1. Crowding-in Commercial Finance in World Bank Operations

2. 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

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

4. 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

5. 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

6. 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

7. 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  

8. Which WSS Providers to Target

9. Conduct Tariff Adequacy Analysis

10. 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

11. 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

12. 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

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

14. 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

15. Possible Sources of Commercial Finance

16. Thank You!