Castalia’s blog
Shannon Riley and Lisa Nations delivered a webinar on the topics of financing facilities and non-revenue water (NRW) performance-based contracts (PBCs). These could be two viable options to help utilities secure the resources they need to continue operations in response to the massive decrease in collections they are experiencing due to COVID-19. This webinar was hosted by RockBlue, an organization that partners with water and sanitation utilities in the developing world, empowering them to grow and optimize their operations.
You can watch the webinar and the Q&A session here. Below the two videos, you will also find a list of the questions and the time in the video at which they occur is listed.
1.1 Presentation
1.2 Q&A Session
- Question 1: “In Kenya, the problem with facilities is that the investment rules (ticket size, creditworthiness of borrowing entities, etc.) are misaligned with realities of the local market. Do the facilities proposed here address that in any way?” Answer: 1:01.
- Question 2: “Are there currently liquidity facilities operating in response to COVID-19?” Answer: 3:10.
- Question 3: “What about the option of bundling electricity and water liquidity facilities together? Target customers are likely to be the same and they are all critical services with similar tariff structures. Are there examples out there?” Answer: 4:23.
- Question 4: “One of the issues for NRW contracts is an accurate baseline. Many utilities/municipalities have a water balance that is not wholly accurate and it’s hard to get a handle on those estimates. How do you ensure in setting up an NRW-PBC that you can achieve an objective baseline that is transparent, that provides the incentives for both parties?” Answer: 6:28.
- Question 5: “One of the things we’re addressing is trying to respond to a pandemic which hopefully will come to an end and we’re facing cash constraints today. Are these mechanisms realistic answers to immediate cash concerns? Is it more appropriate looking at a 2-3 year, mid-term approach? Or are we talking about a long-term resilience mechanism for whatever the next crisis might be?” Answer: 9:43.
- Question 6: “Are utilities receptive to innovative financing? Do they have bandwidth to address this? Is there an uptake/willingness to spend time/energy/resources in structuring innovative contracts to address their short-term or medium-term financial constraints?” Answer: 13:18.
- Question 7: “Are NRW-PBCs appropriate/can they be used in utilities that are under-performing?” Answer: 18:07.
- Question 8: “A concern with liquidity facility model: you have assumed a v-shape recovery. Many utilities are taking severe long-term impacts in their performance so you’re going to see a u-shaped recovery. How long is the timetable of disbursements? What would be repayment periods? How would we address something with a longer trailing leg of recovery?” Answer: 22:00.
- Question 9: “The reforms that you envision in the liquidity model usually require some form of CAPEX investment to drive that performance improvement. Will most utilities that are not recovering costs currently going to be able to achieve substantial improvements on their own that would be necessary to receive additional disbursements? How are the utilities going to repay the financing unless it’s on a grant basis if these reforms don’t achieve recovery levels?” Answer: 24:37
- Question 10: “Your illustrative model demonstrates a potential 6-year payback period. There’s a concern where the lending markets aren’t willing to take on long-term risk. There’s a risk that even a 6-year payback period is out of line with the financial investors that are currently out there. Do you believe those are possible? In testing your model, have you looked at countries in that circumstance?” Answer: 28:39.
Castalia’s John Sachs shares his thoughts on recent developments in the sector.
Like many in the industry, we have spent the last few weeks trying to understand how the COVID-19 crisis will impact electric utilities and IPPs in emerging markets. Our early fears, raised in our late April blog “Assessing the impact of force majeure on emerging markets PPPs”, are starting to come true. The COVID-19 pandemic is putting many state-owned electric utilities in emerging markets under increasing financial stress and jeopardizing not only their IPP programs but also risking wider contagion in the economies. We are seeing this across the globe, IPPs receiving notices of payments being deferred, or threats of declaring force majeure, often with no details of for how long or if or when the IPPs will ever be made whole. The latest example of this financial stress, and the threat of declaring force majeure, was reported this week in Kenya.
This financial stress—resulting from a mix of reductions in demand, consumer tariff forgiveness and deferrals granted by the Governments for social reasons, and greater difficulty in accessing finance—is likely to last beyond the immediate period of emergency pandemic response. An additional source of stress may also be originating from the independent power producers (IPPs), who in some cases may be unable to fully satisfy their Operations and Maintenance responsibilities, import parts, or be faced with foreign exchange constraints due to the pandemic.
What we recommended in April remains even more true today, “Governments and authorities managing infrastructure concessions should get ahead of this through a rapid assessment of their PPP portfolios to identify and measure risk factors, including exposure under their force majeure clauses, develop action-oriented steps to manage the risks and, when appropriate, commence early engagement with private sector operators.” This early engagement to amicably work-out a solution with investors and their lenders could help avoid damage to their investment climates, cost of capital, and resulting cost of service from future PPP projects.
Last week Castalia posted a blog about how Liquidity Facilities could be the solution to providing emergency financial support to water utilities in response to the COVID-19 pandemic. We received a lot of interesting comments about the relevance of this topic (for example, U.S. water utilities actively lobbying Congress to get stimulus money to compensate for their COVID-related losses) and thoughtful questions about the detailed design of these Facilities.
So the Chief Executive of Castalia, David Ehrhardt (DE) answered some of the frequently asked questions about the options in the design of a Facility.
Question 1: How should the scale of required financial support be assessed?
DE response: In this fast-moving crisis, we need quick options to assess financial need. These include existing utility financial models and a World Bank model created for this purpose (COVID-19 Financial Impact Assessment Tool for Water Service Providers). These can be done utility by utility and then added up for a national estimate. Alternatively, data from other similar countries could be used if available. Obviously, you should do high and low scenarios as well as a base case.
Question 2: Will the Facility be a national body, or could it be regional or subnational?
DE response: Almost all Facilities will be at the national level because the money in the Facility has to come from (or be guaranteed by) the national government. That being said, there could be exceptions such as a regional facility for small nations with regional institutions already in place (such as the Organization of Eastern Caribbean States); or a state-level Facility in Federal Systems with states or provinces having responsibility for water (as in Brazil, Nigeria, and India).
Question 3: Which entity will manage the Facility?
DE response: Using existing institutions to manage the Facility will make the Facility quicker to get up and running. Some options for a Facility Manager include:
- A national development bank (such as BNDES in Brazil) or water sector financing agency (such as LWUA in the Philippines)
- A unit in the Ministry of Finance that has experience running government grant or loan schemes and fiscal transfers
- A bank operating under contract to the government with strict guidelines and clear responsibilities, or offering loans with government guarantees (similar to the US Paycheck Protection Program for general business continuity), again with clear guidelines and responsibilities
- A regional development bank or monetary authority (such as the OECS Central Bank or the Caribbean Development Bank), in those cases where a regional fund is judged to be appropriate.
Question 4: What monitoring and fiduciary arrangements are needed?
DE response: At a minimum, the Facility will need a Procedures manual; agreements or contracts with the recipient utilities; accounting systems; clarity on the role of the independent auditor; and clarity on the role of the regulatory entity.
Question 5: What sources can finance the Facility?
DE response: In the majority of cases, the government is going to have to put up the money, or at least guarantee it. In developing countries, the government’s first source of finance during this crisis is likely the IMF and then multilateral and bilateral development finance institutions. To pay out large amounts of cash to water utilities, the government will need to borrow large amounts of money and potentially borrow more money over time. It, therefore, makes sense to set up a Facility that can aggregate money from several different sources at several different times.
Question 6: How will funds be disbursed from the Facility to utilities?
DE response: This is a great question. I think that the modality for disbursement should be loans because the Facility can get the money out the door quickly while also encouraging performance improvements and minimizing fiscal costs (of course, there could still be a fiscal cost because some utilities may default on their loan. In these cases, the disbursement could be converted to a grant). Another good option is for the government to guarantee lending from a commercial bank because it shifts the burden of loan administration to the commercial bank and brings utilities and banks together. All that being said, grants are obviously the simplest, quickest option.
Question 7: Should the Facility attempt to promote utility reforms?
DE response: I think that, at the very least, the designer of the Facility should consider attaching reform requirements to assistance from the Facility. Water utilities, and importantly, their inefficiencies, are finally getting the attention of the Minister of Finance. This creates a rare opportunity to have multi-level stakeholder support for vital reforms. Of course, though I encourage considering promoting reforms, the designer of the Facility must remember that the overriding aim must be to quickly get money to utilities in sufficient quantities to allow them to remain operational.
DE closing remarks: Thank you for all of your thoughtful questions. Please comment to let us know your thoughts and if you think we have missed some important option or consideration. I look forward to continuing this discussion with all of you. If anyone reading needs help with these questions, please let me know
Interviewed by: Lisa Nations.
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