U.S. Agency For International Development

1. U.S. Agency For International Development Financing Water Using Partial Loan Guarantees Jacqueline E. Schafer Deputy Assistant Administrator Bureau for Economic Growth, Agriculture & Trade John Wasielewski, Director, Office of Development Credit

2. USAID’s Approach to Water Finance Adapted from US experience with Clean Water Act of 1972 • Grant funding: limited and unsustainable • Pressing need to mobilize private funding for public services • New approach provides for increased security over direct investment in emerging economies • New approach uses a combination of grant funds/technical assistance, and loan guarantees as security to attract private investors

3. Water Revolving Funds (WRF) WRFs offer pooled-financing mechanisms that can mobilize private sector investment on commercial terms Each WRF will raise capital from local markets for on-lending to municipal & private entities for water infrastructure

4. Water Revolving Funds (WRFs) Supporting Activities: • Technical assistance in local financial market development • Partial loan or bond guarantees • Intercept agreements on inter-governmental transfers • Initial capital funds from donors & reserve fund support

5. USAID Approach: Using Loan Guarantees • Over the past 4 years USAID has used partial loan guarantees to mobilize local capital for investment in a variety of sectors • We believe that this approach can work for the provision of potable water and for waste water treatment

6. What is DCA? • A financial tool used by USAID to achieve its development objectives • Loan Guaranty Authority allowing USAID to issue partial guarantees to private sector lenders • Available for all sectors: SME, Microfinance, Infrastructure, Water, Health, Energy, Environment, etc • Projects are financially sound and economically viable • Financial risk is shared with local financial institutions; lenders typically carry 50% of the risk

7. DCA Projects by SectorAs of December 1, 2003

8. Financing Clean Water in India Through DCA Municipal Bond Guarantees:Tamil Nadu Water & Sanitation Pooled Fund,Karnataka Water & Sanitation Pooled Fund Trust

9. Activity Description Tamil Nadu • The pooled financing mechanism supported by guarantee will provide investment funds to small and medium Urban Local Bodies (ULBs) in Tamil Nadu, India, to implement water and sanitation projects, which will benefit low-income populations in these localities • 50% bond guarantee of equivalent of US$6,400,000 for TNUDF • Individual bonds will carry a face value equivalent to US$2,000 with 9.5% interest rate and 15 year maturities • Guarantee is embedded in the project structure behind two payment mechanisms: 1) an escrow account and 2) debt service reserve fund backed by intercepted state transfers • Supports USAID/India’s Strategic Objective (SO) 4.3, “Improved urban environmental infrastructure built and services delivered in selected cities”

10. Project Diagram, Tamil Nadu • Country: India • Type: Bond Guarantee • Amount: $6,400,000 • Guarantee Ceiling: $3,200,000 • Leverage Ratio: 16 to 1. The estimated cost to the US Government for issuing the Guarantee on the $6,400,000 bond amount is approximately $392,960.

11. Activity Description Karnataka • The guarantee facility will provide credit enhancement to the issuance of a bond to raise capital for a water supply and sewerage infrastructure development project in 8 municipalities within the Bangalore Metropolitan Area • 50% bond guarantee of equivalent of $21,700,000 for Karnataka Urban Infrastructure Development & Finance Corp. • Guarantee is embedded in the project structure behind two payment mechanisms: 1) an escrow account and 2) debt service reserve fund backed by intercepted state transfers

12. Project Diagram, Karnataka • Total Loans Available for coverage: $21,700,000 • Term: 15 years • Portion Guaranteed: $10,850,000 • Bond Guarantee Type: Double-barreled • Coupon: 7.5% - 8.0% • Trustee: WSPF (KUIDFC) • Investors: Private placement

13. Expanding Access to Sustainable Utility Services in Egypt Through DCA Loan Portfolio Guarantees:Commercial International Bank (CIB)

14. Activity Description • Equivalent of US$40,000,000 loan portfolio guarantee for CIB • Guarantee has a 12 year term and covers 50% principal on the portfolio of loans • Estimated number of sub-loans to be extended is twenty at approximately $2,000,000 per borrower for a term of 5-7 years • All borrowers must be Private Sector Provision (PSP) enterprises, offering goods or services pursuant to an agreement with a public water or wastewater utility

15. Project Diagram • Country: Egypt • Type: Loan Portfolio Guarantee • Amount: $40,000,000 • Guarantee Ceiling: $20,000,000 • Leverage Ratio: Mission funding of approximately $1 million will leverage the Egyptian pound equivalent of approximately $56 million in loans from local private banks to PSPs. Commercial International Bank (CIB) 50% DCA Guarantee Loan Loan Loan Private Sector Provision (PSP) Enterprises

16. DCA Global ReachAs of December 1, 2003 Europe & Eurasia (22) Armenia (4) Kazakhstan Bosnia (4) Romania Bulgaria (5) Russia Croatia Ukraine Moldova (4) Latin America &Caribbean (17) Ecuador Guatemala (2) Honduras (3) Jamaica Mexico (2) Nicaragua Peru (5) Regional (2) Asia & Near East (20) Bangladesh (2) Egypt (2) India (2) Morocco (9) Philippines (2) Vietnam (3) Africa (17) Ghana (2) Kenya (3) Mali (2) South Africa (3) Uganda (7) Note: Number in parentheses represents the number of deals per country/region

17. U.S. Agency For International Development US Agency for International Development Ronald Reagan Building 1300 Pennsylvania Ave NW Washington, DC 20523-3800 Phone: +1.202.712.1380 Fax: +1.202.216.3593 Email: odc@usaid.gov http://www.usaid.gov/our_work/economic_growth_and_trade/ development_credit/index. html