Financing Future Cities

Overcoming the Infrastructure Gap in Cities with Private Sector Participation

Hisaka Kimura Head, East Asia Unit Private Sector Infrastructure Division 2 Private Sector Operations Department Asian Development Bank 15 November 2011

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

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?

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.

Water Supply Value Chain

Raw water Extraction

Local government owned water companies

Tap water treatment

BOT started in late 1990

Water distribution
Local government owned water companies
Case Study 2

End users

Case Study 1

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 assistance to 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.

Project Structure
Project Sponsor
Construction Dept Water Authority Bureau Municipal Government Concession Agreement

Project Company
Take or Pay Off take agreement

Water sales

Municipal Waterworks General Company (Distribution)

The project supplies treated water under a take-or-pay offtake agreement, with a performance guarantee from the municipal government.

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 brown fields 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.

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 increase the quality and reliability of the water supply.

Project Structure
ADB USD Loan International banks syndication
100%

Project Sponsor

ADB CNY Bond

ADB CNY Loan

PRC Hold Co

Local Banks CNY Loan

WPC

WPC

WPC

WPC

WPC

WPC

WPC

WPC

Concession Agreements with municipal governments

Various Municipal Entities

WPC: Water Project Company

Discussion points
Existing water infrastructure as a new asset class
Decouple water business and equity investment Majority of tap water is used for cleaning purpose Waste water as a new water resources (Singapore: NEWater) Energy & water efficiency Distributed community sized treatment facility vs large scale facility

Variation of water quality for specific purpose

Water efficiency throughout water chain

Water and energy nexus

Structuring a Water PPP Project

Funding Structure

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

Risk Allocation

Economic Fundamentals

- Equitable tariff structure

A Way Forward
In 2012, and future years, we are looking into the merits of new area of private 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 allocation of 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.