EY recommends gov’t sell or lease Water Authority

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. 

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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. 

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1 COMMENT

  1. The Cayman Islands Government may be well advised to do some research on the privatization of the islands water infrastructure prior to selling. I paste below a link to one such report by the University of Greenwich.

    Public Sector Alternatives To Water Supply And Sewerage Privatisation: Case Studies

    PSIRU Public Services International Research Unit http://www.psiru.org University of Greenwich

    http://www.psiru.org/reports/9908–W-U-Pubalt.doc

    Abstract
    The paper presents a consideration of public sector operations as an alternative to the privatisation of water and sewerage services. Cross-country case studies of publicly-owned enterprises which have succeeded in reconciling efficiency and social purposes and carrying out structural and managerial changes, are compared with some experiences of privatised concessions. Overall, public enterprises appear no less efficient that private companies, while being capable of development-oriented consideration of public interests.
    1. Introduction
    Since the Dublin International Conference on Water in 1992, the management of water as an economic good has been promoted as a solution to the challenges facing urban water management in transition economies and developing countries (Nickson, 1996: 2).
    The spread of this new approach has been associated with pressure in favour of private sector participation. For example, the World Bank is particularly active in promoting privatisation (Nickson, 1998: 10-11). As a consequence, transnational corporations are enjoying significant opportunities for expansion.
    However, the assumption that private sector participation is the only possible catalyst for investment and rationalisation can be challenged. Especially in transition and developing countries, private sector involvement in urban water supply often conflicts with public interest, and publicly-owned enterprises (POEs) active in water supply and sewerage are not necessarily less efficient and cost-effective than private companies (Hall, 1998b: 127).
    The paper is intended to contribute to the debate by presenting a number of case studies. The first section presents empirical evidence of the economic and social impact of water privatisation, mainly in Central and Eastern Europe and Latin America. The second section looks at examples of successful public operation of water utilities, ranging from arm’s-length companies to co-operatives, in Western Europe as well as Central and Eastern Europe and Latin America.

    Nicholas Robson
    Director-General
    Cayman Institute
    http://www.caymaninstitute.org.ky