KNOWLEDGE HIGHLIGHTS FROM THE WATER GLOBAL PRACTICE 2016-2018 3

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Easing the Transition to Commercial Finance for Sustainable Water and SanitationA U G U S T 2 0 1 7

Amanda Goksu, Sophie Trémolet, Joel Kolker, and Bill Kingdom

W A T E R G L O B A L P R A C T I C E

N o v e m b e r 2 0 1 6

James Winpenny, Sophie Trémolet, and Rachel Cardone with Joel Kolker, Bill Kingdom, and Lyndsay Mountford

W o r k i N g P a P e rW a t e r g l o b a l P r a c t i c e

Aid Flows to the Water SectorOverview and Recommendations

Introducing Commercial Finance into the Water Sector in Developing CountriesF E B R U A R Y 2 0 1 7

Kevin Bender

G U i d A n c E n o t EW A t E R G l o B A l P R A c t i c E

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EASING THE TRANSITION TO COMMERCIAL FINANCE FOR SUSTAINABLE WATER AND SANITATION

author(s): Goksu, trémolet, Kolker, Kingdom | Focus: Water Supply and Sanitation

This report brings together the current state of knowledge on water sector finance and sets out the World Bank’s vision for how countries can finance their water and sanitation goals. It calls for countries to place a greater priority on leveraging commer-cial finance into the sector while at the same time bolstering public funds.

AID FLOWS TO THE WATER SECTOR: OVERVIEW AND RECOMMENDATIONS

author(s): Winpenny, trémolet, cardone, Kolker, Kingdom, mountsford Focus: Water Supply and Sanitation

This report, created for the High-Level Panel on Water, provides data and insights on the role of grant funding and concessional financing and recommendations on how to mobilize financing to achieve the water SDG. It includes an inventory of more than 225 institutions that contribute financing and/or technical assistance to the water sector in developing countries.

INTRODUCING COMMERCIAL FINANCE INTO THE WATER SECTOR IN DEVELOPING COUNTRIES

author(s): Bender | Focus: Water Supply and Sanitation

This guidance note offers borrowers, lenders and government officials a holistic ap-proach on how to build a market for commercial finance in the water sector. It takes readers through a step-by-step process for scoping, designing and building the mar-ket, and executing, monitoring, and evaluating the deal.

ACHIEVING UNIVERSAL ACCESS TO WATER AND SANITATION BY 2030: THE ROLE OF BLENDED FINANCE

author(s): Leigland, trémolet, Ikeda | Focus: Water Supply and Sanitation

It is essential for service providers to mobilize up-front financing from both private and commercial sources in order to meet SDG 6. This paper lays out common situations in which financial markets and commercial sector finance opportunities can be struc-tured in different countries. It explains how providers offering concessional finance can best use their grant funding to catalyze commercial sector financing through the blending of resources. 01

August 2016

WATER GLOBAL PRACTICE: DISCUSSION PAPER

James Leigland, Sophie Trémolet, and John Ikeda

Achieving Universal Access to Water and Sanitation by 2030

The Role of Blended Finance

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KNOWLEDGE HIGHLIGHTS FROM THE WATER GLOBAL PRACTICE 2016-2018

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FINANCING OPTIONS FOR THE 2030 WATER AGENDA

author(s): Kolker, Kingdom, trémolet, Winpenny, cardone | Focus: Water Supply and Sanitation

This paper was created in preparation for a meeting of the High-Level Panel on Water. The water sector is repositioning itself toward the Sustainable Development Goals (SDGs). With the advent of the SDGs the agenda is much broader covering all aspects of water, water resource management, and irrigation and their sustainability. The wa-ter sector is not well equipped to face these new financing challenges. Achieving the new financing paradigm requires a more collaborative approach with all stakeholders playing an active role.

SANITATION AND WATER FOR ALL: HOW CAN THE FINANCING GAP BE FILLED?

author(s): World Bank Group, UnIceF | Focus: Water Supply and Sanitation

This discussion paper was created in preparation for the Sanitation and Water for All (SWA) High-Level Meeting. It provides a financial framework for country-level dialogue to help governments meet the SDGs. It outlines a range of proposals for using existing financial flows more effectively, including improving the efficiency of existing fund-ing sources (tariffs, taxes, transfers), and mobilizing domestic commercial finance—a largely untapped financial resource to the sector.

SANITATION AND WATER FOR ALL: PRIORITY ACTIONS FOR SECTOR FINANCING

author(s): World Bank Group, UnIceF | Focus: Water Supply and Sanitation

UNICEF and the World Bank lay out priorities for governments to help leaders create a new financing model to leverage public funds and attract commercial finance. This note covers policies on how to make more efficient use of existing resources, use public funds in a more targeted manner, attract domestic commercial finance, and reduce risk exposure.

BLENDED FINANCING FOR THE EXPANSION OF THE AS-SAMRA WASTEWATER TREATMENT PLANT IN JORDAN

author(s): Water GP | Focus: Water Supply and Sanitation | country: Jordan

Many players contributed to a diverse blend of financing to expand a treatment plant for growing populations in Amman and Zarqa. This paper gives an overview of the financing package that included a blend of donor and public funding (viability gap funding), commercial debt, a grant from the Millennium Challenge Corporation and a Build-Operate-Transfer (BOT) contract.

SANITATION AND WATER FOR ALL

How Can the Financing Gap Be Filled? A DISCUSSION PAPER

MARCH 2017

A paper submitted by the World Bank and UNICEF to support the Sanitation and Water for All Finance Minister Meeting Preparatory Process

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Introduction

The sector is in the process of repositioning itself toward the Sustainable Development Goals (SDGs). Under the Millennium Development Goals (MDGs) the international focus of the water sector was predomi-nantly on increasing access to water supply and sanita-tion (WSS). With the advent of the SDGs the agenda is much broader covering all aspects of water (WSS, water resource management [WRM], and irrigation) and their sustainability.

The SDGs come with new and very significant financ-ing  needs. For WSS they have been estimated at US$1.7  trillion, or three times the amount histori-cally invested in the sector (Hutton and Varughese 2016). For irrigation, the International Food and Agriculture Organization (FAO) estimates that some US$960  billion will be required between 2005/07 and 2050 to ensure water for agricultural production in 93 developing countries (Koohafkan, Salman, and Casarotto 2011). No WRM estimate is available but failure to address WRM could diminish national growth rates by as much as 6  percent of GDP by 2050. These amounts are all well above historic allocations.

The water sector is not well equipped to face these new financing challenges. The sector has historically

relied on public financing to meet its investment needs—through domestic and development partner concessional funds and/or lending. Institutionally many parts of the sector are government depart-ments where mobilizing private finance is almost non-existent. Even when they are established as  corporate entities, such as some WSS providers, it  is rare for them to borrow from commer-cial  lenders  due to weak incentives and/or poor creditworthiness.

Mobilizing additional concessional funds will help—but will not be sufficient. New sources of concessional finance might be tapped (e.g., climate finance) but the gap cannot be filled simply by increasing the volume of concessional funds and lending from governments or development partners.

A new sector financing paradigm is required based on four broad themes. The sector has to realign itself around actions that (a) improve sector governance and efficiency (i.e., improving creditworthiness), (b) crowd in or blend private finance (i.e., leveraging capital ), (c)  allocate sector resources more effec-tively  to deliver the maximum benefit for every dollar invested (i.e., targeting capital), and (d) improve sector capital planning to reduce unit capital costs (i.e.,  minimizing capital requirements).

N o v e m b e r 2 0 1 6

Financing Options for the 2030 Water Agenda

k n o w l e d g e b r i e fw a t e r g l o b a l P r a c t i c e

Joel Kolker, Bill Kingdom, and Sophie Trémoletwith James Winpenny and Rachel Cardone

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This knowledge brief was developed by the World Bank and UNICEF to support the Sanitation and Water for All Finance Minister Meeting Preparatory Process.

Sanitation and Water for All: Priority Actions for Sector Financing

The global commitment to bring universal access to safely managed water supply and sanita-tion by 2030 set by the Sustainable Develop-

ment Goals (SDGs) poses an unprecedented challenge. Strong political leadership will be required to bring about sector-wide changes to improve governance and build technical and administrative capacity at scale. This will pave the way for building, operating, and maintaining cost-effective infrastructure to supply improved and sustained services.

The current model of sector finance is insufficient for reaching these goals. This policy note sets out four interlinked priority actions that governments should take to tackle this challenge:

Priority 1: Make more efficient use of existing resources.

Priority 2: Use public funds in a more targeted manner.

Priority 3: Attract domestic commercial finance.

Priority 4: Focus on de-risking the sector.

What Have We Learned So Far?

The experience with the Millennium Development Goals (MDGs) offers critical lessons for achieving the SDGs by 2030:

Sanitation and Water for All: The Global Challenge

Sanitation and Water for All is a global partnership committed to achieving universal access to clean drinking water and adequate sanitation.

While 2.6 billion people gained access to an improved water source and 2.1 billion to an improved sanitation facility between 1990 and 2015, one in ten people still lack an improved drinking water source and one in three lack improved sanitation (1 billion people still defecate in the open). Most people who do not have adequate water and sanitation services are poor and live in rural areas in Sub-Saharan Africa and South Asia.

•Targets defined at the national level need to ensure that access is provided to those who are still unserved and in areas that deliver the greatest ben-efit to the largest number of people. Targets should be agreed quickly so they can begin to be imple-mented rapidly.

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CASE STUDIES IN BLENDED FINANCE FOR WATER AND SANITATION

Blended Financing for the Expansion of the As-Samra Wastewater Treatment Plant in JordanAugust 2016

Summary Overview

Location: Amman and Zarqa, Jordan, Middle East and North Africa

Approach to Blended Finance: A blended financial package was put in place to finance the expansion of the As-Samra Wastewater Treatment Plant. The project was undertaken by the Samra Wastewater Treatment Plant Company Limited (SPC), a private operator that was recruited through a Build-Operate-Transfer (BOT) contract to finance, upgrade, and operate the treatment plant.

The private operator was required to mobilize private financing, which it did through an equity contribution and a syndicated limited recourse loan provided by domestic banks in local currency. The overall financial package also included public funds provided as viability gap fund-ing (VGF), including contributions from the Government of Jordan and a grant from the Millennium Challenge Corporation (MCC). Public funding was critical to help structure the deal and to convince private financiers to step in and provide what was, at the time, the longest maturity ever achieved for a Jordanian dinar-denomi-nated limited recourse loan.

Context

Jordan is one of the most water-scarce countries in the world. Available water resource levels have fallen with an annual per capita quantity of water approximated at 155 m3 as of 2013. While water demand outstrips supply, it is estimated that two-thirds of available water resources are used for agriculture. Scarce water resources com-bined with high population growth have caused extensive stress on water infrastructure, requiring rehabilitation and

extension work. Water scarcity is considered the most important natural constraint to growth and development in the country.

The As-Samra Wastewater Treatment Plant was initially designed in 2003 to treat wastewater for the 2.3 million inhabitants of Amman, while supplying quality irrigation water to the surrounding region. Construction of the plant was completed in 2008. However, the country’s rapid population growth and a large influx of refugees led to the approach of the plant’s capacity limits (both in terms of the volume of wastewater received and solids processing) sooner than anticipated. For this reason, the Government of Jordan, through the leadership of the Ministry of Water and Irrigation (MWI), prioritized the expansion of the treatment plant in order to meet the needs of the population in two of Jordan’s most popu-lous cities, Amman and Zarqa.

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KNOWLEDGE HIGHLIGHTS FROM THE WATER GLOBAL PRACTICE 2016-2018 5

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FACILITATED ACCESS TO FINANCE FOR DOMESTIC PRIVATE WATER OPERATORS IN CAMBODIA

author(s): Water GP | Focus: Water Supply and Sanitation | country: cambodia

Limited access to finance was preventing private operators in Cambodia from ex-panding and improving services. This case study shows how a blend of non-sover-eign concessional lending, guarantees, grants, and technical assistance was used to leverage local commercial finance and equity investments of US$24 million to accel-erate access to piped water supply.

POOLED MUNICIPAL BOND ISSUANCE IN TAMIL NADU (INDIA)

author(s): Water GP | Focus: Water Supply and Sanitation | country: India

To address the inability of small and medium-sized utilities to access financing, the Government of Tamil Nadu created a fund to help towns finance their water and san-itation services by raising capital market resources on a pooled basis. This example demonstrates how pooled financing vehicles can play a critical role in attracting re-payable finance to smaller providers, reduce risk, and achieve economies of scale.

SCALING UP BLENDED FINANCING FOR WATER AND SANITATION IN KENYA

author(s): Water GP | Focus: Water Supply and Sanitation | country: Kenya

Kenya has experimented with different ways of using blended finance to leverage commercial financing from domestic banks. This case study explains how years of output-based aid support has paved the way for scaling up by utilities through the Kenya Output-Based Aid (OBA) fund that provides grants to water service providers to access commercial loans from domestic lenders for investment projects.

CASE STUDIES IN BLENDED FINANCE FOR WATER AND SANITATION

Facilitated Access to Finance for Domestic Private Water Operators in CambodiaAugust 2016

Summary Overview

Location: Cambodia, Southeast Asia

Approach to Blended Finance: A combination of non-sovereign concessional lending, guarantees, grants, and technical assistance has been used to leverage local commercial finance and equity investments so as to accelerate access to piped water supply. A concessional line of credit was provided by AFD (Agence Française de Developpement) to the Foreign Trade Bank (FTB), a Cambodian commercial bank, to enable them to extend more attractive loans to small- and medium-sized water service providers, mostly active in small towns and rural areas. Output-based investments grants have been used in a complementary way as incentives for private water operators to connect poor households.

Context

Access to piped water supply is lower in Cambodia than in the majority of Southeast Asian countries and was estimated at 21 percent in 2015. Only 7 percent of rural households have access to piped water services on premise, while 75 percent of urban households enjoy such service (JMP 2015). Public utilities serve the capital and eleven other urban areas. In rural spaces and small towns, private water operators (which are either licensed or unlicensed) have invested in water systems. Driven by demand for improved services, steady economic growth, and relative water abundance, the private sec-tor in Cambodia has the potential to be an important force for increasing access to piped water supply. The Government of Cambodia and development partners such as the World Bank, the SEDIF (the water service provider in the Paris area) and the Agence Francaise de Développement (AFD) have been supporting the

development of these dynamic small-scale operators since the early 2000s through a variety of financing and technical assistance approaches.

Limited access to finance is a key factor preventing these private operators from expanding and improving services. Domestic commercial banks are not used to lending to water sector actors, whereas water opera-tors’ capacity to develop sound business plans and build assets to a high standard is sub-optimal. Some local and regional banks have been providing loans to private water operators. However, collateral requirements are usually over 200 percent of the loan amount, and only land, buildings, and cash deposits can be accepted as collateral. Tenors are short (up to 5 five years) with no grace period, which means that only a few large water operators can access financing under such conditions.

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CASE STUDIES IN BLENDED FINANCE FOR WATER AND SANITATION

Scaling Up Blended Financing for Water and Sanitation in KenyaAugust 2016

Summary Overview

Location: Kenya, Sub-Saharan Africa

Approach to Blended Finance: Over the last decade, Kenya has experimented with different ways of using blended finance to leverage commercial financing from domestic banks. Many such efforts have focused on using Output-Based Aid (OBA) subsidies to bridge the financing gap that water service providers face when serving poor customers. Such programs were first devel-oped for community-based water schemes, in which the OBA subsidies were awarded based on results to reduce loan repayments. These have been scaled up for utilities at the national level through the Kenya OBA fund. Nairobi Water Supply Company has established similar arrangements to expand water and sewerage services in poor areas. These initiatives have been supported over time through considerable efforts to improve sector transparency through the preparation of water utilities’ credit ratings funded by donors and later through a utility creditworthiness index led by the water service regulator.

Context

The Kenya Vision 2030 national development plan, in line with the water Sustainable Development Goal (SDG 6), seeks universal access to safe water and sanitation for all by 2030. The annual costs of investment and rehabili-tation for water supply is estimated at US$303 million. However, it is estimated that existing sources of financing can only provide approximately US$193 million per year, underscoring the deep financing gap (World Bank 2016). Domestic commercial lending to water utilities has the potential to help bridge this gap, although experience in this area is still limited in Kenya.

The Kenya Water Act of 2002 introduced important reforms in the sector, separating responsibilities for asset ownership and operation, creating autonomous utilities and an independent sector regulator, ring-fencing rev-enues within the sector, and establishing a framework for utilities and other county-owned Water Service Providers (WSPs) to move toward cost-reflective tariffs. At present, communities operate many small piped-water systems in rural and peri-urban areas. WSPs serve approximately 51 percent of the population in their service areas and 23 percent of the total population. These utilities lack familiarity with commercial banks’ lending practices and are not familiar with the steps that are required in order to become creditworthy. They typically are limited by their inability to provide sufficient collateral to secure loans, and lack adequate self-financing.

High commercial interest rates pose an additional barrier. Local banks perceive the sector as financially weak, and

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CASE STUDIES IN BLENDED FINANCE FOR WATER AND SANITATION

Pooled Municipal Bond Issuance in Tamil Nadu (India)August 2016

Summary Overview

Location: Tamil Nadu, India, South Asia

Approach to Blended Finance: The Water and Sanitation Pooled Fund (WSPF) in Tamil Nadu issued a pooled bond to facilitate access to long-term domes-tic capital markets for small and medium Urban Local Bodies (ULBs) to finance water and sanitation services.

This enabled a grouping of 13 ULBs to overcome high transaction costs and mobilize funds through a single bond issuance. Debt was repaid from project cash flows and from general ULB revenues. A multi-layered credit enhancement package was designed in order to extend the maturity of the bond and increase investor confi-dence. The different credit enhancement mechanisms included a debt service reserve fund capitalized by the state government, creation of individual ULB escrow accounts, a local debt service reserve fund, a State rev-enue intercept mechanism, and a partial credit guarantee from USAID.

Context

In the 1990s and early 2000s, reforms in India helped create opportunities for financing capital infrastructure for water and sanitation. Reform efforts included facilitation of private sector investment and increased autonomy awarded to municipal governments, known as Urban Local Bodies (ULBs), in India. In parallel, growth in the local debt markets meant that local debt became an attractive tool for reducing the financing gap in the sec-tor, particularly for ULBs.

In 1996, the State of Tamil Nadu, the World Bank, and USAID set up the Tamil Nadu Urban Development Fund (TNUDF). The Fund was established as a public-private

partnership for the purpose of attracting private domestic financing for different types of infrastructure investment. However, the TNUDF primarily serviced large ULBs with dependable revenues. Many of the small and medium sized municipalities tended to be excluded from access-ing financing via the TNUDF. Bond issuance fees, legal costs, and an inability to get a credit rating prevented small and intermediate local governments from access-ing capital markets. In addition, sanitation and water were among the most neglected areas of public infra-structure provision.

To address these shortcomings, the State Government of Tamil Nadu (GoTN) created a pooled entity the Water and Sanitation Pooled Fund (WSPF). The WSPF functions as a special purpose vehicle to specifically help small urban local bodies finance their water and sanitation services by raising capital market resources on a pooled basis.

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