Water shortage solution shelved 5 years ago

If Finance Ministry had accepted Kingsley Thomas' proposal, would more consumers have precious commodity now?

BY HG HELPS
Editor-at-Large
helpsh@jamaicaobserver.com

Sunday, May 19, 2019

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A plan to ease the annual shortage of water in the Corporate Area five years ago did not materialise, after the political Administration turned down a proposal penned by top public servant Kingsley Thomas which would have embraced a public private partnership (PPP) approach.

Thomas, the conceptualiser of Jamaica's highway project and who headed the National Water Commission (NWC) as president, had submitted a document to the Ministry of Finance in 2014, aspects of which current Prime Minister Andrew Holness echoed in Parliament last week. It was felt that had the Government at the time decided to pursue the project, it could have gone a far way in easing the water crisis that has submerged hundreds of thousands of Jamaicans in abject frustration.

The construction of a 15-million gallons per day water treatment plant in the Rio Cobre, under a PPP arrangement, was outlined by Holness last Tuesday in the House of Representatives, as sections of the nation continue to be kept in an indefinite smelly state caused by the lack of the precious fluid.

Thomas made the proposal which, among other things, called for the provision of funds from the Ministry of Finance and Planning (MFOP) to get things flowing, but the move was plugged by financial secretary in the ministry Devon Rowe, who cited flaws in the proposal when he responded to Thomas by letter.

In the document titled Proposal to undertake a number of critical and urgent projects in water and waste water services utilising the design, build, finance, operate and transfer model, Thomas detailed how the project could be administered:

“A number of projects dealing with potable water supply and wastewater conveyancing and treatment systems are required to be implemented in order to satisfy the growing demands by the population, and to avoid potential health problems in Jamaica.

“A number of water and wastewater networks, primarily in urban centres, have deteriorated to the extent where numerous leaks are being experienced.

“The National Water Commission is unable to undertake these projects primarily as a result of its inability to finance such works either from its operations or from loan financing, the latter due in the main from the Government's inability to support such financing through guarantees owing to limited fiscal space under the current agreement with the IMF.

“Additionally, NWC's capital programme for the fiscal year 2014/2015 has been reduced at the request of the Ministry of Finance from an originally proposed $19.5 billion to approximately $8.0 billion.

“A number of projects have been undertaken by the NWC utilising foreign currency-denominated loans obtained either from multilateral lending agencies or through the efforts of foreign contractors.

“This has resulted in two main principal negative outcomes:

i) The NWC incurring substantial foreign exchange currency losses [both transaction and translation].

“It is estimated that close to 50 per cent of the losses of the NWC for the financial year ended March 31, 2014 was due to foreign exchange losses, and for the current financial year 2014/2015 a similar percentage is projected.

“NWC's revenue is all local currency and the Price Adjustment Mechanism [PAM] component of the tariff structure is totally inadequate to compensate for the changes in the value of the Jamaican dollar.

ii) The local contractors have, in the recent past, not benefited from undertaking major infrastructure projects, owing primarily to their inability to obtain financing at interest rates to compete with those offered by foreign-owed contractors.

“A number of projects have been identified which need to be implemented over the next 24 months in terms of potable water supply and sewage collection and treatment.

“The total cost of these projects (which are listed in the Attachment 1) is estimated at approximately $23.5 billion.

The principal elements of the proposal are as follows:

a) Special purpose vehicles [SPVs] would be formed which undertake individual or a number of packaged projects.

b) A combination of long-term financing — equity, bonds, and loans — would be subscribed to principally by private sector financial institutions which, together with selected/indigenous local contractors, constitute majority ownership of SPVs, with the NWC being a minority partner primarily through the contribution of existing assets such as water treatment plants.

c) The SPVs would undertake the design, build, financing, and operation of the new facilities and enter into agreements with the NWC for the supply of water, collection and/or treatment of wastewater.

d) The facilities financed by the SPVs would be transferred to the NWC at the end of the period of the arrangement, after the investors have achieved their targeted rate of return and when all liabilities of the SPVs have been liquidated.

“Discussions have been held with four major local financial institutions and, based on initial responses to date, would result in indicative commitments of approximately $15.0 billion.

“Institutions such as the National Insurance Fund (NIF) would be approached after firm commitments have been received from the institutions in the private sector.

“The following are the main benefits of the proposal outlined above:

a) The various projects would be undertaken and funded by the private sector — both financiers and contractors,

b) The model being used — a variation of PPP — would not have an impact on the fiscal targets on the current IMF programme, since no loans would be contracted by the NWC and consequently there would not be the need for Government guarantees.

c) Critical water supply and sewage works would be undertaken which would spawn a number of developments in the construction sector arising from the availability of central sewage in urban centres [and] allowing for higher building densities and improved/increased water supply coverage in the island;

d) The avoidance of potential issues arising from inadequate sewage and contaminated ground water sources primarily in the Liguanea Plains.

e) The empowerment of local contractors.

Rowe's response dated July 7, 2014:

“The NWC proposes to implement projects amounting to $23,500 million within 24 months. One of the main benefits identified in support of using the PPP modality is that the 'variability of PPP would not have an impact on the fiscal target in the current IMF programme since no loan will be contracted by the NWC and consequently there will not be the need for Government guarantees'. This is a major misconception in the assumptions of the commission. Under the fiscal rules, which have been legislated, the Government is required to account for all PPPs in a transparent manner. Whether or not there are loans or guarantees, the projects will utilise fiscal space. If a project demonstrates self-sustainability after analysis by the financiers and other stakeholders including MOFP, then it would be treated as a contingent liability of the Government.

“Similar to the treatment of debt, contingent liabilities are being managed under a ceiling designed to contain fiscal risks. From April 1, 2014 to March 31, 2017, this ceiling is three per cent of gross domestic product.

“The NWC has not addressed the fundamental question that emerges from this proposal. The question is 'will the various projects be funded adequately, in order to pay the investors and financiers, which are the private sector stakeholders?' All projects, including PPPs, must be paid for. Therefore, the avenues for payment are either the users of the facilities or the NWC/Government.

“The projects would essentially require the commission to enter offtake purchase agreements with the SPVs which would guarantee that their output of water and treatment of waste water are sold. This would enable funding of the SPV in order to pay the financiers. However, the NWC's financial position would need to demonstrate that it is capable of this essential element of the contract; meeting the cash flow purchase/obligations to the SPVs. The private sector/financiers need to be assured that their investment is secured and that they will be paid. Hence, the project would need to demonstrate viability. If this cannot be established, then the private sector parties will require a government guarantee, even though the loan to fund the project was not borrowed by the NWC. This would necessitate an increase in the debt stock of the Government to reflect the guarantee.

“The financial position of the NWC, over the five-year period 2008/09 - 2012/13, shows the entity in deep distress and an inability to meet payment obligations or guarantee contract payments of SPVs to the private investors and financiers. Generally, if the commission's financials cannot support the project, the local financiers/private parties will nevertheless look to the Government. Hence, the NWC should aim for financial viability/sustainability as a matter of priority, in order to be better able to support future capital investments.

Alternative options:

“There has been a global shift away from concession contracts in the water sector towards those with less financial investment from the private sector. One area for consideration is management contracts, with benchmark performance indicators.

“Other options are the use of affermage and lease contracts with clear, performance-based incentives for the private operator. With an affermage or lease the operator would not receive a fixed fee from the NWC but would charge an operator fee to consumers. In the case of the lease, a portion of the receipts (lease fee) would go to the NWC as owner of the assets; the remainder is retained by the operator. In the case of an affermage, the operator retains the fee out of the receipts and pays an additional surcharge (charged to consumers) to the NWC, to go towards investments made in the infrastructure. In both options the operator tends to bear greater operating risk and employs the staff directly.

“Other alternatives for the NWC regions could be contracts to one part of the delivery chain, ie production, distribution, or billing and collections.

“Therefore, it appears that opportunities exist for several types to be given for shorter periods (3-5 years) in specific areas of high water loss/revenue loss/other challenges, to be operated by private operators — with strict bench-marked performance indicators for enhanced efficiencies. Essentially, almost/all private water operators in Jamaica do make a profit. Given that the commission is a combination of small water systems, this appears possible.

“The MOFP supports the NWC's proposal to seek the participation of local stakeholders. This is in keeping with emerging trends for PPPs in the water sector in developing countries, given the lack of interest of international participation.

“Given the Government's commitment to the current debt strategy and the private sector's lower-risk tolerance to the water sector PPPs, the NWC is being encouraged to consider issuing municipal bonds or water and sanitation utility bonds, etc. Again, this would require a drastic turnaround for the commission since it must be able to stand up to the scrutiny of potential bondholders. The NWC should therefore move apace to cauterise the losses and begin the process of building credit worthiness.”


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