International Association of Development Funds Second Conference on Financing Municipalities

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International Association of Development
FundsSecond Conference on Financing
Municipalities Sub-National GovernmentsWashing
ton, USA September 30, 2004
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Regional Roundtable Current experience,
innovations and opportunities in Latin
AmericaThe Chilean Experience
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PRESENTATION PREPARED BY

• ING. ALEX CHECHILNITZKY ZWICKY
• President of AIDIS
• President of AIDIS - Chile
• Presidente de Empagua S.A.
• Sanitary and Environmental Consultants
• Sanitary Services Developement, Management and
  Operation
• E-mail achechi_at_empagua.cl - achechi_at_tnet.cl

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Chile in a few numbers

• Population 15 million
• GDP (Gross domestic product)2004E US80 Billion
  
• GDP Per Capita US5300
• GDP adjusted for PPP US10000-11000
• GDP Growth 5 (2004E), average for 1990-2004 in
  excess of (5)
• Assets managed by the AFPs US40-45 billion,
  more than 50 of the GDP
• Sovereign spread 80-100 basis points over
  treasuries

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HISTORICAL EVOLUTION OF SANITARY SERVICES
FINANCING IN CHILE Up to late 80s

• National Budget and external help
• BID, BIRF, other International Institutions,
  Regional Budget (States or Provinces)

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THE SANITARY SERVICES IN CHILE REGULATION AND
CONTROL MAIN CONCEPTS IN THE LEGAL FRAMEWORK
OF THE SANITARY SECTOR
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BASIC CONCEPTS OF TODAYS LEGISLATION

• SEPARATION OF THE NORMATIVE AND REGULATORY ROLES
  (WHICH REMAIN IN THE CENTRAL GOVERNMENT), FROM
  THE COMERCIAL AND PRODUCTIVE FUNCTIONS.
• A TARIFARY SYSTEM BASED ON MARKET RATES THAT
  PROMOTES WATER AND WASTEWATER UTILITY EFFICIENCY
  AND FACILITATES FINANCING.
• DIRECT SUBSIDIES FOR LOW INCOME USERS.

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THE LEGAL FRAMEWORK OF THE SANITARY SECTOR IN
CHILE(OPERATING SINCE 1990)

• General Law of Sanitary Systems
• Tariff Laws
• Law of the Superintendence of Sanitary Services
• Subsidy Law for low income consumers of potable
  water and users of the sewage system services
• Laws that create state-owned utilities as an
  exception

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General Law of Sanitary Systems

• The General Law is the legal backbone of the
  Chilean sanitary system
• Establishes minimum technical and operational
  standards.
• Establishes minimum service quality.
• Defines the conditions under which the
  concessions will be granted.

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SANITARY SERVICES CONCESSION

• Its an enabling title that constitutes a right
  established by law.
• Allows a Company, created with that unique
  purpose, to be the only authorized provider of
  sanitary services in a determined territory.
• On the other hand, concession owners cannot deny
  service within their territory.
• Concessions are granted for an unlimited period
  of time.

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SANITARY SERVICES CONCESSIONFour separate
Concessions are identified

• Water Production
• Water Distribution
• Sewage Recolection
• Sewage Treatment and Disposal
• Must be granted simultaneously

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• Ownership and exploitation rights over
  concessions can be transferred totally or
  partially, and on a permanent or temporary basis.

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PRIVATIZATION PROCESSMOTIVATION

• CAPITAL INTENSIVE PROJECTS REQUIRED BY THE
  SECTOR. (SEWAGE TREATMENT PLANTS)
• PUBLIC RESOURCES NEEDED IN OTHER HIGH PRIORITY
  SOCIAL AREAS.

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CHILEAN SANITARY SERVICES SECTOR STRUCTURE IN 2004

• 95 of the urban population is served by
  companies owned and/or operated by the private
  sector
• 5 of the urban population is served by one
  municipal service in the Metropolitan area

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The right side of the Balance Sheet of the
Chilean Sanitary industryThis Century

• Liabilities
• Equity

Customers (via AFR) Commercial Banks AFPs Insuranc
e Companies The Public International Operators
(Agbar, etc.) Local Operators AFPs The Public
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Utilities Privately Owned or Operated
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Financial Information of Main SanitaryCompanies
(Thousand Dollars in December 31, 2003)
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Sanitary CompaniesMain Shareholders (December
2003)
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Bonds Issuance
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Reimbursable Financial Contributions (AFR)

• A certain amount of money that Operators can
  demand to new clients (persons, industries or
  real state investors) who demand growth or
  increase in sanitary services.
• This amount is stablished in the Tariff Law and
  bylaw.

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Reimbursable Financial Contributions (AFR)

• Money must be reimbursed within 15 years.
• The annual interest rate payed today for this
  Contributions is tied to a local currency,
  inflation-indexed short-term market rate
• The current rate being paid is 2.57 per annum
  plus CPI inflation
• This obligations are publicly traded

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• WHAT HAVE WE ACCOMPLISHED AFTER A LONG PROCESS OF
  MORE THAN THIRTY YEARS?

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SANITARY SERVICES COVERAGE EVOLUTION IN CHILE
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Sanitary Services in ChileWater quality
ACCOMPLISHMENT OF STANDARDS

BACTERIOLOGICAL DISINFECTION
PHYSICAL CHEMICAL
PARAMETERS
PARAMETERS LARGE COMPANIES
99,9 99,9 98,0
97,4 MEDIUM COMPANIES
99,9 99,7 98,2
98,9 SMALL COMPANIES
99,7 99,8 99,5
97,7 TOTAL (COUNTRY)
99,8 99,8 98,3
97,7
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AVERAGE TARIFF (US/M3)
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Conclusions

• Stable regulatory framework, based in tariffs
  with a reasonable level that allow autofinancing,
  and are sostainable in the long term.
• Opportunities in both equity and investment
  grade debt
• Spreads of between 80 and 150 basis points over
  Chilean sovereign debt (and therefore between 160
  and 250 bp over treasuries)
• Debt is mainly denominated in local currency with
  inflation adjusted fixed rates, to avoid currency
  exposure
• In consequence the debt market is dominated by
  local investors

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THE END