Crowding-in Commercial Finance in World Bank Operations

Breaking the Over-Reliance on Public Funds Diversifying Sources of External and Internal Financing Improving the Governance Framework Improving Information Gaps of the Domestic Lending Sector. Why It’s Important

Steps for Sourcing Commercial Bank Loans for WSS Entities   Create Funding & Oversight Programs to Incentivize LGUs Source: Author’s elaboration  

Set Realistic Expectations View the process in a strategic continuum. First stage should focus on getting some level of commercial finance participation. In the short-term focus on tapping the “low hanging fruit” which means: (i) identifying realistic sources of commercial bank loans that can be mobilized quickly for the operation; as well as (ii) identifying those utilities which offer quick paying investments that can be supported through blending arrangements or enhancements. In later stages with the same utilities, the goal should be to increase the participation of the commercial lenders and commensurately decrease the role of public sources of finance. Set Realistic Expectations

Overwhelming Conditions that Must be Reconciled Many financial instruments to leverage PPPs and commercial finance do not work in Water WSS Providers are financially weak Public Finance Alone Cannot Close the Funding Gap Someone has to pay Overwhelming Conditions that Must be Reconciled

Assess Existing Opportunities in Domestic Finance Market Determine the capacity of commercial banks including: (i) lending terms; (ii) experience if any in financing infrastructure and particularly water; (iii) main constraints and reservations and level of interest in participating in the sector. Identify the existence of any special purpose facility and whether water projects would be eligible. Such facilities could include wholesale programs, pooling facilities, OBA programs, ODA supported funds, etc. One of the quickest ways to achieve the financing objectives is to link IBRD or IDA operations to Global Partnership on Output-Based Aid (GPOBA) programs also executed by domestic commercial banks Identify the existence of other programs or financing sources. Assess Existing Opportunities in Domestic Finance Market

Determine the Need for Loan Security and Subordinate Loan Agreements Loan Security Instruments to secure cash flows for private lender (i) collection accounts; (ii) transfer intercepts; (iii) tax pledges. Subordinate Loan Agreements to give senior status to commercial lender. Determine the Need for Loan Security and Subordinate Loan Agreements  

Which WSS Providers to Target

Conduct Tariff Adequacy Analysis

Focus on Performance Improvement Programs Performance improvement programs tend to be much less costly than developing an entirely new water source and in many cases, can offer quick returns and short payback on invested capital. For these reasons, they are safer investments for commercial lenders. Moreover, such programs as opposed to programs requiring longer term payback periods are: (i) much easier for lenders to comprehend, and (ii) easier to assess the related risks and consider positively. For example, combining NRW reduction with a connection program in existing core areas leads to immediate benefits which can accommodate loans of a shorter maturity. Focus on Performance Improvement Programs

Develop a Financing Strategy for Leveraging Public Financing Through blending financing structures; and By providing risk instruments and/or other enhancements Develop a Financing Strategy for Leveraging Public Financing

Develop Blended Finance Strategy Improve sustainability levels of water entities, and by crowding-in commercial finance the development of the financial sector is accelerated. Reduce the overall cost of finance to close the financial viability gap of marginally creditworthy entities and lengthen maturities. Create financially viable and bankable lending arrangements and bridge creditworthiness status. Improve information gaps among commercial lenders by establishing financial relationships with WSPs. Bring additional stakeholders into the governance process. If donors and IFIs are involved in the financing structure as honest brokers, they can provide and extra element of comfort to commercial lenders to reduce their perception of risk.. Develop Blended Finance Strategy

Identify Need for Third Party Guarantees Partial Credit Guarantee Partial Risk Guarantee Identify Need for Third Party Guarantees

Domestic commercial lenders will likely be the more realistic choice for carrying out a joint blended operation. This is particularly true if these lenders have already had some experience in the sector, even as purely depository agencies. OBA and microfinance programs that are either being contemplated or already under implementation offer an excellent opportunity for linking programs, and could speed up the process in identifying private partners. Also look for other conduits through DFIs and MDFs. Match Candidates to Sources of Finance and Assess Capacity of Local Public Finance Institutions as Conduits

Possible Sources of Commercial Finance

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