A Framework for Financing Water Resources Management in Africa; financial modalities and constraits
Sponsorships: These are funds from private contributors in exchange for some form of public recognitions. This will normally be applied to recover operation and maintenance costs.
Government service partnerships: This will involve various combinations of government partnerships such as municipal to municipal, federal-municipal, County– County to fund infrastructure project. This would be ideal for the small administrative units since they can save on the administration cost and achieve a higher level of service.
Strategic budget allocation: This applies when taxes or rates are placed in a special fund, the funds are invested and reinvested and this fund can be used to fund future projects. The advantage with this is that it can be used regardless of the size of an administrative unit.
The draw backs are that this may take years for an admin unit to accumulate sufficient funds to finance a major water project.
Full cost recovery models: This will involve a charge and direct billing for the system use and services. The bill will usually have a fixed charge and a charge based on consumption depending on the tariffs. The billings usually will be on a cost recovery basis.
Bonds: Bonds can be sold at all levels of the government for infrastructure projects. The borrower repays the capital value of the bond plus interest by a specified date. An advantage of bonds is that the funds for the project can be achieved immediately and the financial burden to the public will be greatly reduced since the repayment will be distributed over future generations.
Bonds will not be efficient if the revenue stream is not based on the full cost of infrastructure for the project being financed. Ratings of the borrowing entity is also critical and works well for large and wealthy institutions
Loans: This will include the loan agreements, loan guarantees and the capital access program. The advantage is that the funds can be available immediately and the burden spread over time. Loans will always be subject to appraisal of the borrower by the lender
Revolving Funds: These are initial grants contributed by the national government to a fund to which the beneficiary will contribute a percentage. The beneficiary is responsible for management of the funds and they can lend and relend. The government can also establish Infrastructure banks that provide low rate loans. This funding is sustainable and flexible with respect to conditions of repayment, refinancing and type of project funded. They may not work well for institutions with limited financial and administrative resources.
Trust Funds: This is the percentage of revenue held to undertake specific investments or dedicated to a specific investment area. Largest advantage is that there is no long-term cost to be burdened on the public and overall they are less expensive than bonds. They are also viewed as equitable if their source is from the users of the infrastructure.
Public private partnerships: Involve private sector delivery in public services, This can vary from minimal to extensive and will be successful depending on the government political commitment without interference, this will normally include Build Own operate (BOO), Build Own transfer (BOT),Private finance Initiatives (PFI).
Public Funding: Grants, transfer payments, taxes. Transfer payments from the national governments to other Government institutions or administrative units and can be specific or non specific. Its an equitable form of funding since each administrative unit will have access to such funding.
User based charges: This will include development charges and fees, special levies and tariffs. Studies on ability to pay should be undertaken.
Output Based Aid (OBA): is either a grant subsidy or a concessionary loan designed to address the gap between what users typically can afford for services, and the real costs to provide quality services.
By designing performance -based subsidies that clearly identify who will benefit, the types of activities that qualify for the subsidy, and how much subsidy will be provided, OBA seeks to increase access and service quality for the poor. It is provided by donors and International Financial Institutions, such as the World Bank’s Global Partnership for Output Based Aid (GPOBA), to governments or service providers, whether utilities or small scale providers. Generally, OBA is considered a pro-poor incentive for utilities to extend connections into peri-urban and un- connected areas.
Constraints to financing water resources
There is a range of constraints that hinder successful application of different finance mechanisms to the water sector, which have become increasingly relevant for policy interventions, and serve as a key determinant for planning. While there are many case –specific constraints in general they can be categorized as Political risk/governance issues; Technical, administrative, and financial capacity issues (including project preparation capacity); and Financial/commercial constraints. Specific constraints are:
Capital intensity, with high, up-front investments combined with long payback periods and low sector returns
Risk of political pressure on tariffs, politicians influence and change tariffs depending with their momentary whims
Weak or inconsistent regulation, lack of transparency, and perceived risk of regulatory capture
Sub sovereign risk – local government entities standing counterparty to bulk water sale agreements while having a poor collection record, suboptimal financial condition, and weak credit
Water unaccounted for, water loss, inadequate distribution networks in a state of disrepair, and the lack of investment funding to remedy the same, thus threatening long – term project viability
Foreign exchange risk, with mismatch between local currency revenues and foreign currency financing
Forms of credit backstop (for example, sovereign counter guarantees for financial obligations of sub national entities being scaled back in the face of decentralization, ratings agency reviews and downgrades)
Lack of local government access to bank and capital markets due to absence of central government authorization, and competition for scarce financial resources
Aversion of private insurers and reinsurers to providing bond insurance and political risk insurance to sub national entities in developing countries due to lack of transparency, poor financial condition of reference entity, and absence of credit rating
Based on the paper presented by Mike Kimotho at the third annual Effluent and Water management
Conference held at laico regency in December 2013. He is the Finance Planning & Analysis Manager, Athi Water Services Board