Innovative Finance in the Water and Sanitation Sector
The World Bank at World Water Week 2015
As the global focus shifts to the Sustainable Development Goals (SDGs), and achieving universal access to water and sanitation, there will clearly be a need to mobilize private capital to help finance the necessary infrastructure. The Global Water Practice at the World Bank has been working with key public and private sector partners in over ten countries to mobilize domestic credit and address operating inefficiencies which negatively impact on the delivery of water and sanitation. To scale up (“billions to trillions”) it will be necessary to consider the incentives needed to attract and sustain such capital flows.
The Goal to Achieve Universal Access
Significantly less private capital has been committed into water and sanitation than other infrastructure sectors. In 2013, private sector participation in the sector totaled $3.4 billion, or just 7% of the money that flowed into energy and ICT. Perhaps the single biggest constraint relates to the sources of income to support water projects. There are only two revenue streams to support infrastructure investments: consumers or government. However, unlike ICT and energy, there is often a public perception that water costs to consumers must be kept to a minimum. As a result water and sanitation services are often underpriced, thus undermining opportunities to develop and maintain infrastructure as well as mobilize private finance.
Long-term financial resources are required to support infrastructure development while commercial finance is needed to support short- and medium-term rehabilitation, operating expenses and bridge financing. Both are required to overcome operating inefficiencies which negatively impact delivery and investment opportunities. Nevertheless, it is access to longterm financing that is particularly difficult in developing countries. Moreover, in order to overcome foreign exchange risks, such financing ideally needs to tap into long term domestic sources such as pension funds and insurance companies.
Responding to the Challenges
'Fortunately, there are a number of instruments and tools that exist to facilitate or “crowdin” private financing. Many of these have been used successfully in other infrastructure sectors and, in the right enabling environment and with viable projects, can be used to significantly increase private financing. The innovative financing tools used to attract private capital to finance water and sanitation infrastructure include financial guarantees, insurance, subsidies, equity grants, tenor extensions, pooled finance Project Preparation Funds, hedging instruments, benchmarking, microfinance, and credit ratings.
Innovative financing can transform marginal projects into financially viable transactions, but no amount of innovation can make nonviable projects bankable or overcome lender’s concerns about sector governance, utility performance, and revenue predictability. How public finance and public institutions of service delivery are structured will determine the ability of the water sector to leverage private finance. Poorly structured public systems will not attract private finance or will do so at the risk of creating moral hazard and placing commercial risk implicitly on public resources. Without a concerted push to address these issues, the chances of achieving the SDGs could be threatened.
Submitted by Joel Kolker co-authors: Bill Kingdom, Ada Karina Izaguirre Bradley