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 commercial finance into the sector while at the same time bolstering public funds.

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 water 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 funding sources (tariffs, taxes, transfers), and mobilizing domestic commercial finance-a largely untapped financial resource to the sector.

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.

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.

Introduction
The sector is in the process of repositioning itself toward the Sustainable Development Goals (SDGs). 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 departments 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 commercial lenders due to weak incentives and/or poor creditworthiness.
Mobilizing additional concessional funds will helpbut 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 effectively to deliver the maximum benefit for every dollar invested (i.e., targeting capital), and (d)   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 • 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 benefit to the largest number of people. Targets should be agreed quickly so they can begin to be implemented rapidly.

author(s): Water GP | Focus: Water Supply and Sanitation | country: cambodia
Limited access to finance was preventing private operators in Cambodia from expanding and improving services. This case study shows how a blend of non-sovereign concessional lending, guarantees, grants, and technical assistance was used to leverage local commercial finance and equity investments of US$24 million to accelerate access to piped water supply.

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 sanitation services by raising capital market resources on a pooled basis. This example demonstrates how pooled financing vehicles can play a critical role in attracting repayable finance to smaller providers, reduce risk, and achieve economies of scale.
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 developed 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 rehabilitation 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 revenues 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. Approach to Blended Finance: The Water and Sanitation Pooled Fund (WSPF) in Tamil Nadu issued a pooled bond to facilitate access to long-term domestic 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 confidence. 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 revenue 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 sector, 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 accessing financing via the TNUDF. Bond issuance fees, legal costs, and an inability to get a credit rating prevented small and intermediate local governments from accessing capital markets. In addition, sanitation and water were among the most neglected areas of public infrastructure 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.