All of these different types of investment are offered by both private and public sources, on different terms reflecting their different risk/reward calculations. Each has its own methods for deciding whether or not to invest in any particular project. Meeting all of the investors' needs, as well as those of the municipality, private operating firms, and users/communities, is what makes partnerships involving substantial private investment so time consuming and expensive to arrange.
The only way to navigate this maze is with good guides: the transaction advisors who help structure the partnership arrangement. If substantial amounts of private investment are sought, the municipality must have advisors who are the peers of those representing the potential investors. Only by negotiating on equal terms will a deal be struck that meets the needs of both the municipality and the investors over time. A primary concern will be the appointment of advisors (see discussion on the advisors in Manila, Box 7.14, and the role of advisors as discussed in Chapter 6, and illustrated by the recent consultancies undertaken in Johannesburg, Box 6.22).
Assuming there is a clear legal framework in place - one which provides the municipality with the authority to borrow and provides clarity over the conditions pertaining to debt, interest rates and foreign currency - a number of conditions relating to municipal capacity can determine the access a municipality has to credit:7
• their understanding of collateral - assets are often less than well documented in municipalities;
• their knowledge of lending and borrowing (do they have transaction advisors?);
• their banking capacity (do they have a credit rating?); and
• enforceability in the context of changing municipal governments.
Box 7.12 Private Sector Facilitates IFI Finance | Links to Boxes |
In response to the enabling legislation introduced in 1994 (see Box 10.3), the municipality of Cartagena became a pioneer in Colombia with regard to the introduction of private sector participation in basic public service provision. It was also the first city to introduce a PPP for water and sanitation, with the creation of the joint venture company, AGUACAR. The prevailing poor economic performance of public service provision, itself linked to endemic clientelism and corruption, was a major factor in explaining citizen support in Cartagena for private sector participation in urban water supply. The short-term municipal objective was to rid itself of the fiscal burden of an inefficient in-house operation by delegating the management function, and to improve efficiency by attracting the necessary technical skills from the private sector. A longer-term objective was to secure access to soft loan finance from international financial institutions in order to upgrade and expand the system. By the mid-1990s the municipal-owned Empresa de Servicios Públicos Distritales de Cartagena (EPD), responsible for public service provision including water and sanitation, was already in crisis. Water losses exceeded 50%. Current revenue did not even cover operating costs, producing a financial deficit that was a growing drain on municipal finances. There was not even money to pay for sufficient chemicals to treat water. The lack of an operating surplus meant that investment in maintenance and network extension had ground to a halt. Customer service was very poor, with constant interruptions in water supply and unacceptably low levels of water quality. The negotiation of the joint venture between the public and private sectors was controversial, and powerful economic groups in the city opposed it. The tendering and bidding process for the contract was negotiated by the outgoing mayor Gabriel García (1992-94). Aguas de Barcelona (AGBAR) was the only bidder and the adjudication was completed on 30 December 1994, the day before he left office. The incoming mayor, Guillermo Paniza, had campaigned actively against the terms of the contract negotiated by his predecessor. These had envisaged a 50% shareholding by AGBAR, a 40% holding by private investors and only a 10% holding by the municipality. Paniza argued that the spirit of the pioneering legislation introducing private capital in basic services called for a minimum public sector participation of 50% in any joint venture. He also feared that the low value of the paid-up capital of the new joint venture company would put ownership of the 40% of the shares earmarked for private capital within the grasp of corrupt local politicians who had been involved in the negotiations carried out by his predecessor. The original intention of Paniza was to annul the contract altogether and return to the previous arrangement under which water and sanitation in Cartagena was owned and delivered by a municipal company. However, during a four-hour discussion in Washington, the World Bank project manager made it clear to Paniza that PSP involvement was a precondition for future Bank funding for the water and sanitation sector in Cartagena. Paniza then dropped his objection to private sector participation and renegotiated the terms of the joint venture with AGBAR. In order to strengthen municipal involvement and to avoid the danger of political interference from a large local private share participation, the shareholding earmarked for the municipality of Cartagena was increased to 50%. The shareholdings of AGBAR and private local capital were reduced correspondingly to 46% and 4% respectively. Furthermore, the 50% municipal shareholding would be in the form of 'goodwill' and was not paid in cash. At the insistence of Paniza, the shareholding arrangement was also amended in order to incorporate an employee share ownership scheme within the 4% shareholding allocated to local private capital. In 1995 the municipality of Cartagena finally formed a joint venture with AGBAR to provide water and sanitation services in the city. The new company, known as Aguas de Cartagena (AGUACAR), signed a 26-year contract with the municipality to operate and maintain these services. In turn AGUACAR signed a management contract with AGBAR. Under the terms of its 1995 contract with AGUACAR, AGBAR is only responsible for the management of and funding of the operation and maintenance of the system. Although it did not sign a concession contract, AGUACAR was entrusted with managing a major water and sanitation investment programme on behalf of the municipality. This investment programme is financed mainly by loans from the World Bank (US$85 million) and the Inter-American Development Bank (US$24 million). It is significant that, in response to the history of corruption and mismanagement in the urban water supply and sanitation sector in Colombia, the World Bank insisted on private sector participation as a precondition for further lending to the municipality of Cartagena for water and sanitation. From the Bank viewpoint, the presence of a major international water utility (AGBAR) constitutes a guarantee that its lending resources will be subject to allocative efficiency (e.g., in the selection of investment priorities) and subject to productive efficiency (e.g., in avoiding over-invoicing in the awarding of contracts). From the municipal viewpoint, this insistence meant that a partnership with a major international player (AGBAR) has been instrumental in accessing foreign soft loan funding for its expansion plans; and from the viewpoint of AGBAR itself, the joint venture arrangement has the advantage of reducing the risk of foreign investment. | |
Sources: Adapted from Nickson, 2001a; Foster, 1998 | |