#insights

Due diligence (hereinafter, DD) is an audit on an asset that determines its value at a given time and in specific circumstances.

DD involves researching the condition of the asset to value it against an investment, prior to signing the contract and establishing the financial terms.

DD is usually performed by financial institutions, banks or individuals and administrations when acquiring certain assets and/or obligations, or when granting loans or financing certain transactions.

Design and construction

In the case of water treatment facilities, DD might be required because the owner or contractor needs to finance the design and construction of the facility, insofar as the return on investment tends to be linked to the price of sale of the treated or produced water in the years after the investment is made, a model known as BOT (Build-Operate-Transfer) or BOOT (Build-Own-Operate-Transfer).

With these models, the future operator usually finances the project and construction based on the terms of the contract for the future operation of the water treatment plant. For this reason, the financial institution usually arranges technical DD based on establishing the suitability of the design of the facilities and the future sale (linked to operation and maintenance of the facility), which will be the basis of the repayment and redemption of the entire financial transaction.

The inspections and assessments of technical DD reveal any potential hidden costs, so investors are confident about the actual value of the facility.

Technical DD verifies that the design of the infrastructure meets applicable standards and regulations, and that the calculations are performed correctly in accordance with applicable regulations and codes. It also verifies the correct estimate of costs, planning of the work and determines possible risks associated with subsequent overruns in the construction and commissioning of the facilities.

Asset transfer

There is a second situation where technical DD is usually performed. This happens when, after the years established in the original BOT/BOOT contract have elapsed, the facilities are transferred to the original administration, a process known as an asset transfer.

In this case, technical DD verifies the current condition and value of the facilities to be transferred. It requires a review of data relating to operation and maintenance, carried out over the years from the time the plant was built.

The inspections and assessments of technical DD reveal any potential hidden costs, so investors are confident about the actual value of the facility.

Valuation of the facilities

In the case of BOT/BOOT, the technical valuation corresponds to a detailed review of the project, an assessment of the detailed engineering by the construction contractor and its adjustment, both as an economic valuation reflecting market prices, and in terms of its technical adjustment to calculations, designs, specifications and planning.

In the second case, the valuation is based on verification of the maintenance performed during the plant’s years of operation and on the correct operation of the associated equipment and facilities, with the current condition of the plant assessed in accordance with its life cycle.

The inspections and assessments of technical DD reveal any potential hidden costs, so investors are confident about the actual value of the facility.

Sener and the Water Technologies team have extensive experience in both types of DD and in different geographical regions. For example, although Sener has extensive experience in this field, technical due diligences have been carried out for three wastewater treatment plant operators with their corresponding sanitation networks in Califa, in Córdoba (Colombia); the aqueduct and sewerage system of the city of San José de Cúcuta (operated by Aguas Kpital Cúcuta); both projects for Aqualia; or the desalination plant in Carlsbad, in California (USA) for Infrata.

The final report carried out on projects like these includes a detailed risk analysis (red flags), which includes the definition of each of the risks associated with the facilities and technical equipment, either during the design and construction phase, or during the operation and maintenance phase, describing the possible consequences of this risk as well as the recommended mitigation measures.