Leveraging commercial finance for water: will it hurt the poor?
Water investments are lumpy and costly: financing is essential to spread the costs of these investments out over time.
It can no longer be the only one, however.
To meet the Sustainable Development Goals, governments will need to better target their investments and leverage more financing from private sources, including from households that can afford it (via more realistic and fair tariff policies and incentives to invest in things like toilets) and from commercial finance providers, including microfinance institutions, commercial banks, bond investors or venture capitalists.
A this year’s Stockholm World Water Week, the World Bank is releasing a report which provides guidance to governments and private financiers on “Easing the Transition to Commercial Finance for Sustainable Water and Sanitation”.
Taken together, these messages set out a strong case for sector reforms that will help service providers transition to a more mature modus operandi, in which they strive to minimize their costs, receive tariffs that cover a predictable portion of their (more efficient) costs, and borrow a greater portion of their investment requirements from domestic financiers.
First, commercial finance does not necessarily cost more than concessional finance, once all “hidden” costs are taken into account.
Concessional finance usually comes in hard currency; by contrast, domestic commercial finance is in local currency.
Other hidden costs include delays in arranging financing, which are typically higher for concessional financing than for commercial financing: during that period, the local currency may devalue further, and more importantly, the social and economic benefits associated with the investment do not materialize.
In Tunisia, for example, a detailed analysis of financial flows to the WASH sector conducted using the WHO/GLAAS TrackFin methodology found that national public transfers to government-owned utilities had increased by 70 percent between 2013 and 2015, reaching US$ 93 million per year in 2015, whereas transfers to community-based organizations operating in rural areas were a mere US$ 12 million and no public funds were provided to households to help them invest in on-site sanitation.
In the the water sector, governments should: Define and consistently implement sector financing policies Support overall sector reform for corporatization, stronger governance and transparency Focus on improving service providers’ efficiency and performance to set them on a course towards credit-worthiness Improve the use of public funds and target subsidies where commercial financing would be more challenging.