Debtors impact Veolia Maroc’s cashflow

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The need to match its investment programme with incoming cashflows is becoming ever more apparent as Veolia heads into a critical review of its Moroccan concessions.

Veolia Environnement Maroc will head into this year’s quinquennial review of its Moroccan water, wastewater and electricity concessions seeking greater flexibility on its investment targets as a result of a shortfall in payments from its debtors.

Veolia’s Moroccan subsidiaries manage the 25-year concession contracts in the city of Rabat/Salé (Redal), and in Tangiers and Tétouan (Amendis), but despite making progress towards meeting the contracts’ key performance indicators, the companies are still owed a combined total of MAD760 million ($94 million).

Their debtors include public administrations and municipalities, while illegal connections are also leading to revenue losses through theft.

Veolia Water’s CEO in the MENA region, Patrice Fonlladosa, believes the review offers the opportunity to introduce greater flexibility into the contractual obligations relating to the concessionaires’ investment programmes.

“We would like to change the rigid interpretation of our investment targets,” he explained to GWI. “We are working on a long-term basis, so it doesn’t matter if we meet 80% of our investment target one year and 120% the next. In the long run, it will average out.”

The level of defaulting that Veolia is facing from public administrations could leave the Moroccan Ministry of Interior with little choice but to allow Veolia some flexibility. “Few companies could commit to investing MAD1 billion [$124 million] and respect their contractual obligations in these circumstances,” Olivier Dietsch, chief executive of Veolia Environnement Maroc, explains.

Tariffs are a key source of income for the concessionaires, and they will be high on the agenda during the review process. “Investments are linked to financial resources,” Fonlladosa notes. “To maintain the level of investment we have to be able to raise funds, which includes increasing our tariffs regularly.”

Redal currently buys its water from the Office National de l’Eau Potable (ONEP) at MAD4.30/m3 ($0.52/m3) and retails it out under a rising block tariff structure that starts at MAD2.43/m3 ($0.29/m3). Amendis purchases water from ONEP at MAD3.50/ m3 ($0.42/m3), while its consumer tariff starts at MAD2.76/m3 ($0.33/m3).

“ONEP and ONE [Office National de l’Electricité] regularly increase their tariffs, but we’re not allowed to pass the increases on to customers,” Fonlladosa explains. “The concession includes a clause guaranteeing economic equilibrium, whereby we have to find a sustainable way to balance our results over a long-term period,” he says. The latest tariff increases – involving a 3% average rise across the three concessions – were implemented in 2009, and before that in 2007.

In both years the tariff increases came in below Veolia’s expectations, and the company claims to still be owed MAD93 million ($11.5 million) as a result of increases that were contractually required during the 2007-2010 period but are as yet unimplemented. “If we are to make all the investments planned for 2010 and do not receive further tariff increases, we will face difficulties,” Fonlladosa says. “But the authorities are aware of this and they have no interest in leading us to cease our activity.”

In the short term, Veolia Environnement Maroc has negotiated a repayment plan with the municipalities that have defaulted on payments, and the company’s cashflow should receive a MAD120 million ($15 million) boost by March of this year.

Veolia will also be reviewing its performance targets with the Ministry of Interior. Both parties have acknowledged that the advances already made to the performance of the water system will make further improvements increasingly expensive. One example of this is the significant progress made by Veolia towards the target of maintaining network efficiency at around 80%, despite population growth and network extension.

In Rabat, the 2002 level of 68% had increased to 81% by 2008, while in Tangiers, network efficiency rose from 58.8% to 79% over the same period. The company must also prepare for the next phase of its operations. “We’re at the end of the construction phase,” Dietsch explained to GWI.

“We have finished the de-pollution of Tangiers and we’ll be finished in Rabat and Tétouan within the next couple of years [see table]. This means that our work and commitment will be less obvious to the population, and this is why we are going to focus our attention on customer services even more.”

Veolia’s upcoming review was delayed from 2007 due to the engagement of the Ministry of Interior in the latest revision of the Lyonnaise des Eaux Casablanca (Lydec) contract, which is held by Suez Environnement. Veolia is looking to have its review finished by the end of 2011.