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




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

1. Global trends – and the nature of financing challenge…
2. National level – Financing mechanisms and tools for
   improved sector governance – SWAps and Sector
   Programs
3. Municipal and local level – Financing mechanisms and
   tools to facilitate leveraging local resources



                                                      2
 The Hope in 1990s…
                   Worldwide interest in cross border private sector infrastructure
                     investments… So… the private sector will “fill the gaps”…

 And the Realities…
Financing flows into water in 2000
    Public is dominant ~85%
              80

              60
                                                                     Total (international) private
              40
                                                  international
                                                  domestic
                                                                   investment in infrastructure in
              20                                                    1990-2002 - sector and region
                                                                     200
               0                                                                                         East Asia and Pacific
                      public         private                         150                                 Europe and Central Asia
                                                                                                         Latin America and the Caribbean
                                                                                                         Middle East and North Africa
                                                                     100
                                                                                                         South Asia
                                                                                                         Sub-Saharan Africa
                Domestic is dominant ~ 85%                            50


                                                                       0
                                                                             Energy     Telecom   Transport           Water & Sewerage
                                                                                                                                           3

  Source: Adapted from Ginneken M. 2003: Presentation at Pan African water Conference
   Finance Requirements and Gaps
To meet the MDGs…
   Varying estimates depending in assumptions related
    to status, service standards and existing financial flows
   Rigorous estimates and scenarios lacking for urban
    water supply and sanitation

      In general, many stakeholders argue the need to
                   ‚double the aid flows‛

                                                           4
        In the new millennium – 2000s:
A Plea for Aid Resources, and risk mitigation…
   Camdessus and Gurria Panel Reports
      “There is widespread agreement that the flow of funds for water
       infrastructure has to roughly double…”
      Also places emphasis on risk mitigation measures for private sector
       investments
   Sachs Report - UN Millennium Project
      “The report says the MDGs can be achieved if total annual
       development assistance is doubled to $135 billion—or 0.44 percent
       of donors’ GNP—in 2006, and rises to 0.54 percent of donors’ GNP
       by 2015. “(The Economist)”

                                                                             5
   But, the MDGs are not simply about
‚providing more WSS infrastructure‛…but
    about ‚ensuring good services‛…
    Services that are reliable
    Services that well targeted and are actually used
    Services that are sustainable – institutionally,
     financially and environmentally




                                                         6
 What then is the financing challenge ?

  Not only ‚investments for more infrastructure‛
   But, also ‚financing improved WSS services‛…

            Not only ‚increased coverage‛
But, also ‚increased / affordable access for the poor‛…

            Not only ‚doubling the aid‛
 But, also ‚leveraging additional ‘local’ resources‛…

                                                          7
         And, to meet this challenge
Stability and predictability in financing are
 essential for this…and can be achieved by
   Improving effectiveness in the use of public (and
    aid) resources through improved water and
    sanitation sector governance
   Leveraging additional local resources – for urban
    utilities and small community-managed water
    service providers – linked to improved and
    sustainable water and sanitation service delivery

                                                        8
                      Outline

1. Global trends – and the nature of financing challenge…
2. National level – Financing mechanisms and tools for
   improved sector governance – SWAps and Sector
   Programs
3. Municipal and local level – Financing mechanisms and
   tools to facilitate leveraging local resources



                                                        9
        SWAp and PRSC in Uganda
 Poverty Reduction Strategy Credit used to fund the
  RWSS sector in Uganda through budget support
 Under SWAp Rural Water Supply uses demand
  responsive approach (DRA) with decentralized
  implementation through district governments
 PRSC with decentralization and DRA has enabled:
    Increased participation in planning at lower levels of
     government
    More cost effective technologies being selected
     (protected wells)
    Increasing levels of district level disbursements
                                                              10
Using SWIFT to Improve Sectoral Allocations
   Sectorwide Investment and Financing Tool (SWIFT)
    has been developed by WSP-Wf to assist countries to
    assess policy options for ‘sector financial viability‛
        Sector development costs
        New investments
        Rehabilitation/ replacement of assets
        Operations and Maintenance
   Develop formula based allocations for rural water
    supply finance in Zambia and support analysis of
    SWAp in Mozambique
   Development of allocations mechanisms under
    emerging sector decentralization reforms in Kenya
                                                             11
But, there may be considerable country level variation
          Expenditure to meet the MDG water target as a share of GDP – 2002

                                Increasing GDP/capita
           Rethink service standards?

                                         Rethink allocation principles?
                                                                                         Higher standards possible?




       Increasing GDP per capita
                                                                                                                 12

From Mehta, Fugelsnes and Virjee: Financing the MDGs on water and sanitation: what will it take? WSP-AF, 2004.
Using SWIFT to Improve Sectoral Allocations
    2,500                                Service Delivery Requirements
    2,000                                Service Delivery Availability
                                         Financing Gaps
    1,500
    1,000
     500
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                                                                         13
  What does it take to have successful
    SWAps and Sector Programs?

A conducive environment for reform
   Lead role by national ministries of planning and
    finance and good coordination by WSS linked
    ministries
Role of development partners
   Support, recognition and legitimacy to country-
    owned PRSP and MTEF processes
   Support capacity building and development of
    tools for sector programs
                                                       14
                      Outline

1. Global trends – and the nature of financing challenge…
2. National level – Financing mechanisms and tools for
   improved sector governance – SWAps and Sector
   Programs
3. Municipal and community level – Financing
   mechanisms and tools to facilitate leveraging of local
   resources


                                                        15
Potential Leveraging Opportunities
 To tap the domestic finance markets for additonality
  and improved effectiveness of investments
    Continued emphasis on cost recovery in the water
     supply sector makes this possible
    Market rigour helps increase sustainability
 Ensure that these approaches also contribute to
  further development of the financial sector itself
    For example, new business lines in water projects
     for micro-finance and domestic finance institutions

                                                           16
          Two Market Segments
Small water (and sanitation) service
 providers – community managed and small private
  local providers – funded through ‘micro-finance’ by
  developing a business line in small water projects
Medium to large utilities – urban centers and
  small towns – possibility of funding though
  intermediation (domestic financing institutions) and
  direct market access (bonds or equity )

                                                         17
Micro-finance and OBA Pilot Project in Kenya

 Community-Managed Piped Water Projects (CWPs) in
  rural/peri-urban areas
   Rehabilitation/augmentation of existing projects
   New/greenfield projects
 Key Innovations
   Use of market based microfinance to pre-finance
    community-managed infrastructure
   Risk sharing by Community Water Projects and CWP
    employed Project Engineer
   Planned scaling up in Kenya and other countries
                                                       18
      Revised Community Project Cycle
    PROJECT STAGES
        Eligibility    Community water project submits required
1                      documents to meet the eligibility requirements



2      Assessment      Independent assessment of project viability by
                       support organization


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


4     Implementation   Project construction assisted by construction
                       project manager

           Post        Business development services support
5     implementation   project operations and strategic planning        19
   What does it take to have microfinance
    lending for small water projects?
 Sector reforms to ensure
    Legitimacy for small water providers
    Policy framework that provides ‚financing space‛
    Regulatory framework to ensure risk mitigation
 Reasonably well-developed MFI sector – and a key
  ‘credible’ partner
 Public resources to support initial high transaction
  costs, develop credit assessment tools and address
  affordability concerns due to financial market
  constraints                                            20
Linking Utility Creditworthiness with Reforms
       External Environment                                           Internal Environment
   Regulatory framework and                                     Management capacity/
    authority to set tariffs                                      quality, including utilization
   Legal form, ownership and                                     of private sector
    degree of autonomy                 Assessment of             Human resources
                                         Utility’s               Customer orientation
   Predictability of inter-            Bankability              Strategic planning and
   governmental transfers                                         budgeting
                                                                 Financial aspects
   Level of development of the                                  Operational performance and
   domestic financial sector                                      service delivery




              Required              Benchmarking and                       Required
          External Reforms           Peer Comparison                   Internal Reforms



                                  Explore Credit Enhacement
                                                                                                   21
    High                                  Assessing country potential – An illustration
                                                                    Mexico
    Macro, financial sector development




                                                            South Africa
                                             India


                                                       Senegal


                                                      Philippines




                                                                                          High
        Viability of water utilities, municipalities, small service providers
(Note: country positions on chart are illustrative only)                                  22

Adapted from IFC – Municipal Fund presentation to the SAR Decentralization, May 2005
        HIGH
                                                                                 China urban
                  Capacity building – borrowers:
                            Russia                                  Stimulate market growth – support
                            Capacity building – TA
                  business planning, tariff setting,                transactions, develop a transactions
                            borrowers                                                  South Africa
                                                             India advice market, domestic credit
                  Ethiopia institutional overlap @ local
                  Remove
                                                                    enhancement (guarantees)
                  level Reform/ institutional
                                Peru                         Sri Lanka
                            development (local) – Information
                                      Ghana                         Reform non-market based instruments
                             development of
                  Supportie use of SSIPs market-based
                  intermediaries                   sharing –Continue to enhance utility performance
Maturity of the             Development of         benchmarking,    Senegal
                                                                           Consumer voice and
                             Kenya Urban
                            financial
financial                                          credit                  dialogue
                            intermediaries           China Rural
markets and the   DialogueZambia bankers and assessment, Policy reform/
                              between                utilities      Review policy constraints and launch/
macro                       Transaction support
                                                                           institutional
                                                   WSICA support policy dialogue
environment        Capacity building – TA, performance                                  Columbia
                          Bolivia           Tanzania                       development
                  management contracts                              Support development of transparency,
                                                                           Financial market
                                                                    dialogue and democracy
                                                                              Brazil
                  Strengthening regulatory environment
                                                                           enhancement
                                                                    Increase pool of funds – long term
                                                             Mozambique
                  Pilot transactions – “cherry picking”
                             Cambodia                               bonds,Transaction support
                                                                            guarantees (partial, total),
                  Angola MDF models with private sector
                  “new”                                             pension funds
        LOW

                  LOW       Maturity of sub-sovereign/ WSS utility                         HIGH
                            borrowers
                                                                                                  23
What is needed to leverage local resources?
Facilitating domestic market borrowing
   improving utility creditworthiness through
    improving internal management and external policy
   benchmarking utility performance and credit rating
   Credit enhancement mechanisms for risk mitigation
   Greater interaction and common vocabulary among
    players in the water and financial sectors –
    commonly understood credit assessment tools
   By addressing supply side constraints (development
    of bankable opportunities)
                                                     24
Thank You



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