SEDAPAL (Servicio de Agua Potable y Alcantarillado de Lima) is the primary water and sewage company responsible for providing and managing water and sanitation services to the Lima metropolitan area. As the city faces significant challenges due to its location in a desert region, rapid urbanization, and the impacts of climate change, SEDAPAL needs to undertake substantial investments to improve and expand its services. SEDAPAL has embarked on a comprehensive plan involving nearly $7 billion in new infrastructure projects to address these challenges. These projects aim to enhance water quality and improve sewage treatment. Additionally, SEDAPAL is focusing on building more reservoirs in the mountains near Lima to capture and store precipitation, a critical step in ensuring a more reliable water supply for the city’s growing population, which is expected to reach 13 million by 2030​​.

The necessity for these investments is underscored by the vulnerability of Lima’s water supply system to climate change. The city relies on three key rivers – the Rimac, Chillon, and Lurin – which are increasingly unable to meet the rising demand for water. The melting of mountain glaciers, which contributes significantly to these rivers’ flow, and the unpredictable impact of climate change on precipitation patterns in the Andes further complicate the situation. The water tariff system is a cornerstone of SEDAPAL’s ability to provide high-quality and sustainable water and sanitation services in Lima, especially in the face of growing demand, infrastructure needs, and the challenges posed by climate change.

In this context, and within the strategic partnership framework between SEDAPAL and IFC, IFC seeks to contract a consultant to identify global best practices for water tariff determination in terms of methodology and inputs and provide a comparative analysis with Lima’s current framework.

The services provided by K&M Advisors were structured into three main tasks:

Task 1 (Work Plan): K&M prepared a comprehensive work plan that detailed each task and activity, the organizational structure of the consultancy, involved parties, and a timeline including milestones and expected outputs.

Task 2 (Comprehensive Assessment of WACC Methodology): Following Peru’s Legislative Decree No. 1620 aimed at reforming water and sanitation services, K&M undertook a detailed study to propose a relevant WACC (Weighted Average Cost of Capital) methodology for SEDAPAL. This involved reviewing the current regulatory frameworks, existing methodologies, and assessing risks associated with SEDAPAL’s operations. A SWOT analysis was conducted to tailor the WACC methodology effectively to the needs and challenges specific to the Peruvian water sector and SEDAPAL’s operations.

Task 3 (Review of Tariff Models): Concurrently, K&M reviewed tariff models by analyzing SEDAPAL’s operational efficiency indicators and the existing tariff model used by SUNASS. This review also included a benchmarking analysis against similar regulatory frameworks globally. The consultant prepared a comprehensive presentation on the findings, which included strategies to address identified weaknesses and optimize tariff models to enhance SEDAPAL’s financial and operational performance.

These tasks were completed in collaboration with IFC and SEDAPAL, ensuring that the consultancy’s recommendations were well-grounded and actionable, tailored to the specific operational realities and regulatory requirements of the water sector in Peru.

The IADB contracted K&M to be part of a committee that is evaluating SEDAPAL´s performance and recommending key measures for improvement. As part of this work, K&M is evaluating SEDAPAL’s processes and identifying challenges to understand how and to what extent they impact SEDAPAL’s ability to provide quality services to the public. This assessment intends to propose measures to strengthen and modernize the company’s financial management. The scope of the consultancy includes producing an assessment report on SEDAPAL’s current status and a report on proposals for modernization. Key activities involve reviewing financial data, assessing organizational structures, examining strategic plans, and evaluating investment portfolios. The consultancy will also propose guidelines for financial sustainability, organizational efficiency, and potential modifications to the regulatory framework. Additionally, they will suggest alternative financing solutions and engage in coordination meetings with various stakeholders.

The objective of the service contract was to evaluate SEDAPAL’s processes to consistently deliver quality services. The assessment identified challenges and proposed measures for financial management and modernization. The consultancy tasks included producing a report on SEDAPAL’s current status and creating a preliminary document for organizational enhancement.

The consultancy reviewed SEDAPAL’s financial data, analyzed the organizational structure, and assessed strategic plans. K&M evaluated the proposed investment portfolio, focusing on financing sources and borrowing capacity, and proposed solutions for SEDAPAL to be able to implement the investment plan. Benchmarking was conducted to measure SEDAPAL against international standards. K&M also examined tariff structures and the regulatory framework, providing insights into SEDAPAL’s operational and financial direction. Recommendations were made for financial sustainability, organizational improvements, and potential regulatory changes. They also considered alternative financing for investments. The consultancy coordinated with entities like the Technical Secretariat and SEDAPAL during a week of discussions.

With the support of the Japan International Cooperation Agency (JICA), the Americas program at the Center for Strategic and International Studies (CSIS) conducted an evaluation of hydrogen and geothermal energy development across five countries in Latin America. As part of this project, K&M contributed specifically to the geothermal energy development component, focusing on three countries: El Salvador, Costa Rica, and Peru.

K&M undertook the task of producing a Policy Brief, aiming to identify past and existing bottlenecks, potential risks, inherent advantages, and future opportunities pertaining to geothermal energy development in El Salvador, Costa Rica, and Peru. The Policy Brief served as a comprehensive document outlining the findings and recommendations for various stakeholders, including governments within the region, multilateral organizations, official development assistance agencies, the private sector, and other relevant entities that emerged throughout the research process. The aim was to provide actionable recommendations to support and facilitate geothermal energy development in the region.

The World Bank, as part of an ongoing program to support SEDAPAL in improving its operational and commercial performance, hired K&M to provide support in strengthening SEDAPAL’s financial performance. As part of their assignment, K&M supported SEDAPAL through workshops aimed at developing an action plan to enhance the organization’s financial management. This action plan had been formulated as terms of reference for contracting services financed by a World Bank loan and had constituted one of the components of Component 2 of the Program.

K&M’s scope of work included the following:

1. K&M conducted a desk review of at least three years of SEDAPAL’s financial statements. This review involved analyzing the financial performance and trends over the specified period.
2. An analysis of key financial indicators and their benchmarking across other water utilities in Latin America had been carried out by K&M. This analysis allowed for a comparison of SEDAPAL’s financial performance with similar entities in the region.
3. K&M conducted an analysis of the current tariff structure employed by SEDAPAL. This assessment aimed to identify any areas for improvement in terms of revenue generation and cost recovery.
4. Recommendations for the enhancement of SEDAPAL’s financial management had been developed by K&M. These recommendations included strategies and measures to improve financial planning, budgeting, and reporting.
5. Materials and analysis results had been prepared by K&M for the client through virtual workshops. These workshops facilitated discussions and knowledge sharing to support the implementation of the action plan.
6. Additionally, K&M contributed to the creation of part of the project appraisal document (PAD). Their input had been included either in the main text or as an annex, describing SEDAPAL’s areas of financial improvement and the corresponding recommendations.

A confidential US client which provides debt and/or equity financing to power projects engaged K&M to perform a commercial due diligence review to support a loan transaction for the Inkia generation portfolio.

A confidential US client which provides debt and/or equity financing to power projects engaged K&M to perform a technical due diligence review. The technical due diligence review was for a transaction where the confidential client is providing debt financing to a holding company which has power assets in Peru and Guatemala.
For the assets in Peru, K&M performed a due diligence review of seven power plants including one gas turbine combined cycle power plant with capacity of 871 MW, three gas turbine simple cycle power plants with combined capacity of 1093 MW, and three hydropower plants with combined capacity of 933 MW. K&M reviewed operating and maintenance records, upgrade and expansion plans, inputs to the financial model, and identified major technical risks.
For the distribution company in Guatemala, K&M reviewed available information on conditions of the assets, historic operation data and key performance indicators including losses, collection rates, and service interruption statistics. K&M also identified major technical risks that could impact the company’s performance and financial projections.

K&M conducted a feasibility study for the proposed 95-150 MW Shougang Hierro Peru(SHP) power project at San Nicholas. K&M evaluated power generation alternatives to determine the most cost-effective means of meeting SHP’s future energy requirements. The evaluation considered installation of additional generating capacity on land owned by SHP at its Marcona, Peru iron ore facility. It included a review of the expected future energy demand by SHP and a review of the potential for selling excess energy production into the electricity market in Peru. It also compared several alternative generation technologies, various fuels including Orimulsion and sizes of plants by evaluating their overall life cycle costs.

K&M assisted the Ministry of Energy and Mines to identify viable project and institutional structures to attract private sector participation in the $205 million San Gaban II hydroelectric project. San Gaban is a 100 MW, high head (644m net) hydroelectric project and includes the construction of 160 km of new 138 kV transmission line. K&M assisted the Government to find the most viable project structure and sources of investment which included up to $140 million in funds from the Export-Import Bank of Japan. Specific considerations were given to private sector purchase of existing public sector assets, long-term lease to the private sector for O&M, and development of a BOO facility by the private sector.

K&M is carrying out a rapid review of a US$1 billion capital investment program for Sedapal, the water and sanitation utility that provides service to Lima. The government of Peru is attempting to implement a PPP transaction to expand water supply and coverage in Lima (the “Project”). The objectives of the project are to increase coverage to an estimated 1.8 million unserved people in eight districts in Lima and improve the quality of service for another 1.8 million inhabitants in an additional six districts.
The World Bank contracted K&M to develop a financial model of Sedapal, assess the impact of the proposed project on the finances and tariffs of Sedapal, provide recommendations to the World Bank and the Government on financing the proposed project while minimizing increases of Sedapal’s tariffs, and recommend ways to prioritize Sedapal’s overall capital investment plan.

K&M has been engaged a European-based private equity firm to analyze renewable (and possibly gas) energy investment opportunities in six Latin American countries. For the first phase of the engagement, K&M analyzed each country’s energy sector in terms of market fundamentals, market design and regulation, access to PPAs, risk, level of competition, and return dynamics, and then evaluated each market based on the client’s investment criteria. K&M then presented its market conclusions and recommendations to the client. For the second part of the engagement, K&M performed a deeper-dive assessment of the two countries with the highest investment potential for the client and designed potential entry strategies. This phase also included identification of particular project investment opportunities consistent with the client’s criteria. The conclusions were presented to the client.