Innovative financing and positioning of the water sector · The financing challenges in the water sector . There are a number of challenges to finance water projects, especially in

Innovative financing and positioning of the water sector A toolbox with practical cases for Aid & Trade and water sector practitioners

Client: Netherlands Water Partnership, Netherlands Enterprise Agency

Final Report

Rotterdam, 10 February 2015

Innovative financing and positioning of the water sector A toolbox with practical cases for Aid & Trade and water sector practitioners

Client: Netherlands Water Partnership, Netherlands Enterprise Agency (Partners for Water Programme) Gerbrand van Bork Hein Gietema Ilse van de Velde Maaike Zwart Rotterdam, 10 February 2015

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GvB/KK NL203-28455

Table of contents

1 Executive summary 5

2 Introduction 13

Part I: Finance 4 Water 17

3 Finance 4 Water: the challenges 19 3.1 Water supply & sanitation 19 3.2 Water safety and water security 20 3.3 Conclusions 21

4 Innovative business models 23 4.1 Scope extension: internalizing revenue streams from other sectors 25

4.1.1 Drinking water and sanitation 25 4.1.2 Water safety: revenues from land development and recreation 30 4.1.3 Water security: a business model capturing benefits for farmers 37

4.2 Improving payment systems 39 4.2.1 Water security: Innovative payment systems 40

4.3 Scaling up 42 4.3.1 Water supply and sanitation: umbrella and regional models 42 4.3.2 Water safety & security: scaling up by multi-stakeholder involvement 45

4.4 Private sector participation 47 4.4.1 Water supply in rural areas: community enterprise models 47 4.4.2 Water supply and sanitation: Public Private Partnership 50 4.4.3 Water safety: Public Private Partnership practices 52

4.5 Conclusions: overall lessons learned 55

5 Innovative financing mechanisms 57 5.1 Blending 58

5.1.1 Trust Funds for drinking water and sanitation in small towns 58 5.1.2 Guaranteed loans and microcredit schemes for drinking water & sanitation 61

5.2 Microfinance for drinking water and sanitation 62 5.3 Crowdfunding platforms 64 5.4 Results based financing 66 5.5 Revolving funds and pooled finance structures 68 5.6 Conclusions: overall lessons learned 71

Part II: Positioning instruments for the water sector 73

6 International practices positioning 75 6.1 Local business platforms 75 6.2 Capacity building for project development & procurement 80 6.3 Local agents and procurement officers 82 6.4 Support to project preparation facilities 82 6.5 Setting up Development Companies 83 6.6 Lessons development banks from other countries 85

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Innovative financing and positioning of the water sector

6.7 Summary positioning and conclusions 87

7 Ongoing cases for positioning 89 7.1 Intervention options 89 7.2 NCICD Jakarta 89 7.3 Co-creation in a strategic program lifecycle approach 93 7.4 Masterplan Beira 96

8 Synthesis, conclusions and recommendations 99

9 Glossary 103

10 Literature 105

11 Interviews held 107

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1 Executive summary

Introduction In this report an overview is provided of interesting cases of innovative business models, financing mechanisms and positioning tools deployed in a range of countries in the water sector. We hope this overview serves as a toolbox for Aid & Trade and water sector practitioners. The aim of this report is to create awareness and to share practical knowledge and cases to all relevant practitioners in the water sector involved in international development: government officials working in the area of Aid & Trade and Topsector Water, embassy staff, companies and NGOs. A selection of these tools will also be presented on the TRAIDwheel website; www.traidwheel.nl. The financing challenges in the water sector There are a number of challenges to finance water projects, especially in developing countries. In short these are: Water supply & sanitation • Insufficient cost recovery, cash-flows & returns; • Weak governance and financial discipline and performance in water utilities; • Limited availability of funds for small scale operators and domestic suppliers; • Return-risk perception private sector; • The large size and long tenure period of finance needed for funding for the required facilities. Integrated Water resources Management and Delta • Insufficient government budgets for the major investments in water management protection; • Lack of returns due to difficulties to create private revenue flows; • Lack of international experience with PPPs for water safety projects and lack of experience with

PPP in many developing countries. Innovations in business models The ways of operating water services is changed by organisational or contracting innovations, extension of scope of services, technical innovations such as IT solutions, etc. Basically the operating concepts change and by these changes additional earnings are realised. The activities as part of these innovations serve to improve the financial feasibility (financial performance, cash-flows) and financial sustainability of water related operations. The changes can be characterized by the following elements: • Scope extension often in relation to technical innovation: by involving other sectors such as

land development and real estate, tourism and recreation, or water to energy innovations in water related projects additional income or new earning models become possible;

• Technical innovations such as waste water to energy or IT solutions are implemented to create additional services or to improve payment mechanisms for water related services;

• Private sector participation: private service models, Public Private Partnership (PPP) arrangements, community entrepreneurship models are introduced in areas where traditionally government or NGO provision or traditional procurement modes were dominant. The increasing number of private arrangements for operating concepts in combination with better financial performance enhances possibilities for more private repayable financing schemes;

• Scaling-up: models where activities are targeted to create larger demand for services and capacity and therefore lower unit costs. This ultimately results in a better financial feasibility and sustainability of the related water or sanitation services.

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For all these elements a number of cases from the international practice have been observed by literature search and interviews and meetings with NGOs, IFIs and donors. An overview of a typology of business models and the identified interesting cases is presented below. Table 1.1 Overview typology of business models

Business model

typology

Main elements Applicability Case

Scope extension: revenues from other sectors

Waste water to energy

and fertilizers (re-use)

and health

Conversion of waste water

and waste to energy and

fertilizer

Creating additional revenue

streams to water

Depending on

regulations, feed in

tariffs for renewables,

market for fertilizer,

entrepreneurship

Financial INclusion

Improves Sanitation

and Health programme

in India (FINISH)

Water safety and land

development, recreation

Revenues from land or

recreation development

used for water safety

Urban areas with

demand for land close

to coast and proper real

estate and land prices

Room for the Rivers in

the Netherlands

NCICD Flood

Protection in Jakarta

Water dunen

Eko Atlantic

Water security: capturing

benefits in agriculture and

microfinance

Reaping benefits in

agriculture for (partly)

financing water harvesting

systems & microfinance to

farmers

Definable direct

benefits Interested and

committed farmers and

microfinance providers

Finance for RaiNwater

(FERN): Sustainable

financing for

Sustainable water

Innovative Payment systems

Improving payment

systems by ICT

Mobile payment systems,

more frequent payments

Increasing billing and

payment rates

Willingness mobile

providers and utilities to

change systems

Mobile payments of

water bills in Kenya,

Tanzania, Uganda and

Zambia

Payment for

Environmental services

Lake Naivasha in Kenya

Grants for TA to small scale

farmers

PES payment system for

companies

In kind payments

Existence of regulations

on water intake

companies

Existing value chain

food- agro companies

Appropriate finance for

Sustainable Water

Management in the

Lake Naivasha Basin

Scaling-up

Scaling up to regional

authorities (case waste

water in Turkey)

Regional water unions Institutional setting,

willingness local

authorities

Inter municipal

cooperation –

(waste)water unions

Multi-stakeholder

involvement and co-

creation of projects

(cases water security in

Zambia)

Involvement of key

stakeholders in the basin

Co-creation of projects or

programs

Interests of key

stakeholders aligned

Strong NGO behind

WWF Basin-level water

stewardship Zambesi

Private sector participation (including PPP)

Community enterprise

models (rural drinking


responsible for water

Small villages, strong

community ownership

Water for peace:

Community Based

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Business model typology


water) service delivery Approaches in Water

Supply Projects for

Multi-ethnic

Neighbourhoods in

Crimea

PPP Availability fee

based models DBFMO

contracts for waste water

treatment (NL) or water

safety (UK)

Lifecycle cost optimizations

Availability fee payments

based upon KPIs

Private financing

Developed

procurement

organisations

PPP expertise private

sector available

PPP availability

payments Waste Water

Treatment

Harnaschpolder

Pevensey Bay Flood

Defence

Broadland Flood

Alleviation

Scope extension from the water sector to other sectors can reap new revenue streams. Examples are water to energy and flood safety in relation to incomes from land development for urban functions or recreation. The income flows from other sectors can (partially) overcome the often lack of good private revenue potential in water projects. However, to grasp these income streams is not always easy. Stable feed in tariffs for renewable energy and proper connections to the energy grid are important issues for water to energy projects. Reaping the revenue streams from urban development often requires setting up more complex Public-Private Partnership (PPP) structures (such as development companies) in order to bundle the water and urban development functions. These PPP structures are often complex in nature and many governments and private bodies in developing countries or Water OS countries lack experience in PPP contracts. This might limit the potential for application of PPP in these countries or might create high risks. Innovative financing mechanisms Traditionally water supply & sanitation, water safety and security have always been regarded as public goods where the government should play a key role. Therefore, subsidies for capital investments or operations and maintenance or NGO grants have been dominant for water related projects in many countries. An increasing number of Funds and water related projects have been observed where grants are combined with loans (or micro-credits) and equity (so called “blending”). Regarding innovations in financing structures the following new types of mechanisms are increasingly observed in the water sector: • Blending grants with repayable finance (loans, equity); • Micro-credit mechanisms; • Guarantees and insurance products; • Revolving funds and pooled bond mechanisms (grouped vehicles); • Crowdfunding platforms; • Output based aid.

We have gathered cases of financing mechanisms from the development practice through literature research, meetings with practitioners and IFIs. An overview of the type of instruments and cases is presented below.

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Table 1.2 Overview innovative funding schemes water sector

Funding schemes Main elements Applicability Case

Innovating financing

mechanisms

Blending trust funds for

drinking water in small

towns

Grants and loans for

water utilities in small

towns

Depending on

regulations and

institutional setting

utilities

Devolution Trust Fund

Zambia

Blending finance at

project level

Subsidies can leverage

commercial finance

Grants necessary for first

losses, TA: promotion,

upscaling etc.

Willingness

commercial banks to

enter market

Maji Ni Maisha: Innovative

Finance for Community

Water Schemes in Kenya

Microfinance for water

and sanitation

Micro-credit scheme Micro-finance for sanitation

in Bolivia, Guatemala, India,

Malawi, Peru, Rwanda

and Uganda

Crowdfunding Funding provided through

internet crowdfunding

platform

Grants from public

Communicable projects to

audience

Small easy to

communicate projects

Crowdfunding: Safe water in

Umuonye, Southeast Nigeria

Results Based

Financing

Output based Aid

(Worldbank)

Grant based upon

incentives for delivery

Deliverables of projects

should be measurable

Improving irrigation in the

North China plain

Revolving Fund

structures and pooled

financing vehicles

Funding through an SPV

Hydrobonds issued

Longer term maturity

provided

Financial sustainable

private water

companies

InnovFin (EIB)

US Bond Banks

The most important trend here is the increasing use of blending arrangements. Blending of grants, guarantees with loans or micro-credit schemes is both at the project level, but also at fund level are observed. Important lessons relate to optimal risk allocations and the need use also grants to promote and scale up the schemes. Important observation is that Worldbank, EU & EIB Trust Funds and KfW seem to be first movers in this area. Although there are some blending projects undertaken by Netherlands partners (with DGIS funds), overall Netherlands financing instruments are not ideally geared towards blending. Another observation is the upcoming use of revolving fund structures. Revolving funds basically need projects or utilities which are credit worthy and can repay loans or generate dividends on equity. By pooling projects or utilities risks can be spread and transaction costs can be decreased. This is especially important for smaller projects or smaller utilities in the water sector, where transaction costs for banks are high. The applicability of these funds is most of all relevant for projects or utilities which are profitable (can pay interest and can repay loans). This is often more the case in developed countries and in the drinking water and industrial waste water sector. Revolving fund structures are less easily applicable in developing countries or for the other water subsectors. In order to introduce revolving funds in typical water OS or Water Mondiaal countries and WASH sector addition of grants or guarantee funds to these structures will be essential.

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Moreover, in case of pooled funds used to attract capital market resources, an assessment of the maturity of bond and equity markets in developing countries is crucial. Positioning instruments The report presents a range of types of positioning instruments which can be used to promote the Dutch water sector in the target countries. The instruments vary from low risk, low commitment capacity building until sponsorship of full fledged development companies and concessional financing instruments. The aid to trade agenda and policies could make use of this toolbox and identify for which subsectors and countries which instruments are most suitable. Interesting to observe is that the Dutch water sector makes intensive use of low risk, soft positioning instruments such as capacity building and networks or business hubs, but very low use of higher commitment, higher risks instruments such as concessional financing or sponsorship of development companies. Table 1.3 Overview of potential positioning instruments water sector

Instrument for

positioning

Advantages Disadvantages Case

Capacity building • Building up trusted

advisor position;

• Clear presentation

of NL expertise;

• Low financial risks.

• Low commitment of

host country

institutions for follow-

up projects (risk);

• Potential conflict in

case of support to

tenders.

• Capacity building:

Matra South Water

Management training.

Project development facility

• Direct influence over

project development

in host country;

• Commitment for

projects of host

country institutions.

• Potential conflict of

interest for companies

involved for tenders.

• Kalangala

Infrastructure

Services Project,

Uganda.

Appropriate local network structures:

High level advisory

platforms and/or Centres of Expertise

and/or business

support centres.

• Direct involvement

of local companies;

• Possibilities for

networking and

matchmaking with

NL companies;

• Possibilities for

mutual project

development and

business

development.

• Low commitment of

government

institutions in host

country;

• High running costs;

• Sustainability risk.

• Centre of Expertise

(CoE) South Africa

(SA).

Local agent or

representative • Knows potential

local clients and

local sector well;

• Can serve for

market intelligence

and sales agent

purposes.

• Knowledge and

commitment to NL

sector?

• Companies often use

local representatives

for business

development

Local procurement

officer • Direct influence over

procurement

process;

• Possibility for

• Risk of conflict of

interest.

-

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Instrument for positioning


success fee

incentives.

Local Community

Enterprise • Placement outside

government:

institutional building

and bringing in

professional

management for

urban development.

• High costs of building

an institution;

• Government needed:

how to ensure the

collaboration.

• Water for peace:

Community Based

Approaches in Water

Supply Projects for

Multi-ethnic

Neighbourhoods in

Crimea.

Development company

(special purpose vehicle

for urban of infrastructure

development)

• Professional project

development and

management;

• Private incentives –

less delays or

problems;

• Direct influence over

procurement and

when private direct

contracting possible;

• More optimal risk

allocations and

potential for revenue

sharing.

• High transaction costs

and costs of

sponsoring (equity);

• Higher risks (equity);

• In case of PPP joint

venture: collaboration

issues with

government.

• NCICD Flood

Protection in Jakarta.

Concessional

infrastructure financing

instrument (grants &

concessional loans to

governments, equity)

• Potential to offer a

package of

services/products,

studies and finance;

• Better competition

possible to Chinese

and Koreans.

• For major projects

large funding

resources necessary;

• Risks on government

balance?

• Korean Development

Bank.

Positioning cases of Flood safety Jakarta Indonesia and Beira Mozambique By looking at two ongoing cases: Flood protection in Jakarta and development of Beira Mozambique some issues in the Dutch instruments are highlighted. First of all it is advocated that a more strategic program cycle and value chain approach could be used for positioning, starting at the beginning of such positioning efforts. Program phases from masterplanning, feasibility, design, procurement and implementation and operation should be assessed in connection and interest and strengths of Dutch players could be assessed from the start. Secondly it is shown that current Dutch financing instruments are not well geared towards this types of projects where often equity or loans (or concessional loans to governments) for larger scale infrastructure projects are needed.

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Conclusions In short the analysis and report results in a number of key conclusions: • The water sector is evolving towards other sectors. Technological innovation and scope

extension foster the development of innovative business models with revenues from these other sectors (energy, urban development, agriculture). The water sector is opening up to more private sector participation and PPPs. Public Private Partnership is on the rise in the water sector. Traditionally PPP has been starting in the drinking water sector (especially in Australia, South Africa etc.). In waste water and (more limited) in flood protection PPPs are more recently introduced. PPP projects are however more complex by nature compared to traditional contracted projects and the applicability of these concepts might differ over the countries and subsectors. Availability payment based PPP schemes might be difficult in many developing and emerging countries because of lack of experience with PPP contracts, absence of multi-annual budgeting in governments and high political risks;

• Blending of financing instruments is a key trend in international financing of the water sector, both at institutional level and at project level. Current Dutch financing instruments are not yet well geared towards blending with other financial products (equity, loans etc.) or resources (donors, IFIs);

• The Netherlands water sector currently uses a limited set of different positioning instruments for promotion of the water sector (mainly capacity building and network structures). Other countries such as Korea, Germany etc. use concessional financing instruments for positioning and often blend with grants from development agencies. There is currently in the Netherlands no adequate instrument available for sponsoring large scale infrastructure development companies (equity, loans, grants). Moreover, project preparation facilities are set-up by EU-EIB and others, but are not used by Netherlands agencies such as FMO or RVO.

Recommendations: • It is advisable to develop a more strategic program cycle/value chain approach for positioning of

the Dutch water sector for specific countries, subsectors or projects. Currently, often positioning is assessed per phase of the project cycle. It is recommended to assess the strengths and interest of Dutch parties over the whole project cycle and value chain from the start of processes. Processes for development programs (Masterplans or projects) could start as a co-creation of Dutch public and private sector parties which are relevant for the whole program cycle. Lessons from the ongoing Dutch embassy co-creation pilots (“collective programming”) in Bangladesh and Vietnam could be included in this approach;

• Systematic assessment of possible positioning instruments for strategic positioning of the Dutch water sector before starting and funding a process. Proper selection of positioning instruments depends on likely effectiveness, strengths, possibilities and risk appetite of the Dutch government and private sector and the match with possibilities in the country context. For example to opt for Dutch government sponsoring of development companies might be too risky given the context for some countries. In specific circumstances positioning instruments can complement each other or some might be more relevant in some phases of the program. Moreover after first using one instrument a switch could be made to higher commitment positioning instruments (such direct concessional support or support to full fledged development companies) in later phases of a project;

• Combine capacity building &training projects with creation of alumni networks. These contacts in the countries can later play a vital role for business development. Also use can be made out of the local Dutch water companies and NGOs in the countries to create hubs to collaborate regarding business development, partner with Dutch SMEs, develop projects for NL financing instruments etc.;

• Use or transform NL financing instruments to better position NL private parties. We regard it important to develop DRIVE together with the key sector players for investment projects to be

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suitable for supporting propositions and allow for blending with other instruments and banks, donors agencies/ IFIs. It is advisable to investigate a finance (equity, other) instrument for Development Companies with FMO or others. Moreover, the possibilities to develop a revolving fund for loans for water projects or utilities for developing countries could be assessed where OS grants could be used for TA or guarantees. Finally the possibilities for an NL sovereign (concessional) loan instrument could be investigated;

• For larger investment projects strategic partnership with countries (water sector players, development banks) that could mobilize complementary contractors or operators and large amounts of (concessional) finance could be considered. It might be considered to team up with for example for NCICD Jakarta project with Indonesian, German or Korean contractors and World Bank, German development bank KfW, ADB or the Koreans where they could cover some large scale expensive construction and financing parts.

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2 Introduction

This report has been created in the context of the Water OS and the Partners for Water programmes. Both programmes are executed by the Netherlands Enterprise Agency and the Netherlands Water Partnership on behalf of three Ministries in the Netherlands: Ministry of Foreign Affairs, Ministry of Economic Affairs and the Ministry of Infrastructure and Environment. These collaborating organizations are engaged in a learning process regarding how Aid and Trade can be implemented in practical terms. This report is part of that learning process and provides an overview of interesting cases of innovative business models, financing schemes and positioning tools deployed in a range of countries in the water sector. We hope this overview serves as a toolbox for Aid and Trade and water sector practitioners. A selection of these tools will also be presented on www.traidwheel.nl. Background There are a number of reasons for providing such an overview or ‘toolbox’ for practitioners in the sector. Firstly, many water related projects, especially in developing countries, are not profitable and were often financed through grants/subsidies. In areas such as water supply and waste water treatment full cost recovery is still far from reality because of a number of factors, for example low tariffs related to willingness to pay and affordability, political considerations regarding water tariffs, low billing rates etc. Water safety projects such as storm surge barriers are often public goods where it is not easy to introduce specific taxes or value capturing mechanisms to finance these projects. Therefore, many of these projects have been financed by either government budgets (subsidies), donor grants or concessional loans. In the subsector of water security it is often complex to introduce payments schemes. For this reason, traditional subsidies, special taxes or levies were in most situations the normal financing mode. However, in recent years the situation in the water sector is changing. There is a clear trend visible of different financing ways or business models in the sector. Donors are looking more into innovative business models or financing structures1. There are several factors behind this. First of all, it became more obvious that private sector involvement – investments and management - is needed. Public budgets do not suffice for the vast water infrastructure investments needs and with public sector funding often the sustainability of facilities and delivering and charging for services is an issue. Traditional grant finance or NGO support has led to sustainability and efficiency issues. Examples are lack of institutional sustainability (once the NGO leaves the project halts), poor maintenance of structures or equipment, lack of use or lack of revenue streams in the financing structure (and therefore no financial sustainable way of long term operations). Secondly, it became more possible to attract private sector involvement due to innovations in the financial sector. Private service provision of public infrastructure services (Public Private Partnership, PPPs) became ideologically more acceptable. Various schemes were promoted to create leverage by mitigating risks for private sector. By taking out some first downside risks with grants, private finance can step in resulting in a higher level of funding. Also for water microfinance schemes, blending subsidies with other financing products (equity, debt), new vehicles such as impact bonds, dedicated revolving funds and guarantee funds came available.

1 We define a business model as the earning model: how revenue cash-flows are generated of water related activities (operations) in the operating phase of a project. The financing structure we regard as the mixture of different financing instruments (grants, equity, debt) used for (pre) financing the costs of the project or program.

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Finally, it became more necessary to involve private sector; the aid policy of donor countries has shifted in many countries from aid to trade. In order to make this shift possible and stimulate private sector involvement new financing schemes become more necessary. Aim of the toolbox and report The aim of this report/toolbox is to create awareness and to share practical knowledge and cases to all relevant practitioners in the water sector involved in international development: government officials working in the area of Aid & Trade and Topsector Water, embassy staff, companies and NGOs. Ultimately, we hope that this toolbox facilitates and eases the dialogue between the financial sector and the water sector, by explaining theoretical and rather abstract concepts by means of concrete examples and we hope that these innovations will find their way also to new projects, other countries or other sectors whenever useful and applicable. Moreover, we give some recommendations to the Netherlands government regarding development policies and positioning of the Dutch water sector. Scope We concentrate in Section I of this report on innovative business models and financing schemes for water related projects. Innovative should be understood as deviating from the traditional way of financing and / or operating water projects: either from subsidies/grants or by water users paying user charges (tariffs). The innovativeness of the solutions are characterized by several key elements: 1. Innovations in business models The ways of operating water services is changed by organisational or contracting innovations, extension of scope of services, technical innovations such as IT solutions, etc. Basically the operating concepts change and by these changes additional earnings are realised. The activities as part of these innovations serve to improve the financial feasibility (financial performance, cash-flows) and financial sustainability of water related operations. The changes can be characterized by the following elements: • Scope extension often in relation to technical innovation: by involving other sectors such as

land development and real estate, tourism and recreation, or water to energy innovations in water related projects additional income or new earning models become possible;

• Technical innovations such as waste water to energy or IT solutions are implemented to create additional services or to improve payment mechanisms for water related services;

• Private sector participation: private service models, Public Private Partnership (PPP) arrangements, community entrepreneurship models, inclusive business models are introduced in areas where traditionally government or NGO provision or traditional procurement modes were dominant. The increasing number of private modalities and operating concepts in combination with better financial performance enhance possibilities for more private repayable financing schemes;

• Scaling-up: models where activities are targeted to create larger demand for services and capacity and therefore lower unit costs. This ultimately results in a better financial feasibility and sustainability of the related water or sanitation services.

1. Innovations in financing mechanisms Traditionally water supply & sanitation, water safety and security have always been regarded as public goods where the government should play a key role. Therefore, subsidies for capital investments or operations and maintenance or NGO grants have been dominant for water related projects in many countries. More recently, innovations in finance and innovations in business models have stimulated innovative financing mechanisms where traditional subsidy or grant financing is replaced with microfinance or other mechanisms. An increasing number of Funds and

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water related projects have been observed where grants are combined with loans (or micro-credits) and equity (so called “blending”). Regarding innovations in financing structures the following new types of mechanisms are increasingly observed in the water sector: • Blending grants with repayable finance (loans, equity); • Micro-credit mechanisms; • Guarantees and insurance products; • Revolving funds and pooled bond mechanisms (grouped vehicles); • Crowdfunding platforms; • Output based aid. We have gathered cases from development practice through literature research, meetings with practitioners and IFIs. The cases can be in different phases of maturity: some cases are still in the development phase, some are in the implementation phase and some have been implemented and clear lessons learned could be identified. In the descriptions we will highlight the maturity of the cases, the concept, the wider applicability and lessons learned. In Section II of this report the focus is on positioning instruments in order to position the Dutch water sector in foreign countries. A number of potential instruments are described which can support business development of NL water players in the targeted countries. For a number of instruments cases studies from practice are presented. These positioning instruments and cases can be useful for further development of a positioning strategy for the NL water sector for any prioritized countries (such as Water OS or Water Mondiaal countries). Readers guide The Section I of this report concentrates on water finance. In chapter 3 - the first chapter of section I - the main challenges in water finance for water supply & sanitation, water safety and water security are addressed. Chapter 4 focuses on innovative business models in the water sector and interesting cases from international developments. In chapter 5 innovative financing mechanisms for water projects with interesting cases from a number of countries will be discussed in more detail. In Section II (Chapter 6) a number of instruments (tools) for positioning of the water sector are described. The section concludes with an overview with pros and cons of these tools. In chapter 7 two ongoing positioning cases are presented and some more strategic positioning options are provided for Flood protection in Jakarta Indonesia and urban development in Beira Mozambique. Chapter 8 integrates all findings in a synthesis of this report and concludes and provides some recommendations.

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Part I: Finance 4 Water

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3 Finance 4 Water: the challenges

In this chapter we will address the key challenges in finance for water in three important sectors: water supply & sanitation, water safety and water security. We regard it as important to distinguish between these sectors, because the earning models and financing issues differ quite strongly between these sectors. Water supply and sanitation is defined as provision of drinking water, waste water treatment and small scale sanitation services (WASH). Water safety as part of integrated water resources management is concentrated on providing safety for flooding or other water related disasters. Water security is concerned with securing availability of water for agriculture, food and other purposes, water use efficiency or reducing water pollution.

3.1 Water supply & sanitation

In OECD (2010) a number of factors are described which hamper the flow of private finance (or repayable funds) to the water supply and sanitation sector (WSS). These are: • Limited cost recovery because of insufficient ability to pay cost recovery tariffs; • Affordability constraints of households and or certain groups limit possibilities to arrive at a full

cost recovery level of water tariffs especially in developing countries or poor regions. In many countries also low collection rates and leakages affect water revenues in negative manner. Political (un)willingness to raise tariffs can also be an important factor;

• Weak governance and financial discipline and performance in water utilities; • Limited availability of funds for small scale operators and domestic suppliers; • Return-risk profile and risk perception of investors of the water sector. There is a perception in

the private sector of the water sector as low return-high risk sector, especially for developing countries in relation to low collection rates;

• Lack of funds at decentralized level; • Short tenor of available financing or high market interest rates in relation to time and return

profile of projects in many countries; • Lack of bankable projects or good bankable project proposals. Solutions for these challenges often aim at more factors at the same time. Moreover, in many developing countries Technical Assistance projects to public water utilities aim to improve governance and financial performance of these utilities. Often IFI’s and large donors are involved in these projects. Blending grants with repayable finance basically aims to overcome the funding gap and at the same time bring in private funding into the WSS sector. In the figure below from OECD (2009) this is illustrated.

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3.2 Water safety and water security

The key problem in water safety is to organize sufficient government and private funding given the large needs for resources and large size of many water safety projects. Because of climate change a number of areas in the world is becoming more prune to climate vulnerability and floods. Measures to protect these areas such as storm surge barriers, reservoir systems, drainage systems are expensive and the needs are huge. Often the needs and risks are especially relevant for Delta countries such as Bangladesh, Indonesia, Philippines, Mozambique etc. Government funds are limited and the experience with private sector involvement and PPPs in this sector is also still often weak in this type of countries. Moreover, water safety still has the character of a public good and public funding, cost recovery from levies or private funding or insurance is often not easy to organize due to a number of factors such as: • Insufficient government budgets in the relevant countries for the major investments in flood

protection or drainage systems needed; • Difficulties to create private revenue flows for many water safety projects. Even when private

revenue flows are created the long term nature of the revenue flows creates a high risk perception for private investors and makes private finance attraction difficult;

• Affordability issues or political issues regarding setting special taxes or levies to pay for water management/ water safety;

• Often non existence of a private insurance market for water related risks; • Difficulties to organize mechanisms for value capturing of private benefits in case of prevention

of damages to real estate assets or other private functions (often because of legal or taxation reasons);

• The large size and long tenure period of finance needed for funding for the required infrastructure facilities;

• Lack of international experience with Public Private Partnership (PPP) contracts for water safety projects and lack of experience with PPPs in general in many developing and emerging countries.

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Solutions for these factors often lie in a combination of creating additional private revenue flows by extending the scope of water safety projects to urban land development and tourism and private sector involvement (PPP or development companies). The cases in UK, Indonesia, Mozambique and Lagos all show elements of this approach.

3.3 Conclusions

• Financial feasibility and bankability of projects is a huge challenge especially in sanitation, water supply in developing countries and water safety and security because of public good nature;

• There are difficulties to attract private (repayable) finance in water supply and sanitation due to problems in cost recovery, the political influence on water tariffs and related risks and weak governance or performance of many utilities in developing countries;

• Technical Assistance support aimed at improving the financial performance of water utilities is very important in order to create more financial sustainable projects and utilities and lay the foundations to attract more private finance in the sector.

Innovations in the business model and financing mechanisms are needed in order to generate more financial feasible water projects and attract more private finance in order to fund the huge need for water supply, sanitation, water safety and water security projects in many parts of the world.

21


4 Innovative business models

In this chapter the focus is on innovative business models. We define the business model as the way earnings are generated by either payments of customers for water services or payments for water related services in other sectors. The idea behind most innovations is to create additional revenues (positive cash flows) by either using additional revenue streams by scope extension to other sectors affected, by availability payments from the government, by improving payments systems or by creating stronger financial discipline and efficiency by changing organisation models and private sector involvement. Another important driver relates to scale: by scaling up the activities economies of scale step in and unit costs can decrease. The main drivers of improving the business case of water related projects basically work at the revenue and cost sides of the business models. Important drivers aiming at the revenue side are the following: • Scope extension: internalizing revenue streams from sectors affected often induced by

technological innovations. Examples are the inclusion of revenue streams from waste water to energy in sanitation or land and urban development related to water safety measures;

• Improving payment mechanisms: improving water tariff collection rates by introducing more efficient collection systems (for example by using IT technologies) or prevention of illegal water tapping of drinking water;

• True pricing: the internalization of externalities in water prices or introduction of prices for use of water related resources. Examples are the introduction of payment schemes to farmers or industrial players which extract water from water resources (lakes, rivers etc.);

• Availability payment schemes: by introducing a regular service fee paid by the government (or any other contracting agent) a payment is generated for private provision of public services.

Drivers which address the cost side in business models of water related services are: • Scaling-up: scaling up to larger entities *from municipal to region) or scaling-up the demand

and supply side. Basically these scaling up activities can bring in efficiency gains or savings in unit costs. Moreover, by scaling up private finance becomes easier to obtain;

• Specific cost saving measures. Examples are savings in collection costs by IT or mobile applications for water supply or creating water reservoirs for water storage instead of large investments in dykes in water safety.

A driver which affects both the revenue side and cost side is private sector participation (including Public Private Partnership models): • Private sector participation. Basically, more private sector participation in the water sector

can bring in more incentives towards gearing revenues and cost savings and therefore a higher financial discipline. In comparison to traditional grant funding to public utilities or NGOs the financial sustainability of programs can be improved also by the long term ownership created.

In the picture below the identified main drivers of improving business models in the water sector are described. In this chapter cases are provided from the international practice which are related to these drivers to improve business models of water operations. In the table below an overview is provided for these cases.

23


Table 4.1 Typology of business models

Business model

typology


Scope extension: revenues from other sectors

Waste water to energy

and fertilizers (re-use)

and health

Conversion of waste water

and waste to energy and

fertilizer

Creating additional revenue

streams to water

Depending on

regulations, feed in

tariffs for renewables,

market for fertilizer,

entrepreneurship

Financial INclusion

Improves Sanitation

and Health programme

in India (FINISH)

Water safety and land

development, recreation

Revenues from land or

recreation development

used for water safety

Urban areas with

demand for land close

to coast and proper real

estate and land prices

Room for the Rivers in

the Netherlands

NCICD Flood

Protection in Jakarta

Water dunen

Eko Atlantic

Water security: capturing

benefits in agriculture and

microfinance

Reaping benefits in

agriculture for (partly)

financing water harvesting

systems & microfinance to

farmers

Definable direct

benefits Interested and

committed farmers and

microfinance providers

Finance for RaiNwater

(FERN): Sustainable

financing for

Sustainable water

Innovative Payment systems

Improving payment

systems by ICT

Mobile payment systems,

more frequent payments

Increasing billing and

payment rates

Willingness mobile

providers and utilities to

change systems

Mobile payments of

water bills in Kenya,

Tanzania, Uganda and

Zambia

Payment for

Environmental services

Lake Naivasha in Kenya

Grants for TA to small scale

farmers

PES payment system for

companies

In kind payments

Existence of regulations

on water intake

companies

Existing value chain

food- agro companies

Appropriate finance for

Sustainable Water

Management in the

Lake Naivasha Basin

Scaling-up

Scaling up to regional

authorities (case waste

water in Turkey)

Regional water unions Institutional setting,

willingness local

authorities

Inter municipal

cooperation –

(waste)water unions

Multi-stakeholder

involvement and co-

creation of projects

(cases water security in

Zambia)

Involvement of key

stakeholders in the basin

Co-creation of projects or

programs

Interests of key

stakeholders aligned

Strong NGO behind

WWF Basin-level water

stewardship Zambesi

Private sector participation (including PPP)


models (rural drinking

water)


responsible for water

service delivery

Small villages, strong

community ownership

Water for peace:

Community Based

Approaches in Water

Supply Projects for

Multi-ethnic

Neighbourhoods in

24


Business model typology


Crimea

PPP Availability fee

based models DBFMO

contracts for waste water

treatment (NL) or water

safety (UK)

Lifecycle cost optimizations

Availability fee payments

based upon KPIs

Private financing

Developed

procurement

organisations

PPP expertise private

sector available

PPP availability

payments Waste Water

Treatment

Harnaschpolder

Pevensey Bay Flood

Defence

Broadland Flood

Alleviation

4.1 Scope extension: internalizing revenue streams from other sectors

The introduction of innovations in waste re-use (waste to energy, waste to health), geodata, IT and mobile applications introduce possibilities for new business models by generating additional income from other sectors. In this paragraph some interesting practical cases are shown where income is generated by integrating other sectors into the water projects.

4.1.1 Drinking water and sanitation Conversion of sanitation waste to energy and fertilizers Technological innovations can change business models in the water sector. Waste water to energy technologies introduce new earning models as energy (biogas, electricity) can be produced and sold to the market. Also phosphates (fertilizers) can be produced as a product of biological processes re-using waste water or waste. Important considerations for these business models to become feasible are: • Availability of local entrepreneurship and affordable microcredits in the country or region; • Market upscaling: upscaling of demand side and supply side in order to create scale and lower

unit costs; • Feed-in tariffs for electricity from renewables in order to create competing prices with traditional

electricity production; • Connection to the grid or parties with electricity demand; • An existing market for fertilizers (in agriculture) with reasonable prices. In order to generate successful business models these aspects have to be assessed relevant for the local market. Below some interesting cases are presented from Kenya, India and Costa Rica.

25


Financial INclusion Improves Sanitation and Health programme in India (FINISH)

Introduction and objectives

Financial INclusion Improves Sanitation and Health programme (FINISH) has the objective of

improving health in rural societies not only through creating better sanitation facilities, but also by

improved knowledge and raising awareness. This is the concept of "Total Sanitation". The operational

goal is to build 500,000 safe sanitation systems in India by the end of 2015.

Concept

The concept is to:

• Use output based aid (grants) in sanitation to generate an effectuate demand for latrines by

awareness and promotion activities and increasing sanitation densities (up to 75%) at 2 euro per

latrine;

• Use of innovative materials: waste wood shipbreaking (Gujarat), bamboo;

• Supply side pilot of 5,000 units in Rajasthan where 30% reduction in cost of sanitation system

construction was achieved by assistance and upscaling the supply side;

• Develop a sanitation value chain: a pilot to convert 10 tonnes human excreta in marketable

compost (fertilizer) and biogas. In Tamilnadu, converting agri waste and human excreta and

monetizing biogas (community system), in Gujarat linking toilets to 2,000 new biogas systems.

Standardizing biogas approach with SimGas BV.

Main sponsor and stakeholders

The project is carried out by FINISH SOCIETY for Dutch Ministry of Foreign Affairs (DGIS) since

2009. The project is financed with €55 million with the target of 90% commercial/other funding. The

NGO WASTE is leading the project together with a range of partners (MFIs, cooperatives, India

government).

Scale and specifics regarding the business model, financing model

The main steps in the approach are: i) Demand generation, ii) demand effectuation, iii) supply side

scaling up and quality improvement and decreasing unit costs and prices. The financing model is a

combination of DGIS grants, co-finance from cooperatives, microcredits from MFIs and support from

the government of India. The idea is that after 2016 the system should be financial sustainable (no

DGIS aid necessary). Apart from demand and supply side support the project foresees a health

impact study with use of health insurance claim and medical data.

26


Success factors

1. Innovative business model:

• Using existing channels and field partners;

• Generating demand through intensive behaviour change communication, award winning audio

visuals and grass root support;

• Stimulate also the supply chain;

• Focus on partnership relation management;

• Sustainable organisation and approach;

• Standardized and transparent processes;

• The systems were financed using blending: micro credits, own contributions owners/

cooperatives, Government of India and CSR subsidies as well as cooperative credits.

2. Innovative technology model:

• Use of output based aid in sanitation to achieve sanitation densities;

• Use of innovative materials: waste wood shipbreaking (Gujarat), bamboo;

• Supply side pilot of 5,000 units in Rajasthan where 30% reduction in cost of sanitation system

construction was achieved by aggregating supply side;

• Developing sanitation value chain: pilot to convert 10 tonne human excreta in marketable

compost. In Tamilnadu, converting agri waste and human excreta and monetising biogas

(community system), in Gujarat linking toilets to 2,000 new biogas systems. Standardising biogas

approach with SimGas BV.

Constraints and applicability

Basically the availability of experienced microfinance institutions (MFIs) with a social outlook and

interest in credit provision to sanitation is essential. Moreover, grants for capacity building and

promotion and awareness are essential as a complement to credits and own contributions. This

implies that these types of assistance are applicable to those countries and regions where MFIs are

available and interested.

Lessons learned

Risk diversification is an issue: it is advisable to spread the risk over a number of regions and

suppliers. Secondly, the number of MFI partners was very large in the beginning, but during the

financial crisis a number of these went bankrupt. So selection of a limited number of trustworthy and

financially sound MFIs is crucial. It is advisable to set requirements on the suppliers (constructors and

operators of the facilities). Finally these programs need flexibility from the outset due to required

changes during implementation.

Financial Inclusion Improves Sanitation And Health and other Financial Innovations In Sanitation in Costa Rica and Kenya


Basically the approach for sanitation uses experiences from the value chain of solid waste

management. In solid waste there are businesses both in the service and in the value chain. This

opens the door to many different types of finance. The Ministry of Foreign Affairs of the Netherlands

DGIS recognized at an early stage the value of this kind of expertise and supported financial

innovations. Guarantee financing for enterprises, micro financing for household sanitation, targeting

financing to the poorest segments and setting up an African Finance Facility are described below.

27


Concept

The vision of NGO WASTE is ‘People in urbanized areas living dignified lives in balance with their

environment and the mission is ‘to empower and support stakeholders to create cleaner, better-

functioning, and healthier cities which contribute to alleviating poverty and the effects of poverty in

low- and middle income countries. To strive for a balance between financial, institutional,

environmental, technological and social aspects of sustainability’.

Cases are described in Costa Rica and Kenya on a guarantee fund for enterprises in solid waste and

sanitation. In India and Kenya the cases are about a financial inclusion model for sanitation. Specific

interventions In Ethiopia are about to target the ultrapoor and at the macro level, it is researched if all

these different initiatives in Africa can be scaled into a financing facility.


All material presented is based on original work done by WASTE and its partners and supported by a

host of organisations: DGIS, SNS Asset Management, Banco Popular, FODEMIPYE, ACEPESA, PA,

Family Bank, L&T insurance, Grameen Kota, NABARD, RDO Trust, NHB, UNU-MERIT, AMREF,

Kenyan Ministry of Health, KWFT, K-REP Bank, Goodwell Investments, Social Equity Foundation,

PLAN, OMFI, Arba Minch Municipality, Triodos Facet, Fair & Sustainable, PfW and Aqua for All.


Guarantee (1) Costa Rica features a national guarantee scheme for small and medium enterprise

support of Euro 24 Million. Agreement was reached between WASTE, its local partner (ACEPESA),

the Banco Popular and the national guarantee scheme (FODEMIPYE). Initial coverage by the Waste

Venture Fund (WVF) for urban environmental enterprises was 50% of the loan amount with the

national guarantee and the enterprise each backing 25%. One year later the bank requested that their

share in the guarantee would be increased to 50% and the WVF share reduced to 25%. Two years

later the bank and the national guarantee scheme were sufficiently convinced about viability of small

scale urban environment enterprises that they no longer require the WVF.

Guarantee (2) The WVF objective in Kenya was to support durable solutions to sanitation funding. A

market demand assessment was carried concurrently together with the assessment of financial

institutions in Nakuru that would be best suited to administer WVF. Its purpose was to provide

guaranteed credit loans for hardware investments in waste management and sanitation activities. The

Family Bank was selected as the financial partner. Experiences so far show that over 40 clients have

received WVF loans, with 5 being solid waste and 35 sanitation loans. Only one has defaulted till date

(post 2008 election violence).

Micro finance (1) - Financial INclusion Improves Sanitation and Health (FINISH), India

FINISH is a public private partnership. Its goal is to include effecting construction and use of 500,000

safe and off grid sanitation systems. So far the partnership has succeeded in effecting construction of

over 160,000 sanitation systems in over 1000 GPs from 10 States in India, with 53 MFIs / NGOs as

partners.

Micro finance (2) - FINISH is duplicated in Kenya (FINISH INK). This project just started. It expects

that in the long term, sanitation loan products will be an integral part of the micro financing market.

The project results in increased health status of the targeted communities, which leads to increased

development indicators and contributes to sustainable economic growth.

28


Concept

The vision of NGO WASTE is ‘People in urbanized areas living dignified lives in balance with their

environment and the mission is ‘to empower and support stakeholders to create cleaner, better-

functioning, and healthier cities which contribute to alleviating poverty and the effects of poverty in

low- and middle income countries. To strive for a balance between financial, institutional,

environmental, technological and social aspects of sustainability’.

Cases are described in Costa Rica and Kenya on a guarantee fund for enterprises in solid waste

and sanitation. In India and Kenya the cases are about a financial inclusion model for sanitation.

Specific interventions In Ethiopia are about to target the ultrapoor and at the macro level, it is

researched if all these different initiatives in Africa can be scaled into a financing facility.


All material presented is based on original work done by WASTE and its partners and supported by

a host of organisations: DGIS, SNS Asset Management, Banco Popular, FODEMIPYE, ACEPESA,

PA, Family Bank, L&T insurance, Grameen Kota, NABARD, RDO Trust, NHB, UNU-MERIT,

AMREF, Kenyan Ministry of Health, KWFT, K-REP Bank, Goodwell Investments, Social Equity

Foundation, PLAN, OMFI, Arba Minch Municipality, Triodos Facet, Fair & Sustainable, PfW and

Aqua for All.


Guarantee (1) Costa Rica features a national guarantee scheme for small and medium enterprise

support of Euro 24 Million. Agreement was reached between WASTE, its local partner (ACEPESA),

the Banco Popular and the national guarantee scheme (FODEMIPYE). Initial coverage by the Waste

Venture Fund (WVF) for urban environmental enterprises was 50% of the loan amount with the

national guarantee and the enterprise each backing 25%. One year later the bank requested that

their share in the guarantee would be increased to 50% and the WVF share reduced to 25%. Two

years later the bank and the national guarantee scheme were sufficiently convinced about viability of

small scale urban environment enterprises that they no longer require the WVF.

Guarantee (2) The WVF objective in Kenya was to support durable solutions to sanitation funding. A

market demand assessment was carried concurrently together with the assessment of financial

institutions in Nakuru that would be best suited to administer WVF. Its purpose was to provide

guaranteed credit loans for hardware investments in waste management and sanitation activities.

The Family Bank was selected as the financial partner. Experiences so far show that over 40 clients

have received WVF loans, with 5 being solid waste and 35 sanitation loans. Only one has defaulted

till date (post 2008 election violence).

Micro finance (1) - Financial INclusion Improves Sanitation and Health (FINISH), India

FINISH is a public private partnership. Its goal is to include effecting construction and use of 500,000

safe and off grid sanitation systems. So far the partnership has succeeded in effecting construction

of over 160,000 sanitation systems in over 1000 GPs from 10 States in India, with 53 MFIs / NGOs

as partners.

Micro finance (2) - FINISH is duplicated in Kenya (FINISH INK). This project just started. It expects

that in the long term, sanitation loan products will be an integral part of the micro financing market.

The project results in increased health status of the targeted communities, which leads to increased

development indicators and contributes to sustainable economic growth.

29


All the cases show a number of interesting lessons learned which are common: • Income can be generated for sanitation from energy and fertilizers in developing countries; • Some kind of selection system setting requirements for the entrepreneurs is essential; • Banks can be willing to provide credit schemes to households and entrepreneurs in sanitation if

(partially) backed up by guarantee funds; • Proper risk allocation leaving part of default risks at banks or MFIs is crucial.

4.1.2 Water safety: revenues from land development and recreation In the domain of water safety, flood risk management at coastal zones or river basins and the like, we see several approaches resulting in new earning models. Water safety measures (such as storm surge barriers, dykes, warning systems etc.) are traditionally mainly government budget funded due to i) public good nature of safety and ii) lack or earning capabilities. Recent approaches aim to create new earnings drivers by extending the scope or technological approach to water safety measures. By extending the scope of barrier projects new drivers of revenues are created such as hydropower, land reclamation & urban development and functions such as recreation and tourism. While a new approach to safety such as the NL based project Room for the rivers allows for recreational functions of water and land and cost savings compared to the costs of traditional dyke investments. Below a number of case studies for innovative approaches are shown for water safety measures.

The AFF has the objective to help overcome bottlenecks in matching between suppliers of finance and

needs of entrepreneurs. Thus the AFF would have a number of roles for different actors (banks,

entrepreneurs, households and the enabling environment). The indicative business plan for AFF shows

that with only a limited amount of donor funds the set-up of a guarantee fund covering the four countries

can be feasible.


It is important to have a number of banks and microfinance banks willing to extend their services to the

water and sanitation sector and with expertise in the relevant regions. In case banks are not interested

or if the institutions lack expertise in the region, the model cannot be replicated. Secondly, private sector

entrepreneurship is essential. The model will not be easily replicable in regions of countries with a lack

or entrepreneurship.

Lessons learned

• Willingness of banks to extend their services to the water sector is crucial;

• A limited number of banks or MFIs with experience in the relevant regions;

• Guarantee funds fed with grants from interested donors;

• Proper risk allocations, banks need to contain some risks for defaults.

30


Room for the Rivers in the Netherlands


In 1993 and 1995 residents in the river region in the Netherlands have faced anxious times. The water

levels were extremely high and the dikes just managed to hold. A quarter of a million people had to be

evacuated. To safeguard the river region in the future it was decided to ensure that the rivers could

discharge the forecasted greater volumes of water without flooding. The Government approved the

Room for the River Plan.

This Plan has three objectives:

• By 2015 branches of the Rhine may need to accommodate discharge volumes of 16.000m3/s

without the risk of flooding;

• Safety enhancing measures must also improve overall economic and environmental quality in the

river region;

• Over the next several decades the rivers will require additional room for higher discharges due to

predicted climate change. This must be available on a permanent basis.

Concept

The water safety programme Room for the River sets an example for how to manage flood risks

differently. Instead of heightening the flood defences, a new approach has been adopted that allows

more space for rivers to flow. Meanwhile, the programme contributes to the quality of the river area in

terms of nature, recreation, local economy and liveability. Additional room will be created for the rivers

IJssel, Rhine, Lek and Waal, at more than 30 locations.


The works with a € 2.3 billion budget are carried out by the central government in collaboration with

the provinces, regional water boards and municipalities. The main sponsor of the plan is the Dutch

government (Ministry of Infrastructure and Environment).


In the development phase of the project a cost effectiveness analysis was performed for each river

branch. The cost effectiveness of the reduction of the water level was expressed as mm/million euro

or m2/m euro. Based on this analysis for each river branch the most cost effective measures were

selected. On river branch level this approach has resulted in significant cost savings (compared to the

situation where cost effectiveness of measures is evaluated at the local level). Besides, construction

costs have been reduced. Moreover, the large volume of river sand and clay needed for construction

of the works creates opportunities for revenues of concessions for sand and gravel extraction.

31


Key success factors:

• Working and learning together with key stakeholders for which many enabling governance

arrangements have been used;

• Large portfolio of separate projects leading to risk sharing;

• Availability of realistic budget and political commitment to the project.


The concept mainly works in river basin setting (as on this level there are more opportunities for

optimization based on cost effectiveness). The concept is replicable to other countries for river basin

flood protection. The lessons on effective collaboration seem transferable to many other industries

and policy domains.

Lessons learned

The contextual factors that made the program a success are:

• Availability of space: Making room for the rivers requires available space to conduct one of the

measures. Dense urban communities or critical infrastructure may impede this. This will call for

adopting a system basin approach;

• Flood history: The political will to approve the governmental decision for the room for the river

program is acquired;

• Legitimacy for integrated river basin management: In the 1980s the local stakeholders and the

public were in general enthusiastic about the basic principles of room for the river;

• Multi-level and cross-sector collaboration: Engagement of different governmental levels is

assumed to be vital for the Room for the River program.

NCICD Flood Protection in Jakarta Introduction and objectives

In 2013 and 2014 a Dutch Consortium prepared a Master plan for coastal protection and urban

development of North Jakarta. Important components of the plan are flood protection by sea wall

upgrading and extension, preventing further groundwater extraction and land decline, improving the

transport system, port extension and urban (real estate) development.

Concept

The main concept is to use the income generated by urban development (land reclamation and sales

of real estate) to enable financing of flood protection and other water related measures. It is suggested

to set up an SPV (Special Purpose Vehicle development company) and to introduce a dedicated flood

protection taxation instrument.


The precise structure of SPV (sponsors, arrangements) and financing arrangements are not yet clear

(the Master plan will be finalized Summer 2014).


The reclamation of 1250 ha land can generate profits by creating a concession model for real estate

developers. These profits could be used to attract private finance for an SPV to finance flood

protection measures. However, because of the long development period of the plan and risks

associated with it government backing (guarantees or equity) and some concessional loans will be

necessary.

32



The reclamation of 1250 ha land can generate profits by creating a concession model for real estate

developers. These profits could be used to attract private finance for an SPV to finance flood

protection measures. However, because of the long development period of the plan and risks

associated with it government backing (guarantees or equity) and some concessional loans will be

necessary.

Success factors

What the success factors are is not clear yet. For the plan as such the integrated urban development

approach, broad stakeholder consultation and participation and the Dutch combined with Indonesian

expertise can be mentioned as success factors. However, the implementation of the Master plan and

underlying projects has not yet started. Therefore, it is too early to show overall success factors.


Important constraints are the long development period and large size and scope of the project (total

costs about 20 billion USD). Further downsizing, splitting into manageable projects and phasing might

be necessary to attract enough private interest. In general the concept of using income generated

from other sectors for financing flood protection is only possible in case of land reclamation

possibilities, growing demand for housing and offices and well defined PPP enabling environment.

Lessons learned

Based upon the outcomes of the project review by RABO the involvement of Indonesian stakeholders

(especially at the national government level) could have been better. Also the involvement of financial

bodies and financial specialists could have been earlier in the process in order to scale the project

more down into more financially feasible and implementable packages. As shown in chapter 5 from

the perspective of positioning a strategic program lifecycle and value chain approach could have been

taken from the initial phases of the Masterplanning process.

33


Water dunen


In the region West-Zeeuws Vlaanderen in the Netherlands from 2012 is started with the construction

of Water dunen, a great nature and recreation area. The region of Zeeuws Vlaanderen faces socio-

economic problems. The vitality of the area decreases because of aging inhabitants, the loss of the

car ferry Vlissingen-Breskens and high unemployment rates. The province of Zeeland strives to

reverse these trends and tries to give a new perspective to the areas. Opportunities are seen primarily

in stimulating the economy and improving the environmental qualities such as nature, landscape,

cultural and living and recreational environment. The project Water dunen capitalizes these

opportunities. Realization of the Water dunen project means a substantial investment in the area,

leading to structural economic benefits for a region that sorely needs it. Next to the socio-economic

objectives Water dunen aims to contribute to the coastal defences, to the (national) target for nature

restoration in the area and to increase the spatial quality.

Concept

The nature and recreation area is planned to be used by people from the region, for day trippers and

tourists. Parts of the Water dunen project include:

• Strengthen the coastal defence by means of wide landward dunes;

• Tourist accommodation in the form of a dune camping, 400 bungalows and a hotel;

• Parking spaces;

• 255 hectare of nature, of which 173 hectare estuarine nature within dikes; and

• An extensive route network of hiking, biking and riding trails.


The initiative for this project was taken by a camping owner who’s camping near the dikes had to be

discontinued because of planned dike reinforcement. This camping owner saw the opportunity to

improve environmental qualities. Together with Stichting Zeeuws Landschap, who was looking for an

area for large scale saline nature development, they gave the initial impetus to Water dunen. The

camping owner and Stichting Zeeuws Landschap are working together in a project group with the

Province of Zeeland (leading), the municipality Sluis and Waterboard Scheldestromen.


The total costs for this project have been assessed including the contributions from the different

sources of income. The estimated costs are balanced by sufficient income. Revenues come largely

from government contributions. The coastal protection is funded entirely from the high level water

programme. The Cabinet contributes with 18 million euro from the Spatial Plan Budget. Because

Water dunen contributes to the nature restoration of the Westerschelde, the project can also rely on

the funds from the nature package of Westerschelde. The Province of Zeeland and the two initiators

(camping owner and Stichting Zeeuws Landschap) substantially contributes as well.

34


Success factors

• Several objectives are blended together: coastal protection, nature development and recreation

opportunities and regional economy. The realisation of these four objectives ultimately resulted in

sufficient governmental commitment;

• Linking several funding sources and policy instruments;

• An entrepreneur with vision and persistence;

• Successful cooperation as a result of a competent project organisation.


The model is in principle replicable. There should be flood safety measures which affect recreational

areas and enterprises willing to collaborat5e in such programs.

Lessons learned

• An important lesson that can be learned from the success of Waterdunen is that private parties

and government should develop a common vision on future development of an area at an early

stage, establishing the respective roles of coastal protection, nature, recreation and local

entrepreneurship. This can contribute to greater support and understanding as to how an area is

to be developed. By including stakeholders in the decision process, their preferences can be

included in the project, increasing their willingness to contribute. It is therefore important to form

alliances at an early stage;

• For the realisation of this project land had to be purchased from several landowners.

Communication between the project developers and the landowners in an early stage is key to

prevent opposition to the plans. Furthermore, giving up agricultural land for (saline) nature is an

emotive subject in the Province of Zeeland.

Eko Atlantic


Lagos, in the south-western region of western Nigeria, is a city perpetually on the brink of flooding.

Bounded in the South by the Atlantic Ocean, the city is situated on the mainland, home to 70 percent

of the city’s population with series of islands and a peninsula that holds the remaining 30 percent.

Over the past 100 years, the Atlantic shore of Lagos has lost over 2 km in coastline; land that has

simply vanished due to coastal erosion. The Eko Atlantic project is committed to bringing it back.

35


Concept

The plan is to combine flood protection together with residential, commercial, financial and tourist

developments. The idea is that the commercial developments (land sales) can be used to cross

subsidize the flood protection measures within a Development Company concept. In February 2008,

the project launched a massive and continuous seven-year dredging operation to create a foundation

for Eko Atlantic. By the end of the project, nine million square metres of land ripe for residential,

commercial and tourist development is available. A new city will rise from the Atlantic Ocean. To

protect the newly reclaimed land from ocean surge, a powerful structure is being built along the entire

coastline. It is called the Great Wall. The Great Wall will be fit to withstand and endure the most

severe tidal surges forecast over the next 1,000 years.

Main sponsors and stakeholders

Lagos State Government, South Energyx Nigeria, several local and international banks.


Eko Atlantic is being developed and financed entirely by the private sector. It is a public-private

partnership between the Lagos State Government and South Energyx Nigeria Limited. The certificate

of occupancy given to South Energyx is for 78 years and it started counting from 2006. The project’s

main funders are three Nigerian banks: First Bank, First City Monument Bank (FCMB) and Guaranty

Trust Bank (GTBank) – all publicly traded on the Nigerian Stock Exchange. The international banks

BNP Paribas Fortis, and KBC bank also heavily invested. A large part of the financing will be made

possible from land sales. None of the funding will come from the government, whose role is limited

solely to providing the concession for the project and receiving taxes on the land sales and

development.


Eko Atlantic is being developed and financed entirely by the private sector. It is a public-private

partnership between the Lagos State Government and South Energyx Nigeria Limited. The certificate

of occupancy given to South Energyx is for 78 years and it started counting from 2006. The project’s

main funders are three Nigerian banks: First Bank, First City Monument Bank (FCMB) and Guaranty

Trust Bank (GTBank) – all publicly traded on the Nigerian Stock Exchange. The international banks

BNP Paribas Fortis, and KBC bank also heavily invested. A large part of the financing will be made

possible from land sales. None of the funding will come from the government, whose role is limited

solely to providing the concession for the project and receiving taxes on the land sales and

development.

Success factors

Important success factors for these types of projects are the involvement of relevant stakeholders

from the beginning and the need for urban extension (demand for housing and land).


This type of projects can only succeed in case of feasible project concepts and a mature and growing

market for land (with above average real estate and land price levels). Because of high costs of land

reclamation real estate land prices need to be sufficiently high enough to make the project financially

feasible. In countries and urban areas with modest real estate prices it will be difficult to generate

financial feasible projects.

Lessons learned

Too early yet.

36


All in all the presented water safety programs combined water safety measures with land development (urban, recreation). The important vehicle for capturing the revenues from land development is scope extension in combination with setting up one institutional entity (development company or programme authority) which is responsible for programme execution and arranging finance.

4.1.3 Water security: a business model capturing benefits for farmers One of the key problems in the field of water security is that often the users of water reservoirs do not pay a proper price for water extraction (or pollution) or do not have the means to pay for water management and irrigation systems. Therefore improving water management systems and improving the efficiency of water use is in general complicated without any government subsidies. The problem behind this is that the availability and quality of water is often not priced in the market or results in negative externalities such as water pollution or droughts (non priced effects without a market). Water stewardship aims to create at key players in a water basin such as farmers or industries a more efficient water use and less pollution by own responsible actions. These actions can be of interest to the party itself (such as cost savings or more revenues), but are also in the benefit of the community: better availability and quality of water for other sectors (for example agriculture) or externalities such as improved health, biodiversity etc. The key issue here for financial sustainability is often how to capture the benefits for certain players (or non-priced effects) and creating true market prices. In recent years “water harvesting” is becoming more usable. Water harvesting basically aims to make better use of rainwater by innovative technical solutions: storing water in special storage areas in times of heavy rain, storing water on rooftops etc. For an overview of some interesting water harvesting practices, see Water Harvesting, Guidelines to good practice (RAIN, 2014, and see http://www.aidenvironment.org/media/uploads/documents/English_low_Fullversion_EHW.pdf). The difficulty with these innovative harvesting solutions is often that there is no direct beneficiary or business involved which can directly pay for the services. Innovative initiatives are currently trying to create ways to generate income for rain harvesting initiatives in Nepal. Below such an initiative is presented.

Finance for RaiNwater (FERN): Sustainable financing for Sustainable water

Building a Public-Private Partnership to Support Economic Growth and Food Security in Nepal Introduction and objectives

The project will enable farmers to have reliable access to water through rainwater harvesting for

irrigation by means of micro-finance. This will lead to increased food production and security,

specifically for people living in water stressed areas in Nepal. It will link demand for water for

agricultural production and food security with the establishment and strengthening of local businesses,

by ensuring quality services by local service providers on the provision of micro-finance and

installation of rainwater harvesting systems on a longer-term. It will focus specifically on farmers

affected by water shortages in Nepal.

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The project is unique since it will be build upon a non-subsidy system for the farmers, making

rainwater harvesting less dependent on subsidy schemes. By helping local service providers to create

a business for rainwater harvesting and microfinance, it will ensure that farmers have access to

technical and financial expertise. The partnership believes that setting up a self-sustaining system for

microfinance and rainwater harvesting will bring about food security at farm level and create an

enabling environment between different sectors.

Concept

Micro-finance for rainwater harvesting is relatively new and not practiced on a large scale. Due to the

use of micro-finance, there is no direct subsidy needed for the payment of the rainwater harvesting

systems. Due to the use of water from rainwater harvesting ponds combined with efficient irrigation

methods, no further depletion of current water resources will take place. Instead, rainwater harvesting

will reduce pressure on other water resource and will increase people’s self-reliance. A direct outcome

of this project is that farmers will have increased opportunities for income generating activities (like

increased crop production) and building their resilience to climate change (through increased food

security).


The partnership consists of RAIN, Nirdhan Utthan Development Bank Ltd, Agricultural Development

Bank Ltd and HELVETAS Swiss Intercooperation Nepal.


The business case will contribute to increased access to micro-finance for farmers by providing

services to link the farmer to the bank or micro-finance institute through local service providers. Based

on the high demand for rainwater harvesting systems in many areas of Nepal, the banks will have a

large client base for this product. At least four Nepalese banks have shown their interest in this

product and believe in the strong demand for rainwater harvesting. The development of a self-

sustaining system for access to services for loans and technical expertise for rainwater harvesting

systems will lead to sustainability of the project, beyond the project period.

The business case has been solidly tested during pilot projects running from 2010 to 2013, an external

evaluation of these projects and an in-depth research into financial products for the intended target

group. Farmers were highly satisfied with the performance of a RWH system. About 52% use the

water to feed the cattle, 25% is being used for irrigation purposes. Commercial farmers using a RWH

system increased their income significantly (> NPR 100.000). Non commercial farmers safed slightly

(NPR 5500) and increase farmers’ income (NPR 20.000).


Basically the combination of a need for water harvesting and better irrigation and a number of

interested, qualified and willing banks, farmers and service providers are essential. Subsidies are still

needed to start-up and guide the process and for capacity building.

Lessons learned

• Shared trust in the success of this project and the willingness to make it a success for (poorer)

farmers and households;

• Continuous capacity building and knowledge sharing should be included.

More information can be found on: http://www.rainfoundation.org/wp-content/uploads/140307-2-pager-

RHW-and-MF_DEF.pdf.

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4.2 Improving payment systems

The collection of water bills is a huge problem in many developing countries. Often rates of non- collection can be 40-50%. Any solutions to improve the collection rates can thus immediate have strong positive impacts on the financial performance of water utilities. There are a number of reasons behind the low collection rates. The affordability and ability to pay especially of the poor are one important reason. Especially in case of insecure income in the informal sector to make regular monthly payments can be difficult for many poor families. Another reason is illegal tapping. In many developing countries small communities do illegal tapping from main water pipes. Another issue is the discipline of utilities to manage the process and effectively measure water consumption, monitor and cut-off. Below an example is shown regarding innovative payment systems by using mobile phones for payment of traditional drinking water services.

Mobile payments of water bills in Kenya, Tanzania, Uganda and Zambia


In Africa there were in 2013 more people with a mobile phone connection than with access to drinking

water (African continent: 620 million mobile phone subscriptions in 2013). Many water providers have

problems with performance and cost recovery. Lack of payments of water bills is a big problem in

many countries in Africa. About 500 mln USD per year is not paid. This is why in a number of African

countries water providers have started collection of water bills by mobile phone transfers in order to

increase water tariff collection (and therefore cost recovery).

Concept

Water utilities are teaming up with network operators and have created mobile paying systems in

several towns in Kenya, Zambia, Uganda and Tanzania. Basically invoices are sent to mobile phones

and money to pay for the water bill can be transferred by mobile phones. A survey has indicated that

most users favor the system because of time savings (not having to travel to banks), cost savings and

to a lesser extent to be able to pay on time. Another advantage is that in case billing takes place more

frequently (i.e. weekly instead of monthly) people can pay more easily.


Main players are the local water utilities and network operators and banks. Systems function on local

scale in Kenya (Nairobi) and Tanzania and national scale in Uganda and Zambia.

39


Innovations in payment systems aimed at increasing the collection rates of water utilities are essential for improving the financial performance of the water and sanitation sector in many developing countries. Mobile phone payment systems are one possibility to improve such systems and seem to be promising from the case presented. Improvement of monitoring and water consumption metering systems (also with support of mobile metering devices), stricter penalties to non-payers, smart tariff policies, prevention of illegal tapping etc. are other important possibilities to improve the cost recovery of water supply providers.

4.2.1 Water security: Innovative payment systems The security of water is seen in many countries as a public good that can be made possible because of public funding. Alternative payment systems are often difficult to organize and implement because there is a lack of experience with other payment systems. Below an example is shown regarding an innovative payment system in local farmers get incentives to use more sustainable farming techniques so that the water intake, the water pollution and erosion is reduced.


People pay water bills with a mobile phone application. The application is provided by the mobile

operator and banks.

Success factors

Trust by the (potential) users in the system is a key success factor. Therefore, users would like to see

authorized confirmations when payments are made. Some network operators charged high

transaction cost which prevented good penetration. Finally promotion and marketing are very

important factors.


Lack of mobile phone penetration and lack of trust in the payment system or mobile phone operators

can be important obstacles. These systems will mainly work in areas with high level of mobile phone

use and trustable payment and confirmation systems.

Lessons learned

• Implement a trustable system with clear immediate confirmations of payments;

• Keep transaction costs (fee %) for mobile operators low;

• Promotion and marketing are key.

Appropriate finance for Sustainable Water Management in the Lake Naivasha Basin Introduction and objectives

Basically the Integrated Water Resources Action Plan is a public-private programme which aims to

develop an enabling environment for sustainable water management in the lake Naivasha basin.

The ongoing IWRAP (Integrated Water Resource Action Plan) Programme started in 2013 and is a

four year programme. Commercial businesses in the basin are often blamed for water pollution and

abstraction. Subsequently they also have an interest in sustainable water management to protect

their reputation. Finally, international standards generally require sustainable production methods

by the farmers producing for the export market.

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Concept

The program provides under the so called Payment for Environment Services (PES) scheme

incentives to small scale farmers in selected vulnerable areas to change their farming methods to

more sustainable techniques. The incentives are in kind (products and time provided by

downstream buyers) and consist of trainings (provided by NGOs). The new farming techniques aim

at reducing water intake, water pollution and erosion. The program also developed standards for

water use by farming and horticulture/ floriculture.


Implementation is lead by WWF Kenya in collaboration with CARE and with public and private

Kenyan partners. Funding is provided by the Netherlands Embassy in Nairobi.


Revenue collection on water abstraction and discharge is arranged by the government. In-kind

support and TA Incentive scheme is organized for the small scale farmers (smallholders). Land use

and water management in the upper catchment has a direct impact on the water in the lake.

The Payment for Environmental Services (PES) scheme has two important elements. The first one is

revenue collection on water abstraction and discharge by the government. This is in place legally and

is optimised by the programme by improving systems for monitoring, management, enforcement and

accountability. Secondly, incentives are provided to small-scale farmers in selected vulnerable areas

of the upper catchment (land degradation hotspots) to change their farming methods towards more

sustainable techniques. The incentives – consisting of the required farming inputs to change farming

methods – are provided in kind at a certain value by commercial farmers downstream (the ‘buyers’).

Mobilisation and training of farmers is provided by civil society organisations (Water Resource User

Associations, WWF and CARE) and the government (Department of Agriculture).


Constraints could be the (non) existence of regulations on water intake of companies and absence

of larger companies to provide the in-kind incentives to small scale farmers. This might imply the

model is only applicable to reasonably developed water basins with some medium to large

companies buying in from small scale farmers.

Lessons learned:

• Incentives could be broadened to grants and credits (credits especially for rising income

farmers);

• Transaction costs could be decreased by more incentive payment schemes to

implementation;

• Contributions of buyers are now voluntary, these could be made more sustainable based

upon fixed levy on products;

• Scheme could be extended to other sectors such as tourism etc.

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The case shows that it is possible to create a public –private partnership and financial mechanism at basin level with small holders and other companies involved aiming to reduce water extraction and pollution. Essential elements for such a business model are interest and commitment of the partners, enforced regulation for water extraction and incentives to farmers and other smallholders.

4.3 Scaling up

By introducing new organizational models of a larger scale the business model can change and become more financially feasible and sustainable. The reasons for this are often economies of scale: by upscaling models from local levels to regional levels the operating costs per household can decrease or other savings can be made. Below some alternative organisational model examples are provided which have led to more feasible business models for water service provision.

4.3.1 Water supply and sanitation: umbrella and regional models

Inter municipal cooperation – (waste)water unions Introduction and objectives

In order to assess potential benefits of inter municipal cooperation in water and wastewater treatment

in Turkey, a pilot study has been carried out. The potential benefits of cooperation within the pilot

region of the Akarçay river basin in Turkey have been assessed. Nine municipalities from this area

have been selected for the pilot study, namely: Afyon, Bolvadin, Çay, Suhut, Dereçine, Karaadilli,

Akören, Düzağaç, and Sinanpaşa. The cooperation model selected fort his pilot study is a wastewater

union.

Concept

The independence and self-governance of municipalities lie at the heart of a decentralized

administrative system. Within such form of organization, each municipality is in theory independent

from its neighboring municipalities; it is free to organize the delivery of services to its citizens, as well

as to autonomously fulfil administrative duties. At the same time, however, municipalities too often

struggle with the large number of various responsibilities that they need to manage, as well as to do

so in an efficient way. Experience shows that municipalities are never totally self-sufficient – they often

lack in size, or in resources, to undertake successfully all requisite tasks. On the other hand, there are

many cases when cooperation with other municipalities can bring significant advantages and support

building up on deficient capacity.


The municipalities in the pilot area.

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The cooperation model evaluated in the pilot study is a wastewater union. Several municipalities share

one or more Urban Waste Water Treatment Plants (UWWTP) or participate in a regional waste water

treatment organization. The participating municipalities keep their autonomy but make long term

agreements about financing, staffing, construction, utilization and maintenance of UWWTP’s. The

financing of plant operations is handled through an extra fee for drinking water.

Success factors

Inter-municipal cooperation brings a number of potential advantages, which can be broadly divided in

financial and non-financial, see figure 2. The fact that many non-financial benefits ultimately result in

commercial gains appropriates the cohesive discussion that follows next.

1. Cost reduction

An important advantage of municipal cooperation is the potential for better economies of scale in

many local functions. In a business context, economies of scale imply that with increasing scale

of production, fixed costs are spread out over more units of output, resulting in lower per-unit

fixed cost. Variable costs are also likely to decrease since increasing size is often (though not

always) related to improved efficiency. In that respect, instead of having a number of small

offices, each with its own staff, municipal duties can be organized from one (or at least fewer)

location(s). Reducing the number of facilities through centralization implies more efficient

administration and lower fixed costs, including lower rent and overhead spending. Human

resource costs (e.g. wages and benefit packages) are also likely to decrease alongside a

consolidation process. Reduced staffing expense due to more efficient task allocation among

fewer employees is another potential advantage.

2. Collective purchasing

Equally important, economies of scale can reduce materials expenses. Ordering large quantities

of a product or material is known to be much cheaper than small-scale purchasing. When capital-

intensive functions are concerned, order quantity discounts provided by raw-materials suppliers

provide a good incentive for cooperative municipal organization.

Figure 1. Potential advantages of a (waste)water union

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3. Sharing Information

By organizing various functions from a single centre, municipalities benefit from a better-informed

decision-making process. Beside improved resource planning for the future, shared information

brings about costs optimizations, e.g. by reducing bookkeeping and reporting time. Many small

municipalities face similar problems, implying that shared information and best practice

experience could also provide effective solutions.

4. Improved environmental performance

Utilizing the force of well-trained high-quality workers and managers is likely to result in a better

technical performance of the facilities. In relation to public water infrastructure, collaboration

among municipalities (more specifically, the improved staffing) is likely to deliver enhanced

environmental performance, meaning lower incidence of pollution and an improved rate of

compliance to environmental standards.

5. Education & training

Small municipalities often employ untrained or unprofessional staff because they do not have the

access to skilled workers, or simply because they cannot afford them. Consolidation of staff from

several municipalities provides a new opportunity to attract, train and retain full-time professional

workers. The pooled financial resources, as well as the wider customer base, allow for additional

costs of training to be incurred.

6. Increased Bargaining Power

Individual municipalities often suffer from the absence of political power, especially due to their

small size they often lack voice accountability. By combining forces, municipalities are better able

to protect their collective interests, as well as to partake in policy development and legal decision-

making.

7. Better response to policy changes

The consolidation of municipal functions can introduce uniform standards and guides across

individual systems. The resultant streamlined procedures allow for a better response to policy

changes.

8. Side effects

Some indirect effects of municipal cooperation are also worth to be mentioned. A key advantage

of cooperation is the consolidation of resources. More formal types of cooperation imply the

merging of financial budgets, resulting in better credit rating and lower interest rates. These

factors appropriate for attracting investment funds, as well as applying for grants that may be

reserved for projects of a specified minimum scale. Sharing best practice experience, as already

mentioned, brings enormous potential for the effective management of problems commonly

confronted by individual municipalities. Furthermore, sharing experience, information and

resources is likely to bring a greater sense of solidarity within the partner community.


A number of risks related to formal cooperative organizations are described next. These risks do not

necessarily become obstacles but require proper management.

1. Slow decision-making

The extent to which slow decision-making appears as a problem for inter-municipal cooperation

depends on the legal form and internal regulations agreed among municipalities. Decision-making

gets slower with contract-based cooperation where decisions lie in the hands of constituent

mayors. In cases where the cooperative institution involves a separate legal entity, decision-

making is less likely to be held back.

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In conclusion scaling up of waste water utilities to regional organizations can bring a number of advantages relating to scale and professionalism, such as cost reductions (due to economies of scale and purchasing power), better access to skilled workers, better monitoring processes etc. Important lessons regard the optimal level of municipal versus regional union’s responsibilities.

4.3.2 Water safety & security: scaling up by multi-stakeholder involvement WWF is initiating a number of multi-stakeholder approaches for basin level water stewardship. WWF is currently piloting these approaches at 6 of the 16 priority basins. In below factsheet a case study of Water Stewardship of the Zambesi River Basin is presented.

2. Political costs of co-operation

It is often the case that municipalities are reluctant to commit to union membership, for example

because they are not ready. Ambitious municipal leadership may further hamper co-operation

through its inability to compromise and collaborate. In other cases, the role of certain

municipalities may turn out inactive or passive, reaping the benefits generated by pro-active

partners and creating the so-called “free-rider problem”.

3. Reluctance to financially contribute

Having no clear picture of the related benefits combined with constrained budgets often make

smaller municipalities reluctant to contribute financially to cooperative structures. Opposing this

outlook by way of showing the size of potential savings under effective organization and

management of a municipal union is among the general aims of this chapter.

4. Limits to Shared Management

The discussion so far has presented an overview of some key potential advantages of

cooperation. However, there is a limit to the extent a cooperative structure should be enlarged. As

the number of units clustered in a group increases, so does the size of its centre. The required

additional salaries and materials offset some of the savings in costs achieved by creating the

cluster at first hand, and therefore impose a trade-off of costs.

Lessons learned

The pilot study has presented a wide scope of opportunities for beneficial cooperation among

municipalities, which could promote a sustainable wastewater management practice in the Akarçay

river basin in Turkey. By discussing alternative options and providing examples of how different

wastewater treatment functions could be better arranged, the pilot study has provided a number of

incentives for forming a wastewater union. The illustrative financial analysis has provided some

evidence of cost savings that can occur with economies of scale. The currently incomplete figures

leave room for further analysis and identification of more potential efficiencies. Second in place, but

not in importance, come the conclusions concerning the gains in effectiveness of the wastewater

treatment service. Better-informed management, as well as improved monitoring process and

environmental performance, respectively, are among the other important benefits that a wastewater

union implies. The decisions concerning the desired level and form of cooperation, as well as

concerning the particular functions to be organized collectively, however, remain within the hands of

the municipal authorities.

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WWF Basin-level water stewardship Zambesi


The Zambesi is the four largest river in Africa. It passes through a number of countries: Zambia,

Angola, Zimbabwe and ultimately flows into the Indian ocean in Mozambique. WWF will initiate water

stewardship in the Kafue river basin. Kafue is a tributary to the Zambesi in Zambia. Important

problems are water pollution, land conversion, over abstraction and hydrological regime changes

caused by a number of stakeholders. The objectives of the initiative are to tackle these issues by a

multi-stakeholder approach.

Concept

The solution consists of a multi-stakeholder approach in which together with key industries and

farmers a number of demonstration projects are formulated to tackle the problems. With help of

Zambia National Farmers Union solutions for the sugarcane and cattle ranching are formulated and

replicated. Capacity building will take place with the Water Resources Management Authority and to

leverage agricultural successes to other key water users (mining, industry). Funding comes form the

key players and international donors.


Main sponsors are WWF, International donors and the key stakeholders. The key stakeholders are:

Zambia National Farmers Union, Water resources Management Authority, copper mining firms (KCM,

FQM, Mopani Copper Mines), sugar cane farmers and cattle ranching (Zambia sugar, Zambeef,

Parmalat), cement, food and beverage industry, ZESCO (hydropower).

46


4.4 Private sector participation

Private sector participation in service provision can result in more focus on value creation and revenues and more focus on cost optimization. Moreover, compared to traditional public or NGO provision commitment of private parties can be higher for long term maintenance and delivery of the services. So quality can also be affected. Private sector involvement can have certain advantages, but can also have certain negative consequences such as higher transaction costs or higher prices. The pros and cons of course always need to be carefully assed.

4.4.1 Water supply in rural areas: community enterprise models Community enterprise approaches for drinking water allow communities to manage, maintain and finance their supply systems. The advantage over public provision basically could be higher real local ownership and therefore more sustainability (including financial sustainability).


These are not clear yet, as the program is starting.

Success factors

At this stage of the program is too early yet to discuss success factors.


To be discussed.

Lessons learned

Not yet fully clear.

Water for peace: Community Based Approaches in Water Supply Projects for Multi-ethnic Neighbourhoods in Crimea


By the 1990s, violent conflict seemed all but inevitable on Ukraine's Crimean peninsula. The return of

more than 260,000 Crimean Tatars, Bulgarians, Greeks, and Armenians who had been deported by

Stalin after World War II was creating massive tensions. Eighty-five percent of returnees made their

47


Stalin after World War II was creating massive tensions. Eighty-five percent of returnees made their

home in 300 hastily constructed ‘compact settlements'. Most lacked access to safe drinking water - a

problem that was rapidly becoming a lighting rod for discontent. To help deal with this problem, the

government and the United Nations Development Programme (UNDP) created the Crimea Integration

and Development Programme (CIDP) in 1995 with the goal of preserving peace among the different

ethnic groups by addressing their development needs, particularly their need for water.

CIDP enabled local communities to solve their water supply problems by encouraging them to

organize themselves in several self-governing Community Organizations (CO) and to establish

Community saving funds. COs were able to take stock of their situation, identify needs, set priorities

and decide what resources they can contribute towards the solution. They participated in the design of

the water supply system and its construction. The programme also developed an alternative

institutional and organizational model for community-based water supply Operations & Maintenance

management, where COs were authorized to autonomously manage, operate and maintain the

systems through Community Based Enterprises.

Concept

The concept is a community-based O&M management system for water supply which is transparent

and financially sustainable. Considering as example the experiences in two communities, Tenistoye

and Sevastyanovka, which were serving as pilot projects in the early 2000s. The two communities

were encouraged to organise themselves in several self-governing Community Organisations (CO), to

make plans for the future organization of water supply in the communities.

Project implementation

After approval, UNDP/CIDP and the Community Organisations concluded contracts for the

implementation of the projects. For construction works, UNDP/CIDP selected specialized contractors

by open competitive bidding in the presence of the community organisations. Local authorities

provided modest funds, in-kind support such as equipment, and vital administrative support to ensure

that all legal requirements were met, and that permits were issued. Moreover, the village council has

taken the water supply system in its inventory that will ensure the possibility to allocate budget for

future major maintenance and expansion of the system. This system is particularly suitable for

relatively small rural water supply systems and has been successfully tested in the two pilot

communities.

Following this model, the village councils responsible for the two settlements are now the owners of

the water supply infrastructure, and have authorized the Community Organisations to autonomously

manage, operate and maintain the systems. The Community Organisations have selected a member

from their functional groups who then registers as a so-called Community-Based Enterprise (CBE).

The Community Organisations have sub-contracted all O&M tasks and responsibilities to the CBE. To

ensure payment by consumers, the CBE establishes service delivery contracts for the provision of

water services with individual households, commercial enterprises and other institutions. Only

households that joined the Community Organisations were connected to the water supply systems.

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Discussed above.

Scale and specifics regarding the positioning tool

In the past, consumers were charged a fixed fee for water, calculated as a lump sum per head. The

reason for this mechanism was that many users did not have water meters installed, which had as a

result, that there were no incentives for individual users to be frugal with their use of water. Numerous

misunderstandings have led consumers to mistrust the KomunKhoz, originally responsible for O&M.

Consequently, many people simply did not pay for the water they used. In response, water meters

were installed by users in the communities and the communities were advised to determine a

minimum basic per capita requirement for drinking purposes. The tariff for the water consumption that

exceeds this basic requirement – the lifeline block - should be set at a higher level. This system is

frequently referred to as a rising block tariff system.

In the pilot areas, monthly fees are now collected by the CBE. Revenue is deposited in a bank

account that is expressly and exclusively used for financial administration of O&M for the water supply

system. The CBE is responsible for monthly meter reading and for the collection of water charges

based on the tariff approved by the community organizations. The tariff component that is reserved for

depreciation is transferred on a monthly basis to a depreciation fund held and managed by the

community organization.

The main purpose of this fund is to finance the rehabilitation of the system. Whereas O&M can now be

covered from revenue collected through fees, it is still unrealistic to expect users to cover the capital

costs of system extensions. In the event of major breakdowns or natural disasters, external support

(from government) will probably be needed to restore the systems.

Success factors

• Community participation;

• The key to acceptance and participation is the transparency of the entire mechanism and

process. A critical step is to use simple and understandable terminology in the calculation of the

water tariff.


Major problems faced in the process of operating and maintaining the community-based water supply

systems are:

• Reluctance of some Village Councils to handover a water supply system to community

organizations and CBEs;

• Difficulties faced by CBEs in registering themselves as an enterprise that delivers public services;

• Costly, complicated, and unclear procedures for getting licenses and permits for abstraction and

use of ground water;

• Lack of required technical facilities within the district to undertake major repair works, and to test

water quality.

Lessons learned

With respect to observations made several years ago, the opinions of public authorities at national,

regional and local levels towards CIDP and its approaches have shifted considerably. The orientation

towards real community involvement is seen as a viable approach for improving the desperate

conditions prevalent in most rural villages - and particularly in FDP compact settlements. Nowadays,

community participation is not just accepted but is actively and sometimes even enthusiastically

supported by regional administrations and village councils throughout the Crimea. This growing

awareness is currently contributing to mainstream community involvement in planning and decision-

making processes throughout the Crimea.

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In conclusion the project ‘Water for peace’ shows how rural communities can be involved in managing, maintaining and financing their water supply systems resulting in a more sustainable financial situation.

4.4.2 Water supply and sanitation: Public Private Partnership Public Private Partnership is not always a clear concept in international development. In the Infrastructure domain Public Private Partnership is clearly defined as contracting modes in which the private sector is responsible for operating or financing services which were traditionally delivered by public bodies. Examples of infrastructure PPPs are design-build-finance-operate (DBFO), lease or concession contracts. In the development world PPP is often regarded as any collaboration of public sector with private sector or private sector involvement. This is a much wider concept. In this report we use PPP in the more narrow defined way. The wider involvement of private sector we will discuss under the organisational models. PPPs are often considered for infrastructure services provision for several ways: • Efficiency gains: the idea is that private sector can save investment or operating costs

compared to public provision; • Higher quality: the idea is that the private sector could provide higher quality services because

of better market knowledge or a more professional way of working; • Reduction of government expenses (off balance financing): the idea is that PPPs can help to

finance projects outside the government budget. In the nineties this has also been a motive for governments to stimulate PPPs. However, if PPPs are really more efficient for the government budget depends on a number of factors and is not beforehand a clear cut case.

PPPs are most common in transport and water supply (areas where cost recovery/ profitability is often better than some other areas) in developed countries. Below we show some PPP examples in areas where PPP is not yet of ten applied (waste water, water safety).

At the project level CIDP combines technical know-how with social competence. As a result,

technically sound water supply facilities have been constructed in the above-mentioned communities

with substantial contributions made by the communities themselves. The communities can now rectify

problems such as system leakage independently, right on the spot.

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PPP availability payments Waste Water Treatment Harnaschpolder


Public Private Partnership (PPP) contractual modalities for construction and operation of water

related services are more and more upcoming. Especially in areas such as water treatment PPPs

are quite common. In waste water treatment PPPs are often more difficult especially in low and

middle income countries due to lack of private payment options due to affordability constraints. In

developed countries such as US, France, South Africa etc. PPPs are also more common for

construction and operation of waste water utilities. PPP contracts can result in lower costs and

higher quality, but generally have higher transaction cost due to the complexity of procurement

and contracting and need a favorable PPP environment. In the Netherlands quite recently the

waste water treatment plant Harnaschpolder was constructed with a PPP contract.

Concept

Harnaschpolder waste water treatment plant is constructed and operated under a Design Build

Finance Operate (DBFO) contract. This PPP contract for the Hague region waste water

treatment is new for the Netherlands in the sense that the private consortium is also responsible

for financing of the construction.


The contracting agency was the Delfland Waterboard. A consortium of French – Dutch

companies named Delfluent won the contract (Veolia Water, Strukton, Heijmans and some other

companies). This consortium is responsible for the construction of two WTTP plants and

management of the waste water treatment plants for a period of 30 years. EIB and BNG are the

largest financiers behind the consortium.


The PPP contract showed to be 10-15% cheaper than traditional procurement. The consortium

receives a fee per m3 treated water. The quality of the treated water plays a key role in the key

performance indicators (KPIs).

Success factors

Lifecycle costs asset management

Continuous Risk Assessment and risk management

Scale of WTTP

Collaboration within consortium partners

Well organized Open European Procurement

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4.4.3 Water safety: Public Private Partnership practices There is an increasing use of public private partnerships in water safety projects. This is mainly because water safety is seen as a public good. The examples below show how private parties can be actively involved in water safety projects and how collaboration between public and private parties can help the project to be financially sustainable.


- Experienced private partners (like Veolia Water) should be available for the relevant market/

geography;

- Experienced contracting agents (waterboards, governments);

- Scale; the WTTPs need to have sufficient scale in order to reach economies of scale, this is a

problem in smaller communities;

- Lack of costs recovery (tariffs, taxes) in many developing countries;

- Limited financial market in many countries for PPP finance and high risks and high costs of

private finance (high interest rates in African countries);

- Applicability seems limited in some lower income countries in Africa where governance and

experience in both the public and private sector can be bottlenecks for PPPs.

Lessons learned

---.

Pevensey Bay Flood Defence Introduction and objectives

In the late 90s, the flood defence structure of Pevensey Bay, a nine kilometre area between Eastoune

and Bexhill in East Sussex on the English channel coast, was reaching the end of its technical life.

Due to lack of maintenance the embankment narrowed because of erosion and by 1997 it was

expected that a storm with a return period of 1:20 years would damage the defences.

Concept

In 2000 the Environment Agency signed a £27.4 million Public Private Partnership (PPP) 25 year

long-term contract for the Pevensey Bay Sea Defences with Pevensey Coastal Defence Limited

(PCDL). PCDL is required to carry out improvement works to raise the standard of protection and

maintain the sea defences for a monthly` availability fee which is based on the condition of the beach.

Goal of the PPP is to incentivize innovation and investment.


Pevensey Coastal Defence Limited (PCDL), The Environment Agency, East Sussex CC, Eastbourne

BC, Rother DC, Wealden DC, several parish councils, residents associations and fishermen

representatives; English Nature.

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The Pevensey Bay Sea Defence is a sea defence project funded as a Public Private Partnership

(PPP/PFI). Responsibility for the defences rests with the Environment Agency (the Agency), a Non-

Departmental Public Body of the UK government’s Department for Environment, Food and Rural

Affairs (Defra). The Environment Agency signed PPP contract with PCDL, which is a special purpose

company formed solely for the purpose of performing the Pevensey contract. Following a tendering

process, PCDL received an Invitation to Negotiate (ITN) that ultimately led to a 25 year contract being

signed on 1st June 2000. PCDL actually undertakes none of the work, having subcontracted all

obligations to the four shareholders. Each shareholder has a contract with PCDL backed up by a

similar direct agreement with the Agency, which would allow the Agency to continue to maintain the

defences should PCDL fail to perform.

Success factors:

- A fairly small PPP with as a result that the four subcontracting firms were able to finance the

expenses themselves, rather than borrowing money;

- The four subcontracting firms created a special company Pevensey Coastal Defences (PCDL) to

deliver the contract;

- Long term commitment and vision is created in the form of a 25 year PPP contract and the

consortium has been contracted to provide protection against a breach of the shingle bank for

any storm with a joint return period of one in 400 years or less. This gives the contractor time to

evolve best practice;

- The key physical features of the beach are the basis for payment.


These types of PPP availability fee based contracts are mainly applicable if private parties and banks

have enough trust that local or regional governments commit themselves to pay long term availability

payments from the government budget. Therefore these PPP mechanisms only work in an

environment with credit worthy governments, multi annual budgeting and low political risks or with

sovereign guarantee coverage. For this reason availability fee schemes might be less applicable or

more complex in many developing countries.

Lessons learned

- Sound Key performance indicators based upon the quality specifications for the beach are

important.

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Broadland Flood Alleviation


Some 240km of floodbanks protect approximately 21,300 hectares of Norfolk Broadland containing

more than 1700 properties of which more than 1000 are residential. The main aim of project work has

been to strengthen existing flood defences and restore them to a height that existed in 1995 (a level

defined by the Environment Agency) and make additional allowances for sea level rise and future

settlement of the floodbanks.

Concept

The Broadland Flood Alleviation Project (BFAP) is a long-term project to provide a range of flood

defence improvements, maintenance and emergency response services. The Environment Agency

appointed Broadland Environmental Services Ltd, a consortium of Bam Nuttall and consultant

Halcrow, to do these services and, in partnership with the Agency, it is now implementing the 20-year

programme of works. This contract was awarded in May 2001 in the form of a Public Private

Partnership Programme.

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4.5 Conclusions: overall lessons learned

• Practices in Innovative business models are increasingly observed with scope extension from water to other sectors, innovative payment systems and more private sector participation;

• Reaping revenues from waste water re-use projects needs to go hand in hand with strong market backing: feed in tariffs for electricity generation, a sound market for fertilizers;


Environment Agency, Broadland Environmental Services Ltd, inhabitants, companies.


The 20 year £117.6M contract between the Agency and BESL is a Public private partnership. The

total costs of the project are limited which means that all individual schemes within the project have to

be strictly designed to be cost-effective and within the planned programme. The project consists of

eight key service elements, under which the mechanisms for payment are set. These consist of

monthly payments and lump sum awards, so maintenance works are paid for monthly as is the

provision of an emergency response team, but lump sums are awarded for achievements such as

completed improvement works, getting planning permissions and completion of the annual strategy.

Success factors

- The PPP construction is a successful working model of an alternative, cost effective means of

safeguarding rural communities and offers an essential example of the approach future

governments could take;

- The PPP construction allows the contractor more freedom in developing the most cost-effective

solutions;

- BESL funds each piece of work from conception, though design and planning, to construction

and completion. In this way the Agency get predictability of year on year cost, the BESL can tailor

the construction work to meet these figures so the Agency gets a much more balanced payment

profile.

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• Reaping land development benefits from water safety projects needs a strong PPP vehicle such as a Strategic Development Company backed-up by government commitments (guarantees, government grants);

• Business models in water supply and sanitation go hand in hand with micro-finance systems and grants for capacity building (blending) geared towards the water and sanitation sector;

• Models aiming at cost savings often consist of scaling up of water utility functions to regional levels or Public-Private Partnership contract forms;

• The experience with PPP schemes in the area of water safety is still limited to a few cases, among others in the UK. For flood safety projects, where private revenues are difficult to generate or capture, governments have to play a crucial role. (Partly) private financing seems possible for this type of projects in case of scope extension with urban development.

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5 Innovative financing mechanisms

In this chapter we will provide an overview of innovative financing mechanisms for the water sector from recent years. Financing mechanisms are defined as financing instruments (or structures) which basically aim at attracting new financial resources into the water and sanitation services or for funding of water safety and water security measures. Examples of such innovative financial instruments are trust funds blending grants and repayable financing, microfinance for water services providers, guarantee funds, pooled financing vehicles, revolving funds or out based aid (OBA). Often the schemes combine (“blend”) different financing products such grants and loans or equity in one structure or group projects through pooled financing into bonds. Basically, the instruments do certain things: • Combining traditional grants with loans or equity instruments in order to support single projects

or programs. EU and EIB with its Trust funds (such as EU ACP Water Facility, EU Africa Trust Fund etc.), KfW are currently frontrunners in this domain. In this chapter several interesting project cases are shown where blending is used at project level to improve the business model (with TA grants) and finance the projects;

• Using guarantee funding to make repayable finance available to the water sector by decreasing risks for the lenders;

• Scaling-up: by pooling smaller projects into larger investment vehicles and capital marker products transaction costs are decreased per project and resources from capital market investors are accessed.

An overview of the instruments discussed in this chapter is provide below. Table 5.1 Overview innovative funding schemes water sector


Innovating financing mechanisms

Blending trust funds for

drinking water in small

towns

Grants and loans for water

utilities in small towns

Depending on

regulations and

institutional setting

utilities


Zambia

Blending finance at

project level

Subsidies can leverage

commercial finance

Grants necessary for first

losses, TA: promotion,

upscaling etc.

Willingness commercial

banks to enter market

Maji Ni Maisha:

Innovative Finance for

Community Water

Schemes in Kenya

Microfinance for water

and sanitation

Micro-credit scheme Micro-finance for

sanitation in Bolivia,

Guatemala, India,

Malawi, Peru, Rwanda

and Uganda

Crowdfunding Funding provided through

internet crowdfunding

platform

Grants from public

Small easy to

communicate projects

Crowdfunding: Safe

water in Umuonye,

Southeast Nigeria

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Communicable projects to

audience

Results Based Financing

Output based Aid

(Worldbank)

Grant based upon

incentives for delivery

Deliverables of projects

should be measurable

Improving irrigation in

the North China plain

Revolving Fund structures

and pooled financing

vehicles

Funding through an SPV

Hydrobonds issued

Longer term maturity

provided

Financial sustainable

private water

companies


Zambia

5.1 Blending

In this paragraph a number of cases is shown combining (“blending”) different financial instruments (grants, equity, loans). Basically concessionary financing (grants, loans with a grant element) are combined with repayable finance from IFIs or market sources. Basically blending grant funding with market based funding allows to mitigate some risks for financiers and affordability constraints of the lenders. All cases combine grants (or grants used in guarantee funds) and credit schemes. Blending serves several aims. First of all private finance is attracted towards the water sector (leverage) by taking out some risks for financiers or losses by using the public funds to mitigate these risks or first losses. Secondly, different sets of expertise are mobilized in order to execute and finance the projects. Blending can take place at two levels: institutional level (see par. 5.1.1) and project level (see par. 5.1.2). At institutional level blending combines the different instruments in one financing institution or funds so that different type of funders do not have to match-up. In this sense it saves transaction costs, important especially for smaller projects. Examples are the ACP-EU Water Facility or the Private Infrastructure Development Group (PIDG) vehicles such as the Emerging Africa Infrastructure Fund (EAIF) or at national level FINDETER in Colombia (see OECD, 2010). At project level blending is achieved by combing instruments often from several donors and IFIs specifically for the relevant project. Below several cases are presented and also in Chapter 4 some cases were already presented for water & sanitation.

5.1.1 Trust Funds for drinking water and sanitation in small towns This example of blending shows a basket fund which provides loans and grants to commercial water utilities for drinking water and sanitations of the poor.

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DTF was established by NWASCO (National Water Supply and Sanitation Council) and is established

as separate entity. The main sponsors are German Development Cooperation & KwF, DANIDA and

EU.


Grants and loans towards commercial water utilities based upon competitive calls. Contributions

amount to 4 million USD per year.

Success factors

• Clear regulation and funded regulator in place for utilities;

• Good coordination between the donors;

• Clear predefined project selection criteria;

• Effective monitoring and reporting, transparency.


• Constraints could? be the existence of well regulations and commercial water utilities;

• Fund is replicable to other countries (and this is already happening in Kenya and Mozambique).

Lessons learned

Small scale relative to financial water sector flows and needs. There is potential for up-scaling given

the large needs.

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http://www.dtfwater.org.zm/index.php?option=com_phocagallery&view=detail&catid=6:biogas-training&id=279:biogas-training-7&tmpl=component&Itemid=431

Devolution Trust Fund Zambia Introduction and objectives

The Devolution Trust Fund in Zambia is a Basket Fund and provides loans and grants for drinking

water and sanitation for the poor. The fund provides grants and loans based upon a call for proposal

towards the 10 commercial water utilities (owned by municipalities). The Fund is operational since

2006.

Concept

The Fund provides grants and loans to access to water and sanitation services in low income

suburban and urban areas based upon competitive calls for proposals. Proposals are submitted by

commercial utilities. Funds are released depending on milestones realized (output based funding).

The Fund has two windows; a general fund and a performance enhancement fund. The performance

enhancement fund is aiming to improve the commercial viability of utilities and is only available to

utilities which have completed successful projects under the general fund.

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5.1.2 Guaranteed loans and microcredit schemes for drinking water & sanitation The project below shows an example of how the access to clean and reliable water supply can be increased by blending-output based subsidies and commercial finance.

Maji Ni Maisha: Innovative Finance for Community Water Schemes in Kenya Introduction and objectives

The Maji Ni Majsha project is increasing access to clean and reliable water supply for rural

communities in Kenya. The project is financed by a blend of commercial finance and a World Bank

output-based subsidy. The project’s objective is to help small community-based water providers

access the finance they need to improve water systems and connect poor households to piped

water supply. Maji Ni Maisha’ means 'Water is Life.'

Concept

The financing concept is blending output-based subsidies and commercial finance. It was the first

GPOBA-funded project (General Programme on Output Based Aid) that used this combination of

financing instruments. Financing is provided on a project finance basis. The community provides

equity (20 percent of project cost) and K-Rep finances the remaining 80 percent through a loan

with a maximum tenor of five years. The longer tenor of the loan is made possible through the

output-based subsidy which repays up to half the loan. It also makes the monthly repayments more

affordable for the community. The subsidy is output based in the sense that the actual payments

depend on the performance related to targets (i.e. connected households) of the project.


The output based aid is provided by World Bank’s Global Partnership on Output-Based Aid

(GPOBA). K-Rep bank is proving the loans. The output-based subsidy helped K-Rep to enter the

sector. Community-based water service providers develop, own, and manage the water assets.

World Bank PPIAF finances grants which enabled the communities to contract consultants for

project development and implementation.

Success factors

The provision of an output subsidy covering part of the loan repayments made it possible to use

commercial loans for project financing. Important success factors are:

• Worldbank knowledge, grants and TA enabling private finance;

• Blending grants and loans;

• K-Reps will to enter this new market.

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The case shows that it is possible to increase the access to clean and reliable water supply by blending-output based subsidies and commercial finance. Essential elements for such a business model are having specific knowledge in-house and having local banks who are willing to enter new markets.

5.2 Microfinance for drinking water and sanitation

Microfinance is increasingly used in the drinking water and sanitation sector. Below an example is shown of a micro financing project for sanitation in Malawi provided by an NGO. In this example most loans were provided to collectives.

Constraints and applicability:

• Willingness of commercial banks to enter the market;

• Not in all situations is TA and knowledge from PPIAF available;

• Projects need to have enough revenues to pay for at least part of the loan repayments +

interest;

• Project is in principle replicable to other countries if projects have some revenues and

commercial banks are willing.

Lessons learned:

• Subsidies can leverage commercial financing from banks to make pro-poor investments viable

and attract equity from communities;

• Target communities must be willing to pay for piped-water supply;

• Investments financed with commercial loans should generate revenue within a relatively short

period of time, and outputs linked to the subsidy payment need to be achievable in a timely

manner;

• The approach requires significant technical support, and a scale-up should be embedded in a

programmatic water sector initiative;

• Consideration should be given to institutionalizing support mechanisms necessary to further

develop such financing approaches.

Micro-finance for sanitation in Bolivia, Guatemala, India, Malawi, Peru, Rwanda

and Uganda Introduction and objectives

Water for People (W4P) has undertaken a number of lending schemes in Bolivia, Guatemala, India,

Malawi, Peru, Rwanda and Uganda. These credit schemes aim to stimulate construction and use

of latrines in developing countries. Traditionally many sanitation programs are NGO grant financed,

which often leads to abandoned projects (a sustainability issue). The idea behind providing lending

finance to more market or community driven initiatives is to foster sustainable sanitation products

for lower and middle incomes.

Concept

The concept is in general to provide loans for latrine construction to either individual households or

household collectives or in some cases to the sanitation company itself. Loans are often based

upon a guarantee provided by W4P and provided by local micro-finance providers (MFIs or

SACCOs) at below market interest rates in relation to the guarantees. Generally often in case of

loan collectives some knowledge of NGOs or community institutions is needed regarding sanitation

and function of the local community. Below the case of Malawi will be described. In Malawi Most

loans are provided to household collectives (of 7-10 households). One loan was provided to a local

entrepreneur to expand his sanitation center.

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In Malawi the W4P initiative is organized with OIBM (Opportunity Bank) for the peri-urban area of

Blantyre. W4P provided a guarantee for non-repayments also to reduce the interest rate to below

market level. Local NGO hygiene village promoted loans to the communities and delivered loan

trainings to the collectives.


About 210 loans were provided at interest rates of 24% per year (market rates are about 48% per

year). The payback period was 6 – 12 Months. The management fee was 2,5% and OIBM required

20% of the loans to be held on its savings account. The repayment rate for the loans was 88%.

Success factors

The project was a success in terms of sanitation latrine construction and use. Not successful

elements are that the lending scheme was not sustainable and the non-repayment rate was high

also due to the collective group financing and (unintended) communication of the guarantee

provided by W4P.


The model used in Malawi is mainly applicable for urban to semi urban areas with household

collectives.

Lessons learned

W4P prepared a concept paper regarding the scheme and potential market size to 5 banks and

one MFI in Malawi. Based on meetings with discussions and an institutional assessment a partner

was selected. All the banks required a guarantee as they perceived sanitation lending as high risk.

Other lessons learned:

- Due to reduced interest rates (guarantees) and high non repayments the model showed not to

be financial sustainable. Piloting with more market driven interest rates and individual

contracts (instead of collective schemes) might lead to more financial sustainable outcomes;

- Lending partners need to be market driven, know the sanitation market and lenders/clients

and minimize non-payments;

- Costs to form and manage lending groups should not be underestimated (NGO Hygiene

Village undertook this).

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5.3 Crowdfunding platforms

In the last couple of years crowdfunding is an upcoming phenomenon. In principle crowdfunding is a method whereby people are asked either to donate or lend money to initiatives. Often internet is an important communication tool to reach potential donors. More recently crowdfunding has also been coming up in the water sector. In the Netherlands a number of crowdfunding platforms have been established such as Pifworld, Get it Done, 1% Club, World of Crowdfunding etc. Only several crowdfunding companies such as 1% Club Crowdfunding have been raising funds for a number of smaller water projects in Africa. Crowdfunding can take several forms: as donations of the public to initiatives or as credits. In the water sector the main instrument is donations. Initiatives are disseminated through the crowdfunding company through internet and other media to the wider public. The crowdfunding company serves as the matchmaker, project assessor, organizer and communicator. Crowdfunding by itself is often more than only a financing instrument. The companies try to get more engagement to good causes and organize the communication and marketing both for fundraising but also for accountability to the public. Crowdfunding is suitable for well communicable and small sized (up to 50.000 euro) projects. The promoters get about 60 days time to reach their budget by crowdfunding. Often within 30 days it is already clear if the promoter will be able to reach its goal. Often the crowdfunding companies are for profit institutions and ask a fee (either as a % of the amount, either as membership fees). The commission fees can vary between 6-12% of the amount reached or even of the amount of donations. Below an example is presented of a water project financed by crowdfunding.

Overall lessons:

- NGOs do normally not have the capacities to manage lending schemes in a commercial way

and have high overhead costs;

- Selection of the right implementing partner is crucial;

- Micro-finance capacity building is often necessary, also for banks and community MFIs/

SACCOs. For banks risks are often high (not interested), community financial organisations

need more capacity development but are better connected to the community;

- Sanitation market building (with low costs latrines) and firms platforms should go hand in hand

with the micro-finance scheme;

- Use as much as possible market interest rates (avoid guarantees and such);

- Promotion to and capacity building of lenders is crucial (preferably not to be conducted by

NGO but by the financing partner who stays).

Crowdfunding: Safe water in Umuonye, Southeast Nigeria Introduction and objectives

Bruce Cerew from the Ray of Light Foundation has recently finished two successful crowdfunding

campaigns at 1%Club. The first campaign run by Bruce focused on the assurance of safe drinking

water in the village Umuonye, Nigeria. With a total amount of €5000 crowdfunded they will build a new

water borehole. 10 women of the village will become ‘the water committee’. Together they are

responsible for the use of the borehole.

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Concept

The concept of 1% club is funding selected initiatives in a number of days through donations from

donors through the crowdfunding platform. Communication (Internet and social media) play an

important role in reaching potential donors. 1% club also broadens with being responsible for

communication, linking up to corporate social responsibility (CSR) and working with companies and

their staff based upon CSR to implement projects.


Bruce funded the project via the crowdfunding platform 1%Club. 1%Club is the do-good crowdfunding

platform that works with a donation-based model. Bruce combined online fundraising with offline

fundraising events like festivals. The main stakeholders are the villagers of Umuonye, Nigeria.


Bruce fully funded his campaign with a target amount of €5000.

Budget breakdown:

Electrical pole, cables and other accessories €1000

Supply and deliver to site ½ trip of ½ rice gravel €500

20 ft x 16 x 6 inch pressure PVC €500

Water Storage Tanks 4 nos, 2000 gallons €1050

Steel Stanchions for overhead support, accessories and installation €950

Drilling geophysical water survey €1000

Crowdfunding period: 100 days

Success factors

Main success factors are the do good character and small size (non complexity) of the project. The

project serves practical needs of a small community and is easy to communicate.


Basically crowdfunding is suitable for do good, easy to communicate small and non complex projects.

For larger size more complex projects crowdfunding might not work.

Lessons learned:

• Incentives could be broadened to grants and credits (credits especially for rising income

farmers);

• Transaction costs could be decreased by more incentive payment schemes to

implementation;

• Contributions of buyers now voluntary, these could be made more sustainable based upon

fixed levy on products;

• Scheme could be extended to other sectors such as tourism etc.

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From this case it can be concluded that crowdfunding can play a limited, but complementary role in the water sector, mainly for small do good projects which are easy to communicate to a wider audience.

5.4 Results based financing

Over the last years development practice has implemented more result based financing instruments in healthcare and water programs. The idea is that result based financing (RBF) mechanisms stress incentives for achieving development outputs and outcomes and can serve as an alternative to traditional development assistance (grants, loans and guarantees). There is not a unique uniform definition of these financial mechanisms. For example a variety of schemes is applied in practice. Examples are carbon finance, cash-on delivery aid, output based aid, Payment for Environmental Services (PES) and Take or Pay. The common characteristic of the schemes is that incentives are created for delivery of services or tangible outputs (works, connections) and that the risk of pre-financing and delivery is allocated to the service provider. According to the concept it can result in a number of benefits: • Better quality of services; • Increased transparency and less corruption; • Change in culture (from budget to output oriented); • Stricter principal - agent relation and supervision; • More autonomy of the provider. However, the RBF instruments tend to have higher transaction costs (preparation, monitoring) and the risk of unintended distortions. In a recent Report of the World Bank Global Partnership on Output based Aid (GBOPA, 2014) the concept is detailed and a number of case studies are presented. Most cases in the water sector are presented for the water supply and sanitation sector where the subsidies are often conditional upon the delivery of services to poor households. Below we will show a case of an application of an RBF instrument for an irrigation project in North China.

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Improving irrigation in the North China plain


In the 1980s the irrigation infrastructure in the North China plain deteriorated because of the transition

of the heavily subsidized programs managed by People Communes to autonomous Irrigation districts.

Management practices, maintenance and operations of the systems were weak.

Concept

The result based incentive aims to improve the efficiency of operations management and collection

performance. The risks for collection of water fees and cover O&M costs were shifted from central

levels to the Irrigation Districts (IDs). The IDs then receives provincial funds based against pre-agreed

goals to build and rehabilitate irrigation infrastructure. Moreover the ID adopted incentive based

salaries for employees performance. The Performance of the ID is measures by: collection rates,

water distribution and the quality of maintenance work.


Provincial funds are used (output based) for the construction and rehabilitation works. The water

collection fees are used to cover O&M costs.


Bonuses for staff were linked to performance scores of the entity. The budget bonus for the entity is

based upon collection timeliness.

Success factors

Important success factors were in the enabling environment:

• An improved regulatory framework for water fees and cost recovery;

• Set up of a stronger implementation system with more autonomous Districts;

• Better fees and pricing.


Important constraints were measurement problems regarding water received.

Lessons learned

Performance based instruments can be implemented in public authorities. However enabling

environment and adoption of crucial regulations are important pre-conditions for success.

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5.5 Revolving funds and pooled finance structures

The traditional manner of financing infrastructure throughout the world is through money appropriated by municipal or national governments, which money is used to pay the capital costs of such infrastructure as it is constructed. As there are not sufficient public resources, alternative methods for financing municipal water and sanitation projects are used in a few parts of the world. This alternative method recognizes that a pool of capital can be used repeatedly as a “revolving fund”. The revolving fund may be capitalized by government or may be raised using private capital. The municipality or local water company takes a loan and repays it over time back to the revolving fund and pays some interest costs. There are a number of revolving funds in the world, including in India, Mexico, Philippines, serving the water sector. In the USA all water and sanitation projects are financed with loans. In the OECD report “ Innovative financing mechanisms for the water sector “(2010) a good overview is provided. The revolving fund model is of interest for several reasons: 1. The revolving fund model is replicable elsewhere. It is not unique to the laws of any one

country; 2. The revolving fund model permits governments to better meet their infrastructure needs; 3. The model permits municipalities to access more money than would otherwise be not available; 4. It relies on commonly understood financial tools. Each of the individual tools is well known in the

capital markets of the world; 5. The revolving fund model can attract private capital. Private capital in general helps to increase

the financial discipline and quality of infrastructure services; 6. The credit structure permits projects to be financed at lower annual debt service costs; 7. The revolving fund model’s credit structure permits longer term borrowing than would normally

be available; 8. The model enhances credit ratings and therefore reduces the interest costs for the lenders. Where private capital is used, it is normally raised in the capital markets, through the sale of bonds or other securities to private investors. For many reasons, private investors find these securities or bonds to be attractive investments. The investors include (local) pension funds, provident funds and insurance companies. These models are in use in India, Mexico, Colombia and US. As mentioned, in the latter all water and sanitation projects are financed with long-term loans and the loan repayment history of US municipalities is good. There have been very few defaults. The building blocks for the revolving fund model are rather straightforward. There is wide latitude to create and manage a program consistently within the policies and traditions of each government. The revolving fund model may come with variations. The basic elements include: 1. Private capital and grants to capitalize the revolving fund model using credit enhancement

techniques (grants, pooling and other, see below); 2. A legally dedicated, inviolate fund or account into which the capitalization is placed, which fund

is legally isolated from serving any purpose other than that for which it is established; 3. A clear definition of the use of the funds, for example, for drinking water, sanitation, industrial

and agricultural and for other wastewater projects. There is great latitude given to the fund managers in selecting which projects to fund. Credit enhancement may be necessary to encourage lending of private capital to municipal water projects. Frequently used credit enhancement mechanisms include: 1. The dedication of a specific source of revenue to the support of the debt obligation;

Comment [HG1]: Reference to Martin S Baker’s paper on the Sustainable Fund Model (Guyana 2013)

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2. The pledge of the general revenues of the borrower, including a pledge to raise taxes if necessary;

3. The pledge of funds which they are legally entitled to receive from others such as from the national government (such as an aid intercept);

4. The creation of reserve funds; 5. The pledge to raise tariffs or revenues to meet any unanticipated costs; and 6. The use of third-party guarantees or credit insurance. Other ways of increasing the credit structure is by aggregating and pooling small and medium sized water projects by local utilities into legal entities such as pools, trusts or limited purpose companies. Consequently the pool or trust can issue securities, bonds or other financial instruments to provide the financing for water and sanitation projects on a long tenor basis. This is achieved because the credit of a pool of projects is stronger than the credit of most water projects individually (and transaction costs for the financial institutions are per dollar credit provided lower for the pool as a whole). There are many credit enhancement techniques at the pool level available to permit the bonds to have sufficient credit for them to qualify as suitable investments for such institutional investors. This model permits the active participation of local financial institutions and local investors. The model will work better with such participation. Substantial involvement of local investors is important because it provides a local fiscal discipline for municipal loan repayment. That is, with local lending, the failure of a municipality to timely repay a loan will have local consequences. The local consequences of default have has greater local political meaning than similar defaults solely to international lenders whose recourse is not as immediate or as locally meaningful. Simply put, the model can involve the combination of i) a revolving fund funded by international and local investors and by a possible grant, ii) a portfolio of (pooled) individual loans to small and medium size projects and iii) independent or third party credit support possibly via reserve fund or at project level. Collectively, a very strong credit structure can be created. Figure 5.1 Pooled financing model

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The European Investment bank (EIB) and European Commission have launched the joint initiative InnovFin under Horizon 2020 (i.e. the EU research programme 2014-2020). The objective of this initiative is to facilitate and accelerate access to finance for innovative businesses and other innovative entities in Europe. It is providing a series of integrated and complementary financing tools and advisory services covering the entire value chain of research and innovation in order to support investments from the smallest to the largest enterprise. It is available across all eligible sectors under Horizon 2020, in EU Member States and Associated Countries. By 2020, InnovFin is expected to make over EUR 24bn of debt and equity financing available to innovative companies to support EUR 48bn of final R&I investments. Under the initiative an interesting financial innovation has been set-up in Italy: the Viveracqua Hydrobond. The structure comprises of the issuance of bonds in order to attract investments to finance small water companies in the region of Veneto in Italy. The problem for water companies in the region of Veneto is that they have: • difficulties in accessing bank financing for long maturities; • no access to the EIB direct lending given the companies size and low individual rating. In order to generate more private financing resources for these companies an innovative financing structure has been set-up. A Special Purpose Vehicle (SPV) has been created for loans disbursements to the companies. EIB and investors van invest in Notes issued by the SPV. In the picture below an overview of the structure is provided. Figure 5.2 Structure of the Hydrobond initiative in Italy

In principle the creation of funds with a bond structure can raise capital on the capital markets and could step in gaps in the water market where traditional banks do not offer the right products. The interest rates paid by the utilities can be substantially lower than in case commercial bank credits would have been accessible (especially if back-up is provided by some EIB guarantee funding). These type of revolving fund bond structures can fill in a market gap for financing revenue generating projects by either private or public sector. Pooled revenues possibly backed by guarantees at project or fund level can be used to strengthen the repayment capacity. It may take the form of viability gap funding; providing subsidies for the non profitable part of projects.. Utilities that supply water in urban areas or treat industrial waste water may be easier to finance. Water operations without revenue generating capabilities like traditional water safety projects might be less appropriate for this type of financing schemes.

HYDRO SPV 130/99

Issuer 1

Issuer 2

……….

Issuer 9

Issuance of Bonds

Subscription price

Remuneration and repayment of Bonds

Issuance of Notes

Subscription price

Interest and principal on the Notes

Liquidity and credit support on the Notes

EIB +

Investors

Cash reserve (20%) Veneto

Sviluppo Liquidity and credit

support on the Notes

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5.6 Conclusions: overall lessons learned

• Blending (combining) different financing instruments (grants, debt, guarantees) is a powerful vehicle to step up projects, attract private repayable finance and use government or donor resources to create leverage and mitigate risk in an efficient way;

• Microfinance is increasingly used in the drinking water and sanitation sector, often backed-up by guarantee funds. Careful allocation of risk between the microfinance provider and guarantee provider and prevention of market distortions are key lessons. It is advisable to gradually diminish guarantees or subsidies (aiming at reducing interest rates below market levels) and to have them as much as possible result based as a long term subsidy might not be sustainable;

• Crowdfunding platforms can only play a role for small sized and easy to communicate water projects. Often these organisations are profit oriented, so fees have to be paid even in case the total amount needed to kick-start the project is not reached;

• Pooled finance vehicles bundle utilities or projects and increase the creditworthiness of projects and reduce transaction costs. These vehicles can therefore attract capital market resources into the water and sanitation sector. Guarantee funds can be used to take out (or diminish) some default risks. It is important that the structures are set up at arms length of governments in order to limit political influence as much as possible. Blending with grants, guarantees and TA is often needed in less developed countries on order to improve the financial performance of water utilities or increase the bankability of project proposals.

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Part II: Positioning instruments for the water sector

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6 International practices positioning

In this chapter a number of international examples are presented aimed at improving the positioning of the water sector in other countries. These examples are grouped into business platforms (hubs) initiatives, local agents or procurement officers for business development, development companies and development agencies and development banks. In this chapter we will show some examples of each of these categories with some lessons learned and recommendations for the Netherlands development policy and Aid to Trade agenda.

6.1 Local business platforms

Setting up local network structures in target countries can serve for business development of a certain industry, such as the water sector. In the last years several networks to institutionalize the mutual profitable relationship between the local and Dutch water sector were established in different countries. Although the structures were tailor-made for each country, three different types of structures could be distinguished: • advisory platform; • business support centre; • centre of expertise. These positioning tools can be used to build durable relationships within and between the local and Dutch water sector. The main vehicles which can result in business development are: providing local market knowledge from the network to the business in the Netherlands, the promotion of opportunities and partnerships with Dutch firms, knowledge institutes or public bodies and NGOs. The effectiveness of these platforms for business development depends on factors such as: • the quality of the members (are they good in their business and can they really serve as local

agents?); • the contents and services delivered by the platform to its members (are members prepared to

pay for these services and is the model sustainable in the long run?); • the matchmaking happening between Dutch players and target country members in practice? Below two examples of business platforms in Mozambique and South Africa are shown and more examples can be found on www.traidwheel.nl.

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Centre of Expertise (CoE) South Africa (SA)


South Africa has a backlog in water supply and sanitation services. For foreign water companies the

local water market is difficult to enter, because of strict bureaucratic tender procedures. The Centre of

Expertise gives the South African water utilities access to Dutch innovative technologies and expertise

and creates market access for the Dutch water sector.

Concept

A Centre of Expertise (CoE) is a local structure, acting in specific Product-Market-Combinations

(PMC) and creating an enabling environment as matchmaker between local (water) sectors and Dutch

water expertise and innovative technologies. The Centre of Expertise provides access to local water

markets; it enables, facilitates and organizes the showcasing of Dutch innovations at utilities and

companies. These show cases are important towards valorisation of technologies in the local context.

The Centre of Expertise also assists the Dutch sector in implementing tailor made pilots. By doing so,

innovative technology will become accessible and understandable for the local water sector. This

marketing strategy for the Dutch water sector creates a direct win-win situation.

The Centre of Expertise is no business centre with a broad service package for their clients, but offers

above all the possibility to implement a pilot as a strategy to enter a certain market. The Dutch water

sector is able to fulfil the specific local water knowledge and technology needs by implementing its

expertise and innovative technologies. The CoE increases the performance in the local sector and

creates business opportunities for the Dutch water sector in a largely unknown and sometimes difficult

market. Ben Lamoree, senior water advisor Bangladesh, summarizes: “Business centers are very

useful instruments but they should not remain just talk shops. Demonstrations and pilots of real and

working technology will be more convincing to potential customers.” Leo Meijer, manager Centre of

Expertise South Africa, concludes: “We need to be present to stay in pole position.”

The Centre of Expertise tool is currently active in two countries: South Africa and Bangladesh.

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EWS, Dutch innovators, Dutch partners, Dutch government, South African water sector.


Legal entity

CoE started as a project and becomes a Non-Profit Company (NPC) in 2014 (planned) with the long-

term goal of becoming self-sustaining.

Structure in the Project phase

• The CoE started with a MoU signed between Dutch (World Waternet, VEI, World Water

Academy, business development firm Your Man on Site) and South African organisations

(eThekwini Water & Sanitation (EWS) of the municipality of eThekwini (Durban));

• The CoE is hosted by EWS;

• The CoE office has a general manager + 5 staff members (2013-2016; 2,6-2,2 fte);

• Committee members representing SA utilities are deciding on the overall strategy of CoE, incl.

the selection of showcases;

• NWP facilitates and advises the implementation of the initiatives.

Structure in the NPC phase

• The board of CoE consists of executive representatives of the contributing SA utilities (e.g.

EWS), international business environment (VEI) and an independent chairperson;

• The majority of the board members are local.

Key products and services

• 21 pilots/3 years to showcase the implementation of new technologies & knowledge at EWS;

• Active matchmaking; making innovative technology accessible & understandable for the SA

water sector, demand responsive;

• Supporting Dutch companies in creating a market entry in order to enable them to carry out a

pilot;

• Improving the position of the Dutch water sector: the results of the showcases will be

disseminated to all the interested peer utilities;

• Disseminating results of the pilots takes place through certified training, offered by SA training

institutes, and by selling the TORs of the showcases.

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Investment

The total cost (circa 8 million euro) of the project phase (2012-2015) are shared:

• EWS (45%), the Dutch innovators (28%), the Dutch partners (13%), and the Dutch government,

through the Transition Facility and Partners for Water (14%);

• For individual pilot projects (‘showcases’) contribution and support from various partners will be

combined (Dutch subsidies, investments of Dutch partners, investments of SA partners);

• Revenues come from selling the training modules and ToRs of the pilots.

Success factors:

• Peer to peer cooperation (utility-utility) to build trust, which is crucial for up scaling and long term

cooperation;

• Implementing pilots reflect real and actual local demand and is a good marketing strategy for the

Dutch water sector;

• Pilots create a track record and show evidence of the expression ‘seeing is believing’;

• Finding the support of a local champion: the director of EWS is convinced of the value of the

Dutch innovations;

• Start-up funds for pilots diminish the risks for Dutch partners in the pilots;

• Working on the follow up after the showcases to get the Dutch sector commercially involved;

• Giving full attention to the sustainability of the business model of CoE.


This model is only possible in countries where the Dutch sector has a good reputation and bother

sides are very committed.

Lessons learned

• Start with demand driven pilots and commit local champions.

Local business platforms: the case of PLAMA What: PLAMA - Plataforma Mocambicana de Agua

PLAMA is the result of MoU between M and NL: Mozambique equivalent of NWP; a ‘Public

Private’. The platforms aims for partnership in the water sector and increased trade of NL firms with

the Mozambican water sector.

Why is the Netherlands involved in PLAMA

• Long-standing development cooperation (aid) between the two countries partially in the water

sector;

• Common water challenges (e.g. delta management incl. protecting against floods);

• Upcoming economy with business opportunities for water related services and products;

• A strong Mozambican water sector, in which at the moment only few Dutch organizations are

active, will give better opportunities for partnerships with Dutch organizations.

Stakeholders

PLAMA as a project has a steering committee of 6 members (2 public+4 private).

PLAMA is implemented by Aquashare (association of water professionals in Mozambique). The

project subscribers/members are: central/delegated government bodies; contractors, consultants,

service providers, private operations, academic institutions. NGOs, international organizations. The

NWP supports Aquashare with Technical Assistance (Dutch and local project officer).

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Key products and services:

• Platform & dialogue meetings and network events in Mozambique and the Netherlands;

• Defines Product Market Combinations (PMC’s);

• Matchmaking between the Mozambican and Dutch water sectors;

• Supports the organisation of trade missions from and to Mozambique;

• Conducts projects and programs for reinforcement of the institutional water sector

(governance) in Mozambique.

Revenues/budget

Of the total PLAMA project budget of 640.000 US$, 23% is funded by the Dutch Government

through DNA (Mozambican government), 17% by membership fees, 12% by program funding and

sponsoring and 48% by Water Mondiaal (technical assistance through NWP).

Success factors for PLAMA

• Local signature of MoU of high value for local parties;

• Demand driven (from the Mozambican side), local ownership, serves local needs;

• Dutch support to build sustainable relationships within the M water sector to strengthen the

local water sector in order to create possibilities for b2b development;

• Start-up funding and strong focus on sustainable income raising;

• Process manager guides the stages of development;

• Dynamic team that facilitates conditions in the market for b2b development;

• Connection with other business associations.

At this moment PLAMA is in operation for about a year, so it is too early to discuss any results or if

it is a success or not.

Lessons learned

• Local commitment/ownership is important (also for financial sustainability);

• Sufficient content and paid services have to be offered (sustainable business model and

funding plan);

• Connection with other business associations and sectors;

• Board and team; mix of seniority and experience.

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The two cases show that local business platforms can serve for business development for the water sector. The effectiveness of these platforms for business development depends on factors such as the quality of the members (can they really serve as local agents?), the contents and services delivered by the platform to its members, the matchmaking with entities abroad in practice and the longer term sustainability of these platforms which includes local ownership among other factors.

6.2 Capacity building for project development & procurement

Another example of a possible tool for positioning of the NL water sector is funding capacity building of staff in target organisations responsible for project development and/or procurement for water projects in the country. Examples of such projects are capacity building of the Directorate for Water (DNA) in the Ministry of Public Works in Mozambique or the capacity building component in the project Deltaplan Bangladesh 2100 (BDP2100) for the Planning Authority (GOP). The European Commission is for the Structural and Accession Funds often using capacity building projects and instruments and even has a specialized department for capacity building in DG Regio. The idea behind the capacity building is to build up a role a trusted advisor in an important beneficiary organisation which can facilitate parties from the country of the provider to have higher chances in tenders. However, if Dutch companies are delivering the capacity building services also regarding procurement there can be a conflict of interest for the involved companies for upcoming tenders. The strong points of capacity building are that if the Dutch providers do a good job the reputation of Dutch knowledge is promoted. The weak point is that if the provider is not doing a good job, they can endanger the chances for other Dutch sector players. Moreover, the influence on real opportunities is indirect unless the provider is directly involved in the preparation of tenders of projects of interest to the Dutch sector. Examples of such projects in the water sector are rare yet. There are capacity building projects going on in water supply operators (for example by Vitens-Evides International) and flood management in Ministries (i.e. Mozambique, Bangladesh). However, there are no clear examples yet regarding project development and procurement in Ministries in the Water Mondiaal countries responsible for the water sector.

Capacity building: Matra South Water Management training


The Matra-South training programme (MSTP) is an instrument to enforce the bilateral relations of the

Netherlands with the eligible countries (Egypt, Jordan, Libya, Morocco, Tunisia) at government level.

In the period 2012-2014 three water management courses have been organized and implemented by

Ecorys, Deltares and Grontmij.

The specific objective of this water management training is to create substantial capacity in the water

policy field at governmental level in Jordan, Libya, Morocco, Egypt and Tunisia to adequately react on

policy and implementation issues related to water. An important sub-objective of the training is the

creation of networks between the countries involved and between the Netherlands and the target

countries.

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Capacity building (including trainings) to officials of water partner countries can help to promote the Dutch water expertise and sector. Often former trainees can make a career and can later become important contacts. For this reason setting up alumni organisations and organizing alumni events could support the instrument of capacity building even further. Part from the capacity building providers Netherlands Embassies could play a role in organizing regular events for the alumni in the relevant countries.

Concept

In the period 2012-2014 the good reputation of the Dutch knowledge has been promoted to 75

professionals working in relevant ministries or regional organizations by offering them an Integrated

Water Resources Management training of two weeks.


The Matra-South Programme has been developed by the ministry of Foreign Affairs. The training has

been developed and implemented by private companies.


As a result of this training a significant network on national and regional governmental level in the five

target countries has been developed. This network is very useful for business development.

Success factors

Creating a network is one of the main objectives of this capacity building activity. To build a

sustainable network, personal attention to each trainee and high quality lectures and study visits are

important. Therefor the number of trainees per training should be limited and excellent speakers

/lectures should be invited.


Main constraints to enter are that the Dutch experts have to be regarded as excellent experts and

trainers in the countries. This image might not yet be reached in all Water partner countries.

Lessons learned

The direct spin-off so far is collaboration in knowledge development (k2k). The expectation is that in

the near future some of the trainees will be responsible for project development and/or procurement

for water projects in their country. Dutch companies or consortia could have a competitive advantage

in these tenders. The network in the five countries can also be used for business intelligence and

getting insight information on new tenders.

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6.3 Local agents and procurement officers

Many companies use representatives or local agents for market entree. This is often much cheaper than setting up full offices and can quickly bring in local networks and expertise. Especially in technology supply local agents can be important also in relation to helpdesk, aftercare and maintenance to clients. Currently, in Dutch water sector promotion instruments such as economic diplomacy (embassies supported by Water OS advisors), capacity building, trade fair promotion and network structures play a dominant role. Often Dutch nationals are involved. However, companies do use often more local representatives for business development in the start-up phase of market entree. Reasons are that this can be lower costs and less risky compared to send Dutch staff or open a branch in the target country. Local representatives or agents have also some advantages over Dutch persons. They can already have a good network in the sector and speak the local language of the target country. This can facilitate doing business and getting market intelligence. Moreover, their salary costs might be substantially lower compared to Dutch staff or agents. Local representatives can have disadvantages in terms of commitment and knowledge of the NL water sector and products. Nevertheless, local representatives or agents could play a role for Dutch water sector business development. Procurement officers could be advisors for procurement and contracting authorities in target countries. This is a very direct way to get influence over the procurement process and tender specifications. These persons would need to bring essential water sector knowledge and knowledge of procurement, contracting (possibly also regarding Public Private Partnership contracts when relevant). These skills might not necessary easy to find on the local labour market in some developing or emerging markets. In those circumstances Dutch experienced persons might be needed.

6.4 Support to project preparation facilities

Project development facilities are basically of Technical Assistance by a pool of experts to prepare relevant project documents. These facilities are often created for infrastructure project preparation in countries where the responsible authorities lack skills or personnel to prepare project documents of sufficient quality. European Commission, European Investment Bank and World Bank often sponsor these facilities in order to increase the volume and quality of a project pipeline in a certain country. These facilities often consist of a multidisciplinary pool of experts of technical, financial and procurement or PPP experts. These experts prepare project concepts, business cases, designs, feasibility studies etc. The advantage of such a support tool is that one can directly influence the character of projects and content of tender documents. This can serve to position Dutch interests directly in the design of projects and specifications of tender documents. Moreover, the quality of project documents can be improved which improves chances for funding from Dutch financing instruments and facilitates in a later stage smooth implementation. However, companies or experts providing these services have a direct conflict of interest for upcoming tenders in case they prepare tender documents.

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There are a number of project preparation facilities ongoing in the EU accession countries often funded by EU Funds and EIB. Examples are the Western Balkans Investment Framework (funded by DG Enlargement in collaboration with EIB, see http://www.wbif.eu/) and various EU funded facilities for project pipeline development in the sectors transport and environment (including water supply and waste water). Currently, EBRD is setting up project preparation facilities and PPP preparation facilities. These facilities are often publicly procured by the contracting authority (or through national dedicated procurement agencies) and implemented by consortia of mainly consultancy and engineering firms.

6.5 Setting up Development Companies

Developing companies come into play in case of large infrastructure or urban development plans where professional planning and management is not well available in government bodies or when private finance and private operations have clear examples over government funding and operation. These development companies (or special purpose vehicles) can have the advantage that private sponsors can be mobilized and committed to a project, public money can be leveraged with private finance, risks can be allocated more efficiently and private professional planning and management can be introduced for the project. The main disadvantage is that transaction costs can be higher due to more complicated preparations, procedures and contracting. This is especially an issue when the government and or private sectors are less experienced in this type of development companies. This is often the case in low income countries. For this reason setting up development companies in low income countries often need to go hand in hand with capacity building (TA) regarding project management and PPP for infrastructure or urban development projects.

Kalangala Infrastructure Services Project, Uganda


Bugala Island is the largest of 84 islands that make up the Ssese archipelago in Lake Victoria,

covering 275 sq km. While fishing (along the shores of Lake Victoria) and agriculture (oil palm

growing, timber) dominate the island economy, its location and climate have made it a magnet for

holidaymakers – and, with improved infrastructure, tourism is expected to become a more vital part of

its economy. As an isolated and poor rural location, much of the existing infrastructure on the island’s

principal settlements was either in a dilapidated state, had limited capacity or was non-existent.

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http://www.wbif.eu/

The Kalangala Infrastructure Services Project is a unique multi-sector initiative, developing

environmentally sensitive infrastructure services designed to achieve the economies of scope and

scale necessary to attain project finance, operate efficiently and serve the island residents with

improved access to water, safer transportation, and more reliable, renewable (solar powered)

electricity.

Concept

The total project investment required is US$44.5m. The two passenger ferries, road upgrade and

water supply system, required an investment of US$29m (to be delivered through KIS limited, a

private integrated utility company, wholly-owned subsidiary of InfraCo), with a further US$15.6m

needed for the power generation, transmission and distribution (to be delivered through Kalangala

Renewables).


Through its principal developer eleQtra, InfraCo Africa is the prime mover in this project. It has led the

design of the Kalangala project, playing a catalytic role in encouraging investment through the

blending of various innovative private financing instruments and coordinating the development,

finance and construction. InfraCo Africa is a multi-government funded, privately managed company

providing early stage development capital and expertise to develop infrastructure projects in sub-

Saharan Africa. It acts as an ‘honest broker’ seeking to create viable infrastructure investment

opportunities that balance the interests of host governments, the national and international private

sector and providers of finance.

Other Private Infrastructure Development Group (PIDG) Facilities – EAIF, GuarantCo and TAF – have

all played a part in tying together numerous lenders, investors, donors and guarantors. Without their

expertise and financial backing, this project would never have seen the light of day. Through this

project, commercial funding from Nedbank, the Ugandan Development Corporation and the Industrial

Development Corporation of South Africa was mobilised for the first time to finance a greenfield multi-

sector infrastructure project in sub-Saharan Africa whose principal beneficiaries are poor rural

communities. The project reached financial close in December 2012.

This arrangement is under a public private partnership (PPP) where KIS will invest and maintain the

infrastructure for 15 years and thereafter, government will pay back the money.


The project was financed with a commercial loan of US$3.3m from Nedbank as well as a combination

of debt and equity from various DFIs, including EAIF and a debt joint guarantee from

USAID/GuarantCo. TAF provided an output based aid (OBA) grant of US$5m, used initially to fund the

ferry construction and then reallocated to subsidize power and water connections as well as the ferry

service to poor households on Bugala Island. The OBA grant of US$1.7m for KIS was directly targeted

at enabling affordability for the local, poorer community.

Kalangala Renewables funded its investment with an OBA grant from TAF of US$3.3m and a

US$1.8m commercial loan from Nedbank, alongside DFI loans and equity funding total US$13.8m,

including US$2.4m from EAIF. InfraCo Africa will maintain a 54% equity stake in the project.

Success factors

Blending of various innovative private financing instruments.

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6.6 Lessons development banks from other countries

In many competing countries from the perspective of the Netherlands water sector there are development banks which provide concessional loans. Competing countries with large water companies or contractors are: Germany (esp. in waste water e.g. engineers such as Hydroplan, contractors), France (water supply, waste water, e.g. Veolia), Denmark (water management, e.g. DHI), Korea, China, Japan (large contractors). All the mentioned countries have development banks which provide concessional loans (loans to governments at advantageous conditions compared to commercial banks). In the Netherlands FMO only provides loans to private firms up to a maximum of 24 million euro (no concessional loans to public bodies). Often the development banks in competing countries are connected to development agencies which can provide grants for Technical Assistance (project development, preparation studies) or unprofitable (parts of) projects. Therefore, blending of grants and debt or equity products becomes possible for financing different phases of projects. Moreover, many of the development banks of these competing countries provide concessional loans conditionally. It is for example well known that China provides these “soft loans” for large investment projects conditionally upon access to raw materials or upon construction or supply contracts in later phases of the project. In the Netherlands there is no interest support to export credits, no concessional loan instrument (or public-public development bank) and blending grant-loan-equity combinations are at the moment not well possible. This forms a serious handicap for the Aid to Trade agenda and Dutch firms in the water sector for exporting and to enter some large infrastructure projects (engineering, dredging, construction).


-

Lessons learned

InfraCo points to the time taken to develop a multi-sector project requiring multiple agreements and

licenses with government. In addition, securing financing from private sector lenders (ie Nedbank), as

opposed to DFIs, required that Nedbank’s credit committees get comfortable with the financial

sustainability and commercial strength of the project even though it may have come across at first

blush as purely developmental. This took almost 6 -8months.

Sources: InfraCo Africa Progress Review 2010, http://www.pidg.org/impact/case-studies/kalangala-

infrastructure-services-project-uganda

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http://www.pidg.org/impact/case-studies/kalangala-infrastructure-services-project-uganda

http://www.pidg.org/impact/case-studies/kalangala-infrastructure-services-project-uganda

In the table below an overview is shown of competing countries for the Netherlands, development banks and development agencies and what kind of services (TA, financing instruments) they offer. Table 6.1 Overview competing countries Netherlands water sector and financial product offer

Countries and IFIs Strong in water sector

niche

Products offered

Germany Waste water Interest support export credits.

KFW Gruppe (IPEX Bank, KfW

Entwickelungsbank)

Concessional loans, loans, equity,

government backed guarantees.

GIZ Grants for project development, TA,

Capacity Development, projects.

France Water supply, waste water

(Focus on Africa)

Interest support for export credits.

AFD (Agence Francaise de

Developpement)

Grants, Capacity Development,

Concessional loans, loans.

Denmark Water management, water

supply, sanitation

Interest support for export credits.

DANIDA and DB Finance ODA Grants, Capacity Development, soft

loans, interest subsidies, export insurance

premium subsidies.

Sweden

SIDA Grants and conditional loans, PPP

program, Business for Development

Programme.

Swedfund Loans to Swedish SMEs (up to 40% of

investment abroad).

China Construction of infra,

maritime, energy (Focus

Asia, Africa)

CDB (China Development Bank) Concessional loans (conditional), loans and

grants.

Korea Construction of infra

Korea International Cooperation

Agency (KOICA)

ODA Grants to development projects.

Japan Construction of infra,

maritime

DBJ (Development Bank of Japan) Loans, mezzanine, equity.

JICA Grants for project preparation studies.

From the table it becomes clear that most of the competing countries offer a combination of financing instruments: grants for project preparations, TA studies and capacity building, soft loans, loans and equity. Some also offer interest support to export credits (CIRR) or special loan programs to SMEs (Sweden). In France (AFD) and Denmark (DANIDA) these instruments are offered from one single development agency. This has the advantage of a one stop shop for clients and that TA, capacity development and financing instruments for ODA and Trade can be very well combined according to the needs of the project (or program).

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6.7 Summary positioning and conclusions

Below an overview is presented of possible positioning instruments for the water sector. The overview is ordered from instruments with low commitment and low risks until instruments with higher commitments and higher risks. For each of the instruments the key advantages and disadvantages are listed. Table 6.2 Overview of potential positioning instruments water sector

Instrument for

positioning


Capacity building Building up trusted

advisor position

Clear presentation of NL

expertise

Low financial risks

Low commitment of host

country institutions for

follow-up projects (risk)

Potential conflict in case

of support to tenders

Capacity building: Matra

South Water Management

training

Project development

facility Direct influence over

project development in

host country

Commitment for projects

of host country

institutions

Potential conflict of

interest for companies

involved for tenders

Kalangala Infrastructure

Services Project, Uganda

Business hub or

cluster platform Direct involvement of

local companies

Possibilities for

networking and

matchmaking with NL

companies

Possibilities for mutual

project development

and business

development

Low commitment of

government institutions in

host country

High running costs

Sustainability risk

Centre of Expertise (CoE)

South Africa (SA)

Local business platforms:

the case of PLAMA

Local

representatives/agents

or procurement officers

Good local network

Cost effective compared

to NL staff

Direct influence over

procurement process

Possibility for success

fee incentives

Commitment to NL

Risk of conflict of interest

Many companies

Local Community Enterprise

Placement outside

government: institutional

building and bringing in

professional

management for urban

development

High costs of building an

institution

Government needed: how

to ensure the

collaboration

Water for peace:

Community Based

Approaches in Water

Supply Projects for Multi-

ethnic Neighbourhoods in

Crimea

Development company

(special purpose vehicle

for urban of infrastructure

development)

Professional project

development and

management

Private incentives – less

delays or problems

Direct influence over

High transaction costs

and costs of sponsoring

(equity)

Higher risks (equity)

In case of PPP joint

venture: collaboration

NCICD Flood Protection

in Jakarta

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Instrument for positioning


procurement and when

private direct contracting

possible

More optimal risk

allocations and potential

for revenue sharing

issues with government

Concessional infrastructure financing

instrument (grants &

concessional loans to

governments, equity)

Potential to offer a

package of

services/products,

studies and finance

Better competition

possible to Chinese and

Koreans

For major projects large

funding resources

necessary

Risks on government

balance?

No case presented,

specific information

confidential (China, Korea

etc.)

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7 Ongoing cases for positioning

7.1 Intervention options

The Netherlands government may have and may develop different (financial) instruments at different intervention levels to position the Netherlands as a meaningful partner for developing countries. Examples of such interventions are pictured below.

At the local government level Dutch economic diplomacy is important to position Dutch public and private interests. The possibilities that some other countries have to commit large amounts of (concessional) finance for (infrastructure) projects for national contractors are not available. At the projects and transaction level financial instruments are moderately available to strengthen private sector propositions. These instruments however are relative small and relatively hard to access. The intermediate intervention level in the implementation phase may not yet have had much attention. The Netherlands could support contracting authorities with financial support (grants, loans and perhaps even equity) and expertise (project developers, procurement) to have more grip on the quality and content of the implementing process.

7.2 NCICD Jakarta

Background Netherlands supports through Water Mondiaal (subsidies from Partners for Water), the Indonesian government and DKI Jakarta with the National Capital Integrated Coastal Development (NCICD) project. Within this support, a consortium of Witteveen and Bos, Grontmij, Kuiper Compagnons and Ecorys a Master Plan for the development of flood protection, land reclamation, sanitation and access road developed for this part of North Jakarta (including master plan and business case and financing options). In addition, a consortium of RHDHV has prepared a plan for the Project Management Unit (PMU) and financing strategy. The implementation of the Master Plan is subject to further decision by the Indonesian and Dutch government (and concrete interest of the Dutch sector and financiers). In mid-October, the final plan for the PMU and the possible establishment of a unit or Development Company is expected. Currently, an end-of-project review is ongoing that should shine more light on the options for the continuation of this project.

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Components of the NCICD Master Plan In the table below the main components of NCICD Masterplan are presented. Table 7.1 Components NCICD Jakarta Masterplan

Component NCICD Masterplan Main projects

1. Flood protection by seawalls • Heightening of existing Dyke A before 2020;

• Construction of a grand seawall phase B after

2020;

• Construction seawall C after 2022.

2. Sanitation (2016-2020) • Construction and extension of sewerage (urgent

period 2016-2020);

• Construction of wastewater treatment.

Interesting for NL engineers, builders, technology

suppliers, etc.

3. Transport (2022-2028) • Ring Road (toll), Urban roads (partly toll);

• Metro / light rail connection to North Jakarta.

Less interesting for NL business, more Indonesian

and foreign contractors;

4. Land reclamation (after 2020) • 1250 ha phased land development, property

development (homes, offices, leisure).

Planning, dredging and land reclamation, earthworks

and development and construction of real estate.

5. Port Development (after 2030): • Extension of Tanjung Priok port for container

terminals by means of land reclamation in the sea.

Interesting for NL maritime industry, but is not directly

under the influence of DKI.

The Master Plan costs are estimated at over 30 billion euro for all components (incl. planning, detailed studies and supervision). The cost of the emergency flood protection embankment components A and sanitation are estimated at 1.7 and 2-4 billion euro. Detailed feasibility studies and designs still have to be performed. The first pile for the strengthening of the existing dike system (A) was beaten on 9 October by Chairul Tanjung, Coordinating Minister of Economic Affairs. Possible funding In principle, concessional loans, and / or public funds will be needed especially for the unprofitable project components such as dikes and sanitation. These are also the most urgent items within the plan to prevent flooding in North Jakarta and prevent pollution, floods and subsidence of the city. For more detailed project development activities (studies, designs etc.) grant or equity money might be needed. In the Technical report “NCICD Financing Model “of PMU Assistance it is advised to set up a Development Authority and Strategic Development Company. By bundling the flood protection with land reclamation a financial cross subsidy could be created between these two components. Furthermore, it is advised to fund with strategic equity of Government of Indonesia (GoI) and debt (concessional loans, private loans). All in all some form of government of Indonesia grant or equity funding and national government guarantees will be essential. Strategic options for positioning NL There are a number of options for positioning of the Dutch water sector. Basically the options are based upon some of the support tools mentioned in this report. We outline three possible options for interventions, from small to large commitment: from small commitment up larger commitment.

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1. Dedicated TA and capacity building support This is the lighter option. The Dutch government would then continue to support with TA funds capacity building and some studies for a PMU or for its successor, a development authority and possible strategic development company. The government could recruit a small team of several Dutch key experts with expertise in water project implementation and/or in setting up an area development company and procurement of detailed feasibility and design studies: • Advantages are: less funding from the Dutch government would be needed, it allows for

flexibility and risks are rather limited for the Dutch government. After a number of years Netherlands could still scale up to option 2;

• Disadvantages:” no serious commitment from Indonesia; competitors (Korea, China) might take the cake and actual involvement in a development company would be small.

2. Offering programme management and physical support plus financing support – intervention at transaction / project level The Dutch government could, in consultation with the business community in the first instance focus on offering a program management, design and construction proposition including finance proposition for the most urgent parts of the Masterplan where sufficient capabilities and willingness exist in the Dutch sector. This seems to be valid for the urgent components of the plan: • Renovation and improvement of dike A (especially more complex parts, not complex parts

construction could be done by local contractors); • Sanitation (specific zones for sewerage and specific waste water treatment plants).

In time also the component is interesting: Flood defence Stages B+C / Garuda

Table 7.2 Components NCICD and interest NL sector

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Table 7.3 Components NCICD and interest NL sector

NL sector players Interest

Engineers and

consultants

Interest in masterplans, design, feasibility, supervision all components

Strong points: integral approach, high level of expertise, knowledge NCICD and

offices in Indonesia

Weak points: fee levels and limited equity/risk appetite

Technology suppliers Interested in water supply, waste water

Opportunity: urgency and lack of manpower

Strong points: integral solutions mix of treatment technologies

Weak points: not really different from competitors and price

Construction firms Interest possible in more complex constructions and maritime

Strong points: specialized maritime

Weak points: difficult to compete with local contractors, maybe only regarding

more complex constructions and maritime and with dredgers

Dredgers Interested mainly in large land reclamation

Strong points: scale, already working in Jakarta Bay, internationally strong

Operators / developers

(water and urban

development)

No interest shown yet.

Weak points: water supply/ waste water limited possibilities NL for operating

private concessions. NL project developers less active abroad since crisis.

NGOs Could play bridge between population, other stakeholders and project

Strong points: experience in other parts of the world, donor funding

Weak points: limited track record Jakarta, limited track record large cities

In this case an integral support package could be offered by a combination of Dutch government and private partners (PPP): • Program management (capacity building and TA) including support project with detailed

studies (feasibilities, designs, possibly preparing development company, PPP and tender preparation ed.);

• Construction of the infrastructure (in parts of the sanitation program and complete dike A); • Funding for these specific items (together with other parties such as ING, Rabobank, World

Bank, etc.). Such an integrated package could unburden the Indonesian government: the broad NL PPP consortium would ensure financing and implementation of the 2 most urgent NCICD components. The ability and willingness of the Dutch sector to forward such proposal may depend on the size and scope of the package. Above all it depends on the ability and willingness of GoI / NCICD or its development company to engage with such initiative. Does the Indonesian procurement rules allow some sort of direct contracting or if the project is for open tender, is there some sort of compensation for the development efforts (e.g. ‘right to match’). The advantages of this approach are: • Commitment of Indonesia for Dutch offers for at least for these urgent components; • A more strategic positioning of Dutch interested players would become possible and they would

be more involved; • Less risks for Netherlands compared to option 3 and the potential to be combined with option 3. Disadvantages: • Focus on one component may result in less grip on some other components. This could be

especially a danger for the longer term land reclamation and dyke B activities;

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• Complexity: blending of all sorts of financing sources (commercial, government, IFIs) and instruments might be necessary to reach to necessary budget to cover at least the costs of significant parts of these components.

3. Support for Contracting Authority / Development Company – intervention on intermediate / organisational level Dutch government could consider supporting the development company that may succeed the present Project Management Unit. Such a company could function as a contracting authority coordinating developments and contracting services and works. Sponsors of such a strategic company could be public (i.e. the central government of Indonesia, DKI, Jassamarga, Dutch government) and private (i.e. Indonesian real estate developers, Dutch developers/experts). In this sense the company would be a public-private venture. The Netherlands could support it with financial support (grants, loans and perhaps even equity) and expertise (project developers, procurement) to have more grip on the quality and content of the implementing process. Such a company could use the income from the land development also to partially finance the non profitable infrastructure connected with the urban development (roads, dyke B) and could attract private finance. By having Dutch sponsors the Netherlands has direct influence over the project development and procurement process. Key Indonesian players sponsor so they have a direct commitment to a successful process and to their Dutch partners. The advantages of this model are: • Netherlands delivers a total package (funding, capacity and TA support) for the whole integrated

plan; • Commitment of Indonesia will be secured and organized by the sponsoring agreement

(sponsors equity is in from Indonesian partners); • NL can influence quality and content of procurement and contracting more directly. The disadvantages (or risks) are: • Large amounts of grants/ equity are needed, is it possible to commit sponsors at this phase with

large amounts of funds? • Involvement will be needed also for components which are not interesting for Dutch business

(metro, roads etc.); • NL implementation experience might not meet up to Indonesian expectations.

7.3 Co-creation in a strategic program lifecycle approach

Until recently the Netherlands government has been funding several Masterplans (Jakarta Indonesia, Beira Mozambique) with the aim of bringing NL expertise in and the creation of a strategic advisory position for the Netherlands. This method of positioning however is not without risks. First of all the position of trusted advisor is not generating any hard commitments from the beneficiary country institutions such as financial, procurement or other commitments for NL sector involvement. Other countries might offer a package of services, construction and soft loans which can be very competing and be a risk for the trusted advisor strategy. Therefore, we recommend to have a more strategic value chain approach (both at public level and at private level). This approach already should start before committing a full Masterplan study to identify key areas of interest for the NL sector and the key players who could form a consortium over or in the entire value chain (or in parts of the chain). A proposal and financing plan could then be developed for

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those components of the Masterplan where the NL sector has a unique offer and interest. This proposition could be developed in a co-creation method with the relevant stakeholders at the beginning of the process (collective programming over the program life cycle and/or value chain).

For each of the steps in the lifecycle the services and proposition of NL should be fine-tuned. In principle the preferred way would be to build one predominantly NL consortium for the whole lifecycle so that integration of phases and life cycle cost optimization can occur. A second best would be to organize consortia for each of the phases separately, but this would result in a loss of integration and financing possibilities. This can also be shown looking at the options. With the option 1 more grants will be needed because there are always risks that the companies will not be selected for the next phase (so the companies will not put forward any equity). The most optimal would be to generate an unsolicited proposal from an NL consortium towards a beneficiary country institution. Only in that scenario the full benefits of integrated planning, life cycle costs optimization and financing will be obtained. In other scenarios the financing will be more grants based as for each phase different NL companies might be active. For the three mentioned options the picture is then shown below.

Financing options In order to provide for an interesting package it is a prerequisite that a flexible blend of financing resources and Atradius coverage will be made available to the Government of Indonesia (GoI) and the NL consortium partners. In this sense it will be crucial that NL instruments such as DRIVE, partners for Water (PfW) and Fund Sustainable Water and commercial banks finance (covered by Atradius) will be made flexible and are possible to be combined with international IFI or donor

1. Master plan, sketch designs

2. Feasibility, conceptualdesigns & PPP prep.

3. Detaileddesigns & procurement

4. Imple-mentation

5. Operate & maintenance

NL Consortium Consortium Consortium Consortium Consortium

Finance (TA-grants)

Finance (TA grants & loans)

Finance (blend/ DBFMO)

Finance(loans/ equity/ DBFMO)

Finance(loans/ equity/ DBFMO)

TA, grant

TA, grant

TA, grant TA, grant

DB(F)(back up met grants, capacity building)

DBF(M)(O)TA, grant


2. Feasibili-ty, concep-tual designs

3. Detaileddesigns

4. Imple-mentation

5. Operate

TA, grant

TA, grant

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resources such as grants and concessional loans (see picture). The reason is that the resource needs of the interesting components of NCICD are far beyond the possibilities of individual NL instruments such as DRIVE. The key to success is therefore the possibilities of the NL instruments for blending grants especially for development phases or non profitable projects), with international donors and commercial equity and loans for program components further down the lifecycle.

Conclusions and recommendations for follow up: • Assessment and possible tweak of NL financing instruments. Early involvement at the various

levels of intervention is key. The instruments (for instance DRIVE) should also allow blending with other providers of finance (grants, loans, guarantees and equity) like recipient country’s budget, donor grants and IFI and commercial loans;

• A give factor of the Indonesian government is essential for the Netherlands further involvement. Including efforts in a political lobby is essential. Activities (grants, capacity building) that support a proposition will increase the chances for success;

• Strategic partnership with countries/institutes that could mobilize large amounts of (concessional) finance could be considered. It might be considered to collaborate with World Bank, German development bank KfW, ADB or the Koreans where they could cover some large scale expensive construction and financing parts.

Steps for follow-up: 1. Identification of interesting (sub)projects through a Roadmap Sanitation and possibly a

Roadmap for Stage A. A broad NL consortium could elaborate this proposition in a co-creation approach for sanitation (November 2014 – March 2015);

2. NL Government and banks could scan the possibilities for blending of existing (PfW, FDW) and foreseen NL instruments (DRIVE) and possibilities for concessional loans to the government of Indonesia. NCICD could be used as a pilot project to shape DRIVE;

3. Support the development company/contracting authority with finance and expertise; 4. Assess the chances of a NL proposition and unsolicited proposal for the prioritized plan

components to the government of Indonesia; 5. Assess legal possibilities NL and Indonesia for unsolicited proposals; 6. Interest of donors could be assessed (WB, ADB etc.); 7. In case of positive interest and legal possibilities a proposition or bid could be elaborated.


2. Feasibili-ty, concep-tual designs

3. Detaileddesigns

4. Imple-mentation

5. Operate

PfW, EKN, Water Mondiaal

DRR, DHK

GoI (tendering)

IFI, bilateral donor (tendering)

Private financeer, SOE

International

NLinstruments

ORIO / DRIVE (PPP)

Fund Sustainable Water (PPP)

DGGF (PPP)

Private finance FMO (incl. convertible grants)

Commercial loan & Atradius coverage

NGO’s

Mix Grant/loan

100% Grant

100% loan

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7.4 Masterplan Beira

Background Since 2013 a consortium of Deltares, Witteveen en Bos, Wissing en NIRAS have been developing a Masterplan for the further development of the City of Beira in Mozambique. The process has been initiated by the city of Beira and NL government as a response to the challenges in Beira. These are: • Serious flood problems in relation to unplanned urban development and lack of proper drainage

and sewerage systems; • A need for housing and safe sanitation, especially planned affordable housing for the low

income groups; • A need to port and industrial zone extension due to growing demand for coal, containers and

agrofood exports and imports (Mozambique has a growing population and growing economy in the last years by about 7% average annual economic growth).

Components of the Beira Master Plan The Masterplan of Beira essentially has four components: • Urban development (housing, sanitation, drainage, urban transport); • Industrial development zone (development of industrial zone and roads); • Port extension: extension of the port of Beira especially for growing container, agrofood and

coal transport; • Flood protection (drainage systems, coastal protection by a beach improvement plan and

maintenance). The costs are shown in million USD in the figure below in 2 scenarios (high and low).

million USD Residential Industrial Port Flood Protection

Total

Low 1,623 270 64 60 2,017

High 4,140 875 186 60 5,261

NB waiting for outcomes Business case (expected from Rebel Group, December 2014).

NL sector interests components From an analysis of Masterplan sub projects (on the basis of a preliminary list of Witteveen en Bos) and a round of Rebel group along NL companies the following components (and subprojects) seem most interesting for NL companies: • Port extension: maritime infrastructure design, dredging and construction; • Sanitation (equipment supplies, less in construction); • Capacity building and TA in the development phase. A first assessment shows that housing development and urban transport are less interesting for NL companies. The reasons are several. For housing development in principle local connections and knowledge of local markets are essential. NL project developers are currently in a restructuring process and the appetite for foreign adventures has been seriously declined since the crisis starting in 2008. Secondly, business in Mozambique is not yet perceived as without risks and the Portuguese language is an issue. Road construction is not a sector where NL companies have a competitive edge over local and South African contractors.

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Strategic options for positioning NL Just like with the NCICD case there are essentially several options: 1. Dedicated TA and capacity building support This is the lighter option. The Dutch government would then continue to support the Municipality of Beira with TA funds capacity building and some studies for a PMU. The government could recruit a small team of several Dutch key experts with expertise in water project implementation and/or in setting up an area development company and procurement of detailed feasibility and design studies: • Advantages are: less funding from NL needed, project is no regret and allows for flexibility. After

a number of years Netherlands could still scale up to option 2 or 1; • Disadvantages:” no serious commitment from Beira; competitors (such as China) might take the

cake). 2. Management of urgent components or parts of direct interest for the Dutch sector These are in the case of Beira limited to: • Port development (maritime infrastructure, large scale dredging); • Sanitation and coastal zone protection (engineering, waste water treatment equipment supplies,

small scale dredging). This option would limit the NL involvement in the urban planning & housing development. Although there are some NL companies interested in urban planning activities (IHS, engineers), the interest in the larger projects related to housing development is limited. 3. Set-up of full (Joint Venture PPP) Development Company NL could support in developing a full fledged development company. Stakeholders could be CFM (the port operator), Municipality of Beira, private body and NL government. NL government could bring in grants or equity for institutional support and some TA/studies. In case of equity support it is important to assess the risks for the Netherlands carefully and make use of a trusted institution (such as FMO) at arms length of the government in order to gain the trust of potential other private sponsors. The motives for the NL government behind assistance to setting up such an urban development company would be more of an aid nature than trade. The reason is as presented before that the interest of NL sector is limited to especially port development. Dutch large maritime companies do need involvement of NL in a development company to tender for port contracts. Regarding a more strategic positioning approach the same applies as for the NCICD case. A strategic program cycle approach is advised already assessing the interest of Dutch companies over the entire program cycle and value chain.

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8 Synthesis, conclusions and recommendations

All in all a number of interesting innovative business models and financing arrangements have been recently upcoming in the water sector. In the report various cases are presented and interesting lessons can be derived. Innovative business models The interesting observations from the innovative business cases are the following. Scope extension from the water sector to other sectors can reap new revenue streams. Examples are water to energy and flood safety in relation to incomes from land development for urban functions or recreation. The income flows from other sectors can (partially) overcome the often lack of good private revenue potential in water projects. However, to grasp these income streams is not always easy. Stable feed in tariffs for renewable energy and proper connections to the energy grid are important issues for water to energy projects. Reaping the revenue streams from urban development often requires setting up more complex Public-Private Partnership (PPP) structures (such as development companies) in order to bundle the water and urban development functions. These PPP structures are often complex in nature and many governments and private bodies in developing countries or Water OS countries lack experience in PPP contracts. This might limit the potential for application of PPP in these countries or might create high risks. Innovations in payment systems such as mobile payments can help to increase the billing rates and cost recovery problems in the water supply sector. In many developing countries cost recovery of water utilities is extremely low because of low tariffs, illegal taps and low billing. Therefore, introducing payment and tariff systems which increase billing rates is crucial. Examples with payments through mobile phones in a number of African countries seem promising. Apart from the usual TA projects aiming at improving financial performance of water utilities remain an important pre-condition for business models in the sector. Scaling up to regional utilities or scaling up sanitation demand and supply can especially help to reduce the costs side of business models. In water security the involvement of basin stakeholders in program creation, combined often with incentives and micro-finance provision can create more viable business models. Commitment of stakeholders and enforcement of water intake regulations are essential elements for success. Financing arrangements The most important trend here is the increasing use of blending arrangements. Blending of grants, guarantees with loans or micro-credit schemes is both at the project level, but also at fund level are observed. Important lessons relate to optimal risk allocations and the need use also grants to promote and scale up the schemes. Important observation is that Worldbank, EU & EIB Trust Funds and KfW seem to be first movers in this area. Although there are some blending projects undertaken by Netherlands partners (with DGIS funds), overall Netherlands financing instruments are not ideally geared towards blending. Another observation is the upcoming use of revolving fund structures. Revolving funds basically need projects or utilities which are credit worthy and can repay loans or generate dividends on equity. By pooling projects or utilities risks can be spread and transaction costs can be decreased. This is especially important for smaller projects or smaller utilities in the water sector, where transaction costs for banks are high. The applicability of these funds is most of all relevant for

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projects or utilities which are profitable (can pay interest and can repay loans). This is often more the case in developed countries and in the drinking water and industrial waste water sector. Revolving fund structures are less easily applicable in developing countries or for the other water subsectors. In order to introduce revolving funds in typical water OS or Water Mondiaal countries and WASH sector addition of grants or guarantee funds to these structures will be essential. Moreover, in case of pooled funds used to attract capital market resources, an assessment of the maturity of bond and equity markets in developing countries is crucial. Absence of mature or deep capital markets can limit the potential for pooled funds in a number of developing countries. Finally, crowdfunding through internet platforms can play a role for small and easy to communicate development water projects. The significance of crowdfunding for the water sector as such is expected to stay limited due to the capital intensive nature of the sector. Positioning instruments The report presents a range of types of positioning instruments which can be used to promote the Dutch water sector in the target countries. The instruments vary from low risk, low commitment capacity building until sponsorship of full fledged development companies and concessional financing instruments. The aid to trade agenda and policies could make use of this toolbox and identify for which subsectors and countries which instruments are most suitable. Interesting to observe is that the Dutch water sector makes intensive use of low risk, soft positioning instruments such as capacity building and networks or business hubs, but very low use of higher commitment, higher risks instruments such as concessional financing or sponsorship of development companies. By looking at two ongoing cases: Flood protection in Jakarta and development of Beira Mozambique some issues in the Dutch instruments are highlighted. First of all it is advocated that a more strategic program cycle and value chain approach could be used for positioning, starting at the beginning of such positioning efforts. Program phases from masterplanning, feasibility, design, procurement and implementation and operation should be assessed in connection and interest and strengths of Dutch players could be assessed from the start. Secondly it is shown that current Dutch financing instruments are not well geared towards this types of projects where often equity or loans (or concessional loans to governments) for larger scale infrastructure projects are needed. Conclusions In short the analysis and report results in a number of key conclusions: • The water sector is evolving towards other sectors. Technological innovation and scope

extension foster the development of innovative business models with revenues from these other sectors (energy, urban development, agriculture);

• The water sector is opening up to more private sector participation and PPPs. Public Private Partnership is on the rise in the water sector. Traditionally PPP has been starting in the drinking water sector (especially in Australia, South Africa etc.). In waste water and (more limited) in flood protection PPPs are more recently introduced. PPP projects are however more complex by nature compared to traditional contracted projects and the applicability of these concepts might differ over the countries and subsectors. Availability payment based PPP schemes might be difficult in many Water OS and Mondiaal countries because of lack of experience with PPP contracts, no multi-annual budgeting in governments and high political risks;

• Blending of financing instruments is a key trend in international financing of the water sector, both at institutional level and at project level. Current Dutch financing instruments are not yet well geared towards blending with other financial products (equity, loans etc.) or resources (donors, IFIs);

• The Netherlands water sector makes use of a limited variety of different positioning instruments for promotion of the water sector (mainly capacity building and hubs). Other countries such as

100


Korea, Germany etc. make more heavily use of concessional financing instruments and blending these with grants from development agencies. There is currently in the Netherlands no adequate instrument available for sponsoring large scale infrastructure development companies (equity, loans, grants). Moreover, project preparation facilities are set-up by EU-EIB and others, but are not used by Netherlands agencies such as FMO or RVO;

• Several NL competitors strategically support home contractors using financing tools (tied aid, concessional loans, TA/grants, often using broader credit insurance instruments).

Recommendations: • It is advisable to develop a more strategic program cycle/value chain approach for positioning of

the Dutch water sector for specific countries, subsectors or projects. Currently, often positioning is assessed per phase of the project cycle. It is recommended to assess the strengths and interest of Dutch parties over the whole project cycle and value chain from the start. This could be done in a co-creation of Dutch public and private sector parties;

• Assess all possible positioning instruments in a systematic way before starting and funding a process relating to positioning the Dutch water sector in a target country. Proper selection of the most useful positioning instruments depends on likely effectiveness, strengths, possibilities and risk appetite of Dutch government and private sector and the match with possibilities in the country context. For example to opt for Netherlands government sponsoring PPP development companies might be too risky given the context in some countries. In certain situations positioning instruments can complement each other or some might be more relevant in some phases of the program and switches could be made to higher commitment instruments in later phases;

• Use or transform NL financing instruments to better position NL private parties. We regard it important to develop DRIVE together with the key sector players for investment projects to be suitable for supporting propositions and allow for blending with other instruments and banks, donors agencies/ IFIs. It is advisable to investigate a finance (equity, other) instrument for Development Companies with FMO or others. Moreover, the possibilities to develop a revolving fund for loans for water projects or utilities for developing countries could be assessed where OS grants could be used for TA or guarantees. Finally the possibilities for an NL sovereign (concessional) loan instrument could be investigated;

• For larger investment projects strategic partnership with countries (water sector players, development banks) that could mobilize complementary contractors or operators and large amounts of (concessional) finance could be considered. It might be considered to collaborate for example for NCICD Jakarta project with World Bank, German development bank KfW, ADB or the Koreans where they could cover some large scale expensive construction and financing parts.

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9 Glossary

Table 9.1 Glossary

Term Explanation

ADB Asian Development Bank

AfDB African Development Bank

Blending Combining a variety of financing products (loans, equity, subsidies

etc.)

Business Case A product/service package which delivers revenues for the investors or

operators

Business model The way products or services will make money/ generate earning

capacity (cash-flows)

Cash Flow Cash income or net revenues: yearly difference between revenues and

operating and investing costs

Debt Loans (repayable finance: interest and repayments of loan amount)

DGGF Dutch Good Growth Fund: loans, guarantees and export credit

insurance for SMEs investing abroad (implemented by RVO:

Netherlands Enterprise Agency)

DRIVE Successor of ORIO: the Netherlands financing instrument for

infrastructure and private development (implemented by RVO:

Netherlands Enterprise Agency)

Equity Participation or investment by risk taking shareholders

EIB European Investment Bank

FMO Netherlands Development Finance Company

Grants Direct dedicated subsidies to programs or projects

Guarantee A coverage of certain risks (credit risk, losses) by a guaranteeor

IFC International Financing Corporation: institution of World Bank group

with finance to private institutions

Interest rate subsidy A subsidy to decrease the market interest to be paid

KfW Kredietanstalt fur Wiederafbau is a German owned development bank

Microcredits Small loans to SMEs or households

Microfinance Financial products (small scale savings, insurance, credits) for SMEs

and households

Principal The initial full amount of the loan

Project pipeline facility A facility to support project development studies (designs, feasibility

studies etc.) or capacity building for project development

Public Private Partnership (PPP) A contracting mode to deliver public services by a private entity

Subsidy A contribution to an entity from the public budget (state, region,

municipality)

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10 Literature

PMU Assistance, 2014, “NCICD Delivery Strategy”, National Capital Integrated Coastal Development (Jakarta Indonesia). Witteveen en Bos et al., 2014, “Masterplan National Capital Integrated Coastal Development” Jakarta Indonesia (2014), Witteveen and Bos, Grontmij, Kuiper Compagnons, Ecorys, Triple A, Deltares. OECD, 2010, “Innovative Financing Mechanisms for the Water Sector”, OECD studies on Water March 2010. RAIN, 2013, “Water harvesting, Guidelines to Good Practice”. WASTE, 2014, “Innovation leading to scale, FINISH Progress Report March 2014. Water and sanitation program, 2003, “Meeting the finance challenge for water and sanitation”, Incentives to Promote Reforms, Leverage Resources, and Improve Targeting. World Bank, 2014, “Applying Results based Financing in Water Investments”, Water Paper May 2014 of Global Partnership on Output Based Aid (GPOBA). Variety of project and program internet sites, EIB presentations, leaflets etc.

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11 Interviews held

Table 11.1 Organizations interviewed

Institution Topics

WASTE Business cases and innovation sanitation and waste

Aqua for all Business cases and innovation sanitation and water

AfDB Financing water to energy projects, Safisana

EIB Revolving funds water, EU trust funds (blending)

IFC- World bank Group Multi-stakeholder programs for water and Project development and finance

facilities

WWF Multi-stakeholder programs in river basins

1% Club Crowdfunding for water

Roy Torkelson Revolving funds for water and the experience of bond banks in the USA

Ben Lamoree Masterplan Beira, Mozambique

Grontmij Masterplan NCICD Jakarta, Indonesia

Ministry of Infrastructure

and Environment

Netherlands

Financing climate adaptation measures

Ministry of Foreign Affairs

Netherlands

Financing climate adaptation measures and positioning Dutch water sector

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Innovative financing and positioning of the water sector · The financing challenges in the water sector . There are a number of challenges to finance water projects, especially in

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