Financing Alternatives in WSPs Patrick Nduati Mwangi, WASPA Conference, September 2011 Water and Sanitation Program

2  Understand the Financial and Institutional arrangements required for Alternative Financing  Carefully indentify and analyze projects that increase coverage, efficiency, resources and revenue  Review various Financing Alternatives based on their suitability  Leverage use of any subsidies available to improve viability of projects using the Financing Alternatives Key Messages

3 Water and Sanitation Services Coverage National Progress in water supply and sanitation coverage. Source: SIP and JMP 2010 report  Nearly two thirds of households (64 percent) dispose-off excreta through pit latrines which have to be emptied on a regular basis (but are often not).  Only 19 percent of Nairobi’s informal settlements households had access to a supply of piped water, in the form of either an in-house water connection or a yard tap (2006 study by the World Bank)

4 What is the Goal of the Publicly – Owned Water Company?  To make money?  To provide important social services (potable water, and sanitation)  To protect the poor?  To conserve limited environmental resources (ground water) & minimize pollution? Should a publicly-owned water authority earn a profit?… Can a water authority achieve the rest of its goals if it does not make a profit (surplus)?

What needs to be done 5 Manage the delivery of water services more like a business (performance-based governance) not a bureaucracy (approvals-based governance). Apply commercial principles (cost-recovery targets & output- based performance indicators) Introduce competition whenever feasible: Competition FOR the market (competitive tendering) Competition WITHIN the operator (incentives for managers & staff and among the operator’s suppliers) Involve users and other stakeholders in the decision-making process Selection of Water Authority Board Members Consumer protection strategies & Lifeline tariffs for the Poor Measure & monitor quality of service

The increased economic benefits to consumer of having needed water service available NOW because of the Alternative Financing, rather than having to wait until Govt. could provide the services much later. 6

7 The Record of Private Investments in Water

Key Challenges in Financing 8  Water’s key role in public health, a “public good”  Limited affordability to pay for the full cost of water  Water as a “Local-level” service:  Limited Local Funds to Prepare PPPs/Financing Models  Limited Local-level capacity to Administer PPP/Financing Contracts  Attracting private investment will require more risk- sharing ($/Kshs) by Govts and Stakeholders. Water user-fees will not be enough  Benchmarking & Monitoring Sector Performance  Funding Environmental Challenges:  The need to pay for more water treatment  Limited water resources available  The need to pay for more wastewater treatment

9 The “Waterfall” of Cash Flows for Public Utility 1. O & M Costs 2. Debt Service (Prin. & Interest) 4. Profits/ Surplus? (Wages, Electricity, Chemicals, Spare parts, Board Exp., etc.)

10 1. O & M Costs 2. Debt Repayments 3. “Surplus” In THEORY a Public Water Authority’s Cash Flows Should look like this: FULL Cost Recovery Reinvestment in ASSETS (replacements & Expansion) (Wages, Electricity, Chemicals, Spare parts, Board Exp., etc.) Understanding the challenge to public water authority financial performance:

11 1. O & M Costs 2. Debt Repayments 3. Taxes = 0 4. Surplus = 0 Govt. Subsidies Operating Subsidies Capital Subsidies In REALITY they Usually Look like this:… Occasional Investments In New Assets? (Crisis-based…)

12 1.Sovereign/Public Finance 2.Corporate Finance 3.Limited-recourse “Project Finance” Infrastructure Financing Methods: From the Lender’s Perspective

Attractiveness of Financing Strategies 13

Kayole Soweto – 89,000 residents 14

Financial Analysis Kayole Soweto 15

16  Target prime activities i.e. increase consumer base (including low income areas), resources, efficiency, revenue etc.  Analyze Financial –Institutional Implications of Proposed Projects  Carry out Risk analysis of the Financial Alternatives selected  Identify available subsidies  Leverage alternative financing options Way Forward