An Institution that Takes Full Market Risk with Sponsors in Projects that are NOT Backed by Central Government Guarantees of Repayment.

1. Session I – Track 4Session I – Track 4
Building Sustainability:Building Sustainability:
Partnerships and FinancePartnerships and Finance
Global Environment Facility –Global Environment Facility –
International WatersInternational Waters
Second Biennial ConferenceSecond Biennial Conference
Thursday, September 26, 2002Thursday, September 26, 2002
14:00 – 18:0014:00 – 18:00

2. AgendaAgenda
Overview of the Sector from the PrivateOverview of the Sector from the Private
Investor’s Point of ViewInvestor’s Point of View
PresentationsPresentations
Selection of Focus Groups/ThemesSelection of Focus Groups/Themes
Focus Group MeetingsFocus Group Meetings
Focus Group PresentationsFocus Group Presentations

3. Global Environment Facility – International WatersGlobal Environment Facility – International Waters
Second Biennial ConferenceSecond Biennial Conference
Private Investment inPrivate Investment in
Pollution Control ProjectsPollution Control Projects
Issues for Financial InstitutionsIssues for Financial Institutions
(and the GEF)(and the GEF)
Jerome Esmay, Principal EngineerJerome Esmay, Principal Engineer Dalian, ChinaDalian, China
25-29 Sept. 200125-29 Sept. 2001

4. OverviewOverview
IFC Experience in Water Supply TransactionsIFC Experience in Water Supply Transactions
Partnerships with the Private SectorPartnerships with the Private Sector
Models of Private InvestmentModels of Private Investment
GEF and the Role of the Private SectorGEF and the Role of the Private Sector
Lessons LearnedLessons Learned

5. What is IFC?What is IFC?
The Largest Multi-Lateral Source of Project FinanceThe Largest Multi-Lateral Source of Project Finance
Exclusively for the Private SectorExclusively for the Private Sector
A Profit-Oriented Supporter of EconomicA Profit-Oriented Supporter of Economic
Development Providing Equity and LoansDevelopment Providing Equity and Loans
An Institution that Takes Full Market Risk withAn Institution that Takes Full Market Risk with
Sponsors in Projects that are NOT Backed bySponsors in Projects that are NOT Backed by
Central Government Guarantees of RepaymentCentral Government Guarantees of Repayment

6. IFC - The GEF’s Primary PrivateIFC - The GEF’s Primary Private
Sector Implementing AgentSector Implementing Agent
MISSION:
To promote private sector investment in
developing countries which will reduce
poverty and improve people’s lives
Member of World Bank Group - owned by 174
governments
IFC only invests in private-sector projects which are both
commercially viable and promote sustainable development

7. IFC/GEF Strategy
Match the type of support to the obstacles or
risks blocking achievement of GEF
objectives
Prefer non-grant financing
Focus on near-commercial projects
 Minimize use of GEF resources
 Maximize leverage of GEF resources
Where possible, co-finance with IFC

8. IFC Targets GEF SupportIFC Targets GEF Support
Matches support to the obstacle/risks blockingMatches support to the obstacle/risks blocking
achievement of GEF Objectivesachievement of GEF Objectives
Focuses on near-commercial venturesFocuses on near-commercial ventures
Minimizes use/Maximizes leverage of GEFMinimizes use/Maximizes leverage of GEF
ResourcesResources
Co-Finances, whenever possible, with GEFCo-Finances, whenever possible, with GEF
implementing or executing agencyimplementing or executing agency
Prefers non-grant financingPrefers non-grant financing

9. Partnerships with thePartnerships with the
Private SectorPrivate Sector

10. RISKS
COUNTRY RISKS
SECTOR RISKS
PROJECT RISKS
Larger Risk
=
Larger Required Reward ($$)
Larger Risk
=
Larger Required Reward ($$)
REWARD
INCREASED
DEMAND
OTHER
OPPORTUNTIES
Private Investor PerspectivePrivate Investor Perspective

11. Public Sector--BuyerPublic Sector--Buyer
Wants private capital without making theWants private capital without making the
necessary fiscal/managerial reformsnecessary fiscal/managerial reforms
Chooses between negotiated orChooses between negotiated or
competitively-bid transactionscompetitively-bid transactions
Has unrealistic risk/reward conceptsHas unrealistic risk/reward concepts

12. Private Sector--SellerPrivate Sector--Seller
Eager to win the contractEager to win the contract
Is not sufficiently critical of a weak projectIs not sufficiently critical of a weak project
structurestructure
Wants:Wants:
– Long-term commitmentsLong-term commitments
– Fair contractsFair contracts
– Upside potentialUpside potential

13. Financial Institutions--CapitalFinancial Institutions--Capital
ProvidersProviders
Transparent and open processTransparent and open process
Investor resourcesInvestor resources
Experienced and Qualified ManagementExperienced and Qualified Management
Pari Passu rights with other obligationsPari Passu rights with other obligations
Step-in RightsStep-in Rights
Coverage for Municipal RiskCoverage for Municipal Risk
Indemnification for Force Majeure and ContractIndemnification for Force Majeure and Contract
RescisionRescision

14. Sustainable PartnershipsSustainable Partnerships
Have:Have:
Transparent bidding/negotiationsTransparent bidding/negotiations
– Objective ranking/selection criteriaObjective ranking/selection criteria
e.g. Lowest Tariffe.g. Lowest Tariff
Service-oriented, output-driven contractsService-oriented, output-driven contracts
– ““What” controlled by buyerWhat” controlled by buyer
– ““How” controlled by sellerHow” controlled by seller
– Responsibilities and ownership are clearResponsibilities and ownership are clear

15. Key Elements in PartnershipsKey Elements in Partnerships
with the Private Sectorwith the Private Sector
Early collaboration and consultationEarly collaboration and consultation
Committed partnership betweenCommitted partnership between
national, local/regional government,national, local/regional government,
multilateral organizations and GEFmultilateral organizations and GEF
Learn by doingLearn by doing
Create pilot/demonstration projectsCreate pilot/demonstration projects

16. IFC EXPERIENCE INIFC EXPERIENCE IN
SUPPORT OF PRIVATESUPPORT OF PRIVATE
SECTOR WATERSECTOR WATER
PROJECTSPROJECTS

17. IFC Investment Experience (1)IFC Investment Experience (1)
Buenos Aires: privatized 30-year privatizedBuenos Aires: privatized 30-year privatized
water/sanitation concession ($4 billion total investment)water/sanitation concession ($4 billion total investment)
Puerto Vallarta (Mexico): 15-year private wastewaterPuerto Vallarta (Mexico): 15-year private wastewater
treatment BOT($33MM total investment)treatment BOT($33MM total investment)
Aquas de Limeira (Brazil): 30-year privatized water/Aquas de Limeira (Brazil): 30-year privatized water/
wastewater concession ($50-70MM investment)wastewater concession ($50-70MM investment)
Binh An (Vietnam): 1.5 m3/sec bulk water BOT ($35MMBinh An (Vietnam): 1.5 m3/sec bulk water BOT ($35MM
total investment)total investment)

18. IFC InvestmentIFC Investment Experience (2)Experience (2)
Aguas de Illimani (Bolivia): privatized 30-yearAguas de Illimani (Bolivia): privatized 30-year
water/sanitation concession ($500MM totalwater/sanitation concession ($500MM total
investment)investment)
AG Concessions (Brazil): - Participation inAG Concessions (Brazil): - Participation in
water/toll road operation Company (US$30water/toll road operation Company (US$30
million)million)
IPWC (Egypt): Participation in local utilityIPWC (Egypt): Participation in local utility
services companyservices company
Beijing WTP #10: BOT Bulkwater Supply PlantBeijing WTP #10: BOT Bulkwater Supply Plant

19. IFC Advisory Experience (1)IFC Advisory Experience (1)
Manila: splitting of water/sanitation services into two geographicalManila: splitting of water/sanitation services into two geographical
zones and concession awarded to separate private operatorszones and concession awarded to separate private operators
Gabon: full concession for water and electricityGabon: full concession for water and electricity
Romania: concession of integrated water/sanitation services coveringRomania: concession of integrated water/sanitation services covering
metropolitan Bucharestmetropolitan Bucharest
Lagos, Nigeria (on-going): concession of one service area,Lagos, Nigeria (on-going): concession of one service area,
affermage/contract management for remainderaffermage/contract management for remainder

20. IFC Advisory Experience (2)IFC Advisory Experience (2)
Senegal: 3.0 m3/sec bulk water BOT to provideSenegal: 3.0 m3/sec bulk water BOT to provide
drinking water for Dakardrinking water for Dakar
Brazil (São Paulo): 4.5 m3/sec bulk water BOT toBrazil (São Paulo): 4.5 m3/sec bulk water BOT to
provide treated water to SABESP (Sao Paulo Stateprovide treated water to SABESP (Sao Paulo State
Water Company)Water Company)
Brazil (Fortaleza) 5.5 to 7.5 cum/sec, 20 year ROT-Brazil (Fortaleza) 5.5 to 7.5 cum/sec, 20 year ROT-
upgrade for CAGECE principal WTP ($15 million)upgrade for CAGECE principal WTP ($15 million)

21. IFC Project Development ExperienceIFC Project Development Experience
Cancun (Mexico): 25-year Water/WastewaterCancun (Mexico): 25-year Water/Wastewater
ConcessionConcession
Cartagena (Colombia): Mixed EnterpriseCartagena (Colombia): Mixed Enterprise
Water/Wastewater companyWater/Wastewater company
Santa Cruz (Bolivia): Water/Wastewater UtilitySanta Cruz (Bolivia): Water/Wastewater Utility
Cooperative - SAGUAPACCooperative - SAGUAPAC
Bangalore (India): 25 year 500 Mld BOTBangalore (India): 25 year 500 Mld BOT BulkBulk
Water SupplyWater Supply
Plava Voda (Bosnia-Herzegovina): 25 yearPlava Voda (Bosnia-Herzegovina): 25 year
BOT Bulk Water SupplyBOT Bulk Water Supply

22. Models ofModels of
Private InvestmentPrivate Investment

23. Private Investment Models (1)Private Investment Models (1)
Contract OperationsContract Operations - Little or no private sector- Little or no private sector
investmentinvestment
Leasing/AffermageLeasing/Affermage - Private Sector pays for use of- Private Sector pays for use of
system. Public system pays operations fees/capitalsystem. Public system pays operations fees/capital
investments.investments.
Turnkey ConstructionTurnkey Construction - Private Sector Finances and- Private Sector Finances and
Constructs Facility. Public Sector Operates andConstructs Facility. Public Sector Operates and
Assumes Debt ObligationAssumes Debt Obligation

24. Privatize Investment Models (2)Privatize Investment Models (2)
Build-Own-Operate-Transfer/Build-Operate TransferBuild-Own-Operate-Transfer/Build-Operate Transfer
(BOOT/BOT)-Private Sector Finances and Owns(BOOT/BOT)-Private Sector Finances and Owns
New Facility or FacilitiesNew Facility or Facilities
ConcessionConcession - Usually Significant Private Sector- Usually Significant Private Sector
Investment with Public Sector Retaining OwnershipInvestment with Public Sector Retaining Ownership
Sale of Assets (English Model)Sale of Assets (English Model) - Public Sector sells- Public Sector sells
System Ownership to Private Sector and RetainsSystem Ownership to Private Sector and Retains
Regulatory AuthorityRegulatory Authority

25. Choosing a Private InvestmentChoosing a Private Investment
Model...Model...
When the Public Sector is financially weak, there are few fundsWhen the Public Sector is financially weak, there are few funds
for:for:
– Contract operationsContract operations
– Leasing/AffermageLeasing/Affermage
– Turnkey ContractsTurnkey Contracts
Leaving:Leaving:
– BOT (most popular with Public Sector)BOT (most popular with Public Sector)
– Concession (most popular with Private Sector)Concession (most popular with Private Sector)
– Asset Sale (unpopular with public due to perceived “loss ofAsset Sale (unpopular with public due to perceived “loss of
control” issues)control” issues)

26. Let’s look at some issues with BOT’sLet’s look at some issues with BOT’s
and Concessions...and Concessions...

27. Basic Issues in FinancingBasic Issues in Financing
BOT ProjectsBOT Projects
Is the Project Needed?Is the Project Needed?
Can it Serve the Customers?Can it Serve the Customers?
Can the Buyer Afford It?Can the Buyer Afford It?

28. The Concession Model isThe Concession Model is
Preferred by Private InvestorsPreferred by Private Investors
and Financial Institutionsand Financial Institutions
Brings Efficiency and Innovation toBrings Efficiency and Innovation to
entire systementire system
Investments can be “tuned” toInvestments can be “tuned” to
revenues, inflation, and devaluationrevenues, inflation, and devaluation

29. GEF and the Role of theGEF and the Role of the
Private SectorPrivate Sector

30. Ways that GEF can EngageWays that GEF can Engage
the Private Sectorthe Private Sector
Remove Barriers: to the creation, entry orRemove Barriers: to the creation, entry or
transformation of marketstransformation of markets
Provide non-Grant Financing with: concessional/Provide non-Grant Financing with: concessional/
contingent finance, loans, and guaranteescontingent finance, loans, and guarantees
Fund Pre-Investment Studies in Alternative/Fund Pre-Investment Studies in Alternative/
Innovative Technologies: feasibility/market studiesInnovative Technologies: feasibility/market studies
Promote Progressive Partnerships: long-term, sharedPromote Progressive Partnerships: long-term, shared
information, quicker decision makinginformation, quicker decision making
Demonstrate actual project risksDemonstrate actual project risks

31. Note:Note:
It is NOTIt is NOT obligatoryobligatory to give “free” moneyto give “free” money
directly to the private sector in order todirectly to the private sector in order to
stimulate investment.stimulate investment.
Funds spent to reduce investment/sectorFunds spent to reduce investment/sector
risks can result in the highest multiplesrisks can result in the highest multiples
of investment.of investment.

32. Remove Barriers: to marketRemove Barriers: to market
creation, entry or transformationcreation, entry or transformation
Example:Example:
Establish “nutrient trading credits” forEstablish “nutrient trading credits” for
threatened aquatic ecosystems, e.g.threatened aquatic ecosystems, e.g.
The Black Sea*The Black Sea*
* Carbon trading is showing signs of succeeding beyond the most* Carbon trading is showing signs of succeeding beyond the most
optimistic projections.optimistic projections.

33. Provide non-Grant Financing with:Provide non-Grant Financing with:
concessional/contingent finance, loans,concessional/contingent finance, loans,
and loan/payment guaranteesand loan/payment guarantees
Examples:Examples:
1.1. Cover perceived risk of long-termCover perceived risk of long-term
lending by national/locallending by national/local
private banks.private banks.
2.2. Establish a “Coastal ZoneEstablish a “Coastal Zone
Management Fund” for projects, letManagement Fund” for projects, let
market define demand.market define demand.

34. Fund Pre-Investment Studies inFund Pre-Investment Studies in
Alternative/InnovativeAlternative/Innovative
Financing/TechnologiesFinancing/Technologies
Example:Example:
Determine the feasibility of/QuantifyDetermine the feasibility of/Quantify
demand for - a nutrient trading programdemand for - a nutrient trading program

35. Promote Progressive Partnerships: long-Promote Progressive Partnerships: long-
term, shared information, quicker decisionterm, shared information, quicker decision
makingmaking
Example:Example:
GEF takes a passive but direct role in theGEF takes a passive but direct role in the
partnership as the honest broker.partnership as the honest broker.
Assumes role of contract administrator/Assumes role of contract administrator/
arbitrator, assists in supervisoryarbitrator, assists in supervisory
missions, and ties enforcement tomissions, and ties enforcement to
sovereign obligations.sovereign obligations.

36. Demonstrate actual project risksDemonstrate actual project risks
Example:Example:
Jordan Gateway Industrial Estate ProjectJordan Gateway Industrial Estate Project
Perceived risks of 100% recycle,Perceived risks of 100% recycle,
reducing water demand by 80-90% isreducing water demand by 80-90% is
likely quite low – but no one has done itlikely quite low – but no one has done it
yet and investors are wary of costs/yet and investors are wary of costs/
benefits and have no risk capital.benefits and have no risk capital.

37. Benefits to Business of GEFBenefits to Business of GEF
PartnershipsPartnerships
GEF Funds – reduce risk and catalyze newGEF Funds – reduce risk and catalyze new
marketsmarkets
Co-financing from GEF PartnersCo-financing from GEF Partners
Share know-how, partnersShare know-how, partners
Access markets and technologyAccess markets and technology
Stakeholder supportStakeholder support
Strengthens business’ image regardingStrengthens business’ image regarding
concern for and management ofconcern for and management of
environmental managementenvironmental management

38. GEF Implementing AgenciesGEF Implementing Agencies
can Assist Companiescan Assist Companies
Give quick answers on eligibility/issuesGive quick answers on eligibility/issues
Explain funding alternativesExplain funding alternatives
Advise on project designAdvise on project design
Guide project sponsors through the GEFGuide project sponsors through the GEF
approval processapproval process
Monitor implementationMonitor implementation
Document progress/setbacksDocument progress/setbacks

39. Perceived Disadvantages ofPerceived Disadvantages of
Working with GEFWorking with GEF
BureaucraticBureaucratic
Learning Curve adds costLearning Curve adds cost
Potential for project redesignPotential for project redesign
SlowSlow
Involves diverse, sometimes hostile,Involves diverse, sometimes hostile,
stakeholdersstakeholders
Disclosure of project/financial information toDisclosure of project/financial information to
public and competitorspublic and competitors

40. Potential GEF PrivatePotential GEF Private
Investment ProjectsInvestment Projects
Wastewater treatment plantsWastewater treatment plants
Tradable water pollution permitsTradable water pollution permits
Land use controlsLand use controls
Biodiversity/watershed protectionBiodiversity/watershed protection
Wetlands managementWetlands management
Cleaner ind. production technologiesCleaner ind. production technologies
Ship/Oily waste treatment facilitiesShip/Oily waste treatment facilities

41. LESSONS LEARNEDLESSONS LEARNED

42. Three Initial Indicators of Probable SuccessThree Initial Indicators of Probable Success
1. Support at Highest Levels of Government and
Labor
2. Private Sector Company is Qualified, Experienced,
and Committed
3.3. Clear Regulatory Framework With InternationalClear Regulatory Framework With International
ArbitrationArbitration

43. Water/Sanitation are generally municipalWater/Sanitation are generally municipal
functions BUT most cities/municipalitiesfunctions BUT most cities/municipalities
have the least financial resources of anyhave the least financial resources of any
governmental Body.governmental Body.
Result: They are the weakest ofResult: They are the weakest of
Potential Partners and need the most projectPotential Partners and need the most project
support/financial.support/financial.
Public Project Partners

44. RecommendationsRecommendations
 Do NOT wave the “free money” flagDo NOT wave the “free money” flag
 Insist on sound Project Finance fundamentalsInsist on sound Project Finance fundamentals
 GEF support can provide significant additional project benefits by catalyzingGEF support can provide significant additional project benefits by catalyzing
investments through:investments through:
 Addressing local political/financial risksAddressing local political/financial risks
 Supporting adequate Returns on InvestmentSupporting adequate Returns on Investment
 Financing the development of transparent, balanced, and fair transactionsFinancing the development of transparent, balanced, and fair transactions
 Innovative project finance support mechanismsInnovative project finance support mechanisms

45. RecommendationsRecommendations
AnythingAnything that GEF resources can do to:that GEF resources can do to:
Increase the number of transactionsIncrease the number of transactions
Increase the ERR and IRR of PPPsIncrease the ERR and IRR of PPPs
Lower the risk of disputes and failuresLower the risk of disputes and failures
will result in lowering the risk to IWs.will result in lowering the risk to IWs.

46. Thank You

47. Suggested FocusSuggested Focus
Group ThemesGroup Themes
1.1. Should GEF resources be used to support theShould GEF resources be used to support the
Private Sector, directly or indirectly?Private Sector, directly or indirectly?
2.2. Is there a real need to consider alternative deliveryIs there a real need to consider alternative delivery
mechanisms for environmental infrastructure andmechanisms for environmental infrastructure and
services at the local government level, or is it just aservices at the local government level, or is it just a
case of lack of political will and commitment tocase of lack of political will and commitment to
finance such projects?finance such projects?
3.3. Do governments make good partners? How canDo governments make good partners? How can
governments ensure sustainable partnerships withgovernments ensure sustainable partnerships with
the private sector?the private sector?

48. Suggested FocusSuggested Focus
Group ThemesGroup Themes
4.4. Is there a role for IFI’s, donors, and theIs there a role for IFI’s, donors, and the
international agencies in public-privateinternational agencies in public-private
partnerships?partnerships?
5.5. Are local governments able to accessAre local governments able to access
national and international investors andnational and international investors and
operating companies? What are theoperating companies? What are the
limitations?limitations?
6.6. ??
7.7. ??