0. Innovative Financing Mechanisms
Examples of successful mechanisms
Sophie Trémolet
Senior Economist, Water Global Practice

1. Innovative financing mechanisms: what for?
There is much talk of “innovative financing mechanisms” in the sector – I was myself a culprit in this area, having authored an OECD publication on “Innovative financing mechanisms for the water sector” back in This referred to mechanisms that could bring new financial resources for the delivery of water and sanitation services – and address a number of “critical mismatches” that prevent mobilizing commercial finance for the sector.

2. Mission NOT accomplished!
The first structured calls for more innovative financing in the water sector date back to the Camdessus Report, released in 2003 at the Kyoto World Water Forum just days before President Georges Bush decided to free Iraq and the world from the threat of an unpredictable dictator. As Bush was a bit quick in declaring “Mission accomplished” – we can still fairly state that the water sector has not accomplished its mission in terms of leveraging commercial finance.

3. With global low interest rates
Water sector should be a shoe-in for financing looking for low, stable, long-term returns

4. There is light at the end of the tunnel
Commercial bank loans in Philippines
Mesofinance in Cambodia

5. Cambodia: leveraging mesofinance
Cambodia is an unusual country as far as water supply is concerned.
Country with long history, refined civilization (produced the splendors of Angkor Vat, which were rediscovered in the early 20th century after being abandoned in the jungle). Civil war and domination by the Khmer Rouge almost annihilated all public infrastructure
Strong public water sector provider in capital city Phonmh Penh: remarkable recovery, one of the lowest NRW performance to this day. Financed first with concessional lending and now listed on the local stock exchange
In rural areas: thriving local market for small scale operators – for the most part: private operators have emerged to fill a service gap – but were not necessarily supplying the poorest, or good quality water, or managing water resources effectively. Over the past 20 years,: several initiatives to strengthen these operators and enable them to stand on their own two feet.

6. Financial mechanism: facilitate access to finance
Most recent initiative has focused on facilitating access to finance for these providers with ongoing technical assistance and grant funding to help them extend services to the poorest (on an OBA basis)
2014: Access to Finance project initiated by AFD: facilitate access to financing for small private water and electricity companies in rural and peri-urban areas of Cambodia
AFD: concessional loan agreement with FTB – local bank that wanted to diversity its lending portfolio in water and energy. Focus on: developing FTB’s capacity to assess such investment proposals – support water operators with developing sound business plans – incentivize water operators to serve the poor and extend new connections
3 financial tools = 24.2 million $
Concessional line of credit: 15 mn $- FTB agreed to reserve 1/3 for water – interest rates of 6 to 8% (concessional) – 10 years, 12 month grace period – average investment cost US$ 270,000
Guarantee package - 5 million risk guarantee provided by AFD: reduction of collateral requirement from 200% to 100% loan value, allowing operators to borrow more.
Grant funding: From WB and EU – development of business plans and investment studies for water operators applying for FTB loans + improve regulatory environment (more transparent licensing and tariff regimes)
Source: World Bank (2016)

7. Once convinced FTB became strong supporter
Commercial banks need convincing: other commercial banks that have not received the support have not jumped at the opportunity – these external interventions were necessary to trigger change.
The strong interest from one specific lender certainly helped: important to identify the right banking partner> needed strong communication with the operators on eligibility criteria and conditions (e.g. requirement for operators to recruit finance consultants for detailed design)
Water can be attractive: initially AFD had agreed with FTB that 1/3 of credit line would be reserved for water – mid-way through the program, this was increased to 2/3 (i.e. a total of 10 million USD)
Technical assistance is key
Commercial banks need convincing
Water can be an attractive market

8. Philippines Water Revolving Fund
In the Philippines, JICA took a similar approach but set up a Revolving Fund with much higher lending amounts in order to truly kick-start a market response.
Similarly – the Philippines water market is very fragmented:
There are some big private operators (for example Manila Water is one of the most successful home-grown private operators, which is now winning contracts in the rest of South East Asia) – some small operators
Most operators are still public: 4700 Water service providers; Water Districts (govt owned and controlled, autonomous, state-owned enterprises. 500 operational – on paper 800 were created (300 are to be operationalized). Better performing, set up like corporations. LGUs: Local Government Units, run water systems very poorly –
PWRF: was created to target first the more credit-worthy ones. Most of them are Water Districts. Was considered because MDG targets: investment requirements were 10 times what had been provided: had to supplement with private sector. Looked at SRF in the US: pooled bank financing. Encountered constraints: Department of Finance – did not have steady flow of bankable projects.

9. PWRF Funding Structure
Leveraged ODA: JICA lent money to DBP (government component) – approached universal banks, offered credit risk guarantee through LGCU (private guarantee entity) + DCA co-guarantee.
LGCU was guaranteeing up to 85% of the PFI exposure. 2 parallel loan agreements
Interest rates are low for the private sector: is driving down the interest rate.
DBP loan agreement JICA: low concessional rate (2.75) – national government will add 4% (3% forex cover + 1% guarantee): 6.75% + tax – base tax, + profit DBP: 9% [fixed]
Main interest: extending the loan tenor – rate is not too much of an issue. Started with 7 years: if they want to extend. Appears 15 years loan – bullet payment 7 years.
Source: World Bank (2016)

10. Financing Intervention with Banks
Credit enhancements: LGUGC/DCA
Credit Rating System for Utilities
Built by CRISIL (subsidiary of Standard & Poors) to create an independent/transparent lending standard
Benefit to Banks: reduces political risk to screening process
Benefit to Utilities: creates clear pathway for management to improve credit score and access cheaper financing
Water Project Appraisal Guides
Models/Training to analyze viability of water utility projects

11. PWRF Follow-on Program
Accomplishments
Key Result Areas
PWRF Support Program
(Oct to Nov. 2011)
PWRF Follow-on Program
(Dec Dec. 2014)
PWRF-funded water supply and sanitation projects
Total
19 projects
$100 million
11 projects
$105 million
PFI contribution
$60 million
$51.1 million
DCA guarantee
About $3.66 million
$1.3 million
No. of beneficiaries
2 million people
More than 2 million
More financing has taken place since 2014 but that’s the last time there was official data: since has been able to on-lend the proceeds from the first round of loans
JICA no longer necessary – low interest rate regimes for private banks: line of credit was more expensive. DBP has enough internal resources to continue the lending to the utilities.

12. Where are we at now?
PWRF as an externally-funded program closed in 2017
Private banks now lend directly to credit worthy utilities without co-financing from the government financing institution; some lend without the guarantee
Private banks are offering longer tenors and more competitive rates
Private developers for bulk water supply and concession agreements source financing from the market; some get guarantee for the off-take obligation of the public utility
Opened the market for private lending to water sector. Also offered technical assistance: training of private banks, familiarized them with the sector and operations of the water utilities.
Principles PWRF are there: still recommending commercial finance, building the capitalization of LGPCU (zero default rate: not using its own balance sheet). PWRF: more of a program: not established an SPV, still a program, not institutionalized. Don’t have to formally close it.
Don’t have a central agency tracking the flows: Central Bank is looking at it: difficult to consolidate the lending volumes unless there is a technical assistance to look at the lending volume. No single agency has powers over these providers.

13. Consider full spectrum for commercial finance
Microfinance
Small
Medium
Large
Commercial
bank loans
Households
Utilities / Municipalities
SSIPs
Bonds
Communities
Size of borrowers
Medium sized entrepreneurs
Financing needs 13

14. Thank you!