Towards financial sustainability in the global water utilities sector

1. Towards financial sustainability in the global water utilities sector Samantha Yates Secretary General Global Water Leaders Group

2. Outline • Scoping the situation • Reviewing the spiral of performance • Building bankability • How are we going to take the next steps? Urban Water Catalyst Fund • Wrap up

3. Scoping the situation • Water finance is at a turning point. Historically it has been almost indistinguishable from public finance. This is changing. The global financial crisis has left many governments over-indebted, and therefore increasingly looking to push more responsibility for financing water assets onto the utilities themselves. • At the same time the pressure to invest in water infrastructure is steadily ratcheting up: • Ageing water networks in the Eastern United States and parts of Europe are reaching crisis point after decades of underinvestment. • In the burgeoning megacities of middle income countries in Latin America, Africa and Asia, wastewater collection and treatment is no longer a luxury: it is becoming a necessity. • Across the world’s arid regions, scarcity is forcing a significant investment in the development of new water resources – and a significant shift towards passing the full cost of water to the consumer. • In low income countries there is a growing commitment to extending water and wastewater services ahead of the 2030 deadline for the Sustainable Development Goals. • Globally climate change is creating greater extremes of floods and droughts, forcing investment in urban resilience. • Growing consumer concerns about pollution continue to drive regulation and enforcement, particularly in China and India, but also in high income countries where micropollutants are beginning to cause alarm. • In recent years, this has created a vast disparity in the performance between those utilities which are able to raise the finance they need and those which are not. Going forward this disparity is driving a trend towards greater reliance on self-funding and the financial independence of the water utility sector.

4. Scoping the situation (cont’d) “I’m going to be very honest and frank about this: one of the major problems we have is political interference. Sorry! Water challenges relate to the shortfalls between policy and practice.” - Betty Bigombe, former Minister of Water, Uganda • What makes water finance special? • Water has four significant characteristics that set it apart from other categories of infrastructure finance. These are: • Its capital intensity • The longevity of its assets • The extent of political control • The inevitability of investment Hurdles to political realities: Water Management Timeline: Sustainable water management is a long-term process, requires foresight and commitment, Political Timeline: The time parameters of such development often exceed the time parameters of political office – some decisions are made on the basis of short-term political expediency, Parameter Asymmetry: The conceptual horizons of some politicians do not coincide with the parameters of prudent water resource management, and, Instability Challenges: Political and social instability detrimentally affects economic growth and results in stagnation and the collapse of infrastructure.

6. The first step to financial sustainability – confronting the performance spiral • The money is there, but there are not enough bankable projects. • Becoming bankable: The challenge is to turn the cycle of utility decline into a virtuous cycle of continuous improvement in which results a self-sustaining utility able to make continuous progress towards SDG 6.

7. Where to start? • The donor community says: • Improve collection rates (including the use of prepaid systems and other tools), • Campaign to improve the willingness of consumers to pay for this good (in compensation for the good ‘water’ of appropriate quality, meaning that water quality criteria should follow the World Health Organisation recommendations), • Ensure the reliability of supply; • Implement measures to improve the technical standards of equipment (such as pumping stations, water treatment devices, pipes, and other infrastructure), and • Use of an effective distribution process.

8. Where to start? (Cont’d) • The commercial finance community says: • Build a strong track record of performance (achieving KPIs), • Present a ‘healthy’ financial position (e.g. net worth, profitability, gearing, cash flow and other key financial indicators), • Establish a marketing plan for emphasising the consumer benefits of fresh water and wastewater treatment, • Review the cost and methodology of securing a credit rating or shadow credit rating, and • Ensure timely repayment of debt and avoid litigation by creditors.

9. Confronting the most numerous investor group - households

10. Getting inside the households’ heads

11. Getting inside the households’ heads (Cont’d)

12. MENA trends • Spending in countries classified as developing will be predominantly guided by the Sustainable Development Goals (SDGs), as developing countries have the most need for basic water and wastewater infrastructure. However, they also face the additional challenges of ongoing population growth (especially in already congested urban areas) and social instability and political turmoil. • We estimate that achieving SDG 6 in the developing world will require $203 billion of annual additional spending – more than $2.4 trillion through to 2030. • Infrastructure needs are predominantly in WWT: Developing countries are beginning to shift their attention towards this sector after prioritising water supply networks during the Millennial Development Goals, the predecessors to the SDGs; spending on WWT is anticipated to reach nearly $60 billion annually for WWT as opposed to $44 billion annually for water supply. The exponential increase in WWT spending is particularly acute in Sub-Saharan Africa as a region and India, where thus far WWT spending has been negligible. • Development and public-sector finance are on the downswing: Thus far, developing country utilities have relied on public sector and development finance to fund water and wastewater infrastructure. While this will continue, both central governments and development finance institutions (DFIs) are shifting focus towards harnessing the potential of private and commercial flows. • For example, in resource-rich countries such as Nigeria, Colombia and those in the Middle East, decreased crude oil revenues have slashed government budgets, instigating the promotion of public-private partnerships. This will create an attractive opportunity for private finance, which is anticipated to grow by 18x up to 2030. • Where concessionary financing is still used, it will shift from being largely grant-based to more loan-centric in order to make financing more sustainable and to tie in commercial lenders.

14. A growing opportunity – the global view • As utilities move towards financial independence, private finance is becoming an increasingly attractive option. It offers the possibility of financing new assets away from the public balance sheet while tapping into private sector expertise. In some cases there is also scope to release capital from water infrastructure for investment elsewhere. In 2018 private finance has returned to the political agenda more strongly than at any time in the past two decades:

15. Blended finance • A new approach: blended finance and sector reform • Change is also being driven by development finance institutions. In 2017 the World Bank was denied a capital increase by its main shareholder, the US government, and instead told to use its existing finance more effectively. This has led to a greater commitment to using its resources to mobilise private capital investment rather than to compete with it, a strategy known as "blended finance". • Blended finance • The strategy for many development finance institutions is now to focus their most concessionary resources on where they are critical, while developing structured financial products that are designed to attract commercial finance for their most credit-worthy clients. This kind of two-tiered system could potentially unlock more finance for water infrastructure, although it is reliant on strong utilities with sufficient cashflows to service their debts. • Sector reform • Transforming finance in the water sector is also going to involve transforming the structure of the sector in two important ways: • Corporatisation: Currently most utilities operate as departments of local government. This restricts their ability to attract finance and there is a trend towards these utilities becoming separate agencies with command of their own balance sheets. • Consolidation: Around 85% of utilities serve fewer than 10,000 people - these are subscale in terms of their ability to meet the challenges they face cost-effectively. We are beginning to see serious moves by governments to address this issue.

16. How do we bring this all together? - with the ‘Urban Water Catalyst Fund’ • What is the Urban Water Catalyst Fund (UWCF)? • A public-private partnership developed to accelerate the rate as at which cities achieve the SDG6 for water and sanitation. • How does it work? • It uses a performance-based business model to address the key obstacles to effective Overseas Development Assistance (ODA) in the urban water sector: • Creating bankable utilities: The biggest bottleneck in water infrastructure finance is the scarcity of utilities with the capacity to use funding effectively. The UWCF has a proven methodology for turning around under-performing utilities to the extent that they become bankable. • Fixing the “leaking bucket”: Even where ODA funding can be deployed into projects, its impact is often diminished by poor management. The UWCF ensures that ODA funded infrastructure investments meet expectations in terms of their impact on the level of service and asset longevity by monitoring the assets and mentoring the operators. • Creating opportunities for blended finance: Currently the scarcity of bankable utilities means that ODA funders often find themselves competing to offer better terms to the top performing utilities. By creating more high-performance utilities, the UWCF changes this dynamic, enabling ODA funders to concentrate their resources where they are needed most, while ensuring that utilities with a successful record of concessionary debt service move towards more commercial terms.

17. Wrap up • We are about to change the two-pronged problem of (1) plenty of money but (2) not enough bankable projects. • The Urban Water Catalyst Fund will (1) move high-performing utilities to commercial investment terms, (2) work with utilities to improve the performance of other under-performing utilities, (3) create opportunities for more investment in the utilities sector, leveraging all forms of finance including blended. • Come with us on this journey – Join us in London at the Global Water Summit (8-10 April) • For the ‘Urban Water Catalyst Fund’ workshop • And the launch of the ‘Middle East Water Forum’ – collaboration and partnership throughout the region’s water sector • Stay in contact: • sy@globalwaterleaders.org • @SAbigailYates