Posted by Frank van Steenbergen
August 21, 2012
Over the past three to four years, the financial crisis has dominated the headlines, with much of the attention on national debts in Southern Europe at the moment. What gets less attention is the financial position of lower tiers of governments (municipalities, provinces) or public utilities, such as drinking water companies or water boards.
Traditionally, drinking water companies and water boards are very safe bets financially. They provide an indispensable service. Business-wise, there are no risks or possibilities of major setbacks. One would think they would be highly creditworthy. The only peculiar fact is that investments in them are long-term, as with other infrastructure.
One would think that the water sector would have escaped the financial wizardry of the last ten years (subprime loans, currency lending, etc.), but this seems unfortunately not true. One ‘creative’ method of financing developed over the last two decades and is not uncommon in the water sector is the so-called ‘sale-and-leaseback’.
What this means is that the public utility sells its assets – to a pension fund or an investment fund – and then leases its own assets back. The money that changes hands in the transaction is then used for a new investment or a refurbishment of the existing facilities.
So far, so good? Not really. The first problem is that the water board loses ownership of its own assets. If a new asset is created, this may be okay, but this is not assured. The windfall finance may also be used for covering operational losses, perks, or risk expenditures. The second problem is that, as a rule, the lease paid is more (often twice) than what would have been paid as interest on a loan. And in the case of a loan, the asset would have still been with the water utility. So this is the end sum: fewer assets and more dues.
Do you know of more examples of such doubtful financial constructions in the water sector? Please share with us.
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