The Cayman Islands government should consider a trade sale or an initial public offering of the Water Authority, which currently regulates water and sewerage on the Cayman Islands, according to a report released last week by consultant Ernst & Young.
The report suggests that government would need to determine if the potential transaction would be a sale or long-term lease. The report listed the Water Authority’s value to the government as between $71.3 million and $92.6 million.
“We recommend running a dual track process (trade sale and IPO) to identify the divestment process that provides maximum value to the government coupled with the implementation of improvements to pricing to ensure a more cost reflective charge for the provision of water and waste water services across the Cayman Islands,” the report states.
A long-term lease, consisting of a period of between 50 and 99 years, may be more “prudent” because government would retain the assets at the end of the lease and it would give the private sector time to recoup investments, the report states.
Benefits of the transaction include allowing government to focus on core services and water regulation and would enable capital to be raised to be used for infrastructure or to pay debt, the report states.
It also “reduces government headcount and operating expenditure of the government” and provides access to private sector technology and processes and transfers market demand risk to the private sector.
While the report recognizes “previous privatization attempts have failed and could impact the market’s willingness to participate,” it states that “by packaging water with sewerage it makes the potential investment to the private sector more attractive.”
Implications include the current “condition of assets.”
Further outlined risks include a monopolistic pricing power, loss of a minimal per annum dividend stream of $100,000, although it would likely be replaced with a license fee, the report states.
“The water and waste water treatment assets form a natural monopoly on the island, which would need careful consideration when determining the regulation and controls government may require. The assets should not be sold to Cayman Water Corporation due to competition issues,” the report says. In comparison, the report says the U.K. has privatized its entire water and waste water treatment systems, while the United States industry is highly fragmented, with the responsibility managed by local governments.
“There has been private investment in the water treatment side of the industry by the Consolidated Water Company Limited, who has similar investments in the Caribbean region,” the report says. The report’s road map indicates a 24-month transition process.