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Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
Alexandria PSP Feasibility Study - Final Report
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Alexandria PSP Feasibility Study - Final Report

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  • 1. US Agency for International Development Government of Egypt Governorate of AlexandriaFeasibility Study for Private Sector Participation (PSP) in the Operation & Maintenance of the Alexandria Water & Wastewater System FINAL REPORT By SEGURA/IP3 Partners LLC Contract No. AFP-I-00-03-00035-00 Task Order No. 800 November 2004
  • 2. Feasibility Study for Private Sector Participation (PSP) in the Operation & Maintenance of the Alexandria Water & Wastewater System FINAL REPORT Table of ContentsChapter Title Page Executive Summary i 1 Background and Scope of Work 1 2 Implementation Schedule 4 3 Policy Statement - Recommendations 6 4 Needs Assessment & Feasibility Studies 7 4.1 • AWGA - Metering Billing & Collections 7 4.2 • AGOSD - Septage Management, Site 9 N and 11 Transport 5 Transaction Implementation Plans 18 5.1 • AWGA - Metering, Billing & Collections 18 5.2 • AGOSD - Septage Management, Site 9N and Transport 21 6 Conclusions and Recommendations 29 Attachments A1 AWGA’s Financial Statements 32 Table A1-1. AWGA’s Balance Statements 32 Table A1-2. AWGA’s Cash Flow 33 A2 AGOSD Income Statement 34 A3 Partial List of Individuals Contacted 35
  • 3. Feasibility Study for Private Sector Participation (PSP) in the Operation & Maintenance of the Alexandria Water & Wastewater System Executive SummaryThis report summarizes the activities performed by SEGURA IP3 consultants retained byUSAID Egypt under the SEGIR Privatization II IQC (Task Order No. 800), to conduct afeasibility study for Private Sector Participation (PSP) in the operation and maintenanceof the Alexandria water and wastewater system, which was undertaken from March toNovember 2004. During this period, the consultants reviewed extensive existinginformation from prior technical assistance projects; interviewed relevant actors and stakeholders, gathered and analyzed additional data and had numerous working sessions andmeetings with representatives of the Alexandria Water Governmental Authority(AWGA), the Alexandria Governmental Organization for Sanitary Drainage (AGOSD),the Secretary General of the Alexandria Governorate and USAID, and the HoldingCompany.The initial Scope of Work (SOW) called for the delivery of the following products: 1) Project Implementation Schedule 2) Governorate Policy Statement Paper 3) Workshop on Policy Statement 4) Status Report & Needs Assessment 5) Feasibility Study 6) Workshop on Feasibility Study 7) Draft Transaction Implementation Plan; and 8) Final ReportCopies of the above deliverables have been submitted to USAID and Government ofEgypt (GOE) authorities and final versions of the same were produced for easier use inCD format. The project was initiated in close coordination with the Governorate ofAlexandria (GOA) and the top management of the utilities.A significant event in connection with this project was the enactment of PresidentialDecree No. 135 of April 27, 2004, which establishes the "Holding Company for Waterand Wastewater" and converts fourteen (14) organizations and public companies in thesector into wholly owned subsidiaries. When the SOW for this project was prepared, theGovernorate of Alexandria was the main GOE policy decision-making entity. However,the new Holding Company is now the organization in charge of the sector and significant
  • 4. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandriareforms are beginning to take place. Given the period required for the new entity to startoperating in earnest, this event had a direct impact on the proposed feasibility study.In light of the above developments and after presentation of the Policy Statement Report,and based on discussions held with USAID, the Chairpersons of AWGA and AGOSD,and the Secretary General of the Governorate, the team was instructed to focus onspecific "service contracts" as prospective PSP activities: a) billing and collection forAWGA; and b) PSP options for septage management, as well as for the operation of Site9-N, and transport of waste materials for AGOSD. As a result, SEGURA IP3 consultantsfocused on evaluating the feasibility of these service contracts and estimating thepotential impact they could have on the overall operation of the utilities.As described in more detail in previous separate reports and summarized in the followingchapters, the potential impact of introducing PSP in the metering billing and collectionfunctions at AWGA is likely to generate significant additional revenues. In the case ofAGOSD, the evaluation had to be done at a pre-feasibility level due to shortcoming inbasic information; however, from the analysis conducted it becomes apparent thatimportant cost reductions can be achieved via licensing of septage collection anddisposal, in leasing out the operation of site 9N including composting and servicecontract for transportation of dewatered sludge and other wastewater by products to thissite.AWGA metering, billing and collectionThe consultants considered two basic alternatives: a metering-only contract and acomprehensive metering, billing and collection contract. • For the metering-only alternative, AWGA would delegate to a private operator the metering function, including installation, replacement, and meter reading. The operator could read the meters with its own staff or directly supervise AWGA’s staff. Further, and most importantly, AWGA would continue to be the primary contact with the customer. • For the comprehensive alternative, AWGA would delegate to the private operator all the metering function plus billing and collection. Under this alternative, the operator should be given full control over staff hiring and firing matters and preferable over staff compensation.The consultants recommended the comprehensive metering, billing and collectioncontract as the most desirable and cost-effective alternative for AWGA. The contractwould be for a ten year period in order to allow the contractor sufficient time to amortizethe cost of new meters that will need to be purchased. A ten-year contract should alsoallow AWGA sufficient time to learn from this PSP experience and evaluate ideas that acontractor may offer to improve the continuity of service issues that exist in the pilotarea. This alternative has major advantages over a metering-only contract namely: 1) netrevenues for AWGA will be higher; 2) it will have a more profound and lasting impact onSEGURA / IP3 JV Final Report -ii
  • 5. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, AlexandriaAWGA’s commercialization practices as it will help to substantially improveperformance of AWGA’s branches.This type of contract would be more effective if authorities implement policy changes tosupport the contractor’s efforts to enforce collections and affords the contractor flexibilityto experiment with alternative type of meters and billing and collection practices. Further,the contractor would need full control over employee compensation and hiring and firingmatters in order to be effective. This may cause AWGA to transfer some employees toother organizational units outside of the branches in the pilot area. AWGA shouldconsider granting licenses to employees now working in this activity in exchange forretiring from service.Upon consultations with AWGA authorities, they expressed a preference for themetering-only option. Thus, the team has focused on this alternative for the "TransactionImplementation Plan" report submitted separately.The consultants believe that these contract alternatives do not address the morefundamental water supply management issues mentioned in the report. Investmentsneeded for the optimal rehabilitation of the distribution system that impact the quality ofservice, as well as metering of water delivered to each zone will continue to be AWGA’sresponsibility and therefore outside the scope of any of these contract alternatives. Amuch more capital intensive contract that places responsibility for network maintenanceon a contractor would be needed to address these issues. This type of contract would mostlikely be a long-term concession contract, which ultimately fell beyond the scope of thisPSP initiative.AGOSD Service Contracts Pre- FeasibilityAGOSD sought advice on how to structure service contracts for (a) septage collectionand disposal; (b) operation of Site 9N including composting; and (c) transportation ofdewatered sludge and other wastewater byproducts to this site.a. Septage collection and disposal.The consultants considered two basic alternatives to promote private sector participationin the collection and safe disposal of septage: service contracts; and licensing of privateoperators.Service contracts. Under this alternative, AGOSD would delegate the collection anddisposal of septage to private operators. The contracts can be structured along two basicoptions: 1) each area (or branch) is served by a pre-determined number of contractors; or2) contractors are free to operate anywhere in the city. Under both options, a minimumnumber of operators should be selected to insure competition. Service fees aredetermined by AGOSD and operators collect them on its behalf.SEGURA / IP3 JV Final Report -iii
  • 6. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, AlexandriaUnder both options contractors would operate under exclusive service conditions.Therefore AGOSD has to strictly enforce control of “illegal” operators, and to developregulatory and supervisory functions to ensure that service contracts perform as intended.AGOSD’s organization has had severe difficulties in managing the existing collectionand disposal of septage by its own forces, including rent-seeking opportunities that affectits revenues. Therefore, it is unlikely that it will be successful in implementing andmonitoring these service contracts whose characteristics mirror, to some extent, existingoperations. Moreover, AGOSD lacks adequate operational data on the number andlocation of septic tanks and frequency of service to make an informed decision on theoptimal size of the trucking fleet and thus on service fees to be charged to ensure thefinancial viability of the operation.Licensing. This policy-based approach, widely used in other countries, involves thetransfer of responsibility of septic collection and disposal from AGOSD to licensedoperators. Operators would keep the fees collected but should be required to pay inaddition to the licensing fee, a tipping fee (determined by AGOSD) to compensateAGOSD for the costs incurred in processing these wastes.Under this alternative, a pre-selected number of licensed contractors would operate in anyarea of the city. It is important to promote adequate competition in the market to ensurereasonable prices for service. This competition would eliminate, to a large extent, theneed to control prices.Pre-selection of contractors can be carried out on a competitive basis and based on theinitial premium bidders are willing to pay over a minimum preset license fee. Licensescould be granted for two-three years and the license fee established (including thepremium in the initial bidding), to cover as a minimum, AGOSD’s regulatory andsupervisory functions. At the expiration of the license, AGOSD can use the opportunityto ascertain if additional operators are needed to foster competition and keep prices at areasonable level.AGOSD regulatory and supervisory functions include: a) licensing operators; b)monitoring their performance; and c) exercising the right to revoke licenses if operatorsdo not comply with service standards. Under this alternative, AGOSD supervisoryfunctions will be simplified, as it will not be directly involved in the collection anddisposal of septage or with the collection of fees.AGOSD should consider granting licenses to employees now working in this activity inexchange for retiring from service. Such employees could purchase or lease trucks fromAGOSD under special terms and conditions. USAID may be able to assist with thefinancing through its Development Credit Authority (DCA) facility.The consultants recommended the licensing option as it would eliminate AGOSD’soperating losses and reduce illegal dumping. However, this option would require thecreation in AGOSD of a supervisory unit and the training of this staff. This unit wouldSEGURA / IP3 JV Final Report -iv
  • 7. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandriamonitor performance of operators and maintain adequate competition to ensure a fairpricing system determined on the basis of supply-demand forces. It is important forAGOSD to improve the quality of existing information, in particular the location of septictanks and characterization of septage (domestic, industrial and commercial), to reduceinformation risks detrimental to AGOSD’s interests.b. Operation of Site 9N.There are two basic alternatives to delegate the operation of site 9N to a private operator:a management contract and a lease contract. These two alternatives are quite similar inscope but differ in the way decisions are made to price and sell compost and other by-products, on the risks assumed by the contractor on the sale of compost and on thebidding strategy.Management contract. This contract can be structured for a 5 to10 year period andinterested contractors bid on the fee to manage the operation. Under this contract, pricingdecisions are made by AGOSD, and the main responsibility of the contractor is to operatethe facilities as specified in the bidding documents. Marketing decisions can be delegatedto the operator including incentives to reward its efforts to improve sales and reducecosts. Investments, replacement, and maintenance costs are the responsibility of AGOSD.It is possible however, to structure the transaction assigning some of these costs to theoperator, but this decision is likely to extend the length of the contract, increase themanagement fee or both.Leasing contract. This contract can be structured for a 10 to 15 year period, andinterested contractors will bid on an annual fee to be paid to AGOSD for the use of thisfacility, including the equipment. Leasing fees can be tailored to benefit AGOSD inresponse to the financial performance of the operator.Under this alternative, sales and price decisions are the responsibility of the privateoperator as well as investments (like reception facilities to handle septage and otherimprovements deemed necessary) and maintenance costs.Consultants recommend to AGOSD the lease alternative as it gives more incentives to theprivate operator to fully optimize the use of this facility, to be more proactive in thesearch for new customers and products (such as enhancing compost by adding nutrientssuch as potassium) and to tailor prices to competitive products. These advantages, in turnshould benefit AGOSD as it can expect higher financial returns from the leasedoperation.The consultants also recommend that AGOSD makes an effort to improve theinformation including projections of the supply of different waste materials to site 9N.The consultants estimate that about 7-8 months are required for the full implementationof this option.c. Transport of waste materials to Site 9N.Transportation of waste by-products and operation of site 9N are two different types ofbusinesses that require different managerial skills and equipment. Moreover,SEGURA / IP3 JV Final Report -v
  • 8. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandriatransportation costs of dewatered sludge, scum and grit are significant compared to theoperating costs of Site 9N.Consultants recommend not to incorporate the transport of these materials into theoperation of site 9N, since this could make the combined contract not financiallyattractive and will likely limit competition to the detriment of AGOSD.Nonetheless, AGOSD has two basic options to deal with the transport of these materialsfrom the wastewater treatment plants, sewage pumping stations, and sewer cleaningoperations to Site 9N: 1) transporting these materials using its own resources; and 2)delegating this activity to private operators under separate service contracts.In both cases, there is a need to develop contractual operational arrangements betweenAGOSD and the Site 9N operator; for instance, minimum quantities of materialsdelivered to the site and hours of delivery.Alternative one is a continuation of present practices where the possibilities of costreductions are not obvious. Alternative two presents coordination issues between theoperator and AGOSD. AGOSD needs to decide on the use of transport and handlingequipment that contractors would be operating. AGOSD can also delegate maintenancecosts of the vehicles to operators. Option two offers the potential for cost reductionsthrough competition for and within the market and therefore, the consultants recommendit.Transaction Implementation Plans – AWGA and AGOSDAWGA expressed an interest in developing the transaction implementation plan for themetering-only option; and has also indicated that it believes it can improve its billing andcollection efforts through internal efforts and does not wish to pursue the morecomprehensive metering, billing and collection option.The activities needed to procure the services of a metering contractor will take up to ninemonths, and will require the service of a transaction advisor and several AWGA staff.The first three months of the transaction activities will include efforts to gather and refineinformation that will be needed to allow bidders to assess the situation in the pilot areaand make a responsible bid.Once the necessary background information has been compiled, promotional efforts canoccur, bidding documents prepared, proposals evaluated and a contract negotiated andexecuted. These activities will take an additional three to four months to complete.The consultants estimate that the transaction activities will cost L.E. 2.1 million.Assuming a 10-year contract, it is approximately 6% of the total contact value.A metering-only contract like the one envisioned for the pilot area should be consideredas an initial step toward a more comprehensive use of the private sector in AWGA. If thisis not AWGA’s and the Holding Companys intention, the consultants recommend that nofurther action be taken on this transaction.SEGURA / IP3 JV Final Report -vi
  • 9. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, AlexandriaThe consultants recommended to AGOSD licensing to private operators the collectionand disposal of septage, which should be granted for two to three year periods; leasingthe operation of Site 9N, that should be for 10 years; and service contracts with severaloperators for the collection and transport of wastewater byproducts for three to five years.The estimated time to carry out these projects through implementation is nine months.This period includes about four months required to improve the information on all threeprojects, which is critical to reduce information risks to interested operators and improveAGOSD’s position.The consultants estimate the costs of the transaction process, including AGOSD’sactivities and efforts to gather and refine information, at L.E. 4.2 million. The breakdownof these costs is L.E. 2.9 million for the transaction advisor is L.E. 1.3 million forAGOSD’s efforts.Conclusions and recommendationsThe consulting team has clearly indicated to USAID/ Egypt and GOE authorities thatalthough "service contracts" of this nature are steps in the right direction, they will notaddress the structural problems facing the two utilities (especially in the case ofAGOSD). These problems include primarily: adequate maintenance of existinginfrastructure, capital investments to meet new demand, settlement of accumulated debtand extremely low service rates, which do not make full cost recovery operation arealistic expectation for the Alexandria W & WW utilities in the near future.Given the significant steps undertaken by GOE with the creation of the Water &Wastewater Holding Company and the Egyptian Regulatory Authority (EWRA), westrongly recommend to include more comprehensive PSP alternatives in the reformprogram and to undertake the proposed service contracts at AWGA and AGOSD as partof the implementation of the sector reform.SEGURA / IP3 JV Final Report -vii
  • 10. USAID - SEGIR Privatization II IQC Government of Egypt Feasibility Study for Private Sector Participation (PSP) in the Operation & Maintenance of the Alexandria Water & Wastewater System1. Background and Scope of WorkThe original Scope Of Work for this project stated as main objective - " to provide adviceto the Governorate of Alexandria on all economic, tariff, and regulatory matters related tothe preparation of a feasibility study for private sector participation in the water andwastewater sector in Alexandria, concentrating on a management contract/concessionoption. This feasibility study will take into full consideration the implications of the stateof water and wastewater sector reform (corporatization and creation of a regulatoryagency) currently underway in Egypt".The tasks and deliverables agreed upon, were the following: 1) Project Implementation Schedule 2) Governorate Policy Statement Paper 3) Workshop on Policy Statement 4) Status Report & Needs Assessment 5) Feasibility Study 6) Workshop on Feasibility Study 7) Draft Transaction Implementation Plan; and 8) Final ReportIn this report, the consulting team summarizes the key elements of the project and presenttheir conclusions and recommendations of the study conducted, covering each of theabove activities and reports.The servicesDrinking water supply. AWGA provides services to Alexandria, Marsa Matruh, andparts of the Beheira Governorate. The area of service is quite extensive as it stretches340 kms from east to west and 125 kms to the south.AWGA’s sources of water are the Mahmodia and Noubaria canals fed by the Rosettabranch of the river Nile. Water is treated in eight treatment plants with a total designcapacity of 3.5 million m3/day (mM3/day). Drinking water quality meets governmentstandards. However, intermittent supplies and low pressures in some areas and the use ofhouse storage tanks compromise drinking water quality.Water production varies seasonally, being the highest in the months of July to Septemberand the lowest in January to March. The Water Master Plan indicates that projectedpopulation growth in Alexandria and other cities points out to an “increased competitionfor water in the Nile and its canal system” and that water withdrawn by AWGA beingSEGURA / IP3 JV 1
  • 11. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandriadownstream of almost all other users is “seriously threatened from both a water qualityand quantity perspective”.Close to 99% of the population is connected to the water distribution system; but someareas of the city receive water less than 24 hours a day or at low pressures. Thedistribution system is a network that includes 6,500 kms of water mains with diametersfrom 75 mm to 1,500 mm; 43 pumping stations and 250,000 m3 of storage capacity.Most of consumption is metered but it is estimated that about 5% of meters areinoperative. In the last four years (2000-2003) water losses have remained at about 37 %of production. This system was serving some 978,000 accounts in 2003. Table 1 showssome of the main operational indicators of the water distribution system. Table 1. Water Distribution Network Operational Indicators Indicator AWGA Other cities 1/ Mts of pipe/account 6.7 6 – 24 Storage capacity/account; m3/user 0.3 0.7 – 3.0 Water losses; % 37 < 20 (best practice) Pipe bursts; total per 100 km/year2 630 <20 (best practice)During the period 2002-2004 AWGA has done a good job in balancing its cash flows soas to be able to service most of its debt3 and to cover its cash operational expenditures.Most AWGA investments are financed with loans from the National Investment Bank. Asmaller portion is financed by grants and customer contributions to investment. AWGA’sbill collection effectiveness varied from 85% (2002) to 74% (2003) and 78% (2004).Sewerage. AGOSD (Alexandria General Organization for Sanitary Drainage) was in1979, to provide wastewater collection, treatment and storm drainage system for the cityof Alexandria and its surrounding areas. AGOSD’s wastewater collection and disposalsystem serves some 83% of Alexandria population and includes: • A pipe collection network of 2,390 kms with diameters between 200 and 2,750 mms • Seventy two (72) pumping stations; and • Two primary wastewater treatment plants with a design capacity of 1.20 million m3/day. • Site 9N for the reception and disposal of waste by-products. Composting operations also take place at this facility1 Yepes, Guillermo & Augusta Dianderas. Water and wastewater utilities. Indicators. TWUWS, The WorldBank. 1996.2 Based on information on ten branches. Not including Borg El Arab and Sahel.3 A portion of the interest owed by AWGA to the National Investment Bank is converted into long-termdebt. Of an average yearly interest of L.E. 41 million, L.E. 13 million/year has been converted into long-term debt between FY 2002 and FY 2004.SEGURA / IP3 JV Final Report -2
  • 12. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, AlexandriaTreated and untreated wastewater flows are discharged into Lake Mariout, south of thecity, without complying with the provisions of Law 48, which establishes standards forwastewater effluents and mandates secondary treatment, chlorination and post aeration4.Lake Mariout is a shallow body of water with a total area of some 5,000 hectares.Population living close to Lake Mariout is affected by foul odors.AGOSD’s cash flows have been clearly insufficient to cover its cash requirements. Thisis the result of tariff levels, which are insufficient to cover even its cash operationalexpenditures. AGOSD’s cash deficits have been covered by government contributions tofinance current expenditures and by arrears on its debts with the National InvestmentBank. As in the case of AWGA, AGOSD finances its capital expenditures program withloans from the National Investment Bank.Demand growthThe Water Master Plan projects a “significant growth along the periphery of AlexandriaCity, in Ameriya and west of Alexandria. New highways around the city, new industrialzones in Ameriya and Borg El Arab City, and tourism development to the west will alldrive future growth”. The projected population and water production growth is presentedin Table 2. Table 2. Population and Water Production Projections Year Population (millions) Maximum day Average Peak summer demand day (000 m3/day) 2000 4.14 5.22 1,950 a/ 2007 5.07 6.30 2,800 2012 5.65 7.09 3,200 2017 6.25 7.88 3,600 2022 6.86 8.45 4,040 Source: CDM Master Plan (cited) a/ Average production (AWGA)Recent updates of investment needs indicate that in order to meet full service levels by2022 AWGA will need to invest some L.E. 4,900 million. Similarly AGOSD will need toinvest L.E. 3,300 million over the same period.Based on these recent investment estimates, Consultants have estimated the economiccosts (Average Incremental Cost)5 at:• Water ~ L.E. 1.20/m3• Sanitary drainage ~ L.E. 0.80/m34 WWGC. Alexandria Wastewater Program. Master Plan Update 1992.5 SEGURA-IP3. Alexandria Water and Wastewater Services. Policy Statement, June 2004.SEGURA / IP3 JV Final Report -3
  • 13. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandria• Combined services ~ L.E. 2.00/m3Clearly, both AWGA and AGOSD face a daunting challenge to recover all costs, meetprojected demand and improve the quality of services.2. Implementation ScheduleThis project covered a period of time of about 40 weeks, starting on March 18, 2204, andschedule to deliver the final report and presentation on the first half of November 2004.SEGURA/IP3 expatriate team worked on-field several times with an average of 2-weekvisit period. The project had permanent support from the local team on data collectionand validation. This activity extended through mid October. Consultants prepared a totalof six reports (including this one) and presented them to representatives of AWGA,AGOSD and USAID for further discussions.Four main tasks were performed covering policy considerations statement, scope of workadjustment, feasibility studies, and to conclude with the transaction and implementationplans. A more detailed description of the activities and timing can be found in Table 3. asa result, consultants presented seven reports (including this one) to representatives ofAWGA, AGOSD and USAID. These reports were thoroughly discussed with theseagencies.SEGURA / IP3 JV Final Report -4
  • 14. USAID - SEGIR Privatization II IQC Government of Egypt Feasibility of PSP in the Water & Wastewater System, Alexandria Table 3. Alexandria Water & Wastewater PSP Study Updated Project Implementation Schedule - - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 March April May June July August September October NovemberTASK 1 (Policy Statement) Initial Trip to Egypt (3/18-3/29) Data collection and validation (local team) Considerations for main policy decision making * Report 1 Policy Statement * Report (2) * Team in Egypt - Policy - discussion * Workshop (1)TASK 2 (SOW adjustment - Service Contracts) * Report (Needs Assessment merged into FS report)TASK 3 (Feasibility Study) * Team in Egypt - Service Contract for M/B+C * Consultant in Egypt - Service Contract for Septage Mgt * Briefings to USAID - AWGA - AGOSD * Reports 3 & 4 - Feasibility M/B+C and Options Septage Mgt * Team in Egypt -Service Contracts / Transaction Plan * Workshop (2) - Service Contract DefinitionsTASK 4 (Transaction & Implementation Plan) * Report (5) - Transaction Implementation Plan - AWGA * Report (6) - Steps Toward Transaction Implementation - AGOSD * Final report (7) * Final Presentation USAID/GOEReligious holidays (Ramadan) -Oct 16 - Nov 14 (approx)Notes: 1. Weeks start on Sundays, from March 21/04 2. Schedule shows deliverables, workshops and expatriate visits only SEGURA / IP3 JV Final Report - 5
  • 15. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandria3. Policy Statement - RecommendationsThe recommended policies, consistent with Decrees 135 and 136 of 2004, center on sixpriority areas:a) Governance. To promote efficient and high standards of service throughout thecountry local differences are recognized. Local government authorities and the public atlarge, as main stakeholders, can play an important role in defining priorities to meetparticular local needs and in increasing accountability of service providers. To promotethis participation local and central government sector agencies should strive to: • Seek active participation of local authorities in the board of directors of local companies; • Seek active participation in the board of directors of non-government members to bring their perspective and vision, and enrich the dialogue. • Delegate responsibility to subsidiary companies for financial and personnel management, and planning and construction responsibilities to promote accountability • Allow subsidiary companies to retain operational cash surpluses to finance investments and debt service requirements. If is deemed necessary on distributive grounds, to capture some of these cash surpluses, the holding company can define a percentage of revenues from each utility to be transferred to the holding company. • Empower the public and the users through education campaigns to give them a better understanding of the issues in sector development.b) Pricing of services. Pricing of water and sanitation services will aim to reconcilefour important objectives: • Efficient use of resources and water conservation by recovering economic costs and metering consumption. • Financial viability of service providers by allowing them to cover all financial costs. • Social development by ensuring that all inhabitants have access to adequate basic services at affordable prices. • Transparency in tariff setting and adjustments to foster good planning, and to promote their understanding by policy makers and the public.c) Personnel management. Service providers should have discretion, within laborlaws, to manage their personnel and to provide incentives to encourage higher levels ofefficiency and better response to users needs.d) Financial Viability. Service providers should have incentives to promote thegradual implementation of tariffs that reflect financial requirements to cover operational,rehabilitation and expansion costs and debt service obligations.SEGURA / IP3 JV Final Report -6
  • 16. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, AlexandriaThe government will promote the development of reliable long-term financing for thesector while avoiding distortions to capital markets and undue fiscal pressures.e) Private sector participation. Participation of the private sector will be promotedas a means towards achieving sector development goals. Participation of the privatesector will be sought to serve two main goals: • Efficient and sustainable services. Through the know-how, and more agile private sector management systems, practices and decision making processes. • Financing. To provide the capital to expand services and to promote a more efficient use of existing infrastructure.f) Regulation. To promote high levels of efficiency in operations and investmentsand better customer relations, the regulatory system will make use of complementaryinstruments such as: i) Command and control, or explicit directives to influencebehavior of sector agencies and to promote desirable sector outcomes; ii) Policyincentives designed to achieve higher productivity gains and service standards; and iii)Benchmarking to promote competition by comparison of performance among serviceproviders.4. Needs Assessment & Feasibility Studies4.1 AWGA – Metering, Billing & CollectionThe pilot project is a complement to AWGA’s ongoing institutional developmentprogram. Its objective is to improve customer services, improve revenues and reducecosts and use this experience with a private operator, through an adequate benchmarkingand information system, to improve branch operations. The pilot area consists of 3,600km2 located in the western part of Alexandria, with about 125,000 customer accounts,and includes three branch offices: Ameriya, Borg El Arab, and Sahel (see Table 4).The effects expected by AWGA are twofold: first, improved operations in the pilot area,as a result of the work of the private contractor and, second, improved performance ofAWGA-operated branches, as a result of the “comparative competition” with theprivately-operated branches.AWGA provides water service to virtually 100% of the population in the pilot area. Arecent willingness to pay survey indicates that most customers in the pilot area considerthe quality of the services as fair to poor because of low water pressure and intermittentservice.Domestic customers represent 98% of the total customer base but only 30% of the totalbillings. This distribution clearly indicates a high level of cross-subsidies (discussed inSEGURA / IP3 JV Final Report -7
  • 17. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandriasome detail in the Policy Statement Report). Most domestic customers are billed bi-monthly based on the results of meter readings. Further, many domestic customers livein apartment buildings and are billed based on the results of a master meter for thebuilding and individual apartment sub-meters. The difference between the master meterreading and the total readings of all sub-meters is prorated to all sub-metered customersin the apartment building. Table 4. Pilot Project Customer Base (End of FY 04) Item Branch Ameriya Borg Sahel Total El ArabWater Supply Accounts (No.) • Domestic 72,490 22,700 26,440 121,630 • Large 640 1,170 300 2,110 • Government 710 330 270 1,310Total 73,840 24,200 27,010 125,050Service Area and Accounts Density • Total service area (km2) 1,800 1,300 500 3,600 • Density (accounts per km2) 41 19 54 35Large customers are defined as those that have a meter 2” or greater. Large customersrepresent 2% of the total customer base in the pilot area, 39% of water volume billed and50% of the total billings. Government customers only include government agencies.Public companies, including state owned enterprises, are classified as large customers.Government customers represent 1% of the customer base, 17% of water volume billedand 19% of the total billings.Contract options and feasibilityConsultants considered two basic alternatives for a contract with a private operator: i)Metering only, and ii) Comprehensive metering, billing and collection.Metering onlyUnder this alternative, AWGA would delegate to a private operator the meteringfunction, including installation, replacement, and meter reading. The operator could readthe meters with its own staff or directly supervise AWGA’s staff. AWGA’s brancheswould continue being the primary contact with the customer, as well as being responsiblefor billing and collection.The consultants consider that a metering contract with the appropriate incentives wouldlead to a significant increase in the volume of water billed, particularly for large andgovernment accounts. The effectiveness of the contract to increase the volume of waterbilled to domestic customers is, however, dependent to a large extent on the authoritySEGURA / IP3 JV Final Report -8
  • 18. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandriadelegated by AWGA to the private contractor to purchase the most cost-effective metersavailable in the domestic or international markets.The private contractor could achieve the expected improvements in water billing throughthe implementation of: • Alternative metering technologies. • Systematic meter replacement and repair programs. • Strict control of meter readers.To provide adequate incentives for good performance, the contract should include a fixpayment to the contractor for achieving the targets established in the contract, penaltiesfor non-meeting the targets, and bonuses for exceeding the performance targets.Comprehensive metering, billing and collectionUnder this alternative, AWGA would delegate to the private operator all the meteringfunction plus billing and collection. Under this alternative, the operator should be givenfull control over staff hiring and firing matters and preferable over staff compensation.The consultants consider that a comprehensive metering, billing and collection contractwith the appropriate incentives has the potential to significantly increase the volume ofwater billed and the collection rate. The effectiveness of this contract to achieve thedesired goals is dependent, however, on the authority delegated by AWGA to the privatecontractor to: • Purchase the most cost-effective meters available in the domestic or international markets. • Enforce bill collection through appropriate penalties to delinquent customers, including shutting-off the services and fines. • Experiment with alternative billing and collections practices with domestic customers.As in the case of the metering-only contract, the operator’s remuneration would be basedon a fix payment for achieving the targets established in the contract, plus penalties fornon-meeting the targets, or bonuses for exceeding them.Actions common to both contract alternativesTo achieve the full benefits under both contracts is necessary to: • Conduct a user census to determine that customers are accounted for and properly classified and to refine the information on the need for additional meters. • Provide incentives to implement alternative meter technologies, such as automated meter reading6. • Replace broken meters in the pilot area (about 5% of all meters). • Conduct accuracy test on most meters to determine a cost-effective replacement program.6 The selection scope of alternatives depends on the relative price charge to different consumers. Bettermeters are more accurate but cost more. Therefore, AGOSD needs to balance these higher costs againstadditional revenues (benefits) in order to decide on the most cost-effective technologies.SEGURA / IP3 JV Final Report -9
  • 19. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, AlexandriaThese contracts would most likely be of interest to a joint venture that includes a metermanufacturing company and an information technology company. Given the relativelysmall size of the contract it is most likely that the interested companies will have alreadya significant presence in Egypt. Egyptian companies interested in these contracts shouldbe given incentives to enter into long-term technical assistance agreements withinternational companies to improve their opportunities and know how to enter into thesecontracts.As shown in Table 5 the results of the financial feasibility of the service contracts arepositive:A metering only contract has the potential of increasing annual collections in the pilotarea by about L.E.11.2 million or about 20% of current annual collections and netrevenues by L.E. 7.6 million. The consultants believe this is a reasonable estimate basedon the current meter conditions in the pilot area and the results achieved by other utilitiesthat have implemented similar metering programs.The alternative of comprehensive metering, billing and collection has the potential ofincreasing annual collections in the pilot area by L.E. 16.8 million or 30% of existingannual collections, and increasing net revenues by L.E.11.0 million Contract Financial Feasibility (annualized L.E. in Millions) Item Metering Comprehensive Collection increase from: 11.2 16.8 Broken meters 2.8 2.8 Improved metering 8.4 8.4 Collection activities - 5.6 Expenses increases from: 3.6 5.8 Meter related 2.9 2.9 Renovations & IT - 0.5 Contractor staff 0.7 1.8 Performace bonus - 0.6 Additional net collections 7.6 11.0 As % total pilot area collections 14% 20%SEGURA / IP3 JV Final Report -10
  • 20. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, AlexandriaWhenever an organization contracts-out part of its activities, a contract administrationunit is needed to ensure that the contractor is performing as expected and meeting theperformance standards included in the contract. In this case, AWGA’s contractadministration functions will require a small group of qualified staff with experience indata processing, commercialization, and financial issues. Legal and technical auditresources would also be needed periodically. On a full time equivalent basis, the contractadministration unit would probably range from 4 to 6 people depending on the contractoption selected.To effectively discharge its contract administration functions AWGA will require: • Good information about the performance of the private contractor and its compliance with contractual clauses. • An adequate system to resolve issues arising from AWGA and the contractor providing different interpretations of contractual clauses. • An adequate system to compare performance among AWGA’s-operated branches and the contractor-operated branches. • An adequate interface between the contractor and AWGA’s operational departments.The information requirements depend on the services to be provided by the contractor,the operational targets stipulated in the contract, the basic payments to the contractor andthe bonuses for superior performance. These requirements should be precisely spelledout in the service contract.The location of the Contract Administration Unit within AWGA’s organization is anotherimportant point to consider. One of the options is to establish it as an advisory functionto the Chairperson. This option has several positive aspects, including (a) providing aclear signal to the staff about the importance attached to the contract and (b) promotingthe independence of the Unit from the operational departments, which may have a vestedinterest in the status quo. Alternatively, the contract administration unit could beestablished as part of AWGA’s central revenues and customer department. The positiveaspects of this option include (a) in-depth knowledge of commercialization issues bycurrent staff and (b) uniformity in dealing with commercialization issues in all branches.Possible objections to the second option include lack of objectivity in dealing with theprivate contractor, and resistance to the implementation of new approaches.As there is no experience in AWGA on the administration of service contracts like theone proposed for the pilot project, it is important to provide adequate training to the staffof the Unit. The training should aim at providing the staff a good understanding of theobjectives of the contract, administration of service contracts, and negotiating skills.4.2 AGOSD – Septage Management, Site 9N and TransportAGOSD has identified three operational activities where it would like to assess theviability of private sector participation (PSP) through service contracts: i) Collection andSEGURA / IP3 JV Final Report -11
  • 21. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandriadisposal of septage; ii) Operation of Site 9N waste disposal facility for wastewater by-products and sludge composting; and iii) Transport of waste byproducts to site 9N.These projects can be structured to provide incentives to the private operators to reduceAGOSD costs and/or increase revenues, while affecting AGOSD labor force as little aspossible.Collection and disposal of septageAGOSD provides collection and disposal of septic tank waste to residents and businesseswithin its area of operations on a fee basis. This activity was assessed by CH2MHILL ina 2000 report7. The report estimates that there are about 180,000 septic tanks inAlexandria, most of them serviced by AGOSD. Septage collection and disposal is alsoprovided by an unknown number of private operators whose operation is consideredillegal.AGOSD trucks are dispatched on a request or pre-set schedule basis to pump out thecontents of septic tanks (assumed in the report as once a year on average) and deliver thewaste material to authorized receiving sites. However, the report indicates that “in somecases, sewage is discharged directly into the sewer system at street manholes sites”, withundesirable consequences on the operation of the sewerage system. The consultantsunderstand the situation today has changed little as not all septage is discharged to thesewerage collection system with possible illegal discharges to local waterways. Thisoutcome likely applies also to illegal operators.The report also indicates that AGOSD’s septage program is also affected by “a generallack of detailed operations” and suffers from “the absence of an accounting system whichdoes not permit concise control systems to exist or provide accountability to [its]managers”. The report also recognizes that in spite of assistance received from AGOSDpersonnel, “it was necessary to proceed with minimal data. This was particularly true indetermining the number of septic systems in the service area and the detailed cost for[the] vehicles assigned to the septic program”. These information shortcomings persisttoday.The present outcome of the septage operation strongly suggests that AGOSD has severelimitations to control the staff in charge of providing this service, as well as the safedischarge of the septage. It is also clear that this operation, as presently implemented,represents a heavy drain on AGOSD financial resources.Consultants considered two basic alternatives to promote private sector participation inthe collections and safe disposal of septage: a) service management contracts; and b)licensing of private operators.7 CH2MHILL. Privatizing the AGOSD Septic System, Cleaning & Hauling Program. January 2000.SEGURA / IP3 JV Final Report -12
  • 22. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandriaa) Service management contractsUnder this alternative, AGOSD would delegate the collection and disposal of septage toprivate operators. These contracts can be structured along two basic options: Each area(or branch) is served by a pre-determined number of contractors8 and trucks to fostercompetition; and Contractors are free to operate anywhere in the city.Under both options contractors charge the price defined by AGOSD (under clear andspecified criteria), operate under exclusive service conditions and collect fees on behalfof AGOSD. Contractors, in turn would be paid by AGOSD for services rendered.AGOSD main responsibilities would be to: a) control “illegal” operators; and b)supervise operations and enforce applicable laws and regulations to ensure that servicecontracts perform as intended, including the safe disposal of septage.Under present conditions, service management contracts can be problematic toimplement as: • AGOSD’s organization is not adequately prepared to monitor payments to contractors and thus to ensure that it will receive all the proceeds from this operation. • AGOSD lacks adequate operational data on the number and location of septic tanks and frequency of service to make an informed decision on the adequate size of the trucking fleet. However, this decision will affect the financial viability of the operation. Moreover, AGOSD is also in a weak position to determine, ex-ante, the service fee operators can charge in each area. In particular, if fees are too low it risks that some zones will not receive service, thus encouraging “illegal” operations or rent seeking.b) LicensingUnder this alternative, a pre-selected and adequate number of licensed contractors, topromote competition for services, operate in any area of the city. This competition isessential to ensure good services and to eliminate, to a large extent, the need to controlprices9. Service fees are collected and kept by the licensee and AGOSD receives thelicense fee.The license fee can be established to cover as a minimum, AGOSD’s regulatory andsupervisory functions. Selection of contractors can be carried out on a competitive basisand based on the initial premium bidders are willing to pay over a minimum presetlicense fee. Licenses could be granted for two to three years.AGOSD should have the right to revoke the license at any time for lack of compliancewith operating norms. At the expiration of the license, AGOSD can use the opportunity8 Contracting this service with only one operator for the whole city or for one particular zone will removeany competition in the market to the detriment of service.9 The exception could be in the initial 2-3 years of the contract to ensure a smooth transition and wideracceptance of users to the license system.SEGURA / IP3 JV Final Report -13
  • 23. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandrianot to renew the license of poor performers and to ascertain if additional operators areneeded to foster competition and keep prices at a reasonable level.Under this alternative, AGOSD supervisory functions will be simplified, as it will not bedirectly involved in the collection and disposal of septage or with the collection of fees.Its primary role will be as grantor of the licenses and regulator and supervisor of servicequality.AGOSD should consider granting licenses to its employees working in this activity, inreturn from them leaving the company, and to lease or sell them the vehicles underspecial terms and conditions. USAID may be able to assist with the financing through itsCredit Development Facility (CDF).Under both alternatives AGOSD needs to define: • The number of trucks, if any, that it is prepared to lease or sell to interested operators, and • The relocation of staff working in this service, or the conditions imposed on operators for the incorporation of this manpower in their labor force.For the latter, the private operator should have full control over these employees.Otherwise, protracted discussions are likely to occur, as inadequate control of personnelis detrimental to the efficiency and quality of service.Septage wastes pose several environmental risks that require careful handling anddisposal. Septage, particularly from industrial or commercial activities can containharmful or toxic substances to humans, crops and the environment at large. Similarlywastes from hospitals can contain highly infectious viruses, bacteria and/or radioactivematerials10. Nonetheless, a program for the systematic characterization and monitoring ofseptage from these institutions needs to be developed and enforced (law 37 of 1967)11and non-approved establishments should be mandated to dispose these wastes at specifiedsites and under tight and controlled conditions.Consultants were not able to obtain information on the characterization of septagematerial in Alexandria.Existing AGOSD sewerage infrastructure provides several non-exclusionary alternativesfor the proper disposal of septage; they include: • Addition to both wastewater treatment plant head works. o At a point immediately upstream of the screening and grit removal processes, or o At selected manholes to large drainage pipes upstream of the treatment plants (current disposal practice in Alexandria).10 The factor that differentiates commercial and industrial from domestic septage is not the type ofestablishment generating the waste; rather it is the type of wastage being produced.11 The Ministries of Agriculture and of Environmental Affairs regulate the disposal of these wastes.SEGURA / IP3 JV Final Report -14
  • 24. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandria • In this alternative, it might be necessary to impose septage discharge restrictions at each wastewater treatment plant, to prevent overloading or operational disruptions. • Disposal at Site 9N. Septage would be delivered to a holding pond to improve dewatering and handling at peak flows. • Direct addition to the sludge dewatering facility.Direct addition of septage to the dewatering facility reduces the loading to the primarytreatment process thus eliminating potential problems that could affect the quality of theprimary treatment system. However, as septage is resistant to dewatering, it can alsocomplicate the operation of the MDF and increase the wear of pumps, if septage is notpreviously screened and de-gritted.The first two alternatives are the most promising and should be studied in more detail todetermine the location, characteristics of receiving facilities and loading parameters.Consultants cannot recommend alternative 3 at this time for lack of adequate operationalinformation. If this alternative is of interest to AGOSD, consultants suggest field tests fora representative period of time (3-6 months) to assess its overall feasibility.A cost-benefit optimization is particularly sensitive to the distance between septagecollection and disposal, the number of septic tanks and volume emptied per year.Therefore with the scant information available, the financial viability of the two proposedalternatives and the impact on potential private operators and AGOSD cannot bedeveloped with any degree of confidence.SEGURA/IP3 considers that the licensing alternative is the most desirable option forAGOSD. This alternative has major advantages over a service contract approach,including: • AGOSD will be able to cut operational losses of over L.E. 6 million per year almost immediately. • AGOSD does not need to control prices, as the presence of an adequate number of certified operators will promote competition in the market and thus fair pricing. • AGOSD needs only to create a supervisory unit to provide information to potential users and receive feed back from them, and to ensure that that licensed operators meet required standards of service, and customers receive a satisfactory service. • The licensing fee can be easily adjusted to cover the cost of the supervisory unit and even produce a surplus for AGOSD. • Illegal operators can be brought under control, as licensees will likely report them to proper authorities. • The period of time between license renewals can be set to promote healthy competitionIf this alternative is selected AGOSD needs to: • Develop a regulatory framework and operating policies and the organization and functions of the supervisory unit.SEGURA / IP3 JV Final Report -15
  • 25. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandria • Determine the level of tipping fees that private operators should pay at points of discharge to cover handling costs at receiving stations. • Make an informed decision about the possible auction or leasing of unneeded service trucks to potential licensees. • Develop a political acceptable policy to deal with staff working in septage collection activities.Operation of Site 9NSite 9N is located some 40 kilometers south west of WWTP and has an area of about 150hectares (360 feddans). Facilities at the site include administration building, warehouse,maintenance area, operational equipment and pilot green areas. Some 60 staff works atthis facility.Site 9N receives dewatered sludge, grit, scum and screenings from the two majorwastewater treatment plants (East and West) and sewage pumping stations, as well as oil,grease and screenings from industries and commercial establishments. Grit and scumloads represent about 25 percent of the total handled at this site. Site 9N could also beadapted to receive and compost septage.Operations at Site 9N include: a) composting of dewatered sludge transported by truckfrom the mechanical dewatering facility (MDF) at the West wastewater primarytreatment plant (WWTP); b) grit treatment; and c) sanitary landfill of for industrialwastes. One of the local uses of compost and treated grit is to improve the conditions ofcalcareous soils, common in the area.The manager of Site 9N operations indicated that during FY 2004, this site received fromAGOSD’s operations about 300 tons/day of dewatered sludge, 30 m3/day of grit, 20-30m3/day of screenings and 20 m3/day of scum. It also received about 20m3/month ofindustrial wastes, mainly from three companies. The volume of septage is not known asthere is no reliable information on the number and volume of septic tanks in the area andhow often, on average, they are served.There are two basic alternatives to delegate operation of site 9N to a private operator: a) amanagement contract, and b) a lease contract. These two alternatives are quite similar inscope but differ in the way decisions are made to price and sell compost and other byproducts, and on the bidding strategy.a) A management contract can be structured for a 5 to10 year period andinterested contractors bid on the fee to manage the operation. Under this alternative,pricing decisions are made by AGOSD.The main responsibility of the contractor would be to operate the facilities as specified inthe bidding documents. Marketing decisions can be delegated to the operator includingincentives to reward its efforts to improve sales and reduce costs. Investments,SEGURA / IP3 JV Final Report -16
  • 26. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandriareplacement, and maintenance costs are the responsibility of AGOSD. It is possiblehowever, to structure the transaction to assign some of these costs to the operator, but thisdecision is likely to extend the length of the contract, increase the management fee orboth.b) A Leasing contract can be structured for 10 to 15 year period, and interestedcontractors will bid on an annual fee to be paid to AGOSD for the use of this facility,including equipment. This fee can be set to provide additional benefits to AGOSD ifoperating results are substantially better than anticipated and adjusted periodically forinflation. Under this alternative, sales and price decisions are the responsibility of theprivate operator as well as investments (like reception facilities to handle septage andother improvements deemed necessary) and maintenance costs.To set realistic bidding conditions there is a need to have better market information aboutsupply and demand to assess the economic potential of a full-fledged operation. Thismarket analysis should include price comparison with alternative fertilizer products aswell as an input analysis to ascertain with greater confidence the amounts of dewateredsludge and septage that can be expected during the life of the contract.In addition to the market assessment, the financial and economic viability of suchcontract can be enhanced if: • A tipping fee for the reception of septage, grease and any other acceptable waste material is imposed (most likely this would be determined by AGOSD as there is no competition for this service) • Reception of waste materials is open to other governorates; and • AGOSD can guarantee a minimum amount of dewatered sludge and enforce adequate disposal of septage.Contracting the operation of Site 9N and the production of composting can be a win-winsituation for AGOSD and a private operator. AGOSD can benefit financially from a moreefficient operation and a more aggressive marketing approach. A private operator canalso bring needed know-how and more streamlined management practices that are likelyto reduce costs and thus increase net revenues. On the other hand, AGOSD’s supervisoryfunctions would be simplified if the operator is given a free hand to decide on the sellingprice of its products or production of enhanced compost.Based on this pre-feasibility analysis, the consultants recommend therefore adopting thelease alternative as it gives more incentives to the private operator to fully optimize theuse of this facility including equipment, to be more proactive in the search for customersand in tailoring prices to competitive products. These advantages, in turn should benefitAGOSD as it can expect higher financial returns from a lease operation.It is important to reduce information risks to improve the response of interested biddersfor the operation of Site 9N. The experience of consultants in other internationalcontracts, indicates that perceived information deficiencies by prospective bidders tend tolower the price (lease fee) they would be willing to offer at bidding time. This negativeSEGURA / IP3 JV Final Report -17
  • 27. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandriaperception would be detrimental to the stream of financial benefits to AGOSD. As thesize of this contract is small, it does not seem practical to expect that interested biddersmake a significant investment (due diligence) to ascertain inputs over which they have nocontrol (projection of quantities and characteristics of materials delivered to the site) andmarket opportunities for the compost. Therefore, the bidding outcome will be greatlyenhanced if AGOSD undertakes this input and market analysis.Transport of dewatered sludge and other wastes to Site 9NTransportation of waste by-products and operation of site 9N are two different type ofbusiness requiring different managerial skills and equipment. Therefore, consultantsrecommend not incorporating the transport of these materials into the lease operation ofsite 9N, as this incorporation will make the combined contract not financially attractiveand will likely limit competition to the detriment of AGOSD.Nonetheless, AGOSD has two basic options to deal with the transport of these materialsthe wastewater treatment plants and sewage pumping stations to Site 9N: • Transporting these materials it using its own resources and at its own cost. • Delegating this activity to private operators under separate service contracts.The first alternative is a continuation of present practices, where the possibilities of costreductions are not obvious. The second one should contemplate hiring at least 2-4operators to ensure adequate competition. However, this alternative poses coordinationissues between the operator and AGOSD. Nonetheless, this alternative offers thepotential for cost reductions through competition for and within the market and thereforeconsultants recommend this option.In both cases, there is the need to develop contractual operational arrangement betweenAGOSD and site 9N operator. For instance, minimum quantities of materials delivered toSite 9N and hours of transport, collection and delivery.The consultants recommend that AGOSD delegates responsibility for the transport ofdewatered sludge and other waste materials to site 9N, to private operators under separateservice contracts.5. Transaction Implementation Plans5.1 AWGA – Metering, Billing & CollectionTwo options were identified for PSP in a pilot area of AWGA’s service area: i) Ametering only, and ii) A more comprehensiveAWGA has expressed an interest in developing the transaction implementation plan forthe metering only option. AWGA has also indicated that it believes it can improve itsSEGURA / IP3 JV Final Report -18
  • 28. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandriabilling and collection efforts through internal efforts and does not wish to pursue themore comprehensive metering, billing and collection option.Private Sector Participation Metering ActivitiesThe metering only contract envisioned by the consultants would be a 10-year contractthat delegates a number of activities to a contractor in the pilot area. These activities areexpected to include the following: • Conduct a customer census and identify illegal connections. • Based on the customer census, reclassify customer accounts to tariff categories indicative of actual use. • Replace broken meters. • Relocate inaccessible meters so they can be read more easily. • Test and replace meters over 2” as soon as practical. • Install advanced meter technology for large and government accounts. • Test and replace apartment master meters. • Expand the use of hand held meter reading devices in Ameriya and Borg El Arab. • Purchase motor cycles for meter readers and redesign meter routes as needed. • Replace most domestic meters over a 5 to 10 year period with higher class meters.Many of the above activities have taken place to some extent through technical assistanceprograms supported by USAID. In the consultants opinion, a PSP contract for meteringservices will build upon the technical assistance already provided and offers a mechanismto ensure that the assistance is sustainable on a long term basis.The above activities are estimated to result in annual revenue increases on approximatelyL.E. 7.6 million. The amount could be more if a large number of illegal connections arefound which often occurs when a customer census is conducted.It is also likely that the above activities will improve the collection rate if the customersbelieve that there water use is being more accurately measured. Inaccurate meter readingsare currently one of the reasons some customers do not pay their water bills.The installment of advanced meter technology for large and government accounts, couldinclude implementation of hand held meter reading devices, more sophisticatedautomated meter reading (AMR) or Smart meters. Telephonic reading may also bepossible depending upon security access allowed by customers.For purposes of estimating the potential increase in billings the consultants have assumedAMR would be used. However, each bidder is likely to propose alternative technologiesthat they believe will be most effective for the situation. The consultants have no biastoward any particular technology and believe the final decision should be based on a cost-benefit evaluation of proposals that are received.SEGURA / IP3 JV Final Report -19
  • 29. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, AlexandriaPotential BiddersThe companies to bid on a metering only contract will probably include a joint venturebetween a meter manufacturer and a local service provider and /or international watercompanies. The consultants believe there are several companies that will have a keeninterest in this opportunity.The level of interest and ultimate costs of the metering-only contract will be influencedby the bidders understanding of the potential size of this opportunity. If the biddersbelieve this is an opportunity limited to one pilot area in Alexandria, the level ofcompetition will be limited and thus the costs higher than it might otherwise be.AWGA could also consider a requirement in the contract to install meters in thedistribution system (technical meters) to measure the amount of water delivered to thepilot area. This type of activity would allow the volume of unaccounted for water to bemonitored and measured and provide valuable information to help solve the continuity ofservice issues described in the needs assessment and feasibility report. At least in theSahel area, the installation of technical meters requires minor changes in the distributionnetwork. In the other two areas more extensive modifications are needed.It is worth mentioning that some utilities that have contracted-out services, like metering,allow their employees to bid on the contract. In AWGA’s case some of the managers inthe pilot area branches could organize themselves as a local company and pursue a jointventure with one or more meter manufactures. AWGA would need to support this type ofinitiative and possibly provide some technical assistance to get it started.Transaction ActivitiesTable 6 includes a Gantt chart of the major tasks that will be involved in securing theservices of a qualified contractor for a metering only contract.Moreover, evaluation of proposals and contract signature is likely to take more than onemonth. The Transition can start on month 10.As shown in Table 6, the transaction process will take up to nine months to completefrom the date a transaction advisor is retained. The first three months of the transactionprocess includes activities to gather and refine information and to make decisions onpolicy matters that will have an impact on employees in the pilot area. Once these mattersare resolved, the transaction will take an additional six months of elapsed time tocomplete.SEGURA / IP3 JV Final Report -20
  • 30. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandria Table 6. AWGA - Transaction Activities Months Activities 1 2 3 4 5 6 7 8 9 101 Retain a transaction advisor2 Organize a contract administration unit3 Prepare and enhance existing metering data4 Agree on policy and legal matters5 Issue RFQ6 Evaluate qualification statements and short list firms7 Conduct site visits with short listed firms8 Prepare and issue RFP, including draft contract9 Evaluate proposals and select firm10 Begin transition assistanceContract CostsThe total value of the metering only contract over a ten year term to the winningcontractor is estimated at L.E 36 million. By international standards this is a smallcontract. Further, considering the fact that the contractor will not be able to fully controlall of the metering operations, most contractors will be reluctant to accept contract termsthat base too much of their compensation on incentive payments for increasing theamount of annual billings. The contractor will most likely be paid a fixed fee for everymeter read and a fixed payment for every meter replaced based on meter size. In theconsultants opinion, a small performance bonus ranging from 5% to 10% of increasedannul billings would be an appropriate performance bonus. If this is done the estimatedfixed payments would be reduced.Level of EffortThe consultants estimate the costs of the transaction process, including an estimatedvalue of AWGA’s efforts to gather and refine information, at L.E. 2.1 million, orapproximately 6% of the total contract value. The estimated cost of the transactionadvisor is L.E. 1.8 million and the estimated values of AWGA’s efforts are L.E. .3million5.2 AGOSD – Septage Management, Site 9N and TransportThe consultants developed, at the request of AGOSD, the pre-feasibility analysis forcontracting three operational activities with private operators, namely12: i) septagecollection and disposal; ii) operation of Site 9N; and iii) transport of wastewateroperational by-products to site 9N.12 SEGURA-IP3. AGOSD Pre-feasibility study-October, 2004SEGURA / IP3 JV Final Report -21
  • 31. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, AlexandriaThese contracts with private operators are closely interrelated as: • The disposal of septage (contract 1) and waste materials (contract 3) effects the operation of Site 9N (contract 2); • Most of the equipment used in these operations is interchangeable. Therefore, it is important to allocate this equipment in an optimal way to ensure the maximum net benefits from their use.Therefore, the consultants recommended pursuing private sector participation in theseoperations simultaneously.Implementation activities common to all contracts1. Feasibility a) Information enhancement One important and urgent task is to allocate staff and resources to improve the quality of information relevant to these operations. Information shortcomings were the main reason why the development of these projects could only be advanced to the feasibility level. The enhancement of information is important to help minimize the perception, by prospective bidders, of information risks and thus to ensure a more positive response from them and better competition likely to benefit the interests of AGOSD. Once this information is available, a base-line cost contracting strategy for each contract can be developed. This strategy should be compatible with a sound allocation of risks to contractors and AGOSD, and to promote adequate competition (for the market) for each of the contracts and during the implementation phase (competition in the market), to optimize the benefits for AGOSD. b) Selection of transaction advisors Due to these contracts are interrelated, it is recommended to retain an advisory consulting firm (TA advisors) to help AGOSD in executing these transactions simultaneously. The TA advisors should accompany and support AGOSD on all aspects of the transaction. If deemed necessary, they should also participate in the evaluation of bids and negotiations that may follow as well as in the transition phase to private operations of these services. The advisors can be retained on a professional fee plus reimbursable expenses basis, or on a professional fee plus success fee basis. It is the consultants opinion that given the nature of the consulting work to be performed and the nature of the service contracts the first option is preferable. c) Staff reallocation The staff currently assigned to these three activities will likely be affected by AGOSD decision to delegate these operations to private operators. The consultants understand that AGOSD would prefer to minimize this impact. Therefore, AGOSD needs to develop a consistent staff policy to manage thisSEGURA / IP3 JV Final Report -22
  • 32. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandria initiative in a fair and transparent basis and balance its interests with those of the staff and operators. Towards this goal, AGOSD should consider several options (and combinations): • Staff can be offered the opportunity to join the private operator. Staff would be allowed to take a leave of absence without pay but with the option to be reincorporated, say after two years, if the staff so decides. It is in the interest of a private operator to hire some, but not necessarily all, AGOSD staff working in these activities. However, the operator needs to be given full authority over this staff, as otherwise accountability of the operator will be compromised. Therefore, AGOSD needs to reconcile its own and private operators concerns to reach a workable and effective solution. • Staff not willing to take a leave of absence or not selected by the operator can be transferred to other positions within the organization. • Selected staff, particularly those working currently in the septage collection and disposal or in the transport of materials to site 9N, could be given the opportunity to bid on these contracts, on condition that they resign from AGOSD if they are selected. Consultants were informed that the first two options have been recently successfully implemented in Alexandria in the context of the solid waste management initiative delegated to the private sector. d. Condition of the equipment There are no updated records on the condition of the equipment utilized in these operations. Therefore, is important for AGOSD to determine: • The equipment that is not worth repairing; this equipment could be sold as scrap. • The equipment that it would like to retain for other operations. • The equipment that it would like to lease or sell to operators.2. Pre-transaction activities a. Creation of the implementation unit within AGOSD, which should have the mandate to carry these projects successfully to completion. The head unit should report directly to the Chairman to ensure that the requests for information from other departments are carried out promptly. The main functions of the unit will be: • To liaise closely with and supervise the work of the TA advisors; • To contact prospective bidders and invite them to participate; • To prepare public announcements and call-for-bids documents; • To answer in writing, following proper internal consultations, the questions that interested operators may pose; andSEGURA / IP3 JV Final Report -23
  • 33. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandria • Carry out all activities leading to the successful implementation of the contracts. b. Information memorandum. Its purpose is to inform prospective bidders on the general nature of the contracts and to invite them to participate. This document should be prepared once AGOSD has made the key decisions relevant to each contract (in particular type of private sector participation and policy on reallocation of staff). c. Organization of the data room. All documents pertinent to these contracts should be classified and stored at a centralized point and made available to interested contractors. A log of all visitors and information requests should be maintained.3. Public relations and promotion activities • It is important in all public relations activities to offer factual information about the present service conditions, and to make realistic promises about the expected benefits and impact on different users. In particular, they are beneficial to illustrate to the public at large, about AGOSD’s development plans to improve services to the population, via private sector participation and how they will benefit from these improvements; and AGOSD staff, through internal seminars, about the reasons for private sector participation and how this participation will affect their positions. • The purpose of the promotion activities is to raise the interest of prospective private operators and listen to their concerns. Promotion activities include workshops with professional associations; contacts with national and international operators that may have an interest in these contracts; and organization of technical visits for operators to illustrate in detail the scope of the proposed contracts.4. TransactionThese activities include the preparation and issuance of: • Request for proposals. In local newspapers and international trade magazines. This information often includes a general description of the contracts, cost of documents. It indicates the date for presentation of documents and the form and time limits for clarifications. • Field visits and pre-bidding conference. Interested bidders should be invited to visit the project sites under the guidance of AGOSD and for formal discussions to foster comments from interested bidders on the bidding documents. • Pre-qualification documents. In general, it is customary to pre-qualify interested contractors. However, care should be taken to avoid an earlySEGURA / IP3 JV Final Report -24
  • 34. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandria decision on this matter as if the number of pre-qualified bidders is inadequate it will have an adverse effect on the competition for the contracts13. • Bidding documents. Provides information about the scope of the contract, submission of documents including performance guaranties, and bit evaluation and award procedures. • The contract. Contains all contractual obligations, conflict resolution provisions (arbitration), forms of payment and non-compliance penalties. It should be prepared (in draft) as early as possible to elicit a meaningful response from prospective bidders. Amendments, if deemed appropriate, are introduced in response to these comments.Depending on the overall approach to the bidding process, final contract negotiationsmay or not be part of the transaction process. In some instances, consultations withprospective bidders are sought in earnest to accommodate, to the extent possible, theirconcerns to the contract. If this approach is followed, it is customary to request that allbidders sing the pro-forma contract to signal their acceptance to all contract conditions.5. Transition period & Contract MonitoringIt is important to plan for an orderly transition of operations to private operators.Therefore, the transition needs to be developed with an adequate level of detail to avoiddisruptions in service. This transition includes the legal possession of sites and equipmentby the operators and the transfer of AGOSD staff to contractors. During this processoperators begin a more thorough familiarization with the service they will be in chargeof, and AGOSD staff should be attentive to promptly iron out any glitches in the transferprocess.The supervision of the service contracts entails: • Periodic reporting by operators in accordance with pre-established rules and formats set in the contract; • Validation of this information by the Supervisory Unit; • Monitoring and evaluation of contracts; • Spot and random checks to assess operators’ performance; • Comparison of performance when several contractors are involved in similar operations (collection and disposal of septage and transport of waste materials to site 9N); • Periodic meetings with operators to discuss matters of common interest; and • Applying remedial actions when necessary.6. Specific implementation activities by type of contracti) Licensing of septage collection and disposal13 An alternative to pre-qualification is to set minimum qualification criteria that bidders have todemonstrate at the time of bid presentation. If a prospective bidder does not pass the minimum qualificationcriteria it is disqualified and the second envelope is returned unopened.SEGURA / IP3 JV Final Report -25
  • 35. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, AlexandriaInformation enhancement: It is important for AGOSD to develop reliable informationregarding the location of existing septic tanks and volume, and frequency of service. Thisactivity should be closely coordinated with AWGA as it can be used to validate theinformation on the billing system. As part of this exercise, it is also advisable forAGOSD to update its capital investment plans and population growth for the next 5 to 10years as they will affect the number and location of septic tanks to be served in the future.Definition, design and construction of septage receiving stations: Septage can besafely discharged at the head-works of existing waste treatment plants and at site 9N. Forthe first two, there is a need to define where these reception facilities will be located andto design and build them. In addition, limitations on the septage discharge on these plantsshould be defined to avoid operational disruptions. The construction cost of thesefacilities is modest and not likely to exceed L.E. 100,000 each. Construction of septagereception facilities at site 9N can be delegated to and paid for by the operator of this siteas part of the leasing arrangements.Characterization of septage: This is an important activity that needs to be carried out inparallel with the census of septic tanks. Its purpose is to identify users, most likely fromindustrial, commercial and healthcare activities that generate waste with biological andphysical-chemical characteristics that can pose a danger to staff or to the environment.Based on these findings certain wastes are likely to be excluded from being discharged atreception facilities. Both private operators that collect septage and operators at receivingstations should be thoroughly familiar with these restrictions.It is also good practice to establish routine and spot checks of septage that will beaccepted at each of the receiving stations. Routine characterization analysis should bedone by AGOSD or contracted with an independent and qualified laboratory.ii) Leasing of operation of Site 9NInformation enhancement is necessary to assess in greater detail: • The volumes and likely seasonal variations of different materials to be received at this site, including projections over the life of the lease. It should be noted that the contractor will have no control over these quantities, some of which (dewatered sludge in particular) are critical to the financial viability of the compost operation. • The potential market for compost. Given that the size of the lease contract is small, it does not seem realistic to expect that potential bidders will perform a thorough due diligence process to assess the demand for this product (potential users, volume and price).iii) Service contracts for the transport of waste materialsIt is necessary to improve information related to the volumes and projections, over thelife of the contract, of materials to be transported to site 9N.SEGURA / IP3 JV Final Report -26
  • 36. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, AlexandriaProject execution timetableAs shown in Table 7, the time to carry out these projects to implementation is estimatedat nine months. This period includes about four months required to improve theinformation on all three projects, which as indicated previously is critical to reduceinformation risks to interested operators and improve AGOSD’s position.SEGURA / IP3 JV Final Report -27
  • 37. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandria Table 7. AGOSD - Steps Toward Transaction Implementation Time, months Phase / activity 1 2 3 4 5 6 7 8 9 10 1. Feasibility Information enhancement Septage Site 9N Transport of materials Selection of transaction advisors Staff deployment Assessment of equipment 2. Pre-transaction activities Creation of transaction unit Information memorandum Organization of data room 3. Public relations and promotion 4. Transaction Bidding documents Bid evaulation 5. Transition period One week = Continuous but not full time activity =SEGURA / IP3 JV Final Report -28
  • 38. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, AlexandriaTransaction preparation costsThe consultants estimate the costs of the transaction process, including AGOSD activities andefforts to gather and refine information at L.E. 4.2 million. The estimated cost of the transactionadvisors is L.E. 2.9 million, and of AGOSD’s efforts L.E. 1.3 million. An estimate of the levelof effort to implement these transactions is presented in Table 8. Table 9. AGOSD - Estimated level of Effort Transaction implementation costs, L.E (000). T. Advisors AGOSD Phase / activity Unit costs Staff-days T. Cost Unit cost Staff-days T. Cost T. costs Ex-pats Local Ex-pats Local1. Feasibility 1473 Information enhancement Septage a/ 6000 1000 15 20 110 50 18,000 900 Site 9N 6000 1000 40 80 320 50 160 8 Transport of materials 6000 1000 10 20 80 50 80 4 Selection of transaction advisors 50 40 2 Staff relocation 6000 1000 5 5 200 30 6 Assessment of equipment 6000 1000 5 10 40 50 60 32. Pre-transaction activities 385 Staffying of transaction unit 50 1,800 90 Base-line 6000 1000 30 50 230 Information memorandum 6000 1000 10 5 65 b/ Organization of data room 6000 1000 b/3. Public relations and promotion 6000 1000 40 100 340 b/ 3404. Transaction b/ 1350 Bidding documents 6000 1000 180 120 1200 Bid evaluation 6000 1000 20 30 1505. Transition periodSub-totals 355 440 2535 20,170 1013 3548Direct costs and incidentals 335 317 652Totals 2870 1330 4200Notes; a/ Includes employing university students to do the census b/ Included in operation of transaction unitSEGURA / IP3 JV Final Report -29
  • 39. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandria6. Conclusions and Recommendations • SEGURA/IP3 JV was retained by USAID at the request of the Governorate of Alexandria (GOA), to advance the analysis of the proposed reforms exploring the feasibility of Private Sector Participation (PSP) in the operation and maintenance of the water and wastewater system. Government authorities had expressed interest in possibly merging the water supply –AWGA- and sanitation –AGOSD – agencies. • The consultants prepared an initial “Main Policy Considerations” report to provide government authorities with alternative scenarios and recommendations to guide their policy decisions. These decisions provided the basis for the development of the Governorate Policy Statement Paper. • From the consultants’ point of view merging water and sanitation services could be a desirable but not a necessary condition to improve services. The merger would demand substantial involvement of senior government officials to overcome resistance to change both in AWGA and AGOSD, which is likely to distract their attention. Therefore, it is necessary for government authorities to assess the benefits and costs of embarking on this aspect of reform when it appears that there are other reforms that can have a more significant impact on the quality of service and operations. • When the GOE issued the Presidential Decrees No. 135 and 136 of the year 2004, establishing a Holding Company for water and wastewater companies the consultants analyzed the implications of the modified legal framework and incorporated their views into the Policy Statement Paper, along with feedback from GOE officials. • Its highly desirable to “right size” the work force at both entities, not only to reduce operational costs but also to facilitate reaching a more balanced skill-mix. The government needs to assess the political and social implications of staff reductions and determine a plan to achieve the desired targets. Staff reduction by attrition only will not be adequate, as it will take a long time to produce meaningful results. Likewise, reaching the desirable levels of productivity through service growth will require at least 25 years (assuming 2.5 % growth per annum). • Regarding the service rates, the consultants believe that additional tariff increases are certainly needed. It is also important to revise the tariff structure to improve targeting of subsidies to the poor, and substantially reduce or abolish subsidies to many consumers that do not need them, which can facilitate the tariff adjustment process. • It is still not clear at this stage how the Water & Wastewater Holding Company will operate in practice. Nonetheless, the consultants made two recommendations: o Local service agencies should be given substantial operational and financial autonomy, including the management of their internal cash generation; and.SEGURA / IP3 JV Final Report -30
  • 40. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandria o To consider the inclusion of municipal authorities in the board of directors of these companies to coordinate and take into account their more in-depth knowledge of local conditions and priorities. • A settlement of the outstanding debt of these entities it an urgent issue to be solved by the government, as it is an essential element of the sector restructuring plan. It is highly unlikely that a private operator, under any of the PSP options considered, will assume part of this debt. In similar situations in other PSP contracts, the outstanding debt has been serviced by a special surcharge on the tariff, with the private operator acting as collecting agent on behalf of the administration. • After the creation of the Holding Company, the GOA and USAID agreed that we should concentrate on the feasibility of service contracts. In the case of AWGA, the consultants considered two basic alternatives: i) Metering only; and ii) Comprehensive metering, billing and collection. In our view the comprehensive metering, billing and collection contract is the most desirable alternative. This alternative has major advantages over a metering-only contract: a) Net revenues for AWGA will be higher; and b) It will have a more profound and lasting impact on commercialization practices as it will help to substantially improve performance of AWGA’s branches. • AWGA expressed an interest in pursuing the metering only option. AWGA has also indicated that it believes it can improve its billing and collection through internal efforts and does not wish to undertake the more comprehensive metering, billing and collection option at this time. • None of these contract alternatives addresses water supply management issues, or investments needed for the optimal rehabilitation of the distribution system. Metering of water delivered to each zone will continue to be AWGA’s responsibility and therefore outside the scope of any of these contracts. AWGA also needs to create a contract administration unit, with qualified staff for which training should be considered. • The consultants have prepared a Draft Transaction Implementation Plan for the selected alternative (presented separately) • AGOSD sought advice on how to structure service contracts for (a) septage collection and disposal; (b) operation of Site 9N including composting; and (c) transportation of dewatered sludge and other wastewater byproducts to this site. The pre-feasibility of AGOSD’s potential service contracts is developed in this report. • At the request of AGOSD, SEGURA/IP3 consultants developed the pre-feasibility analysis for contracting three operational activities with private operators, namely: 1) septage collection and disposal; 2) operation of Site 9N; and 3) transport of wastewater operational byproducts to site 9N. • From this analysis the consultants recommended:SEGURA / IP3 JV Final Report -31
  • 41. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandria o Licensing to private operators the collection and disposal of septage. These licenses should be granted for two to three year periods; o Leasing the operation of Site 9N that handles the safe disposal of waste byproducts and produces compost from dewatered sludge that is sold to local markets. This leasing contract should be 10 years, to allow the recovery of likely investments by the private operator, related primarily to the production of compost; o Service contracts with several operators for the collection and transport of wastewater byproducts (dewatered sludge, grit, scum and grease) from the two waste treatment plants and 72 pumping stations to site 9N. These service contracts should be granted for three to five years, to stimulate competition and to lower future costs associated with re-bidding. • The consultants presented a separated report outlining the “Steps Toward Transaction Implementation” for the above service contracts options. • The consulting team has clearly indicated to USAID/ Egypt and GOE authorities that although "service contracts" of this nature are steps in the right direction, they will not address the structural problems facing the two utilities (especially in the case of AGOSD). These problems include primarily: adequate maintenance of existing infrastructure, capital investments to meet new demand, settlement of accumulated debt and extremely low service rates, which do not make full cost recovery operation a realistic expectation for the Alexandria W & WW utilities in the near futureGiven the significant steps undertaken by GOE with the creation of the Water & WastewaterHolding Company and the Egyptian Regulatory Authority (EWRA), we strongly recommend toinclude more comprehensive PSP alternatives in the reform program and to undertake theproposed service contracts at AWGA and AGOSD as part of the implementation of the sectorreform.SEGURA / IP3 JV Final Report -32
  • 42. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandria AttachmentsA1 AWGA’s Financial Statements Table A1-1. AWGA - Balance Statement 1/ (L.E. Million) Assets FY 04 FY 03 FY 02 Current assets Cash and cash equivalents 111 108 124 Accounts receivable 284 262 214 Provision for doubtful accounts (-) -12 -13 -13 Debit balances and other 38 22 52 Inventory (net) 26 26 23 Total current assets 447 405 400 Fixed assets Gross fixed assets 1,038 950 900 Accumulated depreciation (-) -394 -362 -327 Net fixed assets in operations 645 588 573 Work in progress 266 258 205 Total fixed assets and W.P 911 846 778 Total Assets 1,358 1,250 1,178 Liabilities Current liabilities Suppliers and others 307 283 272 Provisions 27 7 8 Total current liabilities 334 290 280 Long-term loans Ministry of Finance 43 31 31 National Investment Bank 424 374 349 Total long-term loans 467 405 380 Equity Capital and government cont. 528 364 364 Reserves 29 390 353 Accumulated losses (-) 0 -198 -198 Total equity 557 555 518 Total Equity and Liabilities 1,358 1,250 1,178 1/ Balance sheets as of June 30 for FY 02 and 03. The balance sheet for FY04 is as of April 29 when AWGA was converted into a Public Business Sector Company (P.D. 135/2004).SEGURA / IP3 JV Final Report A -33
  • 43. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandria Table A1-2. AWGA - Selected Cash Flow Figures Concept FY 04 FY 03 FY 02 Funds from operations Net income before after taxes and before int. 31 28 52 Plus, depreciation 33 37 35 Decreases (increases) in working cap. 1/ 5 -11 -3 Funds from operations (A) 70 54 84 Debt service Principal 19 63 58 Debit interest 32 45 45 Debt Service (B) 51 108 103 Net internal cash generation (A-B) 19 -54 -19 Loans and grants NIB loans for investment 2/ 57 75 57 NIB loans to cover debit interest 2/ 12 13 13 Grants 4 5 6 Total loans and grants 73 92 76 Capital expenditures 90 102 83 1/ Excluding cash. 2/ NIB: National Investment BankSEGURA / IP3 JV Final Report A -34
  • 44. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, AlexandriaA2 AGOSD’s Income Statement Table A2. AGOSD - Income Statement FY O3 L.E. Concept Million Operating revenues 42 Operating expenses (excluding depreciation) 61 Operating profit before depreciation -19 Depreciation 56 Operating profit -75 Interest 56 Profit before taxes -131 Income taxes 0 Net income -131SEGURA / IP3 JV Final Report A -35
  • 45. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, AlexandriaA3 Partial list of individuals contacted Name Title EntityMs. Aida Mahargy Head of Administration/ AWGA Commercial AffairsMs. A. Nasser AWGAMr. Ahmad Shaheen Chairman (March/04) AGOSDMr. Ahmed Hassan Legal CounselMr. Anthony N. Vance Associate Mission Director USAID CairoMr. Ashraf Dessouky General manager Hydro-Comp EnterprisesDr. Beyaly Hosney Mohamed El Chairman AGOSDBeyalyMr. David Logan Saur InternationalMr. David Osgood Chief of Party of the WWSPR CH2MHill ProjectEng. El Shafhie El Dakroury Chairman National Organization For Potable Water & Sanitary Drainage NOPWSDMr. Eric Reading Consultant ChemonicsMr. Ernest A. Slingsby Chief of Party Planning and Development Collaborative International. Middle Egypt Utilities Institutional Strengthening ProjectMr. Gharieb El-Sawi Project Manager, Office of USAID Environment & InfrastructureMr. Ghazi Almani Representative Severn Trent InternationalMr. Hassaan Morsi Deputy Project Director Metcalf & EddyDr. Hossam Rashwan Official Arab SoftMr. James Harmon Chief Division of Water & Waste USAID WaterMr. Jeffrey C. Wuorinen Regional Representative – IP3 MENA (Middle East North Africa)Mr. Joe Haddad Representative Prestage Supplies and servicesMs. Kathy Shandling Executive Director International Private Water AssociationEng. Mahmoud M. Hamed Managing Director, the Alexandria Governorate department of environmental monitoringEng. M. Magd Eldin Ibrahim First Under Secretary, Ministry of Housing, Utilities, Supervisory of Minister Cabinet and Urban CommunitiesEng. Mamdouh Raslan Project Officer, Environment & USAID InfrastructureMr. Michael C. DeMetre Senior engineer USAIDSEGURA / IP3 JV Final Report A -36
  • 46. USAID - SEGIR Privatization II IQC Government of EgyptFeasibility of PSP in the Water & Wastewater System, Alexandria Name Title EntityMr. Michael R. Giddinge, PE Chief of Party Metcalf & EddyMr. Mohamed Ahmed Bassiony Secretary General Governorate of AlexandriaEng. Mohamed El Alfy Deputy Chairman Water & Wastewater Holding CompanyEng. Mohamed H. Ashmawi President IP3 MENAMr. Mohamed Mohamed Gamal Head of the Administration AWGA AffairsEng. Nabil M.A Shehata Engineer AGOSDMs. Eng.Nadia Abdou Chairperson AWGAMr. Patrick Grayson Representative ABBMr. Rick Albani Project Director, AWGA ISC PA Government Services ProjectMr. Roland Gomez Representative Badger MetersDr. Shacker Helmi Advisor to the Governor of University of Alexandria, Alexandria for Environmental Institute of Graduate Studies and Affairs Research, Dept. of Environmental StudiesMr. Simon Langton Representative Severn Trent InternationalMr. Tyler Holt Infrastructure Policy Advisor USAIDEng. Wassim Daniel Mikhaiel Project manager, Office of USAID Environment & Infrastructure, Water & Waste Water SectorMr. William Astrasky Representative Sargent InternationalSEGURA / IP3 JV Final Report A -37

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