Overcoming the Infrastructure Gap in Cities with Private Sector Participation

8/3/2019 Overcoming the Infrastructure Gap in Cities with Private Sector Participation

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Financing Future Cities

Overcoming the Infrastructure Gap in Cities

with Private Sector Participation

Hisaka KimuraHead, East Asia Unit

Private Sector Infrastructure Division 2Private Sector Operations Department

Asian Development Bank

15 November 2011


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Mind the Gap

Area : old city center new outskirts

emerging satellite cities

Money : total investment amount

needs v.s. public budget

Technology: safety, energy & water

efficiency, climate change

Operation Management: large

network v.s small distributed network

PPP is seen as a successful vehicle to

fill in the gaps


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Objective

The session will examine and discuss recent PPP deals that ADB and

other partners have concluded.

Some of the questions that the session will try to address include :

- are PPP deals actually happening in Asia and elsewhere?

- are utilities/governments ready for PPPs?- what are the major stumbling blocks for PPP to happen?

and how do we overcome them?


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Case Study: Water Sector in PRC

Water is one of the PRCs most crucial development challenges.

Growing demand for water is also highlighting importance of water

efficiency: the PRCs per capita water resources are of the global

average, but its water consumption per GDP is 5.5 times higher.

More than 90% of the urban population has access to piped water. But

there is critical shortage in water supply delivery capacity to fulfill last

mile connections to the urban areas and ensure service quality can keep

up with increased demand while the PRC adds another 200 million or

more urban residents by 2020.

Doubling funding needs in the next 5 years. This cannot be met by the

public sector alone.


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Water Supply Value Chain

Local

governmentowned water

companies

BOT started

in late 1990

Local

governmentowned water

companies

Raw waterExtraction

Tap watertreatment

Waterdistribution

End users

Case Study 1 Case Study 2


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BOT Water Treatment Plant

The fist BOT project in the water sector in the PRC

Serving 400,000 cubic meter of treated water per day in Chengdu

city

ADB internal PPP:

ADB public sector operation department provided technical assistanceto the Government on developing tender documents and arranging

competitive bidding.

ADB private sector operation department provided financial assistance

to the winning bidder, consortium of Veolia Environment and Marubeni

Corporation.


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Project Structure

The project supplies treated water under a take-or-pay offtakeagreement, with a performance guarantee from the municipal

government.

Project Sponsor

Project Company

Municipal Waterworks

General Company

(Distribution)

Water Authority

Bureau

Construction

Dept

Municipal

Government

Take or PayOff take agreement

Concession Agreement

Water sales


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PPP Trend

Since the first BOT project, PPP has been seen as an effective means to

address ever-increasing infrastructure needs.

Primary cities have completed flagship large-sized BOT projects.

Guarantee from the central/ local governments are no more available.

High demand exists in a series of small-medium sized green and brownfields projects which involve unproportionally high transaction costs and

substantial project preparation time.

Text book type project finance does not fill in the financial gap in the

current market.


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Municipal Water Distribution Infrastructure

Development Project

ADB offers a portfolio approach to support multiple water

distribution in second- and third-tier cities in the PRC, which are

often too small and time-consuming for international banks to

finance on stand-alone basis.

ADBs loans have two components:

A: USD/ RMB dual currency loan of up to $100million equivalent

B: USD loan of up to $100 million funded by commercial banks

The loans will be channeled to subprojects to improve water

distribution coverage, develop related infrastructure, and increasethe quality and reliability of the water supply.


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Project Structure

WPC WPCWPC WPC

PRC Hold Co

ADB USD Loan

International banks

syndication

ADB

CNY Loan

Local Banks

CNY Loan

100%

Various Municipal Entities

Project

Sponsor

WPC: Water Project Company

WPC WPC WPC WPC

Concession Agreements with municipal governments

ADB

CNY Bond


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Discussion points

Existing water infrastructure as a new asset class Decouple water business and equity investment

Variation of water quality for specific purpose

Majority of tap water is used for cleaning purpose

Water efficiency throughout water chain Waste water as a new water resources (Singapore: NEWater)

Water and energy nexus

Energy & water efficiency

Distributed community sized treatment facility vs large scale facility


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Structuring a Water PPP Project

Appropriate Funding Structure

Equitable risk sharing : risk

should reside with party most

able to manage it.Commercial

Issues such as tenure,termination regime and step-in

rights.

Economic fundamentals:

- Business and financial

viability and affordability

- Equitable tariff structure

Funding

Structure

Risk Allocation

Economic Fundamentals


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A Way Forward

In 2012, and future years, we are looking into the merits of new area ofprivate sector participation that could improve efficiency.

We focus on models involving an enhanced role for the private sector,

with private sector entity taking responsibility for most aspects of service

provisions for a given project, which could yield an improved allocationof risk.

We aim to offer unique financial solution with wide range of financial

options loan, equity, guarantee, private equity fund, etc to ensure

successful launching of projects.

Documents

Overcoming the Infrastructure Gap in Cities with Private Sector Participation