Mobilizing Finance Stable and Predictable Financing Mechanisms for water service providers at all levels

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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

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Outline

• Global trends and the nature of financing
  challenge
• National level Financing mechanisms and tools
  for improved sector governance SWAps and Sector
  Programs
• Municipal and local level Financing mechanisms
  and tools to facilitate leveraging local
  resources

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The Hope in 1990s

• Worldwide interest in cross border private sector
  infrastructure investments So the private
  sector will fill the gaps

And the Realities
Source Adapted from Ginneken M. 2003
Presentation at Pan African water Conference
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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

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In the new millennium 2000sA 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 billionor 0.44 percent of donors GNPin
  2006, and rises to 0.54 percent of donors GNP by
  2015. (The Economist)

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But, the MDGs are not simply about providing
more WSS infrastructurebut about ensuring good
services

• Services that are reliable
• Services that well targeted and are actually used
• Services that are sustainable institutionally,
  financially and environmentally

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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

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And, to meet this challenge

• Stability and predictability in financing are
  essential for thisand 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

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Outline

• Global trends and the nature of financing
  challenge
• National level Financing mechanisms and tools
  for improved sector governance SWAps and Sector
  Programs
• Municipal and local level Financing mechanisms
  and tools to facilitate leveraging local
  resources

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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

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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

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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.
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Using SWIFT to Improve Sectoral Allocations
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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
  country-owned PRSP and MTEF processes
• Support capacity building and development of
  tools for sector programs

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Outline

• Global trends and the nature of financing
  challenge
• National level Financing mechanisms and tools
  for improved sector governance SWAps and Sector
  Programs
• Municipal and community level Financing
  mechanisms and tools to facilitate leveraging of
  local resources

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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

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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 )

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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

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Revised Community Project Cycle
PROJECT STAGES
Community water project submits required
documents to meet the eligibility requirements
Eligibility
1
Assessment
Independent assessment of project viability by
support organization
2
Loan Appraisal
Finance institution appraises loan application
Athi WSB signs a Service Provision Agreement
3
Implementation
Project construction assisted by construction
project manager
4
Business development services support project
operations and strategic planning
Post implementation
5
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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

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Linking Utility Creditworthiness with Reforms
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Assessing country potential An illustration
High
Macro, financial sector development
Mexico
South Africa
India
Senegal
Philippines
High
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
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Capacity building borrowers business
planning, tariff setting, TA Remove institutional
overlap _at_ local level Support development of
market-based intermediaries
Stimulate market growth support transactions,
develop a transactions advice market, domestic
credit enhancement (guarantees) Reform non-market
based instruments Continue to enhance utility
performance
Dialogue between bankers and utilities Capacity
building TA, performance management
contracts Strengthening regulatory
environment Pilot transactions cherry
picking new MDF models with private sector
Review policy constraints and launch/ support
policy dialogue Support development of
transparency, dialogue and democracy Increase
pool of funds long term bonds, guarantees
(partial, total), pension funds
LOW
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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)

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• Thank You