Armenia seeks solidarity in water PPPs
Published on by Edyta Bednorz, Global Water Intelligence - Brand Marketing Executive
Political and economic realities have led the Armenian government to conclude that a single water PPP contract is the way forward. It may struggle to attract bids from outside the universe of incumbents.
The Government of Armenia has formally requested expressions of interest from consultants ahead of the implementation of a 15-year private sector lease contract covering water and wastewater services throughout the country. At present, around two thirds of the republic's 3 million residents receive water and wastewater services from the private sector. Veolia holds a 10-year lease contract in the capital, Yerevan, while Saur has a national management contract with the Armenian Water & Sewerage Company, serving a further 620,000 people. Saur also has a stake in the consortium which holds a trio of management contracts serving
selected areas in three regions in the northwest of the country. All five contracts expire in May 2016, and as part of its second generation of water sector reforms, the government now
wants to unify the scope under a single, nationwide contract. "Our studies show that if we were to keep two contracts, for example one in Yerevan and one outside, then tariffs in
Yerevan would be about three times less than in the rest of the country," explained Gagik Khachatryan, deputy chairman of the State Committee for Water Systems (SCWS), and the architect of the reform process.
"This is politically and economically unacceptable for Armenia, and that's why we have decided to use a unified tariff structure and to have one operator after May 2016," he told GWI. While the government's decisiveness has impressed the international private water community, the decision to move forward with a single, nationwide lease contract has not met with universal approval. "Having one operator in one country is maybe not optimal," observed one Moscow based commentator with extensive experience of the Caucasus. "We would prefer if Yerevan was separate and the rest of the country was under another operator. The question is whether the risk [of a single contract] would be perceived as too big by private operators." The implementation of a unified tariff across the country would remove the need for government subsidies to the sector - which currently stand at around $3 million
per year - and would also provide additional funds for infrastructure rehabilitation, which continues to swallow vast amounts of capital from international financial institutions including the EIB, the EBRD and KfW. "I'm quite impressed by the work they're doing, but the level of investment needed is enormously big - it's like a black hole," commented our Moscow source. While tariffs are already at operational cost recovery levels in Yerevan, the widespread perception is that there is room to hike them further in other parts of the country without causing too much pain. Nevertheless, one key unknown at this stage of the reform process is the extent to which performance payments under the new lease contract will be linked to the speed at which the 650,000 people not currently served by the private sector would be brought into the fold. Khachatryan told us that he expects to have a clearer roadmap
for this by the end of the year. He explained that the tariff formula will be set at the outset for the duration of the new lease contract, and that it will cover routine network rehabilitation, operation and maintenance expenses, and a portion of debt service, all while remaining affordable. All in all, investment of around $1 billion is estimated to be required over the
lifetime of the new 15-year lease contract. Khachatryan expects to appoint a consultant
to oversee the tender process for the lease contract in February next year, with a view to starting the bidding in April ahead of a contract award in late 2015 or early 2016.
"I think they're doing it quite fast considering the challenges they have, and I would not be surprised if they find that their own timetable is a little bit ambitious," said our source in Moscow. A further concern voiced by several market participants is the level of competition that the new lease contract is likely to attract from international private water operators. With two deeply entrenched incumbents (Veolia and Saur), and the other companies which have taken part in management contracts in Armenia in the past (MVV and Acea) seemingly unwilling to look at a lease structure, the very real possibility is that it will end up being a two horse race. Khachatryan is remarkably unfazed by this. "Our consultant approached around
20 companies. We accept that the new operator has to be an internationally accepted company with experience in Armenia, and there are only four such companies. It looks like we will have to find our winner amongst these four."