Bank Financing for PDAMs

1. Bank Financing for PDAMs Lynton Ulrich IndII Wrap-up Conference 14th June 2011

2. Background PDAMs have grown to more than 350 1997 Asian financial crisis- conditions deteriorated By 2007 38% were rated less healthy and 37% unhealthy Current PDAM expenditure levels insufficient to maintain existing infrastructure or increase distribution networks or improve water quality Millenium Development Goal – 10 million new household connections by 2013

3. Objectives Develop full cost recovery tariff structures for participating PDAMs Develop bankable 5 year Business Plans Develop good corporate governance regimes in participating PDAMs Assist participating PDAMs access commercial borrowings to accelerate infrastructure provision Develop guidance materials to assist/facilitate PDAM commercial borrowings

4. PDAM Selection Local Government commitment to reform including full cost recovery tariff adoption Surplus plant capacity Access to raw water No debt or membership of the debt-restructuring program Rated unhealthy by DGCK Approved by DGCK following presentation and interview

5. Perpres 29/2010 Acknowledges water as a basic need and must be available in sufficient quantities, equitably and be of good quality In order to achieve the Millenium Development Goals, new revenue streams need to be available to PDAMs through investment loans from national banks Perpres 29/2009 provides: • Loan guarantees 70% - 40% national, 30% local government • Banks provide up to 30% unsecured but cashflow control • Loan interest subsidy of up to 500 basis points for up to 20 years

6. Perpres 29/2009 To qualify, PDAMs must have no outstanding debt to the Central Government or will obliged to enter the restruction program and obtain Minister of Finance approval Open a bank account with an approved bank Have proposed investment projects approved by the Minister fro Public Works Be rated by BPKP as healthy and have higher than full cost recovery tariffs during the guarantee period Be monitored by the Coordination Team – CMEA, MoF, MPW, MoHA, Bappenas and BPKP

7. Key Problems/Constraints Tariffs not set by PDAMs but by local governments hence political constraints Forced to deal with less healthy PDAMs which increased the scope and complexity of the task Lack of consistent commitment by stakeholders Poor socialisation of Perpres 29/2009 principles and procedures among national banks and PDAMs Lack of capacity at many PDAMs to successfully undertake reform initiatives

8. Lessons Learned and Successes/Failures More care needs to be taken in PDAM selection • Initial time was too short • Evaluations were too simple, some PDAMs not suitable Stakeholder support is critical to successful implementation Beware the political pendulum – full recovery tariffs are not universally accepted Coordination of stakeholders including national banks requires constant vigilance MoF approval processes need to be reformed

9. Lessons Learned and Successes/Failures Three PDAMs completed which will result in 80,000 new household connections and improved PDAM cash flows Another five to be completed by 30 June 2011 which will result in approximately 150,000 new household connections National bank accepted business plan and good governance regime templates completed as well as “Best Practice” guidance manuals for PDAMs Additional technical and environmental consulting assistance is required by many PDAMs

10. Key Challenges/Opportunities The program needs to be able to re-focus on healthy PDAMs which will require less work to get them across the line and therefore increase new connections at a faster rate. MoF approval processes need urgent review. Need to improve national banks’ understanding of Perpres 29/2009 and the lending opportunities it presents. Templates and training materials need to be constantly updated to reflect current and best practice.