Water Financing Facility

Climate change poses a threat to water resources, particularly for poor communities who are more vulnerable to extreme weather events. To meet 2030 Sustainable Development Goals, annual investment in water supply and sanitation in developing countries needs to increase threefold to USD 114 billion.

Private finance will need to fund a significant portion of these investments. The water sector, however, is not traditionally favored by private investors due to uncertainties in revenues and potential for political interference, particularly in developing countries.

Any scaled-up finance flows need to result in low carbon, climate resilient infrastructure and utilities, not only for the benefit of water access but also to ensure any private investment is secure and viable.

The Water Financing Facility mobilizes domestic investment into climate compatible water sector projects through the local bond market.

 

The Water Financing Facility (WFF) mobilizes large-scale domestic private investment from institutional investors such as pension funds and insurance companies in support of countries’ national priority actions on adaptation and mitigation in the water sector, thereby also contributing to ensure availability and sustainable management of water and sanitation for all. It seeks to coordinate this finance with public funding and international impact investment to help bridge the investment, infrastructure, and sustainability gaps countries are facing.

The types of projects financed will have a clear linkage to climate vulnerabilities in the water sector and will be assessed against priority actions as identified in Nationally Determined Contributions for climate change.

Funded by donors and impact investors with up to USD 112 million in public finance, the World WFF aims to centralize knowledge, expertise, and budgets to replicate and scale up eight national-level facilities.

For a given project, WFF financing can improve debt service coverage by 71% and allow cost-reflective tariffs set by utilities to be stable over time.

WFF would provide an initial public-private finance leverage ratio of 1:1.4 to 1:3.4 that would be increased over time as more private capital is mobilized.

In seven potential pilot countries identified, USD 1.23 billion per year in private finance may be mobilized out to 2030 if national WFFs capture a 25% share of the investment needs.

In addition to the positive impacts on costs of capital and resource mobilization for sustainable water infrastructure financing, the approach facilitates a number of additional environmental and socially beneficial outcomes, including improved access to safe and affordable water, health, socio-economic development, and resilience to ecosystem risks.

Implementation at the national level could require two to three years to establish from a standing start, provided there is adequate data on water utilities’ creditworthiness, and adequate and consistent project pipeline, and domestic investors are entitled to invest in non-government bonds.

A pilot in Kenya was established in early 2017. The national-level facility in Kenya has set a target to periodically issue bonds for water and sanitation projects, with a first to be realized by the end of this year. In addition, in April 2017, the Netherlands Ministry of Foreign Affairs announced EUR 10 million to support the World Water Facility’s launch. There are also plans for expansion to two more countries, contingent on raising an additional EUR 21 million in donor funds.

DESIGN

A World Water Financing Facility (WWFF) would be established as a limited liability company that facilitates the creation of eight national-level facilities and provides financial engineering, transaction advice, and financial management support.

The national-level facilities would be established in developing countries and would provide long-term, lower cost loans to public or private water utilities that have little or no access to commercial finance or at poor terms. The loans would be backed by the utility but linked with specific water infrastructure investments, appropriately screened and designed to enhance the adaptive capacity of the utility and sector against identified climate vulnerabilities.

Water-Financing-Facility

The National WFF would then leverage its blended finance capital structure to issue local currency, investment-grade bonds to domestic institutional investors (such as pension funds and insurance companies). Incomes generated by water utilities would be ring-fenced to provide additional creditworthiness beyond the strength of utilities own balance sheet. National governments may also provide a revenue pledge to the facilities’ debt reserve fund to mitigate credit risk.

In order to address the climate compatibility challenges of the water sector, the WFF integrates climate considerations at all levels – from country selection, project selection, project design, optimization, reporting, and impact assessment.

 

  • Gaston Modest Kaziri

    The idea for WFF is brilliant. My thoughts however are that considering the kind of financing arrangements by WFF, it may be difficult for local (public and private) water utilities to access this fund. It is some how difficult to imagine that the government can actually follow such complicated financing procedures proposed by WFF. In Tanzania for example, I do not see how the government can provide a revenue pledge to facilitate debt reserve fund to mitigate credit risks. Neither, I do not conceive how water utilities income generated from water services can be ring-faced to provide any additional creditworthiness beyond their financing balance sheet so that they can access the fund. My advise is that WFF can negotiate with non government organisations willing to commit such funds in rural and semi-urban areas to address climate change adaptation and mitigation. For instance, the fund can be used to support small scale water utilities in rural and semi-urban areas on condition that they engage in climate change resilient projects. In other words, such provided funds should result into producing low carbon climate resilient to meet climate change adaptation and mitigation. As a result, funds recipient should not be required to repay the money instead they should be committed to address the climate change adversities. WFF then can trade produced carbon sink to private sector worldwide instead of burdening national governments to provide risk bonds which sounds like sovereign guarantees to cover the provided funds. The funds from WFF should be provided in a 100% grant and debt free to beneficiaries, only that those receiving the funds should produce evident-based carbon sink in their areas.

    Gaston Modest Kaziri
    Dar es Salaam

    • Thank you for your comments and interesting suggestions. It is indeed true that in many developing countries, the building blocks for facilitating a WFF are not yet present in terms of the policy and regulatory framework for tariffs in the water sector, as well as the capacity of the local capital markets to invest.

      However, if these factors are present, Lab Secretariat analysis shows that a WFF can help scale up private capital into adaptive capacity in the water sector, making more efficient use of grants and development assistance for higher risk areas. We have identified several initial target countries where this is the case. As scaling up private capital is a central goal of the Lab, facilitation of returns on investment are a necessary feature of Lab instruments.