Session 6 Financing PPPs Sources of financing Cost recovery strategies PPPUE/Capacity 2015 Public-Private Partnership training

PPPUE/Capacity 2015 PPP training January 26, Sources of financing The key processes of financing PPP include: A. Defining investment options / sources of funds B. Business valuation C. Bankability assessment D. Investment management

PPPUE/Capacity 2015 PPP training January 26, 2006 A. Sources of funds Equity - ownership in a private company or project Debt - public or private obligation to repay loan Grants - moneys that do not need to be repaid Guarantees - third-parties protecting against specified risks

PPPUE/Capacity 2015 PPP training January 26, 2006 Equity Share in profits, if any – dividends, capital gains Say in major decisions, access to internal information Who?  Private companies  Developers of the project (to share the risks), including IFIs  Funds: infrastructure, pension, venture capital funds

PPPUE/Capacity 2015 PPP training January 26, 2006 Debt financing Commercial banks (WB/Croatia SMM) Multilateral lending agencies – subsidized loan  World Bank International Finance Corporation (IFC)  European Bank for Reconstruction and Development (EBRD)  European Investment Bank (EIB ) Bonds (municipal) Syndicated loan - a pull of investor to finance a big project

PPPUE/Capacity 2015 PPP training January 26, 2006 Grants and subsidies 1/2 National/sub-national government Ear-marked environmental funds  National  International Phare – an instrument to assist the applicant countries of Central and Eastern Europe in their preparations for joining the European Union. ISPA - Instrument for Structural Policies for Pre-Accession (after recent accession only Ro and BU remain eligible for ISPA funding) CARDS - Community Assistance for Reconstruction, Development and Stabilisation, focuses on the Balkan and SEE countries: for investments, institution building, and capacity development Tacis programme focuses on the EECCA region IFIs: WB, EBRD, EIB  Investment project preparation work

PPPUE/Capacity 2015 PPP training January 26, 2006 Grants and subsidies2/2 Bilateral donors - technical assistance  Usually to improve public administration, strengthen democratic institution, enhance capacity of civil societies, etc.  Municipal projects: United Kingdom: DFID – Department for International Cooperation USA: USAID - United States Agency for International Development Germany: GTZ - Gesellschaft fur Technische Zusammenarbeit and KfW, Kreditanstalt für Wiederaufbau Denmark: DANIDA, DEPA Italy: ICA – Italian Cooperation Agency Sweden: SIDA – Swedish International Development Agency, Japan: JICA – Japan International Development Agency

PPPUE/Capacity 2015 PPP training January 26, 2006 Guarantees Contract performance Political risks (war, expropriation) MIGA – WB’s Multilateral Investment Guarantee Agency “take-or-pay” contracts – end users pay a pre-established amounts for products/service, whether or not they are actually received

PPPUE/Capacity 2015 PPP training January 26, Cost recovery strategies How are cost recovered? The key processes for cost recovery

PPPUE/Capacity 2015 PPP training January 26, 2006 How are cost recovered? Capital (infrastructure) costs include building assets used for service and products production and in some cases costs for buildings and grounds. Operational and maintenance (O&M) costs – the cost of actually operating and maintaining the system in order to produce and distribute service. Connection costs – the cost of connecting an individual household to the system.

PPPUE/Capacity 2015 PPP training January 26, 2006 The key processes for cost recovery 1. Establishing cost recovery strategy 2. Tariffs and charges structuring 3. Subsidizing 4. Billing and collection

PPPUE/Capacity 2015 PPP training January 26, Aspects of the cost recovery strategy tariff and fee structure forming an appropriate and feasible payment scheme (usually monthly charge) designing appropriate payment options increase or change payment points work with a community group to collect money customer relations/education rewards and punishments, e.g. random prize drawing for houses that pay or service cut-off for non-payment community mobilization and participation and communal billing, etc.

PPPUE/Capacity 2015 PPP training January 26, Basic types of water tariff structures Single-part tariff (single-tariff pricing) - a consolidates rates across multiple service territories owned and operated by a multisystem utility that may or may not be contiguous or physically interconnected. Two-part tariffs - users pay a fixed sum for access to a service and pay another charge for each unit of the service they consume.

PPPUE/Capacity 2015 PPP training January 26, 2006 Single-part tariff Fixed charge - monthly water bill is independent of the volume consumed (not based on measured water use) Volumetric charge - made for the volume of water which is measured through a supply point  Uniform price volumetric tariff (unblocked) all units of water billed at same price.  Increasing block structures - two or more prices, each applies to use within a defined segment (block) of monthly use- unit charge is constant over a specified range of water use and then shifts as use increases  Decreasing block pricing (or declining-block pricing) – a pricing structure, in which both the average and marginal price per unit decreases as consumption increases.

PPPUE/Capacity 2015 PPP training January 26, 2006 Volume, l Price, € Volume, l Price, € Volume, l Price, € Uniform price volumetric tariff Increasing block structures Decreasing block pricing

PPPUE/Capacity 2015 PPP training January 26, Subsidizing Many public services projects need to be subsidized Decision makers then need to decide:  What they prioritize for subsidy  What element/stage/aspect of the service to subsidise  How the subsidy should be delivered  Who the recipients of the subsidy should be

PPPUE/Capacity 2015 PPP training January 26, 2006 Subsidies come in two forms 1. Direct subsidisation used to cover the shortfall in supply costs by the injection of finance from outside the sector or industry  E.g. the financing of solid waste services or donor support to government undergoing sectoral reform  Advantages: direct subsidies are transparent, explicit, and minimize distortions in the behaviour of utilities and their customers.  Drawbacks: difficulty of defining suitable eligibility criteria as well as the administrative cost entailed in identifying eligible households. 2. Cross-subsidisation used to cover costs by shifting the burden from one consumer group to another within that sector or industry.  between different social, economic or regional groups of users  e.g. cross-subsidy of the poor, by charging richer users more

PPPUE/Capacity 2015 PPP training January 26, Billing and collection This is usually the most significant change introduced by private companies. It is a technically and managerially simple process to create a comprehensive and up-to-date database of users, and issue invoices for the amounts owed. Collection constraints:  Demand, e.g. of the poor  Income level  Affordability/willingness to pay