Review of Trinidad and Tobago Water and Sewerage Authority Capital Expenditure Plans and Asset Valuation

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1 T +1 (202) F +1 (202) K Street NW WASHINGTON DC United States of America Review of Trinidad and Tobago Water and Sewerage Authority Capital Expenditure Plans and Asset Valuation T +64 (4) F +64 (4) Level 2, 88 The Terrace PO Box WELLINGTON New Zealand Analysis of Investment Plans and Advisory on Asset Valuation Methodology for the Trinidad and Tobago Water and Sewerage Authority T +61 (2) F +61 (2) Level 10, 1 Castlereagh Street SYDNEY, NSW 2001 Australia Presentation of Draft Recommendations RIC Stakeholder Presentation 11 July 2008 Copyright Castalia Limited. All rights reserved. Castalia is not liable for any loss caused by reliance on this document. Castalia is a part of the worldwide Castalia Advisory Group.

2 Overview of Presentation Guidance from the RIC Act on capital expenditure and the regulatory asset base Review of WASA s capital expenditure plan criteria for assessing WASA s projects Main driver of WASA s investment plan Indicative unit cost of alternative investments Assessment of WASA s projects Valuation of WASA s existing asset base Monitoring and implementation

3 Guidance from the RIC Act on Capital Expenditure and Asset Base

4 Size of WASA s Proposed Capital Expenditure Programme Cost of programme to WASA is over TT$1.9 billion per year on average over 5 years Cost is in the order of 1.5% of national GDP by comparison: WASA s proposal needs to be carefully scrutinized Only projects that meet regulatory criteria will be passed on in tariff

5 for Capital Expenditure Projects to be Included in Tariff WASA Project Purpose, cost, location of project provided NO YES Required to meet service standard / provides benefit that exceeds cost NO Not yet shown to meet YES YES Least cost way to meet standard / provide benefit NO s to be Included in Tariff

6 Main Driver for Capital Expenditure Increase Hours of Service 100% 90% Class V (< 48 hr/wk) 80% RIC proposed standard: WASA s customers should receive supply for 2 days per week, without a reduction in service levels for customers Percent of Population 70% 60% 50% 40% 30% 20% 10% 0% Class IV (> 48 hr/wk) Class III (> 84 hr/wk) Class II (> 120 hr/wk) Class I (24/7 Supply) Average Hours of Supply (per week)

7 Impact of Investments on Balance between Supply and Demand Start with WASA s baseline forecast of demand and current supply capacity 600,000, ,000,000 Baseline Demand Forecast Annual Water Demand and Supply (m3) 500,000, ,000, ,000, ,000,000 Supply Shortfall = 18% 300,000,000 Existing Supply Capacity

8 Indicative Cost of Options to Balance Supply and Demand Projects Cost Per Cubic Metre Produced (TT$) Cost Per Cubic Metre Delivered (TT$)* Present Value Calculation Leakage Reductions Reasonable costs of leakage reduction proposed by WASA Additional volume of water from reducing leakage and lowering UFW to between percent over 20 years Reasonable costs of customer metering programme Metering projects Additional volume of water from reducing demand through metering over 10 year average meter life Groundwater schemes WASA estimated costs of well drilling, construction of treatment plants and operating costs WASA estimate of annual groundwater yield (over 20 years) Desalination and water re-use Reported current costs of desalination (WASA Tariff Book) Estimates of future charges under BOOT desalinated water supply contracts provided by WASA in capital expenditure plan * Assuming a 50 percent leakage rate

9 Leak Reduction and Metering Name Proposed Cost Information Provided Helps meet service standard Least cost s Further Information Req. Likely to Unlikely to Leakage Reduction Installation of Pipelines and Ancillary Works Laying of Transmission and Distribution pipelines Pipelines (approx 350 km) Procurement of Leakage Detection equipment, loggers and a consultancy study Metering Bulk Metering - Phase 1 (Major Facilities) Bulk Metering - Phase 2 (Major Facilities) Customer Metering 1, * * Cost reduced on basis of international unit cost comparisons

10 Impact of Investments on Balance between Supply and Demand 600,000,000 Baseline Demand Forecast Forecast Demand Annual Water Demand and Supply (m3) 550,000, ,000, ,000, ,000, ,000,000 Supply Shortfall = 18% Customer Metering Leakage Reduction 300,000,000 Existing Supply Capacity

11 Increase Supply (Conventional) Further Information Req. Name Proposed Cost Information Provided Helps meet service standard Least cost s Likely to Unlikely to Construction of Booster Pumping Station Construction of seven Water Treatment Plants Construction of three Service Reservoirs and associated works Design of nine Service Reservoirs Development of twenty nine wells Drilling of Production Wells Pipelines, Booster Stations and Drilling of wells to serve HDC Programme Manage the Expansion of Nth. Oropouche, Mammoral & Moruga Not provided

12 Name Proposed Cost Information Provided Helps meet service standard Least cost s Further Information Req. Likely to Unlikely to Local Water Source Development Local Water Source Development - Paramin Other Water Projects Other Water Sources - Wells Refurbishment of five Water Treatment Plants Replacement of Navet Trunk Main and Critical Segments of the Network * Short Term Investments Upgrade of seven Booster Stations & Construction of one Water and Sewerage Water Quality Project for the Cumuto WTP Water Source Development * Cost reduced to lowest estimate provided in supporting documentation supplied by WASA

13 Impact of Investments on Reducing Water Shortfall 600,000,000 Baseline Demand Forecast Forecast Demand Annual Water Demand and Supply (m3) 550,000, ,000, ,000, ,000, ,000,000 Supply Shortfall = 18% New Supply Capacity Required Customer Metering Leakage Reduction New Supply Developments Significant improvement in hours of service 300,000,000 Existing Supply Capacity

14 Supply Increases (non-traditional) Name Proposed Cost Information Provided Helps meet service standard Least cost s Further Information Req. Likely to Unlikely to Operation of Five Desalination Plants under BOOT contracts 3, ,120.0 Construct Six Packaged Desalination Plants BOOT financed Expand Desalination Plant BOOT financed Four Mobile Water Treatment Plants BOOT financed Construction of the initial stage of the National Grid BOOT financed Beetham wastewater reuse project and submarine pipeline BOOT financed Engagement of Programme Manager - Preliminary Design of Treatment Plant

15 Wastewater Name Proposed Cost Information Provided Helps meet service standard Least cost s Further Information Req. Likely to Unlikely to Sanitary Services - Sewerage system improvements (IDF) Sanitary Services - Sewerage system improvements (PSIP) Design Sludge Management System at Beetham WWTP Construct Sludge Management System at Beetham WWTP Estate Management System Development (HDC) COST TO BE REIMBURSED BY HDC Adoption of HDC Plants and other WWTPs

16 Other Further Information Req. Name Proposed Cost Information Provided Helps meet service standard Least cost s Likely to Unlikely to Administrative Services Disaster Preparedness Engagement of Programme Manager for the SWSP DOES NOT APPEAR TO BE CAPITAL EXPENDITURE Research and Development 15.0 DOES NOT APPEAR TO BE CAPITAL EXPENDITURE 15.0 Water and Wastewater Master Plan 59.1 DOES NOT APPEAR TO BE CAPITAL EXPENDITURE 59.1

17 Summary of Capital Expenditure Review Name WASA Proposed s Further Information Req. Likely to Unlikely to Leakage Reduction Metering 1, Supply increases (conventional) 2, , Supply increases (non-traditional) 3, ,180 Wastewater 1, Other Total 9, , , ,731 18% 23% 59%

18 Approach to Setting WASA s Asset Base A number of valuation methodologies could be used to set a starting value of WASA s assets for the tariff determination The valuation approaches need to be assessed against the following criteria: Consistency with the RIC Act Financial sustainability of WASA Social acceptability Information requirements

19 Setting the Asset Base Valuation Approach Description Value Line in the Sand Asset value set by regulator to yield revenue amount considered to be reasonable Depreciated Optimized Historic Cost Historic Cost Debt Service Repayments Same as Historic Cost, but only includes assets that are used and useful* Value of assets reported for accounting purposes cost of acquiring asset less depreciation over asset s useful life Asset value set to enable WASA to repay debts (which currently exceed the book value of WASA s assets) 1,900 7,400 Depreciated Optimized Replacement Cost Replacement cost of only assets that are used and useful* Current Cost Value of assets reflects the minimum cost of replacing assets to provide same level of service 14,400 * Terminology used in RIC Act (section 2) meaning asset in useful service

20 Setting the Asset Base Valuation Approach Consistent with RIC Act Financially Sustainable Social Acceptability Information Requirements Market Value LIKELY LEAST MOST LOW Depreciated Optimized Historic Cost YES MEDIUM Historic Cost YES LOW Debt Service Repayments LIKELY LOW Depreciated Optimized Replacement Cost YES HIGHEST Current Cost YES MOST LEAST HIGH

21 Implementation Leakage Reduction WASA should consider performance-based leak reduction contracts Customer Metering WASA should consider pay-per-read metering contracts Financing Arrangements Government should consider arrangements to ensure funds are available as required, for example through a revolving fund or asset holding company Monitoring RIC will require WASA to provide implementation plan with details of actual capital expenditure against approved capex, commissioning dates and service improvements RIC will monitor WASA s capital works programme and service levels area-by-area and publish results