“Innovative approaches to financing water and electricity in
developing countries”
Presentation prepared for
Multi-stakeholder Consultation on
“Financing for Development in Asia and the Pacific”
Organized by ADFIAP in cooperation with FfDO (Bangkok, Thailand, 17 December 2007)
Daniel Platz
Economic Affairs Officer
Financing for Development Office
Department of Economic and Social Affairs
United Nations
Overview (I)

More than one billion people in the world today live
without access to clean drinking water, about 2.6 billion
people do not have access to basic sanitation and nearly
1.6 billion lack access to electricity (UNICEF 2005, IEA
2006).

The total cumulative investment required for electricity
to achieve the MDGs in Sub-Saharan Africa alone is
estimated at US$46 billion between 2003 and 2015
(IEA, 2004).
Access to electricity by region
Access to improved drinking water sources
by region and segment of population
Access to improved sanitation facilities by
region and segment of population
Overview (II)


For water and sanitation, the domestic public sector provided
nearly 65%, while the domestic private sector provided 19%
of the total, multi-lateral and bilateral donor funds provided
12% and the international private sector just 5% of funding
(Fonseca & Cardone, 2004).
As a starting point, it is therefore important to realize that
the overwhelming majority of utilities in the water and
electricity sectors of developing countries remain in public
hands and continue to rely on domestic funds. The discussion
should therefore put emphasis on the immediate financing
challenges public utility providers are confronted with in
funding and improving their services.
Overview (III)

This does not imply that market mechanisms are not
important. In order to finance capital expenditures that
cannot be funded through current revenues or fiscal
transfers, the utility provider must take into account all
appropriate options, whether market-based or not.

Once finance is raised, the utility has to generate its own
“internal” revenue to pay off its debt and finance recurrent
expenditure. At the same time, if full cost recovery cannot
be achieved, the utility will depend on “external” sources of
funds such as tax revenue and transfers from the
government.

Any sustainable strategy to improve access to basic utilities
for all must therefore follow a multi-pronged approach and
focus on improving financing (borrowing) mechanisms as
well as “internal” (cost recovery) and “external” (tax
revenue) revenue generating mechanisms.
Mobilizing investment:
Innovative financing mechanisms
Ensuring sustainability:
Revenue-generating mechanisms
Mobilizing Investment: innovative
financing mechanisms

A cautionary note. “Innovative” financing mechanisms are
not a panacea. Their potential for success depends on the
depth of the local capital market, the local economic and
social environment and the viability of the utility itself.

Important to remember that loans have to be repaid,
usually with substantial interest. Foreign exchange risk
occurs in cases where the loan is denominated in foreign
currency and revenues are collected in local currency.

Nevertheless, it can be instructive to take a closer look at
some innovative financing approaches at the municipal and
community level. Depending on the local context, some of
these experiences may be at least partially applicable in
other settings.
a. Innovative municipal financing mechanisms in
South Africa and India (I)

In 2002, Johannesburg experienced a capital
expenditure backlog of R8 Billion (1,077,215,884.24
USD) with significant adverse impacts on investments
in electricity infrastructure and water provision.

In order to generate new funds the city decided to
prepare the issuance of two institutional bonds to be
financed out of operational surpluses from water and
electricity revenues.

The following steps were important in establishing the
bonds: establishing the City Treasury; embarking on a
study tour to Mexico to learn about best international
practice in municipal bonds; eliciting political support
for the move and developing a 10 year financial plan.
a. Innovative municipal financing mechanisms in
South Africa and India (II)

In India, municipalities have come together in pooled
financing schemes that can helped diversify risk and
enabled less creditworthy municipalities to tap the
capital market.

The Water and Sanitation Pooled Fund (WSPF) is a
common financing arrangement of fourteen
municipalities and towns in the Indian state of Tamil
Nadu.

With a 15-year tenure, it is the first successful bond
issue of its kind outside of the U.S., using a pooled
financing structure for financing water and sanitation
projects of small and medium municipalities.
Number of cities, states and municipally owned corporations in
low and middle-income countries that are rated by at least one of
the three major credit rating agencies
LOW INCOME ECONOMIES
13
India
LOWER-MIDDLE-INCOME ECONOMIES
1
Bolivia
5
1
1
1
1
3
1
4
Brazil
Bulgaria
Colombia
Ecuador
Jordan
Kazakhstan
Thailand
Ukraine
UPPER-MIDDLE-INCOME ECONOMIES
6
Argentina
1
Croatia
18
Czech Republic
1
1
1
Estonia
Hungary
Latvia
7
Malaysia
165
Mexico
20
Poland
2
Romania
39
Russian Federation
19
Slovak Republic
4
7
South Africa
Turkey
0
20
40
60
80
100
120
140
160
180
d. Improving actual and perceived creditworthiness

Perceived creditworthiness is critical for the cities and
states abilities to raise finance, whether it is through
bond or bank lending.

With the exception of Mexico, the overwhelming
majority of cities and states in developing countries
have not been rated by Standard & Poor’s, Moody’s
Investors Service and Fitch Ratings.

One strategy to overcome this gap could be to promote
linkages between local and international credit rating
agencies.
b. Innovative community financing in Ghana

Issuing bonds is, however, not a practical option for municipalities
in most low-income countries with shallow capital markets.

Local mechamism: Upper East Region of Ghana women have
developed a so-called "susu" group (an informal savings scheme)
to pool resources.

Regular collection of fixed amounts of money from people
participating in the arrangement. The collected amount is paid out
as a loan for productive ventures for one person at a time until
each member is served.

The collected interest of these loans together with water levies
and other income sources is ploughed back into the susu fund,
which is used for maintaining and operating the water handpumps
in the region. Variants of scheme exist in other developing
countries.
c. Output-based aid (OBA) in Cambodia

OBAs are performance-based subsidies designed to
better target the poor by identifying who will benefit,
the types of activities that qualify for the subsidy, and
how much subsidy will be provided

In Cambodia, 8 firms were invited to participate in an
international competitive bidding process for the first
batch of a $3.1 million OBA grant to supply water to 4
towns. Under the OBA arrangement, service providers
were obligated to connect any household within their
service areas that requests a connection.

The results of the OBA approach in Cambodia still
have to be assessed. However, common sense would
suggest that a good regulatory environment and
corporate transparency appear to be critical for a
successful OBA arrangement.
Mobilizing investment:
Innovative financing mechanisms
Ensuring sustainability:
Revenue-generating mechanisms
Ensuring sustainability: revenue-based
mechanisms

An effective collection system of taxes and user
fees provides the basis for sustainable revenue
generation.

It is vital to strengthen capacities of utilities to
help ensure efficiency, effectiveness,
transparency, accountability and sustainability.

Whereas full cost recovery seems unrealistic for
most utility providers in developing countries,
many utilities have gone a long way in improving
efficiency of their operations.
a. Increasing efficiency in cost recovery in Uganda

As of 1998, the operational efficiency of the old
Ugandan National Water and Sewerage Corporation
(NWSC) was low.

A reduction in administration and overhead costs, a
stricter appraisal of capital projects and a
simplification, rationalisation and indexation of tariffs
led to major operating efficiency gains and resulted in
significantly increased coverage.

Cross-subsidies were applied across customer groups
and across areas by application of a uniform tariff. At
the same time, disconnecting users from their
services upon non-payment could be avoided.
b. Capacity building and technical assistance through
partnerships

There is a need to strengthen technical, financial,
managerial and institutional capacities of water utilities,
including utility operators and regulators.

The emerging consensus seems to be that capacity
building programs should focus on educational training,
monitoring of research and forecasting, legislation and
regulation as well as finding sustainable financing
mechanisms for infrastructure investments.

Developing partnerships mechanisms between utility
operators, such as the Global Water Operators
Partnership mechanism (WOP) recently initiated by the
UN System can help improve the performance and
effectiveness of utilities on a on a regular but not-for
profit basis .
c. Increasing budgetary allocations to water and
electricity




In order to immediately increase access to basic
utilities to the poor, allocations for utilities from
national, state and municipal budgets must increase.
Increasing budgetary allocations to these sectors is a
joint responsibility of the developing and the
developed world, particularly in low-income countries.
Governments should reevaluate fiscal constraints at
the sovereign and sub-sovereign level as to whether
they unnecessarily limit much needed investment in
infrastructure.
At the donor level, ODA falls far short of what is needed.
Overall, ODA rose to $106.5 billion in 2005 or 0.33% of
GNI of developed countries. However, in 2006, ODA
decreased to 0.30 per cent of GNI.
THANK YOU!
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