Public-Private partnerships for Urban Water Utilities: The Senegalese experience Cécile Denormandie Water and Sanitation EC-EIB Seminar June 28, 2011

Public-Private partnerships for Urban Water Public-Private partnerships for Urban Water Utilities:Utilities:

The Senegalese experienceThe Senegalese experience

Cécile DenormandieWater and Sanitation EC-EIB Seminar

June 28, 2011

June, 28 2011The Senegalese experience in PPP 2

Generally viewed as a success, but major difficulties appeared in 2010


1995 – 2010The success story


Context & Overview of the reform

In 1995 : a revised legal and contractual framework was established for the urban water sector

Previously : a public company, the SONEES, was responsible for water and sanitation services in urban centres (investments and operation)

Set up of a PPP in the urban water

In 1995 : creation of a new scheme for urban water services asset-holding company for water service assets (SONES) private operator for water services (SDE) combined asset-owner and operator for wastewater services (ONAS)

1


Scope of the service : 56 centres

Urban water : 5.4M habitants : Dakar + regions

Objectives : what really mattered for the sector Extension of coverage, especially for Dakar Give access to the poor Realise investments : high level of infrastructure

investments were required (Dakar) Reach sector financial equilibrium by 2003 without

major tariff increase (limited to 3% per year)

Bidding process: international call for tender Selection criteria : lowest price / m3 SAUR won the bid with a price of 236 FCFA/m3

Financing model (almost part of the contract)

Context & Overview of the reform1


Legal and contractual framework (1/2)Who does what?

STATE

SONES

Asset holding company

SDE

Private operator

CONCESSION CONTRACT

30 years

AFFERMAGE CONTRACT

10 years

Planning contract

Performance contract

Customer : 56 centers

2

Tariffs policy, long term planning, IWRM…


Legal and contractual framework (2/2) Senegalese specificities

Tailor made contractual arrangements in order to meet all the objectives

Clear share of responsibilities Asset holding company focuses on investing massively in order to address water supply pb.

owns the assets carries out the investments monitors the performance of the operator

Private operator focuses on improving technical and commercial efficiency. produces and delivers water in urban and periurban areas maintains the network collects fees

Maintenance, renewals, rehabilitation and expansion : clearly distinguished in the contracts

Share of commercial risks & share of incentive to make the system work Remuneration formula for the private :

Amount collected : average tariff * vol produced * actual technical and collections efficiencies SDE : (Op fee * vol )- contactual penalities Not linked to the customer category; linked to the performance Penalties : if contractual tech eff < 85% * contract comm eff <97% SONES : (average tariff - op fee) * vol produced * contractual tech eff (85%) * contract comm eff (97%)

Regulation by the contracts Dispute settlements through conciliation : independent experts called in to settle disputes Thanks to the financing model

2


Role of donors

Provided most of the sector financing (soft loans&grants) Donors were ready to contribute massively Sovereign loans retroceded or non sovereign loans to the SONES The creation of the SONES offered better security that the funds allocated to the

sector would be spent in the sector (not in the general budget)

Introduction of a private operator in order to guarantee the efficient use of such large investments : improve management and operation efficiency

Allowed moderate tariff increases (made the reform socially and politically acceptable) : keep the social block and increased social connections

PSE then PLT then PEPAM : Programmatic approach NS loan AFD (20M€) + NS loan IEB (15M€) + Grant UE (8.7 M€) + BOAD (8500 M

FCFA) + IDA Signature of a “Protocole d’accord” in 2007

milliards de FCFA M.EUR1996-2004 Programme sectoriel eau (PSE) 154 2352002-2007 Programme long terme (PLT) 158 241

2007-2015Programme eau potable et assainissement du millénaire (PEPAM) dont :

133 203

2007-2011 - PEPAM 1 37,3 572011-2015 - PEPAM 2 95,7 146

TOTAL 1996-2015 445 678

3


Performance of the PPP (1/4)Impact on access to piped water

2010 Revue Conjointe 2011

Population

totale

Taux de desserte par BP

Taux de desserte par BF

Taux de desserte

total

Dakar 2 870 99,6% 6,5% 100,0%

Régions 2 529 75,5% 14,3% 87,3%

Sénégal urbain

5 399 88,3% 10,2% 98,5%

4

0

20000

40000

60000

80000

100000

120000

140000

160000

1997 1999 2001 2003 2005 2007 2009

production (000 m3)

Sources : annual report (2010) –SDE and Update of the Financial model study (2011)


Performance of the PPP (2/4)Impact on service quality

Source :WB – Philippe Marin

Service continuity

Water quality : physical-chemical quality (100% conformity) & bacteriological quality (99% conformity)

4


Performance of the PPP (3/4)Impact on operational efficiency

Contractual NRW : max 15%

Contactual collection rate : 97%

Labor productivity : connections / employee = 456.33 (+173% since 1995)

4

Sources : annual report (2010) –SDE


Performance of the PPP (4/4)Sector equilibirum

In 2003 : the sector financial equilibrium is reached

Operating + capital cost recovery

(operating costs plus depreciation/amortisation, interest expenses and dividend payments)

4


Success factors

Enabling environment : Strong political will, political stability

Confidence climate between Government – SONES – Donors

No strong external shock (currency devaluation) FCFA pegged to the Euro

Tailor made contractual arrangements

Massive donors support

Wise allocation of the risks : the parties can bear them

No independent regulator : culturally appropriate

5


2010The crisis

The reform shows signs of weakness


Financial crisis :the burden of the state bills…(1/3)

1/ Since 2006 : tariffs increased only for the administration category 2620 FCFA/m3 in 2011 + 232% since 2006 Hidden subsidy for the domestic customers theoretical financial equilibrium (in

books)

2/ Increase of administration consumption

1

Accumulation of state arrears

M FCFA 2007 2008 2009 2010

montant facture TTC 13 936,3 16 594,2 22 768,7 22 282,9

Montant payé TTC 13 883,2 15 120,5 11 830,6 9 512,9 (1)

% 100% 91% 52% 43%

Source :Update of the Financial model study (ICEA, 2011)


Financial crisis : the burden of the state bills…(2/3)

1

Volumes facturés 2009

abonnés domestiques

69%

bornes fontaines4%

administration8%

maraîchers4%

autres abonnés15%

Montants facturés 2009


48%

bornes fontaines2%

administration32%

autres abonnés18%

Redevance SONES 2009

administration81%


1%bornes fontaines

4%

autres abonnés14%

Source : AFD, 2011


Financial crisis: the burden of the state bills…(3/3)

1

Administration bills = 80% of the SONES revenues

22 MM FCFA in 2010

State arrears = 25 MM FCFA in 2011

Source :Update of the Financial model study (ICEA, 2011)


Financial crisis : ….lead to a critical financial situation for the SONES

Consequences :High pressure on cash flows

Partially compensate : non repayment of the retroceded debt from the State

But not enough : in 2010 the SONES couldn’t repay for the CBAO and BOAD loans

Crisis : critical financial ratios -> freeze of the disbursements (non sovereign loans of AFD and EIB)

1


Confidence crisis (1/2)

1. Tariffs : increases frozen since 2003 for the private

1. +3% each year 1995-2003 uniformly across the categories

2. Since 2006 : increases only on administration tariffs

2. State arrears

3. Break of the dialogue between the stakeholders

1. Decision to stop the institutional study for the next contractual framework (unilaterally)

2. Declaration in favour of a private concession

Break in the confidence climate

2

Political will in question


End of the contract : April 2011

2009: institutional study financed by AFD (Nodalis) to identify possible institutional evolutions

January 2010 : termination of the contract with Nodalis imposed by the state

May 2010 : President Wade made an announcement The future contract will be a full concession For water and sanitation + drainage SDE will be competing against other private operators

Signature in July 2010 of an amendment to extend the contract with SDE to end of 2012 (but no negotiations)

Political context not favourable : Presidential elections in February 2012

Confidence crisis (2/2)2


DFIs’ reaction : 1st phase (2009-2010)

Problem started since 2009

How to react?

1/ Senegal viewed as a success story: no one believed that it could fail

2/ Attention focussed on the “what’s next” question and the end of the contract (institutional study)

3/ Social sector

4/ Political engagement

5/ Lack of transparency from the SONES

6/ Need a mean to put pressure

3


DFIs’ reaction : 2nd phase (2010-2011)

Change in the relationships from January 2010

Case of default : AFD and IEB didn’t agree to disburse the first tranche of 9.3 M€ in 2010 for the PEPAM

Many discussions and meetings in Dakar to find a solution to save the SONES EIB financed an update of the financial model

Financial mesures were engaged: Envelope of 4.4 MM FCFA (1.6 MM for the SONES) : for the repayment of OADB Cross debts cancellation agreement 15 MM FCFA in the Finance Law 2011 (instead of 5 MM for 2010) to pay the water bills Obj : reduce up to 15 MM FCFA the water bill (in 2011 admin water bill = 23 MM FCFA) Adoption of the principle to review the tariffs in the years to come Adoption of the principle to sign another Cross debts cancellation agreement end 2011

Signature of a “lettre de confort” in April 2011 :secure the financial equilibrium of the sector and secure the repayments of the on going financing from the donors Institutional uncertainty Duration of AFD and EIB loans : 18 years

IMF : formal commitments of the Senegalese State to ensure the sustainability of the water sector

3

Disbursements of AFD and IEB’s loans


What’s next?And lessons learned


Huge future challenges

1 – Assume large investments for Dakar and the regions

2 - Ensure the urban water sector sustainability: Ensure the payment of the administration bills Decrease the government bills in order not to burden the state budget (up to 15 MM FCFA) & decrease the

consumption Increase the private tariffs (eventually change the tariff structure) : need to depoliticize discussions around tariff Minimum fee for the SONES : 18 MM FCFA

3 – Achieve the MDG and social issue Increase access in the small towns : today SONES and SDE have no incentive to expand beyond the original

perimeter (only covers 42% pop)

4 – Prepare a new fair reform for the sector Renegotiate the contract to have a better equilibrium of the parties : improve exchange of information between

SDE and SONES Resolve the sanitation sector issue Give more responsibility to the private sector in the investments

10% adm consumption (volume)

35% administration tariff

19% average private tariff

Keep the administration bill at 15 MM FCFA + ensure 18 MM FCFA for SONES

1


End of the contract : last news

One year later : major changes vis-a-vis SDE

Protocol signed between the government and the SDE in May 2011 : Concession Duration: 30 years (2042!) Water + sanitation + drainage Direct negotiations with SDE

SDE (and Government?) will start to work on propositions for the next reform

Advantage : set the discussions on an economical basis

Clear advantage given to SDE in the negotiations

2


Role of the DFI

POLICY DIALOGUE : Support preparation of the next institutional scheme Still huge needs on Dakar (pb of resource) Role of the stakeholders : president Wade, SDE Need of a channel for concessionary finance : not possible with a concession What about sanitation services (waste water and drainage)

Set clearly the rule of the game in advance

Government commitment to 1/ pay its bills; 2/ increase the other tariffs

Regular missions + Support to finance a consultant to help the government to negotiate the contract

3


Lessons learned

PPP in Senegal: Good answer to public budget constraints vs MGD Good answer to improve technical & operational performance But someone has to pay at the end! (3T)

Importance of an enabling environment (political will)

1 – Tariffs : Try do disconnect it from the politics OR take on the responsibility of the political choice Link between tariffs policy and debt repayment Update the financial model

2 - Regulator : find the best scheme adapted to the local context and make clear the role of the financial model

No clear and independent supervision authority Need to open discussion on this point for the future contract Put a condition on regular updates for the model

3 – Better anticipate the system failure

4 – Financial tool (Non sovereign loans / duration of 18 years)

Capitalize on the Senegalese experience in other SSA countries : Niger, Cameroun, Mali

4

Thanks


Répartition du prix moyen du m3 d'eau par organisme (FCFA courant/m3)

- prix exploitant

- redevance patrimoine

- prix ONAS

Taxes

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011

FC

FA

/ m

3

Coûts unitaires et tarifs par m3 facturé

0

100

200

300

400

500

600

700

10 20

Volume facturé par bimestre (m3)

FC

FA

/ m

3

Coût variable

Tarif quota maraîcher

Tarif ménages

Coût exploitant

Coût complet

Tarif Professionnels

Tarif Bornes fontaines

Coût variable + Ch. personnel + maintenance

Source :Update of the Financial model study (ICEA 2011)

Documents

Public-Private partnerships for Urban Water Utilities: The Senegalese experience Cécile Denormandie Water and Sanitation EC-EIB Seminar June 28, 2011