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

1. 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

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

3. Financing flows into water in 2000 Total (international) private investment in infrastructure in 1990-2002 - sector and region Domestic is dominant ~ 85% Public is dominant ~85% The Hope in 1990s… Worldwide interest in cross border private sector infrastructure investments… So… the private sector will “fill the gaps”… And the Realities… Source: Adapted from Ginneken M. 2003: Presentation at Pan African water Conference

4. 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”

5. 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)”

6. 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

7. 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”…

8. 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

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

10. 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

11. 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

12. 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 From Mehta, Fugelsnes and Virjee: Financing the MDGs on water and sanitation: what will it take? WSP-AF, 2004.

13. Using SWIFT to Improve Sectoral Allocations

14. 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

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

16. 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

17. 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 )

18. 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

19. Revised Community Project Cycle PROJECT STAGES Community water project submits required documents to meet the eligibility requirements 1 Eligibility 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 Business development services support project operations and strategic planning Post implementation 5

20. 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

21. Linking Utility Creditworthiness with Reforms

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

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

24. What is needed to leverage local resources? • Facilitating domestic market borrowing • improving utility creditworthinessthrough improving internal management and external policy • benchmarking utility performance and credit rating • Credit enhancementmechanisms 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)

25. Thank You