Jackson WISA Africa 2007 nov07

1. . Jackson WISA Africa 2007 nov07

2. Improving Prospects for Financing Water ServicesWISA Africa 2007 Barry M. Jackson Development Bank of Southern Africa www.dbsa.org

3. Improving Prospects for Financing Water Services • Introduction • Typical sources of funds • Constraints to raising finance • Where to begin change? • Improving the prospects for Private Sector Finance.

4. Introduction: raising capital • Continued need for expansion: “lumpy” investments • Limited government resources • Reduced donor funding • Increased availability of private sector funding (money seeking investments), • but • Banks want to see good projects and well run, financially sound institutions • or ring-fenced quality projects.

5. Typical sources of finance • Government grants • DFI loans via Government • DFI loans direct to utility or local government [focus on utility here] • Private sector: local or foreign capital – loans, bonds • Private equity.

6. Constraints to raising finance • Key Question: Where would you like your pension funds placed? • Fund administrator need “Investment Grade” credit ratings • Strong, competent, reliable borrowers in a stable environment • Foreign or Local Capital? • FOREX risk and ability to repatriate funds & profits • Income in local currency • What can the utility influence?

7. Constraints to raising finance (2) • Water utilities work in a difficult environment • Lack of autonomy: • Interference in the business • Tariff control • Hire & fire • Capital investment decisions • Neglect by central government: • Poor performance tolerated • Unpredictable cash injections • Non-payment by govt. agencies • Poorly developed capital market • But not without prospects.

8. Where to begin change? • Entrench a commercial approach • Clarify relationships • Increase private sector participation • Borrow & invest incrementally.

9. A Commercial Approach See WSS as a business; selling a desired product at an affordable price. Realistically assess affordability and demand for LOS Revisit assumptions Capex, Sources, Build a financial model and estimate user charges O & M, Tariffs Sustainable Subsidies Test affordability & political acceptability.

10. A Commercial Approach (2) • Reduce Losses (UAW, leaks, over-staffing) • Increase Revenues (cost-reflective tariff, improve billing & collection) • Improve financial management • Improve customer relations • Manage assets for reliability.

11. Informal connection?

12. A Commercial Approach (3) • Manage assets for reliability: • systematic infrastructure asset management • risk management approach • start budgetting for maintenance etc • Plan & manage investment streams: • Incremental CAPEX (opposite of public sector) • Limit debt exposure • Use grants & TA creatively • A careful roll-out strategy…

13. Careful services roll-out Free or heavily subsidised - for “beneficiaries” The chosen few. Gap between wants and affordability Not just affordability, but willingness to pay. What Level Of Service are customers willing and able to pay for? A challenge for extension worker, health educators etc.

14. A Commercial Approach (3) • Manage assets for reliability: • systematic infrastructure asset management • risk management approach • start budgetting for maintenance etc • Plan & manage investment streams: • Incremental CAPEX (opposite of public sector) • Limit debt exposure • Use grants & TA creatively • A careful roll-out strategy. • Obtain a Credit Rating.

15. Typical credit rating scale AAA Extremely strong AA Very strong A Strong BBB Adequate ----------------------- Limit of Investment Grade BB Very low degree of speculation B Low degree of speculation CCC Moderate degree of speculation CC High degree of speculation C Capital payment is impaired D Default

16. “Obtaining a Municipal Credit Rating” • Lowers cost of borrowing • Useful management tool • Objective benchmark • May highlight political issues • Need not be expensive (intermediate options) • External agencies interested in supporting these. http://www.clgf.org.uk/index.cfm/pageid/79/Research+reports

17. Clarifying relationships • Customer charter etc • Arms-length relationship with Govt. • Performance contracts with responsibilities of EACH party (incl govt); well publicised • Need for consistent supportive environment • Consequences of political interference should be clear.

18. + Government Practice on Cost Recovery Poor service Reluctance to pay Government agencies and revenue Government Policy on Cost Recovery Lack of income Use contract to show Govt. inconsistency; Lobby at right time in budget cycle.

19. Increasing PSP • Drastic might be needed but incremental might be better – lower “transaction cost” • Outsourcing: • Meter reading • Billing & collecting • Comprehensive revenue management • Rehabilitation, UAW, WDM (shared risk & incentives) • Management contracts • Investment-linked contracts • Clear performance contract (seek advice) -> reduction of interference -> customer appreciation -> improved creditworthiness.

20. Improving prospects for private sector finance • Start small • WDM/UAW (Sida project soon) • Aim to boost revenue …

23. Improving prospects for private sector finance • Start small • WDM/UAW (Sida project soon) • Aim to boost revenue • A good business plan • Phased investments/ line of credit • Identifying revenue streams • Include Co-finance • Seek credit enhancement.

24. Conclusions • Encouraging signs that private finance for WSS is feasible • We need to build up experience • Some major obstacles remain ...

25. Conclusions • Some major obstacles remain … • gap between aspirations and affordability • inconsistent government policies & practice, especially with respect to cost recovery • under-developed capital markets and • the lack of enabling regulatory frameworks.

26. Conclusions • Encouraging signs that private finance for CWSS is feasible • We need to build up experience • Some major obstacles remain • African Water Utilities can take the initiative and start real change.

27. . WISA Africa Nov 07

28. PPPs - For & Against (1) • Positive side: • efficiency gains • latest technology • raise capital • train staff • career opportunities • treat consumers as paying customers. • To realise benefits you must deal with potential problems.

29. PPPs - For & Against (2) • Negative perceptions: • “Prices will rise • quality will fall • jobs will be lost • the poor will not be served • excessive profits from a monopoly • unchecked because of corruption.” • To realise benefits you must deal with potential problems.

30. Reasons why prices do sometimes rise: • existing service under-priced (hidden subsidies, political pressures etc) • to pay for overdue investments (so plan) • Quality is a function of contracts and monitoring • So is serving the poor • but make sure it is affordable (so plan).

31. Jobs will probably be created, not lost, in a developing country: • jobs can be protected by contract • system expansion • Profiteering in the eye of the beholder • win-win situation is needed • evenly matched negotiators • Corruption can be anywhere • Monopoly + Discretion - Accountability = Corruption • Transparency, competition, monitoring, & empowered public.