. Jackson WISA Africa 2007 nov07

Improving Prospects for Financing Water Services WISA Africa 2007 Barry M. Jackson Development Bank of Southern Africa

Improving Prospects for Financing Water Services Introduction Typical sources of funds Constraints to raising finance Where to begin change? Improving the prospects for Private Sector Finance.

Introduction: raising capital Continued need for expansion: lumpy investments Limited government resources Reduced donor funding Increased availability of private sector funding (money seeking investments), but –Banks want to see good projects and well run, financially sound institutions –or ring-fenced quality projects.

Typical sources of finance Government grants DFI loans via Government DFI loans direct to utility or local government [focus on utility here] Private sector: local or foreign capital – loans, bonds Private equity.

Constraints to raising finance Key Question: Where would you like your pension funds placed? Fund administrator need Investment Grade credit ratings Strong, competent, reliable borrowers in a stable environment Foreign or Local Capital? –FOREX risk and ability to repatriate funds & profits –Income in local currency What can the utility influence?

Constraints to raising finance (2) Water utilities work in a difficult environment Lack of autonomy: –Interference in the business –Tariff control –Hire & fire –Capital investment decisions Neglect by central government: –Poor performance tolerated –Unpredictable cash injections –Non-payment by govt. agencies Poorly developed capital market –But not without prospects.

Where to begin change? Entrench a commercial approach Clarify relationships Increase private sector participation Borrow & invest incrementally.

A Commercial Approach See WSS as a business; selling a desired product at an affordable price. Realistically assess affordability and demand for LOS Build a financial model and estimate user charges Test affordability & political acceptability. Revisit assumptions Capex, Sources, Sustainable Subsidies O & M, Tariffs

A Commercial Approach (2) Reduce Losses (UAW, leaks, over- staffing) Increase Revenues (cost-reflective tariff, improve billing & collection) Improve financial management Improve customer relations Manage assets for reliability.

Informal connection?

A Commercial Approach (3) Manage assets for reliability: –systematic infrastructure asset management –risk management approach –start budgetting for maintenance etc Plan & manage investment streams: –Incremental CAPEX (opposite of public sector) –Limit debt exposure –Use grants & TA creatively –A careful roll-out strategy…

Careful services roll-out Free or heavily subsidised - for beneficiaries The chosen few. Gap between wants and affordability Not just affordability, but willingness to pay. What Level Of Service are customers willing and able to pay for? A challenge for extension worker, health educators etc.

A Commercial Approach (3) Manage assets for reliability: –systematic infrastructure asset management –risk management approach –start budgetting for maintenance etc Plan & manage investment streams: –Incremental CAPEX (opposite of public sector) –Limit debt exposure –Use grants & TA creatively –A careful roll-out strategy. Obtain a Credit Rating.

Typical credit rating scale AAA Extremely strong AAVery strong AStrong BBBAdequate Limit of Investment Grade BBVery low degree of speculation BLow degree of speculation CCCModerate degree of speculation CCHigh degree of speculation CCapital payment is impaired DDefault

Obtaining a Municipal Credit Rating Lowers cost of borrowing Useful management tool Useful management tool Objective benchmark Objective benchmark May highlight political issues May highlight political issues Need not be expensive (intermediate options) Need not be expensive (intermediate options) External agencies interested in supporting these. External agencies interested in supporting these. +reports

Clarifying relationships Customer charter etc Arms-length relationship with Govt. Performance contracts with responsibilities of EACH party (incl govt); well publicised Need for consistent supportive environment Consequences of political interference should be clear.

Government agencies and revenue Government Policy on Cost Recovery Government Practice on Cost Recovery + Lack of income Poor service Reluctance to pay Use contract to show Govt. inconsistency; Lobby at right time in budget cycle.

Increasing PSP Drastic might be needed but incremental might be better – lower transaction cost Outsourcing: Meter reading Billing & collecting Comprehensive revenue management Rehabilitation, UAW, WDM (shared risk & incentives) Management contracts Investment-linked contracts Clear performance contract (seek advice) -> reduction of interference -> customer appreciation -> improved creditworthiness.

Improving prospects for private sector finance Start small –WDM/UAW (Sida project soon) –Aim to boost revenue …

Improving prospects for private sector finance Start small –WDM/UAW (Sida project soon) –Aim to boost revenue A good business plan –Phased investments/ line of credit –Identifying revenue streams Include Co-finance Seek credit enhancement.

Conclusions Encouraging signs that private finance for WSS is feasible We need to build up experience Some major obstacles remain...

Conclusions Some major obstacles remain … –gap between aspirations and affordability –inconsistent government policies & practice, especially with respect to cost recovery –under-developed capital markets and –the lack of enabling regulatory frameworks.

Conclusions Encouraging signs that private finance for CWSS is feasible We need to build up experience Some major obstacles remain African Water Utilities can take the initiative and start real change.African Water Utilities can take the initiative and start real change.

. WISA Africa Nov 07

PPPs - For & Against (1) Positive side: –efficiency gains –latest technology –raise capital –train staff –career opportunities –treat consumers as paying customers. To realise benefits you must deal with potential problems.

PPPs - For & Against (2) Negative perceptions: –Prices will rise –quality will fall –jobs will be lost –the poor will not be served –excessive profits from a monopoly –unchecked because of corruption. To realise benefits you must deal with potential problems.

Reasons why prices do sometimes rise: –existing service under-priced (hidden subsidies, political pressures etc) –to pay for overdue investments (so plan) Quality is a function of contracts and monitoring So is serving the poor –but make sure it is affordable (so plan).

Jobs will probably be created, not lost, in a developing country: –jobs can be protected by contract –system expansion Profiteering in the eye of the beholder –win-win situation is needed –evenly matched negotiators Corruption can be anywhere –Monopoly + Discretion - Accountability = Corruption –Transparency, competition, monitoring, & empowered public.