MOBILIZING PRIVATE FUNDS TO THE WATER SECTOR

1. MOBILIZING PRIVATE FUNDS TO THE WATER SECTOR OSAMU MURATA Chief Representative Japan Bank for International Cooperation Manila Representative Office June 2005 Presented at Financing for Development Workshop in New York World Economic Forum

2. Outline of Presentation • USAID-JBIC Water Collaboration: Background and Challenges 2. Municipal Water Loan Finance Initiative (MWLFI): Pilot Project in the Philippines 3. Philippine Water Revolving Fund (PWRF): First Full-Scale WRF in Developing Countries (DCs)

3. US-Japan Clean Water for People Initiative • Initiated in September 2002 at the World Summit on Sustainable Development (WSSD) between two governments • Objectives: (a) provide safe water supply and sanitation to the world’s poor (b) accelerate and expand cooperation to achieve the United Nations Millennium Development Goal of reducing half the proportion of people without access to safe drinking water or sanitation by year 2015

4. US-JAPAN CLEAN WATER FOR PEOPLE INITIATIVE USAID-JBIC Water Collaboration US-Japan cooperation in various fields Grant Assistance ODA Loan T/A

5. USAID-JBIC Collaboration • Pilot Countries: To realize the Initiative, Indonesia, India, Jamaica and the Philippines were selected as pilot countries • Challenges: To mobilize private funds to the water sector in rural areas by establishing a Water Revolving Fund (WRF), the idea of which was endorsed in G8 Water Action Plan in Evian Summit To channel private sector funds for water and sanitation projects through JBIC ODA loan and USAID Guarantee

6. USAID-JBIC Collaboration • Philippine Case: (a) In the case of the Philippines, the Initiative is very timely with the enactment of water/sanitation policies and consistent with overall policy of the Philippine Government: → Instituting Reforms in the Financing Policies for Water Supply and Sewerage Sector → Encourage private sector participation → Water as a priority sector in President Arroyo’s 10-Point Agenda

7. USAID-JBIC Collaboration • Philippine Case: (b) Two (2) schemes proposed to facilitate collaboration in the Philippines ▓ Municipal Water Loan Finance Initiative (MWLFI) – as a pilot scheme combining ongoing projects of USAID and JBIC, established in October 2004 ▓ Philippine Water Revolving Fund (PWRF) – targeted as a long-term financing scheme to be established in near future

8. Municipal Water Loan Finance Initiative (MWLFI) ▓ Basic Features of MWLFI ▪ will utilize ongoing guarantee scheme of USAID with LGU Guarantee Corporation (LGUGC, private sector financing) and two-step loan of JBIC with Government Financial Institutions (GFIs), in this case, Development Bank of the Philippines (DBP, public sector financing) through its Environmental Infrastructure Support Credit Program II (EISCP II) ▪ will be the springboard for PWRF

9. MWLFI Structure • Funding from Both Public and Private Sources BORROWER: Creditworthy Local Government Units (LGUs) and Water Districts (WDs) LENDERS: DBP and Private Financial Institutions (with LGUGC guarantee) Participating Private Financial Institution 50% 50% 100% Guarantee 30% co-guarantee LGUs and WDs End-user rate: 9-11% (private loan is floating, depending on market rate) Term: 7-15 years (max. 2-yr grace period)

10. MWLFI: Implementation Status Funding Source: • About US $ 20 Million (Peso 1,020 Million) was earmarked → 50% (US$ 10 Million) by DBP as start-up fund for MWLFI → 50% (US$ 10 Million) will come from private financial institutions (PFIs) with guarantee from LGUGC (30% of LGUGC guarantee is back-guaranteed by USAID/DCA)

11. MWLFI: Current Concerns • Term of private financing institutions is maximum of 7 years but requirements of water supply project is minimum of 15 years • Interest rate of private banks is high and floating; prospective clients prefer fixed rate • Clients do not want to incur additional guarantee fee for the amount to be funded by private banks • Clients prefer 100% GFI loan given better loan terms/conditions and provision of technical assistance

12. Existing Water Financing Schemes in Rural Areas GFIs Creditworthy WSPs ODA Agencies LWUA JBIC Semi-Creditworthy WSPs WB DBP ADB Pre-Creditworthy WSPs LBP Non-Creditworthy WSPs GOP Agencies DILG

13. Experience in Existing Water Financing Schemes → Rural-based water financing system is highly dependent upon GFIs that are supported by foreign aid agencies → GFIs prefer more creditworthy WSPs; hence, less creditworthy WSPs receive less foreign aid → Private sector funds is not an active player in the sector; most WSPs hope to continue to utilize GFI credit windows → Funds from GFIs/ODA is not enough to meet the demands of WSPs; private money is needed !!!

14. MWLFI: Lessons Learned • Regulate GFIs • 100% private money cannot work • Technical assistance (T/A) is imperative; T/A to support WSPs especially during the feasibility study, detailed design and construction supervision stages. WSPs in the Philippines have weak engineering capacity

15. Future Water Financing System Private Funds Creditworthy WSPs WRF WRF Semi-Creditworthy WSPs Catalytic Assistance Role Pre-Creditworthy WSPs GFIs ODA/GOP Non-Creditworthy WSPs DILG/GOP T/A facilities must be incorporated

16. Philippine Water Revolving Fund (PWRF) ● USAID and JBIC started Feasibility Study (F/S) of WRF in the Philippines last year in preparation for the establishment of a full-scale revolving fund that will mobilize private sector funds ● USAID and JBIC play catalytic roles in WRF process ● Involvement of government and the private sector from the conceptual stage ● WRF is envisioned to finance creditworthy and semi-creditworthy water service providers

17. PWRF Prototype Model USAID Guarantee (up to 50% of PFI Funds) GOP Guarantee Reserve Account JBIC 50% 50% WRF PFIs 30 years,1.5% * 7 year/8year option 13% floating LGUs WDs LGUs WDs LGUs WDs 15 years 11% 15 years 11% 15 years 11% * JBIC ODA loan interest is 1.5% in yen but assumed as 5.5% in peso including foreign exchange risk (3%) and government guarantee fee (1%).

18. PWRF: Emerging Issues • Policy Framework ● Water financing policy framework should be elaborated so as not to create unnecessary competition among WRF and GFIs • Institutional Framework ● Need to define a viable scheme and institutional framework to pursue financing options/mechanisms of PWRF; lead proponent in GOP should be defined

19. PWRF: Emerging Issues 3. Major Project Issues ● Potential source of GOP grant/funds for the reserve account should be established; fiscal constraints of government could be a setback ● Size of PWRF still to be decided upon ● Weak technical and implementation capacities of local government units and water districts (LGUs/WDs); how to incorporate T/A facility

20. PWRF: Emerging Issues • Legal Framework ● The framework to legally bind all concerned parties should be structured as soon as the feasibility of WRF is confirmed

21. Finalize Full-Scale Feasibility Study that will establish most viable option including its implementation Plan Policy Framework Institutional Framework Legal Framework First Full-Fledged WRF Established USAID-JBIC will develop and replicate this model in other developing countries

22. THANK YOU! If you have any question, please contact: o-murata@jbic.go.jp and/or visit: http://www.jbic.go.jp