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1 Portfolio Committee Workshop March 2010 TCTA Raw Water Resource Infrastructure Model
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Portfolio Committee Workshop March 2010
TCTARaw Water Resource Infrastructure Model
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Content of presentation
1. Who’s TCTA and Its Contribution Towards Water Sector Strategic Goals
2. Project Implementation Methodology (“PIM”)
2.1 Project Finance & Structuring Model
3. Projects Implemented with TCTA PIM
4. Sources of funding and debt management strategies for projects implemented
5. Sources of funding for new mandates & impact of changes in the financial markets
6. Challenges impacting on the implementation model
7. Possible remedies to the challenges
8. Discussion and Questions
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1. Who’s TCTA & its contributions towards water sector strategic goals
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TCTA’s Mission
TCTA is a specialised liability management body for bulk water supply development in the most cost-effective
manner to the benefit of the water consumer
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Who is TCTA?
Established in 1986 to fund and implement RSA portion of LHWP
Mandate expanded to undertake liability management on LHWP and fund & implement bulk raw water infrastructure in RSA
State-owned Water Resource entity
Non profit-making
Schedule 2 Public Entity - PFMA
Board appointed by Minister of Water Affairs
Report via Minister of Water Affairs to Cabinet and Parliament
TCTA the Organisation
What do we do?
Project implementation
Project funding and tariff setting
Debt management
Financial advisory services
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Water Supply Value Chain
TCTA
DWA
Water Boards
Municipality
End User
National Raw Water Resource Infrastructure
Treat raw water to potable level
Distribution of water
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TCTA’s Contribution to Water Sector Strategic Goals
Critical role-player in the provision of water, particularly in support of government’s policy to seek off-budget funding for strategic infrastructure projects that are commercially viable. Has matured into a center of excellence for planning, financing & implementing bulk water infrastructure in a multi-project setting, establishing best practice approaches.All project activities facilitate social transformation and build sustainable communities by providing jobs and empowering women and youth.Positioning to leverage its knowledge and advisory capability tosupport other sector institutions, in pursuit of greater efficiencies in the water delivery value-chain.Will initiate and lead innovative studies and collaborative platforms that address water security issues and the supportive chain of project finance and implementation.
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High level Financial Status
Unqualified audit report 31 March 2009
No fruitless and wasteful expenditure findings by external auditors
Actual/forecast costs up to 31March 2010 lower than original budget
Negative equity arises due to the business model which results in a deficit by design for the first number of years of each project, in order to ensure tariff affordability,
Thus, expenditure strictly controlled
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PFMA Compliance
Annual report always submitted to DWA within 5 months of year endCorporate Plan always submitted to NT and DWA on within agreed deadlinesBudgets for three year period submitted as part of the CorporatePlan
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Financial obligation of DWA under the current TCTA model
LHWP was explicitly Government guaranteed as required per the Treaty between Lesotho and RSA
DWA is responsible for tariff collections to TCTA through recovery from water-users
Currently DWA collect approximately R300million per month on behalf TCTA funded projects
TCTA uses tariffs received from DWA to repay loans related to commercially funded projects (LHWP, BERG,VRESAP)
Where DWA would not be able to perform under its obligations, both the implicit and explicit guarantee will be called on
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2. TCTA Project Implementation
Methodology (PIM)
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Implementation Principles TCTA/DWAGovernance
Stakeholder involvement - consultative approach
Environmental frameworkDWA remains accountable to DEA in terms of ROD
ImplementationTCTA solely responsible for implementation, funding, acquiring ownership of land and land-rights and adequately insuring the projectRing fencing of projects
Post construction DWAF to operate and maintain
IncomeRepayment of project cost within a reasonable period (20 Years)Annual tariff reviewDWA implied guarantee
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TCTA BoardTechnical Committee
Board Chairs Committee
Intergovernmental Relations Act &
Arbitration
PROJECT COMMITTEE AND GOVERNANCE STRUCTURE
Dispute Resolution Committee Project Manager, CEO: TCTA,
Head: Capital Investments: TCTA &DWAF, ESKOM Representatives
TCTA Board
TCTA Board Technical
Committee
Minister of Water Affairs
Board Chairs Committee
Intergovernmental Relations Act &
ArbitrationTCTA EXCO
Executive Manager: Project Management and Implementation
Dispute Resolution Committee:Project Manager, CEO & Executive Manager: Project Management and Implementation: TCTA, & DWA and Project Partners
Implementation/FundingDirective to TCTA
Project Committee (PC)DWA, TCTA, Project Partners
Chair: Project Manager
Project IndependentReview Panels
Project Governance Framework
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Project Implementation Methodology
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2.1 Project Finance and Structuring Model
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Project Packaging and Risk Management: Off-budget projects
Risk Mitigation:- O & M agreement
Risk Mitigation:- Liquidated damages- Performance bonds- Transfer design risk (PI)- Principal construction insurance
- Retentions
Risk Mitigation:Income agreement:- Annual adjustment to
tariff linked to CPI(x)- Negotiated adjustment
to tariff to reflect changes in water demand etc
Integrated Water
System
Integrated Water
System
Project CreditRating(Fitch) Credit rating based
on the sum of allagreements and riskallocation / mitigation
Project Rating
LimitedRecourseFinancing
O & M
Water Sales
Water Sales Water income
Water income
End Users
DWA
TCTAFunding &
ImplementationDWA
Construction
Design & Supervision
Ownership Land& Structure
Investors
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USERS
• Supply of water from system to the users
• Conditions of supply
• Payment of water incl water user tariffs due to TCTA
• Implementation Agreement
• Payment of tariffs• Collection of Income
DWA
TCTA
Water D
eliveryP
aym
ent o
f Tar
iffs
• Supply of water to DWA
• Operations and maintenance
Impl
emen
tatio
nA
gree
men
tW
ater
Sup
ply
Agr
eem
ent
Institutional Arrangements
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Key Project Finance Principles
Ring-fence projects model Limited recourse funding to income stream of specific projectAgreements, costs, funding and revenue streams
Implied government guarantee Agreements with DWA per project
Sound institutional arrangementsAA+(zaf) credit ratings from Fitch Ratings which substantially reduces cost of funding
No funding on TCTA balance sheetSPV on behalf of DWA – report to Minister of Water and Environmental Affairs
Risk transferTo parties best suited to manage risksNo reserves, no profits – can’t absorb any risks
Flexible income stream – tariff triggersProject agreements allow for adjustment in tariffs to achieve cost break-even 20-years after completion of construction
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TCTA Risk Transfer Matrix
Risk Transferred Method
Revenue collection Income agreement – DWA risk
Funding risk Income agreement – Strength of Income Agreement i.e. Central Government off- takerIncome agreement – DWA step-in
Operations and Maintenance
Income agreement – DWA risk
Construction risk – design, delay etc
Liquidated damages, insurance, performance bonds and retentions
Yield of the system Income agreement – triggerDemand risk Income agreement – triggerInflation Income agreement – triggerBase case data change
Income agreement – trigger
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Project Funding Process
Secure bankable off-take agreements DWA and off-takers
Negotiate implementation agreementDWA and TCTA
Obtain borrowing limit from National Treasury
Credit rate project
Competitive procurement of construction contracts
Appoint DWA as O&M agent DWA manage infrastructure on integrated system basis
Secure long-term fundingQuantitative and qualitative assessments
Set annual tariff Cost/revenue breakeven over specified period
Debt management and repayment of debt over specified periodTreasury activities
Transfer asset and land to DWA once debt is repaid
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Tariff Categories in Pricing Strategy
Off-budget Funding
Capital Unit Charge (CUC)
• Repay debt + 20 years
• Full economic cost of water
• Water management tariff after CUC
Capital Recovery
Return on Asset Charge (ROA)
• Refund Government for its investment
• Lower than CUC
• Not reflective of economic cost
• Operations and Maintenance
• Betterments and Refurbishment
• Statutory charges in Pricing Strategy
Other Charges
Commercial Users Social Users
Government FundingFunding Source
• Operations and Maintenance
• Betterments and Refurbishment
• Statutory charges in Pricing Strategy
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High level Tariff Principles and Implication
DWA and TCTA designed a tariff profile that is constant in real terms i.e. increases annually with inflation
TCTA can not assume any risk by nature of its design and therefore have provided for tariff trigger adjustments over an above inflation should any input assumptions change e.g. demand, interest rates etc
TCTA consults with SARB and NT annually on tariff adjustments in terms of administered prices but are not bound to inflationary increases only
Short-term: TCTA can agree on a lower than required adjustment in a specific year with the proviso that we can make up for it in following year or two
Long-term: TCTA would have to increase over and above inflation at some stage to achieve repayment of debt at an agreed point in time
Administered prices in the long-term will not be commercially viable for off-budget projects unless large reserves are built up at the start of a project which will impact on tariff affordability by end-users
This strategy was tested with the end-users in the Vaal River System which did not support itThe users prefer actual costs to be transferred and rather take the risk of increases over and above inflation when required
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3. Projects Implemented under this Model
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Funded Projects
Completed and Ongoing Projects
• Explicit Government Guaranteed
R 20 billion
1986 - 2001
BWP
• Income stream of BWP
• Implied government guarantee
R 1,4 billion
2003 - 2008
VRESAP
R 3,3 billion
2005 - 2012
• Income stream of VRESAP
• Implied government guarantee
• Fund• Risk
management• Operation &
Maintenance of assets
• Implement• Fund• Risk
management
• Implement• Fund• Risk
management
2025 2028 2028
Construction Period
Peak of debt
Revenue Recourse
Mandate Activities
Repayment of debt
LHWP
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LHWP Debt Curve and tariff profile
LHWP Debt Curve and tariff
-
2.000
4.000
6.000
8.000
10.000
12.000
14.000
16.000
18.000
20.000
2005 2007 2009 2011 2013 2015 2017 2019 2021
Financial Year
Rand
mill
ion
-
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
Rand
per
m3
Debt Curve Water Tariff (FV) Water Tariff (PV)
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VRESAP Debt Curve and tariff profile
VRESAP - Eskom and Sasol CombinedBased on Total Demand from VRESS
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029
Ran
d m
illio
n
-
0.50
1.00
1.50
2.00
Ran
d pe
r m3
Total Liability Curve Capital charge FV Capital charge PV
Const r uct i on P er i od
Repayment P er i od - M ax of 20 year s wi t h
Capi t al i sat i on of I nt er est capped at 5 year s
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BWP Debt Curve and tariff profile
BWP Forecast Cumulative Net Liabililty Curve And Annual Capital Charge
-
200
400
600
800
1,000
1,200
1,400
Mar-03 Mar-06 Mar-09 Mar-12 Mar-15 Mar-18 Mar-21 Mar-24 Mar-27
Rand
mill
ion
-0.10
0.10
0.30
0.50
0.70
0.90
1.10
1.30
1.50
Rand
per
m3
Total Liability Curve Capital charge FV Capital charge PV
Construction Period Repayment Period - 20 years
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LHWP: Katse Dam
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VRESAP: Boschkop Pump Station
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VRESAP: Surface Structures
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BWP: Dam Basin
Before2004
After2008
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BWP: Flood Releases
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4. Sources of funding & debt management strategies for projects
implemented
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TCTA Funding Sources – Current Projects
LHWPRSA money marketRSA capital marketDevelopment Bank of Southern AfricaForeign funding
Export credit loansCommercial loansBi-lateral and multilateral loansConcessionary loans
VRESAP and BWPRSA money marketRSA commercial bank loansDevelopment Bank of Southern Africa International development funding (EIB)
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Loan Evaluation Criteria
Quantitative Assessment:All-in IRR cost including all fees etc
Qualitative Assessment:Risk management objectivesAsset / liability matchingFlexibility within loanAchievable conditions precedentEase of management and impact on financial statementsRelationship with financiersValue added by development banksSocio-environmental issues
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Debt Management Strategies
Defined by funding requirement for each yearAsset liability matchingDebt repayment over specified period – 20 yearsDrawdown mix based on market conditions, drawdown conditions (e.g., expiry dates)Funding Requirements are met through:
Capital Markets and Commercial Paper ProgrammesCommitted loan facilities through DFI’s and local banks2% = foreign loans
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5. Sources of funding for new mandates & impact on recent changes in the financial markets
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Unfunded Projects
MMTS-2
+ R 2.7 billion
• Income stream of MMTS2
• Implied guarantee
• Implement• Fund• Risk
management
20 years after construction
ORWRDP-2
+ R 8 billion (BDS)
Dam: ‘07 –’11BDS: July 2010
Nov 2012
• Income stream of ORWRDP2
• Implied guarantee
• Implement• Fund• Risk
management
20 years after construction
KWSAP
+ R 2.7 billion
Feb 2010Sept 2011
• Income stream of KWSAP
• Implied guarantee
• Implement• Fund• Risk
management
20 years after construction
MCWAP Phase 1
+ R 4 billion
Jan 2011
Nov 2012
• Income stream of MCWAP-1
• Implied guarantee
• Implement• Fund• Risk
management
15 years after construction
Jun 2010July 2012
New Projects
Construction Period:CommenceCompleted
Peak of debt
Revenue Recourse
Mandate Activities
Repayment of debt
MCWAP Phase 2
+ R 16 billion
Aug 2011 July 2015
• Income stream of MCWAP -2
• Implied guarantee
• Implement• Fund• Risk
management
15 years after construction
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Potential long-term Sources of FundingLocal Commercial Banks
Preferred borrower - local banks still have appetite to fund TCTA Projects
Development banks Assessed MMTS-2 for full funding during SeptemberDBSA assessing funding possibilitiesIDC – credit guarantees to small mines in ORWRDP
ECA (Export Credit Agencies)Currently assessing possibilities Might require explicit government guarantee
Capital marketsRequire explicit government guarantee Pooled bond programme possible with increased liquidity – combined bond for all mandates
Concessionary fundingExplore possibilities
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Impact of recent changes in the financial markets and global trends
Local Commercial BanksLimited tenure - introduces refinancing riskCostly - with Basel II liquidity premiumsTerms and conditions unfavorable
onerous market fluctuation clauses, breakage costs on floating loans etcbanks prefer floating rates (high volatility)
Prefer water and sanitation targeted projects in water sector
Timing of raising fundingFunding structure should take cognisance of current market conditions
Committing to long-term funding during liquidity crisis that should ease out in 5-year’s time
Tight deadlines – all projects funded almost simultaneously
TenorLonger term loans more costlyLess than 15 years available where projects repay 20-years after completion of construction
Development banks Prefer water and sanitation targeted projects in water sector
includes MMTS-2 and indirectly ORWRDPPrefer environmentally friendly projects
excludes KWSAP and MCWAP
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Impact of recent changes in the financial markets and global trends (cont.)
Interest capitalisationNot preferred project profile for financiers but increases tariff affordability
Crowding out effectCompeting with government guaranteed entities for fundingConcentration risk in banks to Eskom and Government
Capital market limitationsPossible saturation of infrastructure bonds in capital market
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6. Challenges impacting on the implementation Model
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Implementation model challengesUpfront commitment required by off-takers
Constitution commits Government to provide infrastructure
Infrastructure risk should therefore be carried by Government
Through current model, risk is transferred to end-usersWilling to pay for water used and to repay infrastructure costsNot willing to take risk on take-or-pay principle – payment regardless of use where user-base is small or off-take is uncertain (ORWRDP, MCWAP)
Government could provide bridging capital fundingTo stimulate economyInitial infrastructure risk taken by the governmentRecover investment from commercial users on actual use
Government could provide guarantees for shortfall in debt repayments in the early years of a project
To grow economyCorrectly place infrastructure risk with governmentRecover shortfall from commercial users once volume justifies debt repayment including government funding
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Implementation model challenges (cont.)
Tariff affordabilityInfrastructure costs increased substantially due to
Input cost (capex)Operational costs-pumping costs due to increased electricity tariffsFunding costCheapest sources fully utilized
Tariffs based on higher infrastructure value – more expensive
Capital Unit Charge (off-budget funding)Take-or-pay expensive if off-takers’ economic activity is not aligned with implementation date of water infrastructure (mines paying for water before inception of mining activity)Municipalities struggle to pass-on increases to users (even with phase-in) due to affordability and political pressure on tariff increasesPossible tax implications for end-users if water tariffs are linked to capital repayment and not water use as is intended
Return on Asset Charge (on-budget funding)Unaffordable tariffs even though infrastructure is funded on-budget
– Existing grants including MIG, BIG and Equitable share not sufficient to cover growth in infrastructure requirements – ROA unaffordable
– Smaller user base – limited cross-subsidization opportunities– Free water provision to end-users - still ROA due to DWA against zero income
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Implementation model challenges (cont.)
Combined projects (off-budget and social components)
Uncertainty of timing and availability of MTEF funding through full implementation cycle
MTEF 3-year window – construction period longer
Possible review of committed funding– amounts and timing
Banks require upfront commitment from NT that full social funding is committed when required
Possible under provision by Government– Social component not always certain at inception
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Pricing Strategy Challenges
Pricing strategySystems tariff challenges
Huge tariff differentiation in water pricing across systems
No uniformity in application of augmentation costs– Cost shared by all users (Vaal System)– Costs carried by specific end-users (VRESAP)
No uniformity in risk sharing– Take-or-pay based on license volume (ORWRDP)– Actual use (Vaal System)
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7. Possible Remedies to Challenges
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Possible Remedies to Some ChallengesGovernment could provide explicit government guarantees for the initial project finance loans
Increase access to funding optionsDecrease tariffsIncrease tenor of loans availableSupports economic growth through lower water cost
Review of Water Sector Funding and Pricing Strategy to consider:national type of tariff structure
– Increase uniformity in water costs
Based on national grid of water provision to the country as a whole – Eskom model for energy pricing
Sector differentiation– Domestic separate from industrial etc– Water thirsty industries charged a premium in water scarce areas
Systems becoming largely inter-linked with cross system and cross border transfers – difficult to determine true cost on system’s basis
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Thank you
Discussion ….TCTA
James Ndlovu : Chief Executive OfficerZodwa Mbele: Executive Manager; Project Finance & Structuring
Johann Claassens: Executive Manager; Project Management and ImplementationHalima Nazeer: Chief Financial Officer
Ola Busari: Executive Manager; Knowledge Management
e-mail: [email protected]
Telephone: (012) 683 1200
Website: http://www.tcta.co.za
