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

June, The Senegalese experience in PPP 2 Generally viewed as a success, but major difficulties appeared in 2010

June, The Senegalese experience in PPP – 2010 The success story

June, The Senegalese experience in PPP 4 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

June, The Senegalese experience in PPP 5 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 reform 1

June, The Senegalese experience in PPP 6 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…

June, The Senegalese experience in PPP 7 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

June, The Senegalese experience in PPP 8 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 daccord in

June, The Senegalese experience in PPP 9 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 ,6%6,5%100,0% Régions ,5%14,3%87,3% Sénégal urbain ,3%10,2%98,5% 4 Sources : annual report (2010) –SDE and Update of the Financial model study (2011)

June, The Senegalese experience in PPP 10 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

June, The Senegalese experience in PPP 11 Performance of the PPP (3/4) Impact on operational efficiency Contractual NRW : max 15% Contactual collection rate : 97% Labor productivity : connections / employee = (+173% since 1995) 4 Sources : annual report (2010) –SDE

June, The Senegalese experience in PPP 12 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

June, The Senegalese experience in PPP 13 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

June, The Senegalese experience in PPP The crisis The reform shows signs of weakness

June, The Senegalese experience in PPP 15 Financial crisis : the burden of the state bills…(1/3) 1/ Since 2006 : tariffs increased only for the administration category 2620 FCFA/m3 in % 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 montant facture TTC13 936, , , ,9 Montant payé TTC13 883, , ,69 512,9 (1) %100%91%52%43% Source :Update of the Financial model study (ICEA, 2011)

June, The Senegalese experience in PPP 16 Financial crisis : the burden of the state bills…(2/3) 1 Source : AFD, 2011

June, The Senegalese experience in PPP 17 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)

June, The Senegalese experience in PPP 18 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 couldnt repay for the CBAO and BOAD loans Crisis : critical financial ratios -> freeze of the disbursements (non sovereign loans of AFD and EIB) 1

June, The Senegalese experience in PPP 19 Confidence crisis (1/2) 1.Tariffs : increases frozen since 2003 for the private 1. +3% each year 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

June, The Senegalese experience in PPP 20 End of the contract : April : 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

June, The Senegalese experience in PPP 21 DFIs reaction : 1 st phase ( ) 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 whats 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

June, The Senegalese experience in PPP 22 DFIs reaction : 2 nd phase ( ) Change in the relationships from January 2010 Case of default : AFD and IEB didnt 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 IEBs loans

June, The Senegalese experience in PPP 23 Whats next? And lessons learned

June, The Senegalese experience in PPP 24 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

June, The Senegalese experience in PPP 25 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

June, The Senegalese experience in PPP 26 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

June, The Senegalese experience in PPP 27 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

June, The Senegalese experience in PPP 29 Source :Update of the Financial model study (ICEA 2011)