Mobilizing Finance Stable and Predictable Financing Mechanisms for

Mobilizing Finance Stable and Predictable Financing Mechanisms for

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% Total (international) private investment in infrastructure in 1990-2002 - sector and region 80 60 international domestic 40 20 200

0 East Asia and Pacific public private Europe and Central Asia 150 Latin America and the Caribbean Middle East and North Africa 100 Domestic is dominant ~ 85% South Asia Sub-Saharan Africa 50

0 Energy Source: Adapted from Ginneken M. 2003: Presentation at Pan African water Conference Telecom Transport Water & Sewerage 3 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 billionor 0.44 percent of donors GNPin 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 infrastructurebut about ensuring good services Services that are reliable

Services that well targeted and are actually used Services that are sustainable institutionally, financially and environmentally 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 thisand can be achieved by Improving effectiveness in the use of public

(and aid) resources through improved water and sanitation sector governance Leveraging additional local resources for urban utilities and small community-managed water service providers linked to improved and sustainable water and sanitation service delivery 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 4.5% 4.0% 3.5% Increasing GDP/capita

Rethink service standards? % GDP 3.0% 2.5% 2.0% 1.5% Rethink allocation principles? Higher standards possible? Range of expenditure from current studies 1.0% 0.5% 0.0% Increasing GDP per

capita Country From Mehta, Fugelsnes and Virjee: Financing the MDGs on water and sanitation: what will it take? 12 Using SWIFT to Improve Sectoral Allocations 2,500 Service Delivery Requirements 2,000 Service Delivery Availability 1,500 Financing Gaps 1,000

500 (500) (1,000) 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 microfinance 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 prefinance 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 1 PROJECT STAGES Eligibility Community water project submits required documents to meet the eligibility requirements 2 Assessment 3 Loan Appraisal

Finance institution appraises loan application; Athi WSB signs a Service Provision Agreement 4 Implementation Project construction assisted by construction project manager 5 Post implementation Independent assessment of project viability by support organization Business development services support 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 20 market constraints Linking Utility Creditworthiness with Reforms External Environment Regulatory framework and authority to set tariffs Legal form, ownership and degree of autonomy Predictability of inter-

Assessment of Utilitys Bankability governmental transfers Level of development of the domestic financial sector Required External Reforms Benchmarking and

Peer Comparison Explore Credit Enhacement 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 Required Internal Reforms 21 High

Assessing country potential An illustration Mexico Macro, financial sector development Indi a South Africa Senegal Philippines Viability of water utilities, municipalities, small service providers e: country positions on chart are illustrative only) Adapted from IFC Municipal Fund presentation to the SAR Decentralization, May 2005

Hig h 22 HIGH Russia borrowers: Capacity building Maturity of the financial markets and the macro environment LOW China urban Stimulate market growth support Capacity building business planning, tariff setting, TA

transactions, develop a transactions borrowers India advice market, domestic South Africa credit Ethiopia Remove institutional overlap @ local enhancement (guarantees) Peru institutional level Reform/ Sri Lanka development Reform non-market based instruments Ghana(local) Information Supportiedevelopment of market-based use of SSIPs sharing Continue to enhance utility performance intermediaries Senegal Development of Consumer voice and benchmarking,

Kenya Urban financial dialogue credit intermediaries China Rural DialogueZambia between bankers andassessment, utilities ReviewPolicy policy reform/ constraints and launch/ Transaction support policy dialogue WSICA supportinstitutional Columbia Capacity building TA, performance development Bolivia Tanzania management contracts Support development of transparency,

Brazildemocracy Financial market dialogue and Strengthening regulatory environment enhancement Mozambique Increase pool of funds long term Pilot transactions cherry picking supporttotal), bonds,Transaction guarantees (partial, Cambodia Angola pension funds new MDF models with private sector LOW Maturity of sub-sovereign/ WSS utility borrowers

HIGH 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 25

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