.the.risk.of.PMRI. contract).obtain.local.financing.from.capital.market. not.achieving.its.development.objectives.(i.e.,.to.convert. using.GoP.sovereign.guarantees;.and, participating.LWU.into.financially.viable.utilities.able.to.pay. ·. option 4:.Privately.managed.LWUs.(or.parts.of.it).ob- their.financial.obligations.through.the.Fideicomiso.).Once. tain.loans.from.local.capital.market.using.IFC.partial. the.Fideicomiso.successfully.repays.KfW.loans,.institutional. risk.credit.guarantee. local.financiers.may.be.enticed.to.channel.funds.to.LWU.us- ing.the.same.contractual.and.institutional.arrangements. These.options.can.be.combined..For.example,.option. two--restructuring.LWU.for.balance.sheet.financing--can. Main.milestones.to.implement.this.option.would.include: use.option.one.during.implementation.of.restructuring,. provided.financing.handled.by.a.fideicomiso.is.in.line.with. the.restructuring.plan..In.this.case,.obligations.to.the.fidei- i A fideicomiso is created.with.the.legal.mandate.to.cap- ture.a.portion.of.LWU.revenues.that.will.be.used.to.pay.for. comiso.will.need.to.supersede.any.other.financial.obliga- principal.and.interest.of.financing.raised.from.local.inves- tion.of.the.LWU.in.process.of.restructuring..Another.com- tors..Local.water.utilities.will.need.to.sign.a.contract.with. bination.can.be.Option.two.and.Option.three;.in.this.case. the.Fideicomiso.authorizing.it.to.capture.tariff.revenue. directly.from.the.LWU.cluster.of.clients,.which.can.include. the.restructuring.might.be.best.undertaking.by.detaching. large.customers.with.a.good.track.record.of.payments. production.of.water.facilities--or.other.infrastructure-- case.in.which.the.detached.facility.will.look.for.funding.us- ii the fideicomiso securitizes the water utilities' future revenue streams.through.issuing.bonds; ing.principles.outlined.in.Option.three..Other.combinations. may.also.be.possible. iii the goP issues a sovereign guarantee.to.cover.pay- ment.of.bonds.issued.by.the.Fideicomiso.in.case.the.rev- enue.of.the.water.utility.does.not.materialize.when.due; 7.2 options for local financing of water iv local financiers (PPfs and others) purchase bonds. backed.by.the.GoP.sovereign.guarantee..To.cover.itself. Utilities in Peru from.undue.financing.risks,.the.GoP.will.instruct.the.Fidei- comiso.to.use.bond.sale.proceedings.to.finance.the.LWU's. Based.on.the.analytical.framework.for.exploring.options.to. investment.program,.to.pay.financing.costs.during.the. attract.local.private.financing.to.finance.LWU.infrastructure,. investment.period.and.to.form.a.debt.payment.reserve. account;.and, the.four.main.options.are.further.explained.in.this.section.. Drawing.from.both.local.conditions.and.international.ex- perience,.main.milestones.for.implementation.have.been. identified.based.on.the.present.situation.in.the.sector.and. 14. .CONASEV.issued.ruling.for.securitization.of.cash.flows.in.1999.. Since.then,.government.institutions.and.private.sector.companies. acknowledging.the.barriers.which.would.need.to.be.over- have.used.securitized.cash.flows.to.obtain.funding.from.local. come.prior.to.or.during.implementation. financiers. 30 Opportunities.and.Challenges v the fideicomiso is responsible for both the invest- iii inversAn assumes control of Bod. Before.any.invest- ment program and for the repayment of debt through. ments.in.LWUs,.INVERSAN,.as.an.equity.holder,.will.take. two.separate.accounts. control.of.LWU.BoDs,.so.it.can.force.the.implementation. of.their.restructuring.plan.to.convert.them.into.finan- cially.viable.entities; Option2:PubliclyManagedLWU iv inversAn orchestrates qualification (or hiring of RestructuredtoBecomeFinancially new) management and auditors..LWU's.BoDs.will. ViableandGetLocalFinancingwithout retain.its.corporate.oriented.managers.or.hire.new.ones. depending.on.the.qualification.of.the.existing.manage- GoPGuarantees ment.and.ensure.periodic.technical.and.financial.audit- This.option.takes.into.account.the.lessons.learned.through. ing; CORFO's.overhauling.of.13.major.water.utilities.in.Chile.dur- v lWu issues shares to attract inversAn funding..To. ing.the.1990s..CORFO,.an.autonomous.development.fund,. get.into.the.restructuring.program,.LWU.will.issue.shares,. took.over.financially.underperforming.public.water.utilities. and.sell.them.to.INVERSAN,.in.a.private.offering,.to.fund. their.investments.under.the.restructuring.plan..Market. and.converted.them,.using.modern.corporate.restructuring. value.of.such.shares.may.be.low.at.the.onset.of.the. principles,.into.commercial.utilities.able.to.raise.funding. program; competitively.in.the.Chilean.Stock.Market.15.As.in.the.case. vi INVERSAN,.under.the.restructuring.plan,.will.make.LWUs. of.Peru,.by.the.early.1990s.the.water.utilities.in.Chile.were. comply.with.the.listing.requirements.of.BVL,.and.list. already.operating.under.corporate.law.16.CORFO.was.able. them.when.they.become.profitable. to.assume.control.of.their.boards.of.directors.by.becoming. vii lWu floats its shares in stock market.providing.an.exit. one.of.the.main.equity.holders. route.for.INVERSAN..INVERSAN.can.sell.a.portion.of.its. shareholding.in.the.LWU..In.doing.so,.it.is.expected.that. The.main.tool.of.the.restructuring.program.was.the.submis- INVERSAN.will.make.a.substantive.gain--that.will.in- crease.the.value.of.its.fund--by.the.fact.that.the.shares. sion.and.implementation.by.water.utilities.of.sound.restructur- of.a.profitable.utility.can.be.worth.several.times.that.of. ing.plans.that.enabled.them.become.financially.viable..Among. its.previous.value.(when.not.performing);.and, other.provisions,.under.the.restructuring.plans.LWUs.were.al- viii lWu issues bonds to get more finance..As.already. lowed.to.re-write.contracts.with.all.major.stakeholders,.includ- financially.viable,.LWU.will.also.be.able.to.raise.more. ing.employees,.creditors,.suppliers,.and.customers..Based.on. funding.using.its.own.balance.sheet. these.new.contracts.and.an.overhaul.of.existing.management,. the.LWUs.were.expected.to.emerge.as.a.financially.viable.enti- ties..Main.steps.to.implement.this.option.in.Peru.would.be: i obtain seed funding.to create a Water restructuring 15. .CORFO.undertook.an.Initial.Public.Offering.(IPO).of.most.public. fund (inversAn)..Rather.than.providing.non.recover- water.utilities.in.1999,.which.attracted.the.competitive.interest.of. able.grants.to.the.sector.through.APT,.the.GoP.could. private.investors..Private.investors.bought.equity.holdings.with.the. fund.INVERSAN,.with.the.mandate.to.convert.water. condition.to.participate.in.the.management.of.the.water.utilities.. utilities.into.financially.viable.entities..To.comply.with.its. The.Chilean.government.accepted,.without.selling.all.its.shares.. mandate,.INVERSAN.will.require.LWU.to.present.restruc- CORFO.retained.shareholding.in.all.its.water.utilities,.as.such.the. turing.plans.and.approve.them.if.credible; government.still.partially.owns.the.water.utilities.in.Chile.getting. net.income.from.them. ii inversAn will use the seed funding.to finance in- 16. .Law.No..18,777.of.1989.for.EMOS.(Santiago).and.ESVAL. vestment programs of water utilities with approved (Valparaiso).and.Law.No..18,885.of.1990.(for.11.regional.com- restructuring plans and to pay principal and interest panies),.created.the.water.utilities.under.private.corporate.law.. of bonds it.will.issue.(as.irrevocable.payment.notes).dur- An.economic.regulator.(SISS).was.also.created.through.during. ing.the.first.5.year.period..In.doing.the.former.INVERSAN. 1990.(Law.No..18,902).so.ensure.tariff.increases.consistent.with. will.become.an.equity.holder.of.LWU;.by.doing.the.latter,. improvements.in.operational.efficiency.and.financial.viability. INVERSAN.will.get.additional.funding.to.undertake.over- of.water.utilities..Similar.reforms.happened.in.Peru.4.year.later,. hauling.of.more.local.water.utilities..INVERSAN.would. although.full.commercialization.by.restructuring.of.water.utilities. seek.a.partial.risk.credit.guarantee.through.IFC; was.not.pursued. 31 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) Option3:PublicPrivatePartnershipsto cases.of.Agua.Azul.and.Taboada.(in.the.water.sector),.the. GetLocalFinancingwithGoPSovereign IIRSA.projects.in.the.toll.roads.sector,.and.the.energy.and. Guarantees telecoms.infrastructure.companies..This.option.is.based.on. this.experience.and.draws.from.interviews.with.private.op- This.option.is.grounded.in.the.recent.trend.of.local.financ- erators.active.in.the.Peruvian.water.sector.(including.Grupo. ing.of.infrastructure.through.Public.Private.Partnerships. VEGA.and.Agua.Azul).who.stated.their.willingness.to.par- (PPP).in.Peru..It.is.implemented.using.concession.contracts. ticipate.in.concession.contracts.to.undertake.infrastructure. that.include.the.conditions.(contractual.agreements).for. rehabilitation.to.reduce.system.loses.in.key.areas.of.SEDA- obtaining.funding.from.local.financiers,.including.PPFs..Main. PAL.and.SEDALIB.(Trujillo)..As.such,.this.option.considers.the. contractual.arrangements.to.implement.this.option.include: possibility.of.issuing.concession.contracts.both.for.limited. parts.and.for.all.parts.of.a.local.water.utility..If.the.LWU.were. i investments to be financed by tariffs revenues..The. to.issue.such.contracts,.it.would.essentially.become.a.pub- concession.contract.should.specify.a.well.defined.invest- ment.and.O&M.program,.upon.which.a.wining.tariff.is. lic.asset.holding.company..Main.steps.to.implement.this. estimated,.including.a.fixed.tariff.portion.allocated.to. option.include: repay.the.financing.of.investment.programs; ii the portion of the tariff for capital investment is seg- i lWu undergoes vertical and horizontal de-integra- regated into a fideicomiso controlled by financiers.. tion and becomes a holding company..It.de-integrates. The.concession.contract.should.also.specify.that.a.fidei- into.production.plants,.distribution.areas,.waste.water. comiso.will.be.formed.by.the.creditors.of.the.concession,. treatment.plant.etc; and.that.the.fideicomiso.will.handle.both.an.account.for. disbursement.of.funds.for.investment.programs.and.an. ii lWu issues concession contracts for de-integrated account.for.the.payment.of.debt.issued.by.the.fideicomi- parts..For.example.it.might.sign.a.contract.to.reduce. so.to.get.funding.for.investment.program; system.losses,.or.to.build.a.new.production.plant.or.to. expand.in.a.non.served.area; iii the fideicomiso issues bonds backed by future tariff revenues..The.Concession.contract.should.also.include. iii local financiers allowed to form a fideicomiso to col- the.rules.according.to.which.the.fideicomiso.will.issue. lect and secure lWu's revenue. The.concession.contract. bonds.backed.by.future.(capital).tariff.revenues,.effec- would.include.the.subcontract.for.local.financiers.to.es- tively.securitizing.future.revenues; tablish.a.fideicomiso.to.directly.collect.local.water.utilities'. revenues.or.a.part.of.them; iv the goP provides a sovereign guarantee for bond is- sue.("nil.guarantee")..The.concession.contract.should.also. iv the fideicomiso securitizes future revenue..The. specify.that.the.GoP.will.provide.a.sovereign.guarantee,. concession.contract.includes.rules.for.securitization.of. indicating.the.payment.to.bond.holders.in.case.the.fidei- collected.revenues.and.for.issuance.of.bonds.to.finance. comiso.is.unable.to.meet.its.obligations; investment.programs.of.LWU; v PPfs and other local investors buy bonds..The.pro- v A partial risk credit (PrC) guarantee is provided for ceeds.of.the.bond.sale.would.go.towards.repayment.of. securities issued by fideicomiso..Such.a.guarantee. principal.and.financing.costs.during.construction.and.to. might.be.sought.from.IFC..Premiums.would.need.to.be. finance.the.investment.program.of.PPP. paid.by.the.fideicomiso. vi the fideicomiso gets cash to fund its PPP investment plan, to pay for the PrC and to pay principal and in- terest of bonds issued during construction..After.con- Option4:PrivatelyManagedLWUs(or struction.is.completed,.the.fideicomiso.will.depend.exclu- partsofit)ObtainLoansfromLocal sively.on.tariff.revenues.to.pay.debt.to.local.financiers. CapitalMarketusingIFCPartialRisk CreditGuarantee. these four basic options would be of use to a number Experience.in.Peru.shows.that.that.local.institutional.and. of stakeholders as large economic costs to both gov- private.investors.are.willing.to.provide.loans,.purchase.their. ernment and consumers will be avoided by successful bonds.or.participate.with.equity.investments.when.the.pri- commercialization of lWu..Main.interested.parties.are:. vate.sector.handles.an.infrastructure.project..Such.are.the. (i).the.Ministry.of.Economy.and.Finance.(MEF),.who.handles. 32 Opportunities.and.Challenges tax.payer.money;.(ii).the.Regulatory.Agency,.who.represent. commercially.oriented.organization.and.then.taking.it.to. the.interests.of.the.customers.and.who.plays.a.role.in.en- full.commercial.viability.is.a.tremendous.business.policy. suring.financial.viability.of.LWU;.(iii).the.Ministry.of.Housing. challenge..Both,.provincial.and.district.local.governments. and.Construction.(MVC).who.is.mandated.to.do.strategic. controlling.the.BoD.had.limited.awareness.of.the.business. planning.and.policy.making.for.the.sector.and.who.at.pres- policy.challenge.in.front.of.them,.including:.(i).identification. ent.implements.investment.programs.through.its.autono- of.key.responsibilities.for.the.senior.LWU.management.and. mous.agencies;.(iv).representatives.of.Local.Governments. the.need.to.professionalize.them;.(ii).identification.of.key. problems.that.could.adversely.affect.success.of.LWUs'.com- these parties will be key participants in the formula- mercial.operations;.(iii).identification.of.strategic.options. tion of policies to facilitate access of lWu to local fi- that.can.affect.their.path.towards.success. nancing for their investments..Their.immediate.objective. will.be.to.quickly.design.the.policies.and.action.plans.to. An.interesting.comparison.is.the.case.of.Chile,.which.was. turn.around.commercial.performance.of.LWU..Practical.out- also.implementing.commercialization.of.its.water.utilities. comes.of.the.policy.exercise.will.include.a.detailed.program. during.the.1990s..Here,.policy.making.for.commercialization. to.overhaul.operating.and.financial.performance.of.water. was.coordinated.between.the.Ministry.of.Finance.and.the. utilities.so.they.become.creditworthy,.and.to.promote.at. Sector.Ministry.(Ministry.of.Public.Works).and.implemented. the.same.time.those.utilities.that.can.immediately.access. by.CORFO,.even.for.those.water.utilities.serving.the.larg- local.financing.using.appropriate.financing.structures..To. est.local.governments.areas.(Santiago.and.Valparaiso).17. facilitate.this,.further.discussion.of.options.including.their. Furthermore,.before.taking.part.in.the.commercialization. policy.challenges.is.included.below. of.the.water.utilities,.CORFO.had.experience.creating.com- mercial.companies.and.taking.them.from.their.creation.to. complete.commercial.success. 7.3 Discussion of the options for facilitating local financing of lwU Peruvian policy for commercialization of lWus..Policy. making.must.respond.to.the.barriers.to.local.financing. The.four.basic.options.presented.in.the.previous.section. summarized.in.section.6..In.particular,.policy.makers.will. offer.a.basic.route.for.LWUs.to.attain.local.financing..While. need.to.find.ways.to.restructure.debts.of.LWU--especially. the.four.options.differ.depending.on.the.availability.of.GoP. those.owed.to.COLFONAVI--conditioned.to.improvements. guarantees.and.the.utility.management.model,.they.also. in.corporate.governance.and.operational.and.financial. have.several.commonalities..Most.options.rely.on.the.cre- efficiency..Such.conditioning.will.become.a.powerful.ne- ation.of.fideicomiso.to.securitize.tariff.revenues.of.utilities.. gotiating.tool--in.the.hands.of.the.central.government. Interviews.with.key.representatives.from.the.local.private. or.its.agent--with.the.far.reaching.objective.of.enabling. finance.sector.and.the.experience.of.the.KfW.PMRI.program. LWUs.become.creditworthy..Debt.restructuring.will.need. suggest.that.fideicomiso.are.a.promising.way.to.improve. to.be.accompanied.by.the.injection.of.fresh.fiscal.resources. LWU's.attractiveness.to.investors. (in.the.form.of.loans.or.equity).conditioned.to.its.recovery. upon.successful.commercialization.of.the.LWU..Injecting. these four options are not without their policy chal- more.financial.resources.to.finance.investment.projects. lenges..While.opportunities.for.Peru.have.been.identified. in.LWU.jurisdiction.without.any.conditions.is.by.contrast. drawing.from.experience.in.other.sectors.and.other.coun- non.recoverable,.and.contributes.to.increased.economic. tries,.there.are.a.number.of.challenges.which.must.be.met. costs.to.the.national.economy..Likewise,.forgiving.COL- in.the.context.of.the.present.WS&S.sector.in.Peru. FONAVI.debts.under.a.business.as.usual.scenario.will.be. local government capacity..Local.governments.in.Peru. 17. .Participation.of.the.ministry.of.finance.confirms.that.govern- assumed.control.of.the.LWUs.in.the.1990s.prior.to.having. ance.is.more.easily.improved.if.a.key.policy.maker.holds.the.check. a.tested.water.utility.corporate.model..Yet,.instituting.a. book..This.is.also.consistent.with.the.carrot.and.stick.theory. 33 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) counterproductive.as.it.will.impose.into.MEF.a.financial. infrastructure to match their future financial obligations. obligation.in.favor.of.FONAVI's.claimholders.(Fonavistas),. ­.It.is.in.the.interest.of.PPFs.to.have.secure.minimum. organized.in.a.national.association..When.well.defined.and. risk.investment.opportunities.in.the.LWU.sector,.but. assessed.as.a.viable,.these.policy.options.can.possibly.be. this.will.not.happen.without.policies.to.improve.LWU. linked.to.a.temporal.takeover.of.LWUs.by.a.specialized.in. cash.flows.predictability..At.the.outset,.policy.makers. corporate.restructuring.agency. might.need.to.bust.confidence.of.investors.by.linking. key.sources.of.revenue.(tariffs.included).to.payment. A review of Peru's own case shows that opportunities of.financial.obligations.without.neglecting.long.term. for lWus may exceed those that have existed in other financial.viability.of.LWU. sectors or countries that have informed the four op- ·. International infrastructure finance experience in vari- tions. There.are.circumstances.that.allow.a.large.menu. ous infrastructure and economic groups in Peru.­.Major. of.options.for.local.financing.in.Peru..Such.circumstances. infrastructure.international.companies.and.financial. include: groups.with.experience.in.the.water.sector.have.been. established.in.Peru.to.implement.projects.using.local. ·. Significant experience of institutional investors (PPFs) financing. financing infrastructure projects.­.Institutional.investors. ·. Peru's economy and its fiscal management are robust and.banks.have.developed.expertise.in.packaging. and promise to be robust over the years to come.­.Well. and.syndicating.loans.for.infrastructure.projects..Policy. conceived.commercialization.policies.to.enable.LWUs. making.will.benefit.by.putting.in.place.conditions.to. to.finance.their.needs.through.local.financing.may. leverage.this.experience.to.enable.LWU.access.local. require.tariff.increases..This.should.not.be.found.diffi- financing. cult,.as.incomes.of.the.Peruvian.population.have.been. ·. Significant amounts of savings in the hands PPFs look- growing.faster.than.LWU.tariffs.over.the.last.ten.years. ing for opportunities of long maturity investments in (except.in.the.case.of.SEDAPAL). 34 8. reCommenDaTions anD neXT sTePs Topics.for.future.study.and.suggestions.of.concrete.steps. strong message of transparency to the investor com- that.can.be.taken.in.Peru.were.identified.throughout.in- munity..Upon.attaining.this.milestone,.a.well.defined.risk. terviews.held.with.key.government.officials,.local.financial. qualification.will.be.available..To.complete.the.process.of. institutions.and.utility.and.concession.managers..These.sug- being.listed,.SEDAPAL.may.benefit.from.hiring.a.special- gestions.are.summarized.in.Box.4. ized.restructuring.consulting.group..SEDAPAL.should. securitize.part.of.its.revenues.and.issue.bonds.to.raise. Drawing.from.suggestions.received.throughout.interviews. financing.for.their.investment.projects..SEDAPAL.can.also. with.WS&S.and.financial.sector.experts,.specific.recommen- raise.local.financing.immediately,.indirectly,.using.private. dations.for.key.players.in.the.Peruvian.Water.Utility.sector. operators.willing.to.sign.contracts.for.improving.operat- have.been.outlined.below..These.recommendations.will.only. ing.units,.using.as.a.reference.its.contract.with.Consorcio. be.effective.if.a.strong.policy.framework.is.in.place.to.ensure. Agua.Azul. that.LWU.initiatives.are.consistent.with.national.strategies. other large lWu, serving large urban areas, will need full restructuring of their debt, their operating prac- 8.1 recommendations for Peruvian tices and their management..As.their.main.creditor.is.the. Utilities Ministry.of.Finance.(MEF).they.will.need.to.negotiate.with. MEF.options.of.restructuring. sedAPAl needs to complete its process of being listed in the Peruvian stock market, which will send a box 4: suggestions to facilitate lwUs' access to local financing ·. Develop.a.toolkit.for.LWUs.to.prepare.attainable.financing.packages ·. Capitalize.on.lessons.learned.from.GTZ.including.improvements.to.LWUs'.corporate.governance ·. Examine.the.sector-wide.financial.strategy.and.planning.to.provide.a.rationale.for.combining.different.sources.of.finance ·. Identify.practical.options.to.overcome.the.FONAVI.debt.issue ·. Establish.mechanisms.for.contracting.services.of.competent.technical.advisors.(for.capital.improvement.planning.and.finan- cial.planning).and.financial.service.advisors.at.both.utilities.and.at.PROINVERSION ·. Prepare.of.capital.improvement.plans.and.strengthen.the.capacity.of.LWUs.to.develop.pipeline.of.bankable.projects ·. Commission.an.independent.feasibility.study.on.adequacy.of.tariff.rates ·. Retain.independent.financial.auditors ·. Strengthen.the.regulator,.SUNASS ·. Improve.Agua.para.Todos.conditionalities.and.implementation.mechanisms.so.that.it.provides.leverage.for.governance. strengthening.(grant.to.loan--subsidy) ·. Examine.the.uses.of."free.money".with.a.policy.on.subsidization ·. To.boost.financial.market.confidence.in.the.sector,.establish.a.system.of.guarantees.(including.insurance,.government.guar- antees.(IFC,.USAID/DCA,.etc).and.a.system.of.use.and.limitation ·. Create.official.offering.statements.(Income.Statement,.Cash.Flows,.Balance.Sheets).that.contain.full.transparency.and.include. the.information.developed.in.the.PMO.(Unaccounted.for.water,.invoiced.amounts,.collection.experience.and.efforts.to.im- prove,.etc.) ·. Explore.possibilities.for.creating.fideicomisos.with.private.banks ·. Improve.market.frameworks.around.fideicomisos:.for.handling.flow.of.funds.for.debt.service.payments.and/or.for.handling. the.expenditure.of.bond.proceeds.for.capital.improvements 35 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) medium size and small water utilities can attempt 8.3 recommendations for Donors the Pmri model,.with.the.objective.of.(i).preparing.their. long.term.investment.plans.to.improve.service.provision,. Donors.should.be.aware.of.the.possibilities.for.the.WS&S. (ii).overhauling.its.management.structure,.and.(iii).to.re- sector.in.Peru.to.become.financially.sustainable.through. quest.tariff.increases.to.become.financially.viable. access.to.local.financing..Thus,.donor.cooperation.in.the. WS&S.sector.in.Peru.could.focus.on.promoting.an.enabling. fideicomisos can be used to handle both flows of environment.by.convening.key.players.in.the.WS&S.sector,. financing for investments and payments of debt to assisting.the.GoP.to.learn.from.international.good.practice. financiers. At.present,.SUNASS.has.penalties.for.delayed. and.helping.build.capacity.within..sector.agencies. completion.of.investment.programs..Such.penalties.may. take.the.form.of.denying.tariff.increases,.which.can.hinder. payment.of.debt.obligations..To.avoid.this,.fideicomisos.can. 8.4 next steps be.used.to.handle.both.debt.repayments.and.payment.to. construction.contractors.in.such.a.way.that.debt.payment. 8.4.1. NextStepsinPeru is.made.on.time.and.contractors.receive.payment.upon. The.World.Bank.and.UNSGAB.will.work.together.to.ensure. completion.of.work. dissemination.of.the.results.through.a.Spanish.language.re- port.in.Peru.and.convene.a.working.group.of.government. representatives,.bilateral.donors,.IFIs.and.other.entities.(e.g.. 8.2 recommendations for the Peruvian NGOs).that.are.working.with.local.water.and.sanitation.utili- Private sector ­ financial & non ties.and/or.are.providing.financing.for.technical.assistance. financial and.loans.to.the.government.of.Peru. the financial sector could promote the formation This.action.will.stimulate.the.setting-up.of.an.action.plan.of. of water infrastructure funds and participate in the priority.steps.that.need.to.be.taken.to.develop.the.manage- governance structure.of.restructured.water.utilities..In. ment,.governance,.technical.and.financial.capacity.of.the. doing.so,.they.will.have.the.leverage.to.demand.bottom. water.utilities,.thereby.enabling.each.potential.contributor. line.results.in.the.management.of.the.local.water.utili- the.opportunity.to.provide.the.technical.assistance.needed. ties.upon.which.the.recovery.of.their.investments.will.be. to.execute.those.steps..By.mounting.a.more.coordinated. less.risky. approach.to.enabling.the.water.utilities.to.become.better. managed.one.can.expect.that.they.will.overcome.the.poor. Private.operators.could.attempt.design,.finance,.build.con- perception.the.market.has.of.them.and.help.them.access. tracts.under.the.current.PPP.framework,.having.the.govern- funding.for.their.future.capital.infrastructure.needs.in.the. ment.or.LWU.clearly.define.contractual.arrangements. Peruvian.debt.capital.market. Using.the.Private Initiative.option.for.PPPs,.according.to. which.private.operators.can.identify.the.need.for.a.proj- 8.4.2. NextStepsinOtherCountries ect--makes.the.government.appear.as.abdicating.(in.favor. One.purpose.of.the.joint.effort.by.the.World.Bank.and. of.the.PO).its.policy.and.strategic.direction.function..This. UNSGAB.in.Peru.was.to.demonstrate.the.reality.of.many. is.not.convenient.because.it.is.well.known.that.the.private. barriers.to.access.to.borrowing.facing.local.water.utilities.. operator.will.not.choose.a.project.according.to.the.com- The.case.of.Peru.has.been.very.instructive.both.in.testing.a. mon.good.interests.but.according.to.its.profit.motive.which. methodology.and.in.making.barriers.and.favourable.condi- can.be.in.conflict.with.the.common.good..This.limit.to.PO. tions.visible. behavior.should.be.dictated.by.the.government. 36 Recommendations.and.Next.Steps The.joint.study.allowed.a.quick.assessment.of.barriers.and. in.its.second.Hashimoto.Action.Plan,.UNSGAB.selected.the. of.the.legal,.financial.(local.and.capital.market),.regulatory,. following.key.objective. managerial.and.governance.situation.in.a.country.to.be. made..Such.a.study.could.be.replicated.in.other.countries.. Financing Objective 2: Improve access of utilities to This.would.benefit.donors,.who.could.better.target.and. financial markets tailor.technical.and.financing.objectives.and.focus.on.the. The borrowing capacity of many local water operators needs to accomplishment.of.opening.sub.national.entities.to.access. be enhanced so that they can plan and finance the necessary their.respective.local.capital.and.financial.markets..It.would. investments to function effectively. National governments are also.benefit.the.related.countries.by.helping.them.to.better. responsible for putting in place appropriate legal, institutional identify.their.internal.barriers. and financial frameworks and developing access to local finan- cial markets. 8.4.3. NextStepsintheInternational Community Actions Many.international.reports.on.water.utilities.in.developing. countries.only.detail.successes.and.difficulties.for.utilities. ·. Collaborate with the World Bank, Regional Development serving.economic.and.political.capital.cities..In.the.recent. Banks, UNDP regional offices, UN Regional Commissions past.several.reports.focused.on.another.extreme,.the.very. and Water Operators Partnerships to assess the current small.water.service.providers..It.would.be.very.useful.that. situation and highlight country level obstacles that ham- international.institutions.increase.research.on.the.financial. per development of local financing for water utilities. situation.of.local.water.utilities..It.is.likely.that.there.is.a. ·. Support knowledge sharing and the scaling up of existing knowledge.gap..Identifying.potential.difference.between. mechanisms to help water utilities assess financial markets. the.smaller.utilities.and.the.main.ones.may.lead.to.detect- ·. Convince local and national governments to implement ing.abnormal.or.unnecessary.barriers.to.local.financing.and. good practices such as sustainable cost recovery policies, thereby.help.to.overcome.them. capacity building and transparency. ·. Mobilize international support to water utilities in this 8.4.4. FutureActionbyUNSGAB regard, from water utility networks, Regional Development The.United.Nations.Secretary-General's.Advisory.Board.on. Banks and others. Water.and.Sanitation.(UNSGAB)'s.mission.is.not.one.of.be- ing.an.implementing.agency.but.rather.one.of.encouraging. Expected.outcomes and.catalyzing.governments,.bilateral.donors.and.IFIs.to. expand.their.ways.of.financing.water.and.sanitation.proj- ·. National plans in place that improve access of local utili- ects..With.the.experience.of.the.above.findings.UNSGAB. ties to financial markets. is.convinced.that.more.effort.is.necessary.to.enhance.the. ·. Increased activity of donors and multilateral banks aiming capacity.of.water.utilities.to.financial.markets..This.is.why. at access to capital markets for sub-sovereigns. 37 aPPenDiX 1: loCal waTer UTiliTies, rankeD by nUmber of ConneCTions, year 2007 Pop, pipe Pop w/o pipe Connections Pop, service area connections connections sedAPAl s.A. 1,157,142 8,354,796 7,010,861 1,343,935 large water utilities 929,999 5,382,360 4,312,986 1,069,374 SEDAPAR.S.A. 198,081 979,344 825,733 153,611 EPS.GRAU.S.A. 161,814 956,498 732,649 223,849 SEDALIB.S.A. 134,422 843,222 672,999 170,223 EPSEL.S.A. 131,087 812,673 650,853 161,820 SEDACHIMBOTE.S.A. 70,337 360,952 316,795 44,157 EPS.TACNA.S.A. 64,600 253,772 215,663 38,109 EPS.SEDALORETO.S.A. 56,939 462,499 286,541 175,958 SEDAM.HUANCAYO.S.A.C 56,740 346,796 260,624 86,172 EPS.-.SEDACUSCO.S.A. 55,979 366,604 351,129 15,475 medium size water utilities 422,912 2,308,081 1,788,351 519,730 EMAPICA.S.A. 40,078 169,855 149,409 20,446 EPSASA 39,647 209,070 165,400 43,670 SEDAJULIACA.S.A. 37,205 219,677 176,364 43,313 AGUAS.DE.TUMBES 36,332 204,546 124,549 79,997 SEMAPACH.S.A. 33,334 164,715 136,916 27,799 SEDA.HUANUCO.S.A. 32,320 207,049 168,297 38,752 EMSA.PUNO.S.A. 32,310 165,598 140,060 25,538 EMAPA.SAN.MARTIN.S.A. 31,659 154,679 138,301 16,378 SEDACAJ.S.A. 29,424 136,817 130,689 6,128 EMAPA.CAÑETE.S.A. 26,409 142,741 106,334 36,407 EMAPACOP.S.A. 22,288 273,679 114,395 159,284 EPS.ILO.S.R.LTDA. 20,884 68,700 65,769 2,931 EPS.CHAVIN.S.A. 20,614 95,983 88,976 7,007 EMAPA.HUACHO.S.A. 20,407 94,972 82,891 12,081 (continued on next page) 39 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) (continued) Pop, pipe Pop w/o pipe Connections Pop, service area connections connections small size water utilities 218,491 1,081,300 922,861 158,439 EMAPISCO.S.A. 17,565 82,880 76,131 6,749 EPS.SELVA.CENTRAL.S.A. 17,140 95,097 69,890 25,207 EPS.MOQUEGUA.S.R.LTDA 16,056 55,377 44,126 11,251 SEMAPA.BARRANCA.S.A. 14,813 75,599 66,728 8,871 EPS.MANTARO.S.A. 13,638 67,497 61,630 5,867 EMAPA.HUARAL.S.A. 12,298 70,436 57,260 13,176 EMAPA.MOYOBAMBA.S.R.LTDA 11,806 58,669 53,113 5,556 EMPSSAPAL.S.A. 10,732 45,768 45,184 584 EMAPA.PASCO.S.A. 10,115 70,150 53,136 17,014 EMUSAP.ABANCAY 9,680 55,039 55,039 0 EPS.SIERRA.CENTRAL.S.A. 9,580 35,086 32,170 2,916 EMAPAT.S.R.LTDA. 9,201 48,948 40,893 8,055 EPS.MARAÑON 7,275 34,679 29,166 5,513 EMAPAVIGSSA 6,859 36,060 24,320 11,740 NOR.PUNO.S.A. 6,503 23,390 22,874 516 EMAPA.HUANCAVELICA.S.A.C 5,273 32,841 26,911 5,930 EMUSAP.AMAZONAS 5,217 23,285 22,886 399 EPSSMU.S.R.LTDA 4,969 32,498 26,244 6,254 EPS.AGUAS.DEL.ALTIPLANO 4,548 22,347 20,026 2,321 EMAQ.S.R.LTDA. 4,526 23,011 15,052 7,959 SEDAPAR.S.R.L..(Rioja) 4,462 18,448 15,881 2,567 EMAPAB.S.R.LTDA. 4,358 20,485 19,288 1,197 EMAPA.Y 3,763 12,521 11,580 941 EMSAP.CHANKA 3,436 15,571 13,515 2,056 EMSAPA.YAULI 2,552 15,058 10,632 4,426 EPS.CALCA 2,130 10,560 9,186 1,374 total 2,728,543 17,126,537 14,035,060 3,091,477 40 aPPenDiX 2: formUlas for THe esTimaTion of Tariffs of ws&s UTiliTies Tariff.setting.and.scheduling.is.expected.to.begin.with.the. year.period.can.be.part.of.the.tariff.schedule;.however.tar- presentation.of.a.30.year.Optimized.Master.Plan.(PMO),. iff.increases.might.not.happen.if.SUNASS.verifies.that.the. based.on.which.a.tariff.schedule.for.five.years.can.be.ap- program.of.investment.is.not.implemented.as.planned;. proved..Prior.to.being.presented.to.SUNASS,.the.PMO. this.issue.is.related.to.construction.risks.and.instruments. should.be.approved.by.the.WS&S.board.of.Directors;.in. to.handle.it..In.case.a.WS&S.utility.does.not.present.a.PMO,. case.the.WS&S.is.operated.by.a.private.contractor,.the.PMO. SUNASS.can.have.the.initiative.to.propose.a.tariff.schedule. should.be.approved.by.the.government.entity.that.signed. for.the.five.year.period.in.which.it.can.incorporate.perfor- the.concession.contract..As.the.PMO.is.expected.to.have. mance.improvements.targets. a.program.of.investments,.tariff.increases.during.the.five. ANEXO B. exPresión generAl del Costo de mediAno PlAzo. A. exPresión generAl del Costo inCrementAl Pro- El.costo.medio.de.mediano.plazo.(CMP),.está.definido.por.la. medio de lArgo PlAzo. siguiente.expresión: El.costo.incremental.promedio.de.largo.plazo.(CIP),.está.defini- do.por.la.siguiente.expresión: 5 CMet r ( I + r )5 CMP = t × t =1 (I + r ) (I + r ) - 1 5 It n (C - C ) i VR (1+ r ) t =1 t ­ (1+ r )n + t t =1 (1+ r ) t 0 Donde: CIP = n (Q ­ Q ) CMet.=.Costo.medio.anual.del.año.t t =1 t 0 (I + r )t r.=.Tasa.de.actualización. C. exPresión generAl de lA fórmulA PolinómiCA de Donde: indexACión y de lA tAsA de CreCimiento de ÍndiCe. CIP.=.Costo.incremental.promedio.de.largo.plazo. It.=.Inversión.en.el.año."t".correspondiente.al.Plan.Maestro. n (IN1 )t = (ak i IPIki ) VR.=.Valor.residual.de.las.inversiones.correspondientes.al.Plan. k =1 Maestro,.en.el.año."n". (INi )t = -1 Ct.=.Costos.de.explotación.sin.depreciación.en.el.año."t" (INi )t -1 C0.=.Costos.de.explotación.sin.depreciación.en.el.año."0" Qt.=.Consumo.del.año."t".en.metro.cúbicos. Donde: Q0.=.Consumo.del.año."0".en.metro.cúbicos. (INi.)t.=.Índice.de.ajuste.del.servicio.i,.en.el.periodo.t. r.=.Tasa.de.actualización. (INi.)t­1.=.Índice.de.ajuste.del.servicio.i,.en.el.periodo.t­1. j.=.Número.de.años.del.programa.de.inversiones. =.Tasa.de.crecimiento.del.índice.de.ajuste.del.servicio.i . n.=.Número.de.años.del.horizonte.de.planteamiento. (IPIk.i.).=.Índice.de.precio.del.insumo.k.en.el.servicio.i,.tal.que. ati.=.Ponderación.del.insumo.k.en.el.servicio.i,.tal.que m a k =1 ki =1 Siendo.m.=.Número.total.de.insumos.del.Servicio."i" 41 aPPenDiX 3: Tariff of waTer UTiliTies in PerU 1996 1996 2007 2007 (Soles/m3) (US$/m3) (Soles/m3) (US$/m3) Tariff increase sedAPAl s.A. 1.02 0.42 1.79 0.56 75% large water utilities 1.06 0.44 1.32 0.41 25% SEDAPAR.S.A. 0.99 0.41 1.23 0.38 24% EPS.GRAU.S.A. 1.45 0.60 1.65 0.51 14% SEDALIB.S.A. 1.02 0.42 1.94 0.60 91% EPSEL.S.A. 1.27 0.53 1.04 0.32 ­18% SEDACHIMBOTE.S.A. 0.88 0.37 0.97 0.30 10% EPS.TACNA.S.A. 0.98 0.41 1.17 0.36 20% EPS.SEDALORETO.S.A. 1.01 0.42 1.24 0.38 22% SEDAM.HUANCAYO.S.A.C 0.00 0.96 0.30 EPS.­.SEDACUSCO.S.A. 0.85 0.35 1.71 0.53 101% medium size water utilities 0.81 0.34 1.18 0.37 45% EMAPICA.S.A. 0.51 0.21 0.95 0.29 87% EPSASA 0.59 0.25 0.85 0.26 44% SEDAJULIACA.S.A. 0.96 0.40 0.68 0.21 ­29% AGUAS.DE.TUMBES 0.89 0.37 1.44 0.45 61% SEMAPACH.S.A. 0.90 0.37 1.18 0.37 32% SEDA.HUANUCO.S.A. 0.76 0.32 1.04 0.32 36% EMSA.PUNO.S.A. 0.95 0.39 1.12 0.35 19% EMAPA.SAN.MARTIN.S.A. 0.97 0.40 1.08 0.34 11% SEDACAJ.S.A. 0.89 0.37 1.64 0.51 84% EMAPA.CAÑETE.S.A. 0.70 0.29 0.90 0.28 28% EMAPACOP.S.A. 0.80 0.33 1.16 0.36 45% EPS.ILO.S.R.LTDA. 1.13 0.47 2.46 0.76 117% EPS.CHAVIN.S.A. 0.51 0.21 0.65 0.20 27% EMAPA.HUACHO.S.A. 0.80 0.33 1.38 0.43 72% (continued on next page) 43 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) (continued) 1996 1996 2007 2007 (Soles/m3) (US$/m3) (Soles/m3) (US$/m3) Tariff increase small size water utilities 0.69 0.29 0.80 0.25 15% EMAPISCO.S.A. 0.52 0.22 1.15 0.36 119% EPS.SELVA.CENTRAL.S.A. 0.74 0.31 0.53 0.16 ­28% EPS.MOQUEGUA.S.R.LTDA 0.70 0.29 0.80 0.25 14% SEMAPA.BARRANCA.S.A. 0.42 0.18 0.88 0.27 107% EPS.MANTARO.S.A. 0.00 0.60 0.19 EMAPA.HUARAL.S.A. 0.00 0.88 0.27 EMAPA.MOYOBAMBA.S.R.LTDA 0.86 0.36 1.11 0.34 29% EMPSSAPAL.S.A. 0.00 0.76 0.23 EMAPA.PASCO.S.A. 0.32 0.13 0.28 0.09 ­14% EMUSAP.ABANCAY 0.89 0.37 0.68 0.21 ­24% EPS.SIERRA.CENTRAL.S.A. 0.83 0.26 EMAPAT.S.R.LTDA. 2.01 0.83 2.56 0.80 28% EPS.MARAÑON 0.54 0.22 0.61 0.19 13% EMAPAVIGSSA 0.87 0.36 1.00 0.31 15% NOR.PUNO.S.A. 0.60 0.25 0.54 0.17 ­10% EMAPA.HUANCAVELICA.S.A.C 0.43 0.18 0.69 0.21 62% EMUSAP.AMAZONAS 0.87 0.36 1.18 0.37 35% EPSSMU.S.R.LTDA 0.58 0.24 0.78 0.24 35% EPS.AGUAS.DEL.ALTIPLANO 0.00 0.37 0.12 EMAQ.S.R.LTDA. 0.37 0.15 0.45 0.14 22% SEDAPAR.S.R.L..(Rioja) 0.00 1.06 0.33 EMAPAB.S.R.LTDA. 0.00 0.57 0.18 EMAPA.Y 0.34 0.14 0.69 0.22 101% EMSAP.CHANKA 0.00 0.79 0.25 EMSAPA.YAULI 0.00 0.58 0.18 EPS.CALCA 0.00 0.34 0.11 Source: SUNASS.Indicators,.2007 44 aPPenDiX 4: aCCess To safe waTer in Urban CenTers in PerU, by UTiliTies serviCe area 2007, includes 2007 house pipe 1996 stand posts connections sedAPAl s.A. 74% 88% 84% large water utilities 77% 85% 81% SEDAPAR.S.A. 88% 86% 84% EPS.GRAU.S.A. 82% 83% 77% SEDALIB.S.A. 71% 81% 80% EPSEL.S.A. 89% 84% 80% SEDACHIMBOTE.S.A. 71% 92% 88% EPS.TACNA.S.A. 88% 97% 85% EPS.SEDALORETO.S.A. 56% 68% 62% SEDAM.HUANCAYO.S.A.C 75% 75% EPS.­.SEDACUSCO.S.A. 71% 97% 96% medium size water utilities 70% 83% 81% EMAPICA.S.A. 84% 92% 88% EPSASA 59% 85% 79% SEDAJULIACA.S.A. 68% 80% 80% AGUAS.DE.TUMBES 63% 66% 61% SEMAPACH.S.A. 87% 85% 83% SEDA.HUANUCO.S.A. 54% 83% 81% EMSA.PUNO.S.A. 69% 85% 85% EMAPA.SAN.MARTIN.S.A. 83% 92% 89% SEDACAJ.S.A. 71% 96% 96% EMAPA.CAÑETE.S.A. 78% 80% 74% EMAPACOP.S.A. 41% 42% 42% EPS.ILO.S.R.LTDA. 68% 97% 96% EPS.CHAVIN.S.A. 65% 93% 93% EMAPA.HUACHO.S.A. 95% 91% 87% (continued on next page) 45 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) (continued) 2007, includes 2007 house pipe 1996 stand posts connections small size water utilities 66% 88% 86% EMAPISCO.S.A. 76% 96% 92% EPS.SELVA.CENTRAL.S.A. 48% 75% 73% EPS.MOQUEGUA.S.R.LTDA 82% 88% 80% SEMAPA.BARRANCA.S.A. 78% 93% 88% EPS.MANTARO.S.A. 91% 91% EMAPA.HUARAL.S.A. 64% 81% 81% EMAPA.MOYOBAMBA.S.R.LTDA 73% 91% 91% EMPSSAPAL.S.A. 73% 99% 99% EMAPA.PASCO.S.A. 68% 78% 76% EMUSAP.ABANCAY 63% 100% 100% EPS.SIERRA.CENTRAL.S.A. 70% 93% 92% EMAPAT.S.R.LTDA. 64% 92% 84% EPS.MARAÑON 45% 84% 84% EMAPAVIGSSA 69% 67% NOR.PUNO.S.A. 55% 98% 98% EMAPA.HUANCAVELICA.S.A.C 66% 82% 82% EMUSAP.AMAZONAS 78% 98% 98% EPSSMU.S.R.LTDA 71% 88% 81% EPS.AGUAS.DEL.ALTIPLANO 94% 90% EMAQ.S.R.LTDA. 61% 67% 65% SEDAPAR.S.R.L..(Rioja) 87% 86% EMAPAB.S.R.LTDA. 63% 94% 94% EMAPA.Y 73% 92% 92% EMSAP.CHANKA 51% 87% 87% EMSAPA.YAULI 71% 71% EPS.CALCA 87% 87% 46 aPPenDiX 5: waTer UTiliTy oPeraTing PerformanCe inDiCaTors Local WS&S Utilities Large Medium Small Total SEDAPAL Access to safe water Access.to.safe.water,.1997 81% 72% 72% 77% 80% Access.to.safe.water,.2007 84% 80% 88% 84% 88% Population without access to piped water 1997 0.89 0.57 0.11 1.58 1.35 2007 1.14 0.57 0.07 1.79 1.34 m3 potable water produced per m3_billed 1996 1.72 1.57 2007 1.91 1.57 un Accounted for Water Unaccounted.for.water,.1996 37% 48% 54% 42% 36% Unaccounted.for.water,.2007 46% 49% 54% 48% 37% Cost of m3 of water billed to customers (us$/m3) 1996 0.40 0.33 2007 0.40 0.44 staff efficiency Staff.per.1000.connections,.1996 4.97 6.33 7.26 5.65 1.61 Staff.per.1000.connections,.2007 3.17 3.56 4.53 3.46 2.45 (thousand.m .water.billed.per.staff ) 3 (66) (145) Water billed to customers (million m3/year) 1996 292 421 2007 347 410 service Quality Hours.of.service/day,.1996 13.66 14.43 16.05 14.20 13.55 Hours.of.service/day,.2007 14.94 15.02 15.90 15.10 21.29 Sources: Prepared.by.authors.with.information.in.SUNASS.2007.Water.Supply.and.Sewerage.Utility.Indicators 47 aPPenDiX 6: PerUvian waTer UTiliTies finanCial sTaTemenTs A.6.A: Simplified Income Statements, 2007 (Millions of Soles unless otherwise indicated) Local WS&S Utilities Large Medium Small Total SEDAPAL Operating.Revenues 277.18 101.87 40.13 419.18 866.82 Earnings.Before.Interest,.Taxes,.and.Depreciation 54.30 16.49 3.72 74.51 388.38 Depreciation 62.03 24.63 9.82 96.48 213.52 Earnings.Before.Interest.and.Taxes ­7.73 ­8.14 ­6.10 ­21.98 174.86 Net.Financial.Expenses 8.61 8.62 3.52 20.75 ­7.81 Net.profits/loss ­16.34 ­16.77 ­9.62 ­42.73 182.71 Operating.Margin.Before.Depreciation 20% 16% 9% 18% 45% Operating.Margin.After.Depreciation* ­3% ­8% ­15% ­5% 20% Source: prepared.by.the.authors.with.figures.from.SUNASS.(Indicators.2007).and.Financial.Statement.of.water.utilities.when.available. *.These.figures.are.in.general.the.actual.operating.margin.as.most.water.utilities.are.using.their.depreciation.allowance.to.cover.operating. costs. A.6.B: Simplified Balance Sheets millions of Soles, 2007 (COLFONAVI Reimbursable Contributions Claims included) Local WS&S Utilities Large Medium Small Total SEDAPAL total assets 1,741 636 299 2,675 5,171 Current.assets 172 75 63 310 378 Net.fixed.assets 1,568 561 236 2,365 4,793 liabilities and equity 1,741 636 299 2,675 5,171 Current.Liabilities 85 144 27 257 434 Long.term.liabilities 1,337 732 278 2,347 1,838 total liabilities 1,421 877 305 2,604 2,272 equity 319 ­241 ­7 72 2,899 Debt.to.revenue.ratio 5.13 8.61 7.61 6.21 2.62 Source: prepared.by.the.authors.with.figures.from.SUNASS.and.Financial.Statement.of.water.utilities.when.available. 49 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) A.6.C: Simplified Balance Sheets, millions of Soles, 2007 (COLFONAVI Reimbursable Contributions Claims not included) Local WS&S Utilities Large Medium Small Total SEDAPAL total assets 1,741 636 299 2,675 5,171 Current.assets 172 75 63 310 378 Net.fixed.assets 1,568 561 236 2,365 4,793 liabilities and equity 1,741 636 299 2,675 5,171 Current.Liabilities 85 144 27 257 434 Long.term.liabilities 691 255 98 1,045 1,186 total liabilities 776 400 126 1,302 1,620 equity 965 236 173 1,373 3,551 Debt.to.revenue 2.80 3.93 3.14 3.11 1.87 Source: prepared.by.the.authors.with.figures.from.SUNASS.and.Financial.Statement.of.water.utilities.when.available. 50 aPPenDiX 7: bank DePosiTs anD loans in PerU (million of inDiCaTeD CUrrenCy mid 1998 % sep 2008 % Change 1998­2008 total Banking system soles 38,800 100 91,797 52,997 .Deposits.in.local.currency 9,609 25% 41,472 45% 31,872 .Deposits.in.foreign.currency 29,191 75% 50,325 55% 21,134 total Banking system us$ 13,208 100% 30,396 -- 17,188 .Deposits.in.local.currency 3,269 25% 13,732 45% 10,463 .Deposits.in.foreign.currency 9,939 75% 16,664 55% 6,725 source of funds Local (soles) 84,221 92% Foreign (soles) 7,576 8% Bank deposits/GDP 21% -- 30% -- -- Rate of exchange Soles/US$ 2.937 -- 3.02 -- -- Portfolio.of.investments.(US$.million) Dec.2004 Dec.2008 Change.04­08 .Net.loans 11,164 29,308 18,144 Of which mortgages 1,646 3,825 2,179 .Other.investments 3,545 6,446 2,901 Source: Web.information.from.Superintendencia.de.Banca.y.Seguro,.Peru 51 aPPenDiX 8: PerUvian Pension fUnDs invesTmenTs (million) nov-99, April-09, April us$ % us$ % soles total local markets 2,375 100% 16,247 88.1% 48,740 Of.which National.T-bonds 166 7.0% 4,713 25.6% 14,138 Banks 850 35.8% 2,316 12.6% 6,947 Investment.Funds 14 0.6% 542 2.9% 1,627 Public services infrastructure 335 14.1 2,915 15.8% 8,744 Of which energy 170 7.2 1,745 9.5% 5,234 Electricity distribution -- -- 414 2.2% 1,243 Electricity Generation -- -- 753 4.1% 2,260 Electricity Transmission -- -- 87 0.5% 261 Hydro-Energy Projects -- -- 61 0.3% 184 Hydrocarbons -- -- 429 2.3% 1,286 transport infrastructure -- -- 513 2.8% 1,539 Roads -- -- 498 2.7% 1,493 Railroads -- -- 2 0.0% 6 Airports -- -- 13 0.1% 39 telecoms 165 6.9 637 3.5% 1,910 Water and sanitation -- -- 20 0.1% 61 Of which -- -- Water (Agua Azul) -- -- 10 0.1% 31 international markets -- -- 2,158 11.7% 6,475 Of which Mutual Funds 986 5.3% 2.,957 operations in transit -- -- 30 0.2% 89 total 2,375 18,435 100% 55,304 Source: Web.version.of.the.Monthly.Report.Peruvian.Private.Pension.Funds,.Nov.1999.and.April.2009,.plus.information.from.meeting..Rate. of.exchange,.April.3.00.soles/US$. Note 1:.Average.return.on.investments.over.the.last.10.years.was.above.10%.(13%.according.to.SBS_AFP.regulators);.and.pensioners.con- tributions.during.2008.was.US$3.5.billion..Then.return.on.investments.and.new.contributions.make.about.US$5.billion/year. Note 2:.Balance.sheet.based.investments.(equity.and.Bonds).estimated.using.rules.of.allocation.in.multifondos. 53 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) A.8.B: Allocation of PPFs Funds by Maturity PPF.funds,.Feb.2009 Less.than.1.year 1­2.years 2­5.years More.than.5.year Not.defined US$.15.5.billion 9% 2% 6% 46% 38% Source: Superintendencia.de.Banca.y.Seguro,.PPF.funds.Vice.Presidency 54 aPPenDiX 9: esTimaTion of invesTmenT neeDs 2009­2015 To aCHieve mDgs in PerU A.9.A: Financiamiento Agua Potable y Saneaminto 2005­15(Million US$) Ampliación Rehabilitación Medición Total SEDAPAL 1,211 ·. Agua.Potable 433 145 0 577 ·. Saneamiento 489 145 634 EPS.Grandes 652 ·. Agua.Potable 157 123 41 321 ·. Saneamiento 288 43 331 EPS.Medianas 367 ·. Agua.Potable 72 71 25 167 ·. Saneamiento 178 22 200 EPS.Pequeñas 87 ·. Agua.Potable 22 13 5 40 ·. Saneamiento 43 3 47 Otras.Administraciones 310 ·. Agua.Potable 73 43 17 133 ·. Saneamiento 167 10 177 Ámbito.Rural 285 ·. Agua.Potable 94 125 219 ·. Saneamiento 66 66 Total.General 2,082 742 87 2,911 Source: Ministerio.de.Vivienda,.Construction.y.Saneamiento,.Plan.Nacional.de.Saneamiento 55 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) A.9.B: Financiamiento Tratamiento de Aguas Servidas (Million US$) Ampliación Rehabilitación Total SEDAPAL 367 0 367 EPS.Grandes 331 22 353 EPS.Medianas 203 9 212 EPS.Pequeñas 47 0 47 Otras.Administraciones 152 1 153 Total.General 1,100 31 1,131 Source: Ministerio.de.Vivienda,.Construction.y.Saneamiento,.Plan.Nacional.de.Saneamiento A.9.C: Inversiones durante 2006­2008, to correct table Appendix 7a. Ampliación Rehabilitación Total SEDAPAL 70.07 261.93 332.00 Other.urban.utilities 396.60 100.67 497.27 Total.General 466.67 362.60 829.27 56 aPPenDiX 10: PerUvian Pension fUnDs invesTmenTs (million) Concession Agua Azul (CAA, Box 3) ­ In.this.case.CAA's. during.construction;.the.Trust.Fund.will.also.handle. main.contracts.included.both.a."take.or.pay".contract.with. CTO.operational.revenues.in.such.a.way.that.the.Re- SEDAPAL.and.the.obligation.to.create.a.repayment.of.debt. serve.and.Debt.service.accounts.are.able.to.comply. reserve.account..The.first.ensured.that.cash.revenues.will. with.the.financial.obligations,.including.those.in.favor. be.available.once.the.project.is.operating..The.latter,.estab- of.the.lenders. lished.with.City.Bank.as.an.agent,.had.to.be.funded.with. vii.. Equity contribution.of.sponsor.(Odebretch).less.than. an.initial.deposit.and.replenished.with.the.cash.revenues. 10%.(US$20.million).of.total.project.cost.as.equity.and. handled.by.a.collecting.account.in.City.Bank..Priority.service. issue.shares.that.is.maintained.as.collateral.(prenda). of.debt.was.ensured.by.bondholders.control.of.the.col- of.debts..In.CTO's.case,.payment.of.debts.also.depend. lecting.account.from.where.funds.go.to.the.debt.reserve. on.the.operational.performance.of.the.concessionaire;. account.and.to.CAA's.own.income.account..Also,.according. however,.the.RGL.is.regarded.weakly.able.to.pay.for. to.the.financing.agreements,.CAA.could.not.get.more.debt. the.large.amounts.of.water.to.be.delivered.by.CTO,. aside.from.its.bond.issues..Additionally,.CAA.offered.the. therefore.the.likelihood.of.the.CTO.cash.revenues.even. project.treatment.plant.assets.as.collateral,.but.repayment. with.the.take.of.pay.contract.are.not.regarded.robust.. of.the.bonds.was.ultimately.linked.to.CAA.operating.perfor- Thus,.had.CTO's.contract.not.included.the.two.GoP. mance..Operating.performance.was.ensured.by.the.partici- sovereign.guarantees,.the.CAF's.partial.risks.guarantee,. pation--as.sponsors.on.the.concessionaire.side--of.ACEA. and.the.Creditors.Trust.Funds.to.handle.debt.service,. (a.municipal.company.handling.Rome.water.and.energy. it.is.unlikely.that.any.investor.would.have.provided. services).and.Impregilio.NV.(a.Dutch.engineering.firm.with. financing.for.this.project. well.established.reputation)..Furthermore,.the.sponsors.also. provided.financing.equivalent.to.25%.of.total.cost.of.the. Interoceanica Finance Limited (IFL) ­.IFL.has.risen.funding. project.which.provided.further.guarantee.of.the.sponsor. for.a.concessionaire.in.Peru.(Interoceanica.IV).by.securitiz- commitments.to.the.project. ing.its.CRPAOs,.a.GoP.irrevocable.payment.obligation.(See. Appendix)..The.securitization.consisted.on.the.issuance. Concession Trasvase Olmos (CTO, Box 4) ­.In.this.case. of.two.series.of.bonds.with.interest.and.principal.value.of. CTO's.main.contracts.included: US$562.million--with.10.and.18.year.maturities--that.will. be.paid.with.revenues.generated.by.CRPAOs..The.operation. i.. Take or pay contract.between.the.Regional.Government. was.possible.by.the.participation.of: of.Lambayeque.(RGL).and.CTO; ii.. GoP Sovereign Guarantee.in.case.RGL.can.not.comply. i.. BNP Paribas Security Corp.as.arranger.of.the.operation.­ with.its.take.or.pay.contract; ii.. Goldman Sachs.as.Credit.Default.Swap.(CDS).and.Total. iii.. CAF18.Partial Credit Risk Guarantee.in.case.GoP.does.not. Return.Swap.(TRS).issuer.­.The.CDS.will.pay.in.case.the. comply.with.its.sovereign.guarantee.in.favor.of.RGL; GoP.does.not.comply.with.paying.its.CRPAO.obligation. iv.. GoP Sovereign Guarantee.for.bonds.to.be.issued.by.the. when.due..The.TRS.will.pay.a.minimum.market.return. concessionaire.and.for.CAF's.debt.to.finance.the.proj- to.bond.holders.while.the.CRPAOs.are.not.still.issued. ect; during.construction.period..Goldman.Sachs.will.handle. v.. Obligation to create.a.Reserve.and.Debt.Service.Ac- bond.sales.to.investors. count.to.ensure.timely.payment.to.creditors; vi.. Obligation to create.a.Creditors'.Public.Trust.Fund.(Fidei- comiso).to.handle.GoP.co-financing.of.the.project.for. 18. .CAF.stands.for.Corporacion.Andina.de.Fomento.(a.subregional. US$77.million.and.bond.financing.for.US$100.million. development.bank). 57 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) iii.. A Peruvian Trustee (La Fiduaciaria S.A.).­.To.receive.fund- of.delays.in.construction.of.the.roads.or.other.causes,.in- ing.from.CRPAOs.sales.and.allocate.it.to.fund.construc- vestors'.remuneration.will.be.a.combination.of.returns.of. tion. already.issued.CRPAOs.and.TRS.returns..Peruvian.PPFs.have. iv.. An American Trustee (Bank of New York)..Will.register.the. purchased.bonds.for.about.US$116.million..Note.that.in. bonds.in.the.NYSE,.will.issue.the.bonds,.keep.proceed- this.financing.structure,.the.returns.to.investors.have.totally. ings.of.bond.sales.and.its.TRS.returns.until.needed.to. been.delinked.from.the.operational.performance.of.the. purchase.CRPAOs. concessionaire,.and.all.that.matters.is.the.GoP.credibility. v.. Interoceanica IV,.the.concessionaire,.signed.an.agree- to.pay.the.CRPAOs..However,.it.is.in.the.best.interest.of.the. ment.to.sell.its.CRPAOs.to.BNP.Paribas. concessionaire.to.control.time.construction.risks.as.CRPAOs. are.issued.to.him.upon.timely.completion.of.construction. If.the.road.construction.program.is.fully.implemented,.and. progress.and.he.can.only.get.the.financing.receiving.fund- the.GoP.issues.all.CRPAOs.corresponding.to.this.project,. ing.upon.delivery.of.his.CRPAOs..It.is.also.in.the.best.inter- the.investors.will.cash.the.full.return.stated.in.the.bonds,. est.of.the.concessionaire.to.maintain.good.toll.road.O&M. which.is.about.8%.as.sale.value.of.the.bonds.(present.value). performance.as.its.profits.during.operation.phase.of.the. was.US$286.million..If.CRPAOs.are.not.fully.issued.because. contract.will.depend.on.it. 58 aPPenDiX 11: agenDa of mission anD lisT of inTerview Persons Proposed Topics Time Name Position Entity Meeting for Meeting MONDAY MAY 18, 2009 08:00 Al mission Marriott Hotel Working breakfast a.m. members 10:00.a.m. Fernando.Laca Vice.Minister.of. Ministry.of.Housing,. Ministry.of.Housing,. National.Investment. Construction.and. Construction.and. Construction.and. Program,.criteria.of.MVC. Sanitation Sanitation.. Sanitation.(Edificio. to.invest.in.Sedapal,.and. José.Luis.Becerra National.Director.of. (211-7930) Petroperu) other.utilities..Sustainable. Sanitation local.financing.of.WSS. projects 12:00.p.m. Lorena.Masias Deputy.Superinten- BANKING,.INSUR- SUPERINTENDENCE. Government.policies.and. dentant ANCE.AND.AFP.SU- (Los.Laureles.214,. restrictions.for.the.acquisi- PERINTENDENCE San.Isidro) tion.of.local.bonds.by.the. (221-8990) AFP. 12:00.p.m. Ivan.Lucich. Tariff.Regulation. SUNASS.(264-1623) SUNASS.(Bernardo. SUNASS.recent.experience. Larrauri Manager Monteagudo.210,. in.supporting.local.financ- Magdalena ing.with.and.without.pri- Antonio.Bringas PSP.Legal.Advisor del.Mar) vate.sector.participation. 03:00.p.m. Betty.Sotelo Director.of.Public. Ministry.of.Finance. Ministry.of.Finance. Local.financing.of.invest- Credit (426-.9822) (Jr..Lampa.255,. ment.in.Water.and.Sanita- Roger.Dias Investment.Prog. Lima) tion Director 05:00.p.m. Guillermo.León Executive.president SEDAPAL.(614-3200) World.Bank Portfolio.of.projects,.local. Carlos.Olle Planning.Manager public.and.private.funding. Pedro.Muñoz.Najar. Finance.Manager for.investment.projects. Rojas and.for.O&M. Jorge.Barco General.Manager Options.for.getting.private. Ana.Coletti Project.Manager financing.for.investment. projects;.including.balance. sheet.financing.and.proj- ect.based.financing TUESDAY MAY 19, 2009 09:00.a.m. Gustavo.Méndez Water.and.sanitation. KfW.(222-2233) KfW.(Av..Los.Incas. Agencies.financing.strat- sector 172,.piso.6,.San. egy.for.the.water.and.sani- Isidro) tation.sector. 9:00.a.m. James.Fernandez. President SEDAPAR.. World.Bank Investment.needs.and. Salguero (054).28-6295 finance.strategies Oscar.Pastor. General.Manager Paredes (continued on next page) 59 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) (continued) Proposed Topics Time Name Position Entity Meeting for Meeting 10:30.a.m. Esmidio.Rojas. President SEDALIB.. World.Bank Investment.needs.and. Rodriguez (044).48-2350 finance.strategies Roberto.Vigil.Rojas General.Manager 12:00.p.m. Americo.Montañez. President SEDACUSCO.. World.Bank Investment.needs.and. Tupayachi (084).22-5020) finance.strategies David.Valenzuela. General.Manager Chirinos 12:00.p.m. Pedro.Rubio Corporate.and.En- Banco.de.Crédito. BANCO.DE.CREDI- Participation.in.the. terprise (313-2000) TO.(Calle.Cente- financing.of.infrastruc- Manager nario.156,.Urb..Las. ture.projects.using.local. Laderas.de.Melgar- finance..Their.experience. ejo,.La.Molina) in.concession.contracts. with.local.financing..Their. participation.in.setting.up. local.currency.infrastruc- ture.funds. 03:00.p.m. Jorge.Guibo Water.and.Sanitation. Ministry.of.Finance. Ministry.of.Finance. Local.financing.of.invest- Sector.Leader (311-.5930.anexo. (Jr..Lampa.255,. ment.in.Water.and.Sanita- 3704) Lima) tion 03:00.p.m. Andrés.Arias General.Manager CONSORCIO.AGUA. World.Bank Private.contractors.share. AZUL.(441-7072) holder.of.Agua.Azul..Their. Ruben.Beltrán Finance.Manager experience.on.working. in.water.raising.local.cur- rency.finance..Their.experi- ence.in.Agua.Azul 05:00.p.m. Marlic.Ventavet Representative.in. CONSORCIO.SNC. World.Bank Concession.contract.WTP. Peru LAVALIN.INTERNA- and.submarine.ourfall. TIONAL.&.VEOLIA. Chira,.and.prospects.and. EAU.(613-0900) modalities.to.get.local. financing 05:00.p.m. Alexis.Carbayo Business.Director GRUPO.VEGA.. World.Bank The.acquisition.process.of. (616-9191) Aguas.de.Tumbes. Hazem.Fayad Comercial.Manager Investment.needs.and. financing.strategy. WEDNESDAY MAY 20, 2009 09:00.a.m. René.Cornejo Director HELIOS.(358-6021). World.Bank Former.executives.of.PRO- Av..Angamos.Este. INVERSION..Portfolio.of. Eduardo.Escobal General.Manager. 2514,.Oficina.301,. concession.projects,.spe- eescobal@helios. Surquillo cific.reference.to.WSS,.and. com.pe prospects.of.local.private. finance.of.concessions (continued on next page) 60 Appendix.11:.Agenda.of.Mission.and.List.of.Interview.Persons (continued) Proposed Topics Time Name Position Entity Meeting for Meeting 9:00.a.m. Gastón.Raimundo Representative.in. LATINAGUAS.(993- World.Bank Aguas.de.Tumbes..First. Peru 525-785) PSP.contract.conducted. by.PRO-INVERSION.in.the. WSS.sector. 10:30.a.m. Miguel.Delgado. Operations.Manager COFIDE.(615-4000) COFIDE.(Calle.Au- Infrastructure.develop- Maldonado gusto.Tamayo.160,. ment.funds..Trust.Funds. San.Isidro) management.and.infra- structure.projects 11:00.a.m. Máximo.Prado. Executive.Director COL-FONAVI.. COL-FONAVI.(Miro- Their.experience.regard- Delgado (428-9638) quesada.320,.Lima) ing.their.loans.to.water. utilities,.their.willingness. to.restructure/refinance. their.debt 03:00.p.m. Johanna.Izquierdo Director APOYO.RISAK.CLA- APOYO.RISAK. Their.experience.in.the. SIFIER.(444-5588) CLASIFIER.(Miguel. classification.of.risk.of.sub. Aljovin.180,.Urb..El. national.entities,.that.is. Rosedal,.Lima.18) an.obligation.for.internal. loans. 05:00.p.m. Carmiña.Moreno Water.and.sanitation. BID.(215-7800) Carmiña.estará. Agencies.financing.strat- sector fuera.de.Lima:. egy.for.the.water.and.sani- audio.conferen- tation.sector. cia.a.su.celular. 989.185.493 05:00.p.m. Cayetana.Aljovin Executive.Director PRO-INVERSION. PRO-INVERSION. Portfolio.of.concession. (612-1202) (Edificio.Petroperu) projects,.specific.reference. Rosina.Manche Water.sector.private. to.WSS,.and.prospects.of. investment.projects. local.private.finance.of. manager concessions THURSDAY MAY 21, 2009 9:00.a.m. Eduardo.Gómez. Corporate.Finance. SCOTIABANK.. SCOTIABANK.(Av.. Participation.in.the. de.la.Torre Manager (211-6000) Dionisio.Darteano. financing.of.infrastruc- 102,.Piso.5,.San. ture.projects.using.local. Isidro) finance..Their.experience. in.concession.contracts. with.local.financing..Their. participation.in.setting.up. local.currency.infrastruc- ture.funds. 11:00.a.m. Gonzalo.Camargo Investment.Manager AFP.HORIZONTE. AFP.HORIZONTE. Experience.and.instru- (215-4000) (Av..República.de. ments.used.for.financing. Panama.3055,.piso. of.infrastructure.projects. 5,.San.Isidro) for.public.services. (continued on next page) 61 Local.Financing.of.Water.Utilities:.Challenges.and.Opportunities.­.The.Case.of.Peru...(Final.Draft) (continued) Proposed Topics Time Name Position Entity Meeting for Meeting 11:00.a.m. James.Loveday Investment.Deputy. AFP.PRIMA.. AFP.PRIMA.(Calle. Experience.and.instru- Manager (615-7250) Chinchón.980,.piso. ments.used.for.financing. 12,.San.Isidro) of.infrastructure.projects. for.public.services. 03:00 All mission team World Bank Discussion of findings p.m. (all members about practical issues after- for mainstreaming lo- noon) cal financing of water utilities. 05:30.p.m. Eduardo.Campos Financial.Advisory. APOYO.INVESTMENT. APOYO.INVEST- Concession.experience. Manager FUND.ADMINISTRA- MENT.FUND. and.local.finance.of.con- Gianfranco. TION.SOCIETY.. ADMINISTRATION. cessions.in.Peru..Risk.clas- Castagnola Executive.President (513-3030) SOCIETY.(513-3030). sification.of.municipal.and. Calle.Gonzales. regional.governments,. Larrañaga.Nº.265,. and.infrastructure. Urb..San.Antonio,. Miraflores FRIDAY MAY 22, 2009 09:00.a.m.. All mission team World Bank Discussion of findings (all.morn- members about practical issues ing for mainstreaming lo- cal financing of water utilities. 62