"By not addressing the global water crises, none of the UN Sustainable Development Goals will be achievable. Clean Water & Sanitation [SDG 6] is interconnected to all SDGs"
The water crisis is a tragedy of epic proportions. A large part of humanity - more than 2 billion people - do not have access to safe drinking water. An equal number of people do not have access to safe sanitation as well.
This post is part 6 of a series of 8 posts by TIGRIS co-founder, Saud Siddique, detailing thoughts on the current global water crisis, and recommendations on how it can be effectively addressed.
6. “Splitting” Water PPPs into Discrete Project Components
For successful implementation of Water BOT projects, risks need to be allocated to parties best able to manage such risks. The ‘splitting’ of a project into discrete components can help accomplish this.
What is “Project Splitting”?
Discrete components, where it is possible to get fixed-price, date-certain EPC contracts, can be done by the private sector. Discrete components, where it is not possible to get fixed-price, date-certain EPC contracts, need to be undertaken by the public sector.
Projects are more easily “bankable” when project costs are fixed. Fixed price, date certain EPC contracts are key to a fixed project cost. Predictability of project cost, and hence, project cashflows, allow for PPP projects to be significantly leveraged, i.e.,70-80% of a project can be financed by debt which will allow for competitive and affordable tariffs.
The Kigali Bulk Water BOT project provides a good example of “project splitting”. The Kigali project was spilt into a) pipeline component, and 2) the Bulk Water Treatment Plant (as shown in Diagram 1 above).
As construction of the pipeline (to transport water from a river 15 km away from the city) involved right of way issues which, if not handled properly, could increase project cost and delay project implementation, it was appropriate for the government to take responsibility for constructing and funding it.
The Kigali Water BOT was divided or “split” into discrete components to facilitate and maximize private sector participation.
This reduced the risk for implementing the entire project, and it was easier to secure the participation of a private sponsor to build and fund the Bulk Water Treatment Plant.
Splitting a project can also better cater to the typical investment horizons of public and private investors, i.e., the public component can have a longer pay-back period versus the private component.
Another example of where “project splitting” may be appropriate and where capital recycling is possible is in NRW.
Non-Revenue Water – Example of “Project Splitting”
The global NRW market is estimated to be 126 billion litres per year. Most urban centres have water pipelines which need repair and are more than 60 years old.
About 70% of NRW losses are in developing countries, where NRW generally ranges from 30% to as high as 70%. These losses can be substantially reduced through capital investments. Unbilled or apparent losses, which account for between 40%-50% of the losses, can be reduced by installing new water meters and active network metering. Leaks/overflows are only minimized through replacement of the old pipes and active network operation metering. The investments for new meters can have an investment payback period of 2-3 years, while leak reduction investments can have an investment payback period of 5-9 years.
The large NRW losses seriously affect financial sustainability of utilities through lost revenues, and inflated operating expenses and capital expenditures. Water utilities are unable to fund service expansions, experience intermittent water supply, and provide water of poor quality.
The process of improving cost recovery through NRW reduction allows for better service, which can lead to increases in water tariffs because customers are willing to pay for better and more reliable service.
A strategy for NRW reduction may be split into two components: Physical losses (leaks) can be undertaken by the public utility, while apparent losses (metering) can be undertaken by the private sector under a PPP model (see Diagram 8 below).
Diagram 8 - "Splitting" of Non-Revenue Water - Optimizing Risk Allocation among Public and Private Sectors
Under the PPP, structured through a Special Purpose Vehicle, the business model can consist of performance-based contracts whereby the increase in revenue owing to NRW reduction can be shared between the private sector and the utility (e.g., on a 50:50 basis).
The NRW reduction program can be implemented in a phased manner. The pilot phase can start with one specific town, city, or province. After successful implementation, the NRW reduction platform can be rolled out to cover entire regions (e.g., Africa), or globally (developing countries in multiple regions).
Given the high predictability of future revenues, post-construction, of bulk water treatment plants, or NRW programs, recycling of capital, asset securitizations, or pooling such projects into Yieldcos, can be possible. The multiplier effect in terms of capital raising can be huge. This can have a salutary impact on accelerating improvement of the financial and operating performance of the public utilities, so much so that these entities could be in a position to access local or global capital markets either individually, or on a pooled finance basis, within a reasonable period of time.