11 th November 2011
Bernadette Njoroge WASREB

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Tariffs charged by water utilities – usually able to cover operation and maintenance
Taxation- money raised from the public from the Treasury which is directed to utilities through the ministry of water and irrigation
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Used for capital development of assets in the urban and the rural areas
May not be sufficient for all as it is competition for resources with other sectors
Allocations based on political decisions and not on evaluation of need or on demonstration of performance
Disbursements not coherent leading to absorption problems
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Transfers- from development partners on a multilateral or bilateral basis usually dedicated to fund specific projects and money provided on specific times
Takes time to prepare , design and finally disburse
Deals mainly with the central government and not lower level
Specialised skills needed to manage and implement the project

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Over reliance on central government
Weak governance structures at lower levels of government
Weak capacity in project preparation
Weak capacity in business development
Weak culture of cost recovery – low cash flows Water services sector deemed high risk low return
Weak /overlapping legal and institutional frameworks that govern the business
Lack of sufficient cash flows to cover costs
Achieving sustainable cash flows the 3Ts have to be bridged by attracting repayable finance.
Repayable finance can be debt finance in the form of loans
, bonds issued through capital markets and project finance
Equity finance – can be listed or non listed equity

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Innovative finance – shift from who can provide finance as well as how finance can be supplied and demanded.
Innovative finance moves beyond central government and development partners to national NGOs , local banks , financial intermediaries , private investors
Innovative finance moves from capital works development to other areas for operational efficiency , business development skills , connection fees for the poor and longer term sustainability of the services

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Innovative use of grant finance to stimulate governance reform in utilities at the lower level and improved governance leads to other finance
Using grants to aggregate small scale providers to qualify for larger financing envelopes
Grants have also been used as seed financing for revolving funds
Main objective of blending – it attracts funds that would otherwise not be attracted to a given project while ensuring public policy goals are met

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Democratising borrowers and lenders to wider stakeholders
Creates an incentive for microfinance lenders to penetrate a new market through concessional loans and grants
Suitable for households and Small Scale WSPs
Small scale operators are allowed to borrow from a micro finance institution to expand their assets
Output based aid (OBA) – subsidies are paid based on effective and measurable results by service providers in implementing the project ( example of K-Rep and GPOBA)
May have complexity and high transaction costs
There may be need for pre-financing from the community
– combine OBA subsidies with access to microfinance

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Guarantees- form of risk mitigation that can be used with debt or equity to provide coverage against political , regulatory, policy and sovereign risks associated with projects
Improve the credit of a borrower and may lower cost of debt-
Not used in WSS because of political interference in tariff increase, low cost recovery and governance levels in WSS
Fairly suitable for large projects -
Interfere with a country’s debt ceiling since counter guarantee is required

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Basically this is pooled financing
Accessing finance for a large number of small borrowers with small projects for combined use
Hallmark is the creation of a reserve fund – to mitigate the risk of cashflow problems
Assists small operators to access finances which would not otherwise be available to them
Transfers repayment capacity to the portfolio rather than to individual projects

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This will help strengthen the balance sheet of undercapitalised water operators
Equity will strengthen the balance sheet
And provide sound basis for leveraging additional finance
Investors may swap debt for equity
PSP contracts with equity contributions risk premium built into expected returns does not lead to unfavourable tariff increases

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Preparation of bankable projects in an accelerated manner

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Potential providers of innovative finance are hampered by:
Lack of understanding by lenders and investors
Lack of funds at decentralised level small utilities unable to access market based payable finance
Weaknesses in management and governance systems of decentralised units
Affordability constraints difficult to increase tariffs to cover costs
Short tenor of available financing -
Undercapitalized balance sheets – high debt levels compared to equity
Lack of bankable projects – or poor project preparation capacity
Risk profile and difficulties in managing risks

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Establishing institutions at national level that can channel funds both private or public into the sector in-order to finance small projects using flexible methods
Strong governance and institutional framework in all operators to inspire confidence in an investor
Capacity in project identification and preparation suitable for demands
Use of partnership and aggregation in utilities to enable knowledge and skill transfer and also improve credit history
Change thinking of who can be an investor –
Share experiences on successful innovative financing

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For the credit worthy companies
Regular loans from the commercial banks
Due to the market interest rates it is only good for bridging the gap from 3Ts finance
Comes with its own covenants which have positive aspects and negative aspects
Covenants – contractual restrictions placed on a borrower
Set minimum standards for borrower future conduct and performance
Borrowers with strong credit history attract fewer covenants

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Negative covenants –restrain the borrower from particular actions such as new borrowing, expenditure on unauthorised items
Affirmative covenants – require a borrower to meet certain standards such as discharging license requirements ,providing information , pay taxes
Violation of covenants leads to action by lender which may accelerate loan repayment or lead to penalties or imposition of constrictions in operations

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Operating activity
Investment expenditure
Asset sale
Cash payouts
Financing – limitations on debt or debt like contracts or changes in capital structure
Reporting and disclosure
Preservation of collateral / seniority
Management control and ownership
Going financial concern- liquidity, debt and leverage, cashflow

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Level of operation – town, municipal ,city ,
Size- turnover , number of connections, license area
Degree of corporatisation – does the owner observe arms length principle, professional team running operations or does owner interfere
Credit worthiness depending on cost recovery
Legal status – how valid is the license , what period of time
Collateral – what can secure the loan – can debentures be issued (an equitable charge on the assets for the time being of a going concern)
Potential for cost coverage and surplus
Allowed ambit of operation in regulated sector

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To attract more commercial forms of finance credit worthiness of all WSPs is imperative which means:
Bankable projects
Good governance structures
Recordkeeping of accounts and finances
Demonstrated cashflow
Ability to manage debt
Given cash flows and assets
Stable macro-economic framework