Crowding-in Commercial Financing to Water Supply and Sanitation Utilities

This is a guest blog by RWSN Members Lance Morrell and Michael Ashford.

Achieving SDG6, clean water, and sanitation for all by 2030 requires estimated investments of US$114 billion per year. The present value of the total investment needed is US$1.7 trillion, and these estimates do not include costs of operation and maintenance. At three times current levels, this far exceeds the financing capacity of the entire public sector and donor community, combined.  

We in the development community need new tools and approaches to address this gap. Using donor and public funds to “crowd-in” private investment can help. USAID’s recently announced Private-Sector Engagement (PSE) Policy, for example, recognizes the urgency of using development funding to attract private sector capital into development of infrastructure and services around the world. Similarly, USAID’s Water, Sanitation and Hygiene Finance (WASH-FIN) program is developing and piloting specific interventions to increase private and public investment in WASH. The World Bank’s Public-Private Infrastructure Advisory Facility (PPIAF) is another important source of information and successes on how to leverage the public and donor sectors’ financial power to increase private investment in public infrastructure and services. In all cases, the policies and prescriptions call for the use of market-based approaches as the only sustainable path to sustainably support communities in achieving development and humanitarian outcomes.

While “billions and trillions” of capital for WASH feels overwhelming, outside of 20th century Soviet-style economies, public infrastructure was never meant to be financed, funded, and operated with public resources alone. Commensurate with the growing financing gaps, there is today a glut of private sector capital looking for reliable investments that meet their investment criteria. Globally, pension funds, insurance companies, sovereign wealth funds and commercial banks hold approximately US$100 trillion in assets. In this light, the global financial system is out of balance, and the challenge is to attract private capital and other types of private sector participation into the water and sanitation sector. Development professionals, working with their government counterparts, must now “put skin in the game” without sacrificing the broader objective of shared, public benefits and economic growth.

Changing Project Funding to Crowd-In Private Investments

If the private sector has the capital needed to expand and improve the performance of the WASH sector, why haven’t governments been able to access it? How do we crowd-in the private sector?

The first step is to stop crowding-out private investment with donor funds. Governments and donors crowd-out private investors by providing grants or ill-designed concessional financing against which the private sector cannot compete. Financing and funding are products that banks and donors, respectively, want recipients to “buy;” the price is the interest rate. Free or cheap money from donors is not something private capital can beat.

There are numerous real-world examples of crowding-out in development, which follow the same basic scenario: Donor X works with a government to develop a project that will use public and donor funds to attract commercial financing to the project. In order to attract – or crowd-in – the commercial financing, government will work with financiers to understand their concerns and design appropriate risk mitigating measures. To crowd-in the private sector, the project designers require time to develop both the demand and the supply side. As this project preparation is proceeding and nearing agreement, Donor Y approaches the government and offers grant financing for 100 percent of the cost of the project, and crowds-out the private sector.

In contrast, as USAID’s PSE policy emphasizes, governments must engage and collaborate with the private sector, and the private sector must be allowed to manage its level of risk and to earn a reasonable profit. Adhering to an enterprise-driven development model, USAID and other donors are aiming to play a catalytic role in achieving results, rather than fully funding and managing the majority of its projects. The PSE model recognizes that the private sector represents nearly 90 percent of the direct foreign investment to developing countries, and the model represents a strategic approach through which USAID would consult and collaborate with the private sector for greater scale, sustainability and effectiveness. Under this approach, USAID will attract, or crowd-in, the private investors.

Increasing Government Commitment

Government is the key stakeholder in attracting private sector financing to the WASH sector. To effectively express these commitments, government officials need to understand the benefits and costs of the WASH sectorfrom the perspective of commercial finance. Some of the potential policies and actions include the following, with the commitment type identified in parentheses:

  • Sharing capital costs or providing limited guarantee of recovery of capital costs (lump sum);
  • Guaranteeing continuous payments during project performance to recover capital costs overtime or sharing in expected revenue from tariffs to cover financing costs (revenue flows);
  • Indirect market development by requiring improved operational performance of the utility, whether publicly or privately owned, to reduce expenses and increase revenue, so the utility can enter into direct lending arrangements (regulatory enforcement);
  • Contractually transferring asset management of utilities, if owned by government, through performance-based contracting with private sector service providers (give up control of asset).

Developing a business relationship between governments, utilities and commercial lenders takes time and patience, and the path forward should be gradual to allow all parties to develop trust and confidence. For example, commercial lenders could start with financing smaller projects that enhance revenue for the utility, such as new or upgraded water meters or increasing customer connections. If the utility then dedicates the additional revenue attributable to the project to the private investor, the private investor’s and utility’s interests align around ensuring performance during operation. After the loan is paid off, the additional revenue accrues back to the utility. Once the utility passes this kind of test with private investors, it can expand follow-on borrowing to finance further extensions of the water supply system –again using new cash flow that is “ring-fenced” to repay next the loan.  Meanwhile, scarce public funds are protected and can be used for projects which have high economic value but low financial viability, such as a new sewage treatment system. Overall, the goal is to create more incentives for private capital to partner with donors and government toward shared development goals.

About the authors

  • Lance Morrell is a financial specialist with more than 35 years of professional experience, and is the Founder and Managing Director of FEI Consulting;
  • Michael Ashford is senior clean energy and infrastructure professional with more than 20 years of experience, and is the Global Practice Lead for the Water, Energy, and Sustainable Cities practice at Chemonics International.

This blog post represent the views of the authors and does not necessarily represent the views of Chemonics. Photo credit: Gerardo Pesantez / World Bank.

Rural water supply is changing. Be part of it.

The Rural Water Supply International Directory that is available to download from today aims to track the organizations and businesses fostering this change.

by Philip T. Deal, University of Oklahoma, USA

The Sustainable Development Goals are pushing the water and sanitation community to reach higher than ever before. After decades of fighting for the human right to water, universal coverage is the next, challenging summit to climb. “Access to an improved source” has been upgraded to “safely managed drinking water” – a standard that requires continuous service, good water quality, increasing coverage, and affordability. Considering that rural infrastructure often lags behind when compared with urban environments, accomplishing this standard can sometimes feel more like a cliff than a mountain. For these reasons, rural water supply requires new ideas – experimentation – innovation.

The 2019 RWSN directory of rural water supply services

The The 2019 RWSN directory of rural water supply services, tariffs, management models and lifecycle costs that is available to download (and in French) from today aims to track the organizations and businesses fostering this change. These entities are the catalysts to novel service delivery and management models. Some offer minor changes to technology or accountability mechanisms that increase functionality. Some create new financing opportunities that were not previously accessible. Some create a complex management system to maintain water systems over large geographical areas. Some could potentially fail. All are valuable.

The cases described in the Directory are meant to foster growth, learning, and inspiration. The successes, challenges, and failures depicted by one organization could spark a solution for another across the continent. Financing and life cycle cost discussions could become more transparent, uniform, and clear across borders. Networking opportunities and connections become easier – there may even be a neighboring WASH partner nearby that fits your needs!

This new Directory is intended to be an annual compilation. Current cases can be updated with new developments and research. Other innovations and businesses can be added. If a future reader thinks some other information should be included, there’s potential for expansion. We are open to your input.

Questions to Consider

When reviewing the cases within this directory, I would encourage any reader to think on the following questions:

  • What are some common management traits that you observe? What is similar or different when compared to traditional water and sanitation models?
  • What are the most striking innovations that can be observed?
  • What role does each case hold in their water and sanitation ecosystem? What are their responsibilities, and for what are they dependent upon others?
  • Which cases seem more conducive to scaling up?
  • What life cycle costs do various organizations consider their responsibility? What costs should realistically be expected to be covered by tariffs?
  • How would an organization react if international or support funding were reduced or lost? What would be the ramifications to the customers or beneficiaries?
  • What monitoring schemes seem to be effective in maintaining quality water services?
  • What information or data would you be interested in evaluating for these programs?

Bio – Philip T. Deal

At the end of 2015, I began my doctoral research on service delivery models at the University of Oklahoma. My first significant reference was, “Supporting Rural Water Supply”, by Lockwood and Smits (2011), which has often guided my thought process. Understanding how various management models can improve, disrupt, or maintain the status quo for water service has become a focus of my efforts. I want to know if each case is really sustainable, if there is measurable impact, and if equity is truly equal when applying these models.

Since I began, I have had the opportunity to investigate these types of questions in partnership with Water4 and Access Development in Ghana. You may notice this case was not yet included in the directory. This is because I have wanted to give excellent, data supported answers before I do. The team involved has been working diligently to measure and evaluate the level of service provided, the associated life cycle costs, and the effectiveness or their company. Keep an eye out in the next year for these results in multiple studies.

I would encourage all who would like to be a part of the directory in the future to do similar investigations. Challenge your assumptions and dig into the details. Determine what is working and what should be changed. Put resources into evaluating your organization. Then, be honest about it. It is not an easy or glorious task, but it keeps us accountable.

If you do not know where to start – RWSN is a great place to begin. Connect with experts, practitioners, and researchers that can provide excellent guidance. Sean Furey reached out for help on the Directory project in the fall of 2018 through a Dgroup discussion. Since agreeing to participate, I have had the opportunity to grow my knowledge base and network.  We hope this directory will offer the same opportunity to innovative and budding organizations across the world.

Cost effective ways to leave no-one behind in rural water and sanitation – Summary on the RWSN E-discussion

The e-discussion on the topic of “Cost effective ways to leave no-one behind in rural water and sanitation” has come to an end and we are very grateful for the 40+ participants who actively took part. A summary of the e-discussion can be found here. Additionaly, we as moderators want to share our own summary of the discussion in this short blog.

Authors: Julia Boulenouar, Louisa Gosling, Guy Hutton, Sandra Fürst, Meleesa Naughton.

As duty bearers for the realisation of human rights to safe drinking water, States have the responsibility to ensure that no-one is left behind. And the SDG framework clearly sets out the need for all stakeholders to work together on the challenge. This e-discussion was an opportunity for diverse members of the Rural Water Supply Network to share lessons and views on how this can be done.

Reminding ourselves of the challenge at stake: since the SDG WASH targets 6.1 and 6.2 were adopted in 2015, the sector has been thinking hard about how to finance the ambitious goal of providing access to safely managed WASH services for everyone, everywhere and forever. This ambition is even more challenging in rural areas, where coverage levels are lower and the unserved include remote communities which are harder to reach and often poorer.

In order to develop a credible financial strategy to achieve this ambition and leverage resources, governments and sector stakeholders need to determine the real costs involved (not only to provide first time access for a few, but sustainable services for all) and the sources of funding that are available and can be mobilised. It needs credible data on those aspects as well as on the population served and unserved, including the most vulnerable groups.

What we already know about the cost of providing WASH services: the costs of providing services rely on many factors and the WASH Cost initiative led by IRC has helped to identify 6 categories beyond capital expenditure to include among others, operation and maintenance, capital maintenance expenditure and direct support. We know that some of these cost categories are largely unknown and as a result, not planned, not budgeted and not financed. This is the case for capital maintenance expenditure and for direct support costs (generally referring to costs for local government to support service providers).

In terms of actual costs, a World Bank study of 2016 showed that $114 billion per year would be needed globally to cover capital costs and roughly the same for operation and maintenance.

What we know less about is the real cost of providing services to all, especially for those left behind (including those marginalised and those discriminated against) and this is because limited data are available. We also recognise that beyond the 6 generic cost categories, many costs are unknown and neglected and these include:

  • the non-financial time costs of WASH access,
  • the cost of taking time to properly understand demand, recognising gender differences and diverse perspectives,
  • the cost of strengthening skills and stakeholder capacity to fulfil their mandate, particularly service authorities and service providers,
  • the cost of corruption,
  • the time and cost of including people with disabilities and others who are socially excluded in services.

These can be seen as cost drivers rather than additional categories, but should be thought through, every time services are planned for.

Who is currently financing this goal and who should do more? Leaving no one behind is the responsibility of national governments. They need to mobilise funding through a combination of sources, including government (taxes), development partners (transfers) and users (tariffs). This is usually known as the “3Ts”. In some contexts, the private sector may have a role to play in investing in water services. However, results from countries that conducted to identify and track WASH financing with the UN-Water tool TrackFin, show that the main contributors for the sector are by far the users who are paying for their own services through capital investment (Self-supply) and through water tariffs (operation and maintenance). In that context, should we consider revising the “3Ts” to “3Ts and S” to acknowledge the importance of Self-supply in the mix of services? And should we also add a 4th T for time to recognise the extent of unpaid labour, especially that of women, on which rural water supply depends? And should we recognise the time used to travel to a place of open defecation or also the waiting time for shared sanitation?

In any case, given the magnitude of the challenge, governments should mobilise additional funding for the WASH sector and coordinate efforts at all levels to ensure cost-effectiveness and efficiency, particularly in resource-constrained environments. Developing WASH plans at sub-national level could be a good way to strengthening governance and coordination, and maximise cost-effectiveness.

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What about serving those that cannot afford to pay? Those currently left behind include communities located in rural and remote areas who are often the poorest and currently rely on Self-supply. For those who cannot afford to pay and to address the issue of leaving no-one behind, various areas can be investigated:

  • Defining and measuring users’ affordability
  • Considering low-cost technology options such as Self-supply but only if accompanied by long-term support from local and national government (including through regulation)
  • Making sure the solutions are acceptable and accessible for all – taking into account gender, disability, and cultural preferences

This e-discussion has been useful at clarifying knowns and unknowns related to costing and financing services. Even though the issue of affordability has been touched on, many questions remain unanswered.

We think this discussion should continue and here are a few questions, which we still have in mind, but you might have many more:

  • Who are populations left behind in different contexts (including the marginalised and discriminated against) and how can we define and identify them?
  • What are the ongoing costs of reaching everyone (including the aspects listed above)?
  • If users are those paying the majority of WASH supply costs, how do we deal with those who cannot afford to pay?
  • What mechanisms can be introduced to set tariffs appropriately, whilst also covering the costs of long-term service provision?
  • What are the examples of supported Self-supply that have been successful?
  • What are the specific roles of local government in ensuring no-one is left behind?

Continue the discussion with us and post your answers below or sent your contribution to the RWSN e-discussion group.

Photo credits (top to bottom): Dominic Chavez/World Bank; Alan Piazza / World Bank; Arne Hoel / World Bank; Gerardo Pesantez / World Bank