Mobilizing Finance
Stable and Predictable Financing Mechanisms for
water service providers at all levels
Meera Mehta
Water and Sanitation Program – Africa
New York, June 2006
Outline
1. Global trends – and the nature of financing challenge…
2. National level – Financing mechanisms and tools for
improved sector governance – SWAps and Sector
Programs
3. Municipal and local level – Financing mechanisms and
tools to facilitate leveraging local resources
2
The Hope in 1990s…
Worldwide interest in cross border private sector infrastructure
investments… So… the private sector will “fill the gaps”…
And the Realities…
Financing flows into water in 2000
Public is dominant ~85%
80
60
international
domestic
40
20
Total (international) private
investment in infrastructure in
1990-2002 - sector and region
200
0
East Asia and Pacific
public
private
Europe and Central Asia
150
Latin America and the Caribbean
Middle East and North Africa
100
Domestic is dominant ~ 85%
South Asia
Sub-Saharan Africa
50
0
Energy
Source: Adapted from Ginneken M. 2003: Presentation at Pan African water Conference
Telecom
Transport
Water & Sewerage
3
Finance Requirements and Gaps
To meet the MDGs…
 Varying estimates depending in assumptions related to
status, service standards and existing financial flows
 Rigorous estimates and scenarios lacking for urban
water supply and sanitation
In general, many stakeholders argue the need to
“double the aid flows”
4
In the new millennium – 2000s:
A Plea for Aid Resources, and risk mitigation…
 Camdessus and Gurria Panel Reports
 “There is widespread agreement that the flow of funds for water
infrastructure has to roughly double…”
 Also places emphasis on risk mitigation measures for private sector
investments
 Sachs Report - UN Millennium Project
 “The report says the MDGs can be achieved if total annual
development assistance is doubled to $135 billion—or 0.44 percent
of donors’ GNP—in 2006, and rises to 0.54 percent of donors’ GNP
by 2015. “(The Economist)”
5
But, the MDGs are not simply about
“providing more WSS infrastructure”…but
about “ensuring good services”…
 Services that are reliable
 Services that well targeted and are actually used
 Services that are sustainable – institutionally,
financially and environmentally
6
What then is the financing challenge ?
Not only “investments for more infrastructure”
But, also “financing improved WSS services”…
Not only “increased coverage”
But, also “increased / affordable access for the poor”…
Not only “doubling the aid”
But, also “leveraging additional ‘local’ resources”…
7
And, to meet this challenge
Stability and predictability in financing are
essential for this…and can be achieved by
 Improving effectiveness in the use of public (and
aid) resources through improved water and
sanitation sector governance
 Leveraging additional local resources – for urban
utilities and small community-managed water
service providers – linked to improved and
sustainable water and sanitation service delivery
8
Outline
1. Global trends – and the nature of financing challenge…
2. National level – Financing mechanisms and tools for
improved sector governance – SWAps and Sector
Programs
3. Municipal and local level – Financing mechanisms and
tools to facilitate leveraging local resources
9
SWAp and PRSC in Uganda
 Poverty Reduction Strategy Credit used to fund the
RWSS sector in Uganda through budget support
 Under SWAp Rural Water Supply uses demand
responsive approach (DRA) with decentralized
implementation through district governments
 PRSC with decentralization and DRA has enabled:
 Increased participation in planning at lower levels of
government
 More cost effective technologies being selected
(protected wells)
 Increasing levels of district level disbursements
10
Using SWIFT to Improve Sectoral Allocations
 Sectorwide Investment and Financing Tool (SWIFT)
has been developed by WSP-Wf to assist countries to
assess policy options for ‘sector financial viability”




Sector development costs
New investments
Rehabilitation/ replacement of assets
Operations and Maintenance
 Develop formula based allocations for rural water
supply finance in Zambia and support analysis of
SWAp in Mozambique
 Development of allocations mechanisms under
emerging sector decentralization reforms in Kenya
11
But, there may be considerable country level variation
Expenditure to meet the MDG water target as a share of GDP – 2002
Increasing GDP/capita
Rethink service standards?
Rethink allocation principles?
Higher standards possible?
Increasing GDP per capita
From Mehta, Fugelsnes and Virjee: Financing the MDGs on water and sanitation: what will it take? WSP-AF, 2004.
12
Using SWIFT to Improve Sectoral Allocations
2,500
Service Delivery Requirements
2,000
Service Delivery Availability
Financing Gaps
1,500
1,000
500
n
th
er
N
or
or
ia
Va
lle
y
N
.
R
ift
.
L.
Vi
ct
or
ia
S
st
Vi
ct
L.
Ta
na
C
oa
(1,000)
At
h
(500)
i
-
13
What does it take to have successful
SWAps and Sector Programs?
A conducive environment for reform
 Lead role by national ministries of planning and
finance and good coordination by WSS linked
ministries
Role of development partners
 Support, recognition and legitimacy to countryowned PRSP and MTEF processes
 Support capacity building and development of
tools for sector programs
14
Outline
1. Global trends – and the nature of financing challenge…
2. National level – Financing mechanisms and tools for
improved sector governance – SWAps and Sector
Programs
3. Municipal and community level – Financing
mechanisms and tools to facilitate leveraging of local
resources
15
Potential Leveraging Opportunities
 To tap the domestic finance markets for additonality
and improved effectiveness of investments
 Continued emphasis on cost recovery in the water
supply sector makes this possible
 Market rigour helps increase sustainability
 Ensure that these approaches also contribute to
further development of the financial sector itself
 For example, new business lines in water projects
for micro-finance and domestic finance institutions
16
Two Market Segments
Small water (and sanitation) service
providers – community managed and small private
local providers – funded through ‘micro-finance’ by
developing a business line in small water projects
Medium to large utilities – urban centers and
small towns – possibility of funding though
intermediation (domestic financing institutions) and
direct market access (bonds or equity )
17
Micro-finance and OBA Pilot Project in Kenya
 Community-Managed Piped Water Projects (CWPs) in
rural/peri-urban areas
 Rehabilitation/augmentation of existing projects
 New/greenfield projects
 Key Innovations
 Use of market based microfinance to pre-finance
community-managed infrastructure
 Risk sharing by Community Water Projects and CWP
employed Project Engineer
 Planned scaling up in Kenya and other countries
18
Revised Community Project Cycle
PROJECT STAGES
Community water project submits required
documents to meet the eligibility requirements
1
Eligibility
2
Assessment
3
Loan Appraisal
Finance institution appraises loan application;
Athi WSB signs a Service Provision Agreement
4
Implementation
Project construction assisted by construction
project manager
5
Post
implementation
Independent assessment of project viability by
support organization
Business development services support
project operations and strategic planning
19
What does it take to have microfinance
lending for small water projects?
 Sector reforms to ensure
 Legitimacy for small water providers
 Policy framework that provides “financing space”
 Regulatory framework to ensure risk mitigation
 Reasonably well-developed MFI sector – and a key
‘credible’ partner
 Public resources to support initial high transaction
costs, develop credit assessment tools and address
affordability concerns due to financial market
constraints
20
Linking Utility Creditworthiness with Reforms
External Environment
 Regulatory framework and
authority to set tariffs
 Legal form, ownership and
degree of autonomy
 Predictability of inter-

Assessment of
Utility’s
Bankability



governmental transfers


 Level of development of the
domestic financial sector
Required
External Reforms
Benchmarking and
Peer Comparison
Explore Credit Enhacement
Internal Environment
Management capacity/
quality, including utilization
of private sector
Human resources
Customer orientation
Strategic planning and
budgeting
Financial aspects
Operational performance and
service delivery
Required
Internal Reforms
21
High
Assessing country potential – An illustration
Macro, financial sector development
Mexico
India
South Africa
Senegal
Philippines
Viability of water utilities, municipalities, small service providers
(Note: country positions on chart are illustrative only)
Adapted from IFC – Municipal Fund presentation to the SAR Decentralization, May 2005
High
22
HIGH
Russia – borrowers:
Capacity building
Maturity of the
financial
markets and the
macro
environment
LOW
China urban
Stimulate market growth – support
Capacity
building
–
business planning, tariff setting, TA
transactions, develop a transactions
borrowers
India advice market, domestic
South Africa
credit
Ethiopia
Remove institutional overlap @ local
enhancement (guarantees)
Peru institutional
level Reform/
Sri Lanka
development
(local) – Information
Reform non-market based instruments
Ghana
Supportiedevelopment
of market-based
use of SSIPs
sharing –Continue to enhance utility performance
intermediaries
Development of
Senegal
Consumer voice and
benchmarking,
Kenya
Urban
financial
dialogue
credit
intermediaries
China Rural
DialogueZambia
between bankers andassessment,
utilities
ReviewPolicy
policy reform/
constraints and launch/
Transaction support
policy dialogue
WSICA supportinstitutional
Columbia
Capacity building – TA, performance
development
Bolivia
Tanzania
management contracts
Support development of transparency,
Financial
market
Brazil
dialogue
and
democracy
Strengthening regulatory environment
enhancement
Mozambique
Increase pool of funds – long term
Pilot transactions – “cherry picking”
supporttotal),
bonds,Transaction
guarantees (partial,
Cambodia
“new” MDF models with private sector
pension funds
Angola
LOW
Maturity of sub-sovereign/ WSS utility
borrowers
HIGH
23
What is needed to leverage local resources?
Facilitating domestic market borrowing
 improving utility creditworthiness through
improving internal management and external policy
 benchmarking utility performance and credit rating
 Credit enhancement mechanisms for risk mitigation
 Greater interaction and common vocabulary among
players in the water and financial sectors –
commonly understood credit assessment tools
 By addressing supply side constraints (development
of bankable opportunities)
24
Thank You
25