EBRD: a growing appetite for non-sovereign loans

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The European Bank for Reconstruction and Development (EBRD) co-financed nine water and waste transactions in2000 worth a total of €211 million. As well as concession financing, the bank arranged a number of municipal loans without recourse to sovereign guarantees.

The countries of eastern Europe and the CIS have a long road ahead to meet EU environmental quality standards and many do not have the extensive capital necessary for large-scale maintenance and
development of water and sewerage infrastructure.

However, the availability of long-term financing for infrastructure projects has paved the way for compliance with EU standards and for privatisation through lease management, BOT and concession projects. The extent of privatisation increases every year, particularly in the water and sewerage sector.

Year 2000 transaction highlights included Sofia Water, Almaty Sui and Tallinn Water. EBRD played a central role in helping Sofia define parameters for private sector participation (PSP), as well as mobilising independent advisors who worked with the city to prepare the project and select the concessionaire through competitive international bidding.

Sofijska Voda, the International Water/United Utilities majority owned concessionaire, received a €31 million senior loan at the end of 2000. The loan has a 15-year maturity, priced at six month LIBOR decreasing thereafter subject to cover ratios, city rating and successful performance. The sponsor group is providing combined subordinated debt and equity, which together with funds generated internally by Sofijska Voda, bring the total amount of the five-year project to €94 million.

EBRD finance will support Sofijska Voda’s CAPEX programme for the first five years of the25-year concession, including start-up costs. Initial investments will focus on the rehabilitation of the water and
sewerage networks to reduce leakage and infiltration, ensure reliable supply, as well as streamline billing and financial management.

The Almaty concession is the first privately owned concession for water and wastewater services in Kazakhstan. The concession was let on a 30-year basis to Almaty Sui, a newly created company established by Vivendi and the existing water company, VodoKanal of the city of Almaty.

The concession involves full responsibility for refurbishing, developing and maintaining the entire urban water and wastewater system. The project will provide at least $40 million in investment in water and wastewater services for 1.1 million customers in the Kazakhstan capital over the next 15 years. It will significantly improve environmental standards allowing Almaty to eventually comply with EU standards.

EBRD has worked closely with Vivendi and the municipality of Almaty since 1999. The bank has provided a €7.5 million senior loan with a 15-year maturity, priced at six month EURIBOR and backed by a direct agreement with the city of Almaty and an agreement with the Kazakhstan Anti-Monopoly Agency.

Municipal activities
EBRD’s municipal utility transactions in 2000 reflected a growing willingness to lend funds without recourse to sovereign guarantees or full municipal guarantees.

In November, the bank announced a €39 million loan (including one year’s grace period) to the Riga Water Company (RWC) to improve municipal water and wastewater services. In the process, RWC became the first local service utility in Latvia to receive a direct corporate loan from an international financial institution (IFI).

The loan was backed by an undertaking of municipal support – but not a financial guarantee – from the city of Riga. The city agreed to adhere to tariff schedules and other obligations of the municipality towards the utility. Funds will be used for the installation of water meters, sewerage and water network extension and to refinance RWC’s existing sovereign guaranteed loan into a €24.8 million corporate loan.

A €20 million loan to Miekskie Przedsiebiorstwo Wodociagow I Kanalizacji w Krakowie (MPWiK), the municipal water supply and sewerage company for Krakow, was also provided without a financial guarantee from the city.

The loan, which is in two currencies – Plz45.5 million and €10 million – will enable MPWiK to modernise a mechanical WwTP and build a biological plant in the Plaszów area of the city. The European Union’s Instrument for Structural Policies for Pre-Accession (ISPA) programme is providing complementary grant financing of around €55 million.

In both cases, EBRD carried out an extensive assessment and found the two utilities to be of sound financial standing and management. Where municipal utilities can demonstrate a strong operating cash flow, the bank is willing to take the full commercial credit risk says Thomas Maier, EBRD’s director of municipal and environmental infrastructure.

The loan to MPWiK will enable the city to invest its resources in non-revenue sectors, such as housing, education or roads. The structure of the Riga loan will allow RWC to make additional investments suited to its cash flow.

Eastern Europe in 2001
With several public-private partnerships (PPPs) set to close this year and the sale of 66% of Prazské vodovody a kanalizace (PVK) to a consortium of Vivendi and AWG already confirmed, the bank is looking at a number of possible deals in 2001/02.

Funding for private projects in the Polish cities of Poznan and Szczecin is likely this year. Szczecin in north-west Poland is expected to require some form of privatisation in the provision of municipal services and infrastructure. Poznan has prequalified five groups for a concession and advisor BNP Paribas is preparing tender documents.

In Zagreb, EBRD is working with German development bank Kreditanstalt für Wiederaufbau (KfW) and RWE/Thames Water to agree financial terms for a deal which will close around the middle of the year. In December 2000, RWE signed a concession contract to build and operate a WwTP in Zagreb involving investment of around €180 million. The plant will provide wastewater services for a population of around one million in the Croatian capital. The project is the largest privately organised investment in Croatia to date and covers planning, construction, financing and operation of the plant for a 26-year period.

The eastern European water and wastewater industry is highly fragmented with many local and small regional water companies operating independently from one another. As such, the bulk of private sector contracts have been awarded in large urban areas. When privatisation is successful in these urban areas, rural municipalities are more likely to consider forming a consortium and put their combined systems to bid.

At the end of last year, a concession model was drawn up for the water and sewerage utilities in the north-eastern Bulgarian cities of Varna and Shumen. Subsequent projects will target the water and sewerage utilities in Vidin, Vratsa and Montana (all in north - western Bulgaria), and Dobrich in the north-east.

Maier says EBRD will also be looking to encourage private sector involvement in Ukraine’s water supply and sewerage industry. The Ukrainian government has already applied for a $24.24 million IBRD loan towards the cost of the Lviv water and wastewater project. The government will try to prequalify an international operator for a management improvement programme connected with the project.

EBRD is talking to operators to promote interest in Sebastopol, Kherson and Mariupol – the first batch of a larger number of cities where the bank would try to combine public finance with private operator know-how in performance based management contracts.

As part of this approach, the private partner would receive a fixed and variable fee. The variable fee would be subject to financial, operational and environmental performance targets set as part of a five-year contract.

EBRD is working on the project structure which could be ready by the summer with bidding later in the year. Operators would bid on the certainty of the contractual arrangements with the knowledge that EBRD finance would be in place and that the municipality fully backed the project.