Since the focus of any potential private partner is on the risk/reward calculation described above, the major new topic accompanying arrangements involving major infusions of private capital is the introduction of additional parties into the negotiating process: private and public investors. Potential investors fall into several different categories, each with their own expectations as to risk and return. These are discussed in turn below.
Box 7.11 Financing a Concession | |||||||||||||||||||
Financing for the Buenos Aires concession - including regular operations, as well as the US$4 billion capital investment programme - has come in a number of forms (primarily equity, user fees and debt), drawn from a range of private and public sources. On the equity side, the concessionaire - Aguas Argentinas (AA) - is owned by several different shareholders. The company's major owner is Suez Lyonnaise des Eaux (now Ondeo), a French water company. It holds 25% of concessionaire's equity. The other foreign companies holding shares are S.G. de Aguas de Barcelona (10.8%), Compagnie Generale de Eaux (now Vivendi) of France (7.6%), and Anglian Water of England (4.2%). Local shareholders include Sociedad Comercial del Plata S.A (19.6%), Meller S.A. (10.2%), and Banco de Galiciay Buenos Aires S.A. (7.6%). In addition, employees of AA own 10% of the company. Finally, after the concession was awarded, the International Finance Corporation (IFC) acquired 5% of the company's shares as part of a broader financing package (see below). User fees have been collected by AA since it took over operations and have been a major source of operating capital. AA has been able to reduce its operating costs significantly - while still improving performance - and has also been able to increase tariff collections well beyond the levels achieved by its public predecessor (OSN). The result was a much higher level of income available for system operation and expansion. Though AA showed a US$23 million loss in net income for the first year of the concession (1993), by 1996 net income had risen to US$58 million. Even with these infusions of equity and user fees, AA has needed to borrow large amounts of money to meet its expansion obligations (see Box 7.2). Prior to award of the concession, OSN's capital investment programme had averaged US$20 million per year. By contrast, AA will have to spend approximately USUS$130 million per year to meet its expansion requirements. The first major borrowing was led by the IFC in 1994. In its role of using public money to catalyse private investment, the IFC: purchased a 5% equity stake in the company for US$7 million; lent over US$40 million of its own funds to the company; and found private, commercial banks willing to make funds available for a US$134.5 million syndicated loan (including BNP, Credit Suisse, SocGen, Banque Sudameris, La Caixa, Credit Lyonnais, BFCE, Banque Paribas, Deutsche Bank and Dresdner Bank). Other public sector lenders included the Inter-American Development Bank (IDB) and the European Investment Bank (EIB). A summary of AA's financing structure from July 1995 to June 1997 is provided in the following table:
In 1999, Duff & Phelps Credit Rating gave a 'BBB' (triple-B) rating to the new US$120 million loan being arranged through the IDB. The transaction provides that the IDB will make a US$75 million loan from its own funds, with the remainder of the loan amount being contributed by private commercial banks. | |||||||||||||||||||
Sources: Haarmeyer and Mody, 1997; PR Newswire, June 24, 1999 | |||||||||||||||||||