Why Public Utilities Should Corporatize and Innovation with PPPs by Lu Shen

8/3/2019 Why Public Utilities Should Corporatize and Innovation with PPPs by Lu Shen

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PointsPoints

On Corporatization

Saneamento Basico do Estado de Sao Paulo (SABESP)

Empresa Publica de Medellin (EPM)

On PPPs

Caribbean Regional Wastewater Financing Mechanism

The Nature Conservancy and Water Trust Funds



PointsPoints

Corporatization



SABESPSABESP

Founded in 1973 Majority shareholder is the State Government of São

Paulo (50.3%) Provides 60% of water supply to the States

population (23.7 million) 19 million customers for sanitation services Covers 367 out of the 645 municipalities, Employees: 15,330 (2010) vs 17,448 (2005)



Key EventsKey Events

Pre-1994State-controlled,low liquidity, poor

service

1994National PrivatizationProgram implemented

in Sao Paulo fortelecom, electricity and highways in the form of

concessions

1995

Water was notconceded, but wasrestructured and

corporatized . givenaccess to issue debtwithout government

guarantee

1996

SABESP issues 1 to 3-year bonds,

commercial papers

1997

SABESP registers inBOVESP A, the Sao

Paulo Stock Exchange.First round of

Eurobonds

1999SABESP adopts the

GAAP (Generally Accepted Accounting

Practices)

April 2002

Shares listed onthe Novo Mercado

May 2002

IPO on the NYSE



19951995

Statutory change, new requirements for accountingStatutory change, new requirements for accountingand reporting to facilitate access to financial marketsand reporting to facilitate access to financial markets

Improvement of service provision (potable water fromImprovement of service provision (potable water from84% to 91%; sanitation services from 64%84% to 91%; sanitation services from 64% -- 73%)73%)

OneOne--off reduction of staff and elimination of off reduction of staff and elimination of outsourced activitiesoutsourced activities

Improving collection and minimizing delinquencyImproving collection and minimizing delinquencyrates down to 8%rates down to 8%

Acquisition of water and sanitation service Acquisition of water and sanitation serviceprovision from other municipalitiesprovision from other municipalities



Tariff IncreasesTariff Increases

Year Increase in (%)

2001 13.1

2002 8.2

2003 18.9

2004 6.8

2005 9

2006 6.712007 4.12

2008 5.1

2009 4.4

2010 4.05

2011 6.83

ARSESP ( ARSESP (Agencia Agencia ReguladoraReguladora dede SaneamentoSaneamento ee EnergiaEnergia do Estado de São do Estado de São PauloPaulo) The State has transformed the former gas and electricity regulator) The State has transformed the former gas and electricity regulatorinto a new gas, electricity and water supply and sanitation regulator in theinto a new gas, electricity and water supply and sanitation regulator in thenew multinew multi--sector regulatory agency. The agency organizes public hearings,sector regulatory agency. The agency organizes public hearings,public consultationpublic consultation



Key Success FactorsKey Success Factors

Operational

Sustainability

Market

DisciplinethroughMarket

Participation

Effective

Leadershipand

regulation

Diversification

of service andfinancing

Timing



OverviewOverview



OverviewOverview

Empresas Publicas De Medellin E.S.P. (EPM)

Decentralized body, operational under the ownership ofDecentralized body, operational under the ownership of

Medellin municipalityMedellin municipality

Mainly engaged in the business of electricity, water, gas,Mainly engaged in the business of electricity, water, gas,and telecommunications servicesand telecommunications services

Services within Colombia include Antioquia, Bogota,Services within Colombia include Antioquia, Bogota,Manizales, Armenia, Pereira, Bucaramanga, Cucuta,Manizales, Armenia, Pereira, Bucaramanga, Cucuta,Barranquilla, Cartagena, Cali and Barranquilla, Cartagena, Cali and QuibdoQuibdo

Investments internationally include electric generationInvestments internationally include electric generationwithin Panama and electricity sales to Ecuador.within Panama and electricity sales to Ecuador.



Key EventsKey Events

1989 - 1994

Shifting from MOHto MED

Establishment of Law 142 /CRA

1997

Registers as aCommercial and

IndustrialCompany abiding

company law

2001

SecuritiesCommission requiresenterprises to adopt

codes of good governance

2003

Rating agency raisesconcern over lack of separation between

EPM and MM

Multiple acquisitions

2004

EPM issues newdecree to clarify theseparation of dutiesbetween EPM and

MM

2005

EPM adopts newcorporate strategyand organization

structure

2007-8

EPM began creatingRegional Water

Companies through

joint ventures withlocal utilities ormunicipalities

2010

MEGA



Fitch RatingFitch Rating

Fitch Ratings raised EPM's investment gradeFitch Ratings raised EPM's investment gradefrom BBBfrom BBB-- to BBB, for EPM's debt to BBB, for EPM's debtdenominated in local and foreign currency.denominated in local and foreign currency. Fitch also maintained EPM's national scaleFitch also maintained EPM's national scalerating at 'AAA for its debt servicing capacityrating at 'AAA for its debt servicing capacity

Low business riskLow business risk Strong cash flowStrong cash flow Strong metricsStrong metrics

Low regulatory riskLow regulatory risk Aggressive growth strategy Aggressive growth strategy



Key Performance IndicatorsKey Performance Indicators

306 million m306 million m33 of water / annumof water / annum 874,000 customers874,000 customers 100% coverage100% coverage accounts for 18% of overall revenueaccounts for 18% of overall revenue



Key Success FactorsKey Success Factors

Strong Governance: only SOE in LAC that requires theStrong Governance: only SOE in LAC that requires thepresence of independent Board Memberspresence of independent Board Members

Maintenance of strong credit rating to facilitate borrowingMaintenance of strong credit rating to facilitate borrowing

Engagement with local communities (Engagement with local communities (EstamosEstamos ahiahi))

Independent Strategic Business Units (SBU): autonomyIndependent Strategic Business Units (SBU): autonomy

Separation of municipal interest from operational efficiencySeparation of municipal interest from operational efficiencythrough transfers and CSRthrough transfers and CSR

Long term strategy: MEGA 2015 (Meta Grande yLong term strategy: MEGA 2015 (Meta Grande y Ambiciosa Ambiciosa))

Timing (Alvaro Timing (Alvaro UribeUribe, macroeconomic stability), macroeconomic stability)



Maintaining balance between politicalMaintaining balance between politicalinterest, social obligations and operationalinterest, social obligations and operationalsustainabilitysustainability

-- market disciplinemarket discipline-- value propositionvalue proposition

-- strong regulationstrong regulation-- diversificationdiversification

Retaining support from the state, municipalityRetaining support from the state, municipality

or central government for concessionary lendingor central government for concessionary lending

Assess local conditions Assess local conditions Gage the appetite of marketsGage the appetite of markets Engage the governments on regulationEngage the governments on regulation



PointsPoints

PPPs



Caribbean Regional Fund for Wastewater Management

CReW

Global Environment Facility

Documents

Why Public Utilities Should Corporatize and Innovation with PPPs by Lu Shen