Mobilizing Finance Stable and Predictable Financing Mechanisms for water service providers at all levels Meera Mehta Water and Sanitation Program – Africa.

Mobilizing Finance Mobilizing Finance Stable and Predictable Financing Stable and Predictable Financing

Mechanisms for water service providers Mechanisms for water service providers at all levelsat all levels

Meera Mehta Meera Mehta Water and Sanitation Program – Africa Water and Sanitation Program – Africa New York, June 2006New York, June 2006

2

OutlineOutline

1.1. Global trends – and the nature of financing Global trends – and the nature of financing challenge…challenge…

2.2. National level – Financing mechanisms and tools National level – Financing mechanisms and tools for improved sector governance – SWAps and for improved sector governance – SWAps and Sector ProgramsSector Programs

3.3. Municipal and local level – Financing Municipal and local level – Financing mechanisms and tools to facilitate leveraging mechanisms and tools to facilitate leveraging local resourceslocal resources

3

The Hope in The Hope in 1990s…1990s…

Source: Adapted from Ginneken M. 2003: Presentation at Pan African water Conference

0

20

40

60

80

public private

international

domestic

Public is dominant ~85%

Domestic is dominant ~ 85%

Financing flows into water in 2000

0

50

100

150

200

Energy Telecom Transport Water & Sewerage

East Asia and Pacific

Europe and Central Asia

Latin America and the Caribbean

Middle East and North Africa

South Asia

Sub-Saharan Africa

Total (international) private investment in infrastructure in 1990-2002 - sector and region

Worldwide interest in cross border private sector infrastructure Worldwide interest in cross border private sector infrastructure investments… investments… So… the private sector will “fill the gaps”…So… the private sector will “fill the gaps”…

And the And the Realities…Realities…

4

Finance Requirements and Finance Requirements and GapsGaps

To meet the MDGs…To meet the MDGs… Varying estimates depending in assumptions Varying estimates depending in assumptions

related to status, service standards and existing related to status, service standards and existing financial flowsfinancial flows

Rigorous estimates and scenarios lacking for Rigorous estimates and scenarios lacking for urban water supply and sanitationurban water supply and sanitation

In general, many stakeholders argue the need to In general, many stakeholders argue the need to

““double the aid flows” double the aid flows”

5

In the new millennium – 2000s:In the new millennium – 2000s:A Plea for Aid Resources, and risk A Plea for Aid Resources, and risk

mitigation…mitigation… Camdessus and Gurria Panel ReportsCamdessus and Gurria Panel Reports

““There is widespread agreement that the flow of funds There is widespread agreement that the flow of funds for water infrastructure has to roughly double…”for water infrastructure has to roughly double…”

Also places emphasis on risk mitigation measures for Also places emphasis on risk mitigation measures for private sector investmentsprivate sector investments

Sachs Report - UN Millennium Project Sachs Report - UN Millennium Project ““The report says the MDGs can be achieved if total The report says the MDGs can be achieved if total

annual development assistance is doubled to $135 annual development assistance is doubled to $135 billion—or 0.44 percent of donors’ GNP—in 2006, and billion—or 0.44 percent of donors’ GNP—in 2006, and rises to 0.54 percent of donors’ GNP by 2015. “rises to 0.54 percent of donors’ GNP by 2015. “(The Economist)”(The Economist)”

6

But, the MDGs are not simply But, the MDGs are not simply about “providing more WSS about “providing more WSS infrastructure”…but about infrastructure”…but about “ensuring good services”…“ensuring good services”…

Services that are Services that are reliablereliable Services that well Services that well targetedtargeted and are and are actually actually

usedused Services that are Services that are sustainablesustainable – –

institutionally, financially and institutionally, financially and environmentallyenvironmentally

7

What then is the financing What then is the financing challenge ?challenge ?

Not only “Not only “investments for more infrastructureinvestments for more infrastructure””

But, also “financing improved WSS services”…But, also “financing improved WSS services”…

Not only “Not only “increased coverageincreased coverage””

But, also “increased / affordable access for the But, also “increased / affordable access for the poor”…poor”…

Not only “Not only “doubling the aiddoubling the aid””

But, also “leveraging additional ‘local’ resources”…But, also “leveraging additional ‘local’ resources”…

8

And, to meet this challengeAnd, to meet this challenge

Stability and predictabilityStability and predictability in financing in financing are essential for this…and can be achieved are essential for this…and can be achieved byby Improving effectivenessImproving effectiveness in the use of public in the use of public

(and aid) resources through improved water and (and aid) resources through improved water and sanitation sector governancesanitation sector governance

LeveragingLeveraging additional additional local resourceslocal resources – for – for urban utilities and small community-managed urban utilities and small community-managed water service providers – linked to improved and water service providers – linked to improved and sustainable water and sanitation service delivery sustainable water and sanitation service delivery

9

OutlineOutline

1.1. Global trends – and the nature of financing Global trends – and the nature of financing challenge…challenge…

2.2. National level – Financing mechanisms and National level – Financing mechanisms and tools for improved sector governance – tools for improved sector governance – SWAps and Sector ProgramsSWAps and Sector Programs

3.3. Municipal and local level – Financing Municipal and local level – Financing mechanisms and tools to facilitate leveraging mechanisms and tools to facilitate leveraging local resourceslocal resources

10

SWAp and PRSC in UgandaSWAp and PRSC in Uganda Poverty Reduction Strategy CreditPoverty Reduction Strategy Credit used to used to

fund the RWSS sector in Uganda through budget fund the RWSS sector in Uganda through budget supportsupport

Under SWAp Rural Water Supply uses demand Under SWAp Rural Water Supply uses demand responsive approach (DRA) with decentralized responsive approach (DRA) with decentralized implementation through district governments implementation through district governments

PRSC with PRSC with decentralization and DRAdecentralization and DRA has has enabled:enabled: Increased participation in planning at lower levels Increased participation in planning at lower levels

of governmentof government More cost effective technologies being selected More cost effective technologies being selected

(protected wells)(protected wells) Increasing levels of district level disbursementsIncreasing levels of district level disbursements

11

Using SWIFT to Improve Sectoral Using SWIFT to Improve Sectoral AllocationsAllocations

Sectorwide Investment and Financing Tool Sectorwide Investment and Financing Tool (SWIFT)(SWIFT) has been developed by WSP-Wf to assist has been developed by WSP-Wf to assist countries to assess policy options for ‘countries to assess policy options for ‘sector sector financial viabilityfinancial viability”” Sector development costsSector development costs New investmentsNew investments Rehabilitation/ replacement of assetsRehabilitation/ replacement of assets Operations and MaintenanceOperations and Maintenance

Develop Develop formula based allocationsformula based allocations for rural for rural water supply finance in Zambia and support water supply finance in Zambia and support analysis of SWAp in Mozambiqueanalysis of SWAp in Mozambique

Development of Development of allocations mechanismsallocations mechanisms under under emerging sector decentralization reforms in Kenyaemerging sector decentralization reforms in Kenya

12

But, there may be considerable country level But, there may be considerable country level variation variation

Expenditure to meet the MDG water target as a share of GDP – 2002Expenditure to meet the MDG water target as a share of GDP – 2002

From Mehta, Fugelsnes and Virjee: Financing the MDGs on water and sanitation: what will it take? WSP-AF, 2004.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Country

% G

DP

Range of expenditure from current studies

Increasing GDP/capita

Higher standards Higher standards possible?possible?

Rethink service Rethink service standards?standards?

Increasing GDP per Increasing GDP per capitacapita

Rethink allocation Rethink allocation principles?principles?

13

Using SWIFT to Improve Sectoral Using SWIFT to Improve Sectoral AllocationsAllocations

(1,000)

(500)

-

500

1,000

1,500

2,000

2,500 Service Delivery Requirements

Service Delivery Availability

Financing Gaps

14

What does it take to have What does it take to have successful SWAps and Sector successful SWAps and Sector

Programs?Programs?A conducive environment for reformA conducive environment for reform

Lead role by national ministries of planning Lead role by national ministries of planning and finance and good coordination by WSS and finance and good coordination by WSS linked ministries linked ministries

Role of development partners Role of development partners Support, recognition and legitimacy to Support, recognition and legitimacy to

country-owned PRSP and MTEF processes country-owned PRSP and MTEF processes Support capacity building and development Support capacity building and development

of tools for sector programsof tools for sector programs

15

OutlineOutline

1.1. Global trends – and the nature of financing Global trends – and the nature of financing challenge…challenge…

2.2. National level – Financing mechanisms and tools National level – Financing mechanisms and tools for improved sector governance – SWAps and for improved sector governance – SWAps and Sector ProgramsSector Programs

3.3. Municipal and community level – Financing Municipal and community level – Financing mechanisms and tools to facilitate mechanisms and tools to facilitate leveraging of local resourcesleveraging of local resources

16

Potential Leveraging Potential Leveraging OpportunitiesOpportunities

To tap the To tap the domestic finance marketsdomestic finance markets for for additonality and improved effectiveness of additonality and improved effectiveness of investmentsinvestments Continued emphasis on Continued emphasis on cost recoverycost recovery in the water in the water

supply sector makes this possiblesupply sector makes this possible Market rigourMarket rigour helps increase sustainability helps increase sustainability

Ensure that these approaches also contribute to Ensure that these approaches also contribute to further development of the financial sectorfurther development of the financial sector itself itself For example, For example, new business lines in water new business lines in water

projectsprojects for micro-finance and domestic finance for micro-finance and domestic finance institutionsinstitutions

17

Two Market SegmentsTwo Market Segments

Small water (and sanitation) service Small water (and sanitation) service providersproviders – community managed and small – community managed and small private local providers – funded through ‘micro-private local providers – funded through ‘micro-finance’ by developing a business line in small finance’ by developing a business line in small water projects water projects

Medium to large utilitiesMedium to large utilities – urban centers – urban centers and small towns – possibility of funding though and small towns – possibility of funding though intermediation (domestic financing institutions) intermediation (domestic financing institutions) and direct market access (bonds or equity ) and direct market access (bonds or equity )

18

Community-Managed Piped Water ProjectsCommunity-Managed Piped Water Projects (CWPs) in rural/peri-urban areas(CWPs) in rural/peri-urban areas Rehabilitation/augmentation of existing projectsRehabilitation/augmentation of existing projects New/greenfield projectsNew/greenfield projects

Key InnovationsKey Innovations Use of Use of market based microfinancemarket based microfinance to pre- to pre-

finance community-managed infrastructure finance community-managed infrastructure Risk sharingRisk sharing by Community Water Projects and by Community Water Projects and

CWP employed Project EngineerCWP employed Project Engineer Planned Planned scaling upscaling up in Kenya and other countries in Kenya and other countries

Micro-finance and OBA Pilot Project in Micro-finance and OBA Pilot Project in KenyaKenya

19

Eligibility

Assessment

Loan Appraisal

Implementation

Post implementation

Project construction assisted by construction project manager

Business development services support project operations and strategic planning

Community water project submits required documents to meet the eligibility requirements

Finance institution appraises loan application; Athi WSB signs a Service Provision Agreement

Independent assessment of project viability by support organization

PROJECT STAGES

1

3

2

4

5

Revised Community Project CycleRevised Community Project Cycle

20

Sector reforms to ensureSector reforms to ensure LegitimacyLegitimacy for small water providers for small water providers Policy framework that provides “Policy framework that provides “financing financing

spacespace”” Regulatory frameworkRegulatory framework to ensure risk mitigation to ensure risk mitigation

Reasonably Reasonably well-developed MFI sectorwell-developed MFI sector – and a – and a key ‘key ‘credible’ partnercredible’ partner

Public resources to support initial Public resources to support initial high transaction high transaction costscosts, develop , develop credit assessment toolscredit assessment tools and and address affordability concerns due to financial address affordability concerns due to financial market constraintsmarket constraints

What does it take to have microfinance What does it take to have microfinance lending for small water projects? lending for small water projects?

21

Linking Utility Creditworthiness with Linking Utility Creditworthiness with ReformsReforms

External Environment Regulatory framework and

authority to set tariffs Legal form, ownership and

degree of autonomy Predictability of inter-

governmental transfers Level of development of the

domestic financial sector

Internal Environment Management capacity/

quality, including utilization of private sector

Human resources Customer orientation Strategic planning and

budgeting Financial aspects Operational performance and

service delivery

Assessment of Utility’s

Bankability

Required External Reforms

Required Internal Reforms

Benchmarking and Peer Comparison

Explore Credit Enhacement

22

Assessing country potential – An Assessing country potential – An illustrationillustration

Macro

, fi

nan

cia

l se

cto

r M

acro

, fi

nan

cia

l se

cto

r d

eve

lop

men

td

eve

lop

men

t

Viability of water utilities, municipalities, small Viability of water utilities, municipalities, small service providers service providers

HighHigh

HigHighh

Adapted from IFC – Municipal Fund presentation to the SAR Decentralization, May 2005Adapted from IFC – Municipal Fund presentation to the SAR Decentralization, May 2005

India

South Africa

Senegal

Philippines

(Note: country positions on chart are illustrative only)(Note: country positions on chart are illustrative only)

Mexico

23

China urban

South Africa

Columbia

Brazil

Mozambique

China Rural

India

Sri Lanka

Senegal

Tanzania

Kenya Urban

Zambia

Bolivia

AngolaCambodia

Ghana

Peru

Ethiopia

Russia

Dialogue between bankers and utilities

Capacity building – TA, performance management contracts

Strengthening regulatory environment

Pilot transactions – “cherry picking”

“new” MDF models with private sector

Maturity of sub-sovereign/ WSS utility borrowers

LOW HIGH

Maturity of the financial markets and the macro environment

LOW

HIGH

LOW

Capacity building – borrowers: business planning, tariff setting, TA

Remove institutional overlap @ local level

Support development of market-based intermediaries

Review policy constraints and launch/ support policy dialogue

Support development of transparency, dialogue and democracy

Increase pool of funds – long term bonds, guarantees (partial, total), pension funds

Stimulate market growth – support transactions, develop a transactions advice market, domestic credit enhancement (guarantees)

Reform non-market based instruments

Continue to enhance utility performanceConsumer voice and dialogue

Policy reform/ institutional development

Financial market enhancement

Transaction support

Capacity building – borrowers

Reform/ institutional development (local) – ie use of SSIPs

Development of financial intermediaries

Transaction support

Information sharing – benchmarking, credit assessment, WSICA

24

Facilitating Facilitating domestic market borrowingdomestic market borrowing improving improving utility creditworthinessutility creditworthiness through through

improving internal management and external policy improving internal management and external policy benchmarking benchmarking utility performance and credit ratingutility performance and credit rating Credit enhancementCredit enhancement mechanisms for risk mitigation mechanisms for risk mitigation Greater interaction and Greater interaction and common vocabularycommon vocabulary among among

players in the water and financial sectors – commonly players in the water and financial sectors – commonly understood understood credit assessment toolscredit assessment tools

By addressing By addressing supply side constraintssupply side constraints (development (development of bankable opportunities)of bankable opportunities)

What is needed to leverage local What is needed to leverage local resources?resources?

25

Thank YouThank You