Improving Prospects for Improving Prospects for FinancingFinancing

Water Water ServicesServicesWISA Africa 2007WISA Africa 2007

Barry M. JacksonDevelopment Bank of Southern Africa

www.dbsa.org

Improving Prospects for Improving Prospects for FinancingFinancing

Water Water ServicesServices• Introduction

• Typical sources of funds

• Constraints to raising finance

• Where to begin change?

• Improving the prospects for Private Sector Finance.

Introduction: raising capitalIntroduction: 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 financeTypical 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 financeConstraints 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)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?Where to begin change?

• Entrench a commercial approach

• Clarify relationships

• Increase private sector participation

• Borrow & invest incrementally.

A Commercial ApproachSee 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 assumptionsCapex, 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?

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 scaleTypical credit rating scaleAAA Extremely strongAA Very strongA StrongBBB Adequate----------------------- Limit of Investment GradeBB Very low degree of speculationB Low degree of speculationCCC Moderate degree of speculationCC High degree of speculationC Capital payment is impairedD Default

“Obtaining a Municipal Credit Rating”

Lowers cost of borrowingLowers cost of borrowing

Useful management toolUseful management tool

Objective benchmarkObjective benchmark

May highlight political issuesMay highlight political issues

Need not be expensive Need not be expensive (intermediate options)(intermediate options)

External agencies interested External agencies interested in supporting these.in supporting these.http://www.clgf.org.uk/index.cfm/pageid/79/Research+reports

Clarifying relationshipsClarifying 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 PSPIncreasing 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 Improving prospects for private sector financeprivate 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.

ConclusionsConclusions

• Encouraging signs that private finance for WSS is feasible

• We need to build up experience

• Some major obstacles remain ...

ConclusionsConclusions

• 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.

ConclusionsConclusions

• 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 African Water Utilities can take the initiative and start real changeinitiative and start real change..