Session FT 1.13
Financing mechanisms for local water initiatives
African Water Facility
The Water and Sanitation program (Africa)
Islamic Development Bank
There is general consensus that water development is the basis for all aspects of social and economic development. Africa has developed only 3% of its technically feasible hydropower potential and only six percent of its cultivated land is irrigated. In total, only 3.8 percent of its total renewable water resources of 5,400 billion m3 are developed for water supply, irrigation and hydropower use. The financial investment required to meet the 2025 African Water Vision targets has been estimated at about US$20 billion per year. Public budgets are inadequate and often inefficient in spending decisions. The volume of financial and technical support pledged so far falls far short of what is required and most of it is still in the form of pledges yet to be honoured.
African countries need to increase the volume of financing to the water sector from internal and external sources. More importantly it is necessary for increased direct financing to local governments and actors who are responsible for the water resources development and the provision of water services to their citizens. The Session “Financing mechanisms for local water initiatives” has tried to identify financing mechanisms that would increase financial flows to the African water sector, in particular direct financing of sovereign and non sovereign entities.
Generating more funds for the water sector will not be successful unless there are complementary efforts at creating the right conditions on the demand side of financing. Sustainable capital investments can only take place under appropriate enabling policy and institutional environment that promotes good governance and sound water management practices. IWRM principles and polices are considered an essential prerequisite for water resources development. This session was aimed at presenting cases that responds to issues of increased volume of financing as well as creating the right conditions for water sector investments in Africa.
- The most important lesson from this session is that there is great scope for increasing financial flows to the water sector in Africa through various mechanisms that appropriately target sovereign, sub-sovereign and non-sovereign entities.
- Grant funding is required to build capacity for subsovereign and private sector water sector actors
- Private sector finance is required to support the enabling environment for private sector actors
- For countries without well developed financial services institutions, traditional financing is more realistic such as concessionary sovereign loans/grants to support decentralisation, equity investment to microfinance and technical assistance to develop the capacity of municipalities
- For most countries with an emerging financial market, mechanisms to increase local financing include credit support and capacity to bridge the gap between supply and demand for finance, such as guarantees for agencies to work on higher risk areas, guarantees and lines of credit to domestic banks;
- Opportunities for increased financing to non-sovereigns include support to commercial MFI banks, private companies, SMEs focusing on service provision or supply chains and NGOs
- SME financing is very much in demand through patient capital, venture capital, lines of credit and where possible funds should be earmarked for water sector activities;
- There is great scope for increased sovereign, sub-sovereign and non sovereign financing of water activities in Africa
- Sub-sovereign and non-sovereign financing are effective ways to increase the volume of funds in the water sector in Africa
- There is need for increased flexibility in the use of grants for the water sector development
- Support microfinance for sustainable water sector investment
- There is a strong need to build linkages between water sector actors and commercial banks through facilitation and knowledge management, in order to help create a similar language between financiers, engineers, and policymakers, as well as work to characterize the perceived and actual risks
Orientations for action
- Multilateral and donor agencies should expand the use of local currency for guarantees, debt and risk mitigation to support water sector finance
- Africa needs to consider water as a cross cutting issue so that water sector investments can be undertaken as part of achieving other sector goals;
- African governments need to pursue financial policies to stimulate access to sub-sovereign and non-sovereign finance
- The African Development Bank and other multilateral development Institutions should work together to identify where existing and planned lines of credit can be earmarked for water sector-related business, including SMEs, SSIPs, supply chains, etc.
- Donors should support a window through the existing Project Development Fund for municipal strengthening and bond market development in select middle income countries
Local Actions presented
The African Water Facility
African Development Bank
This local action paper examines the African Water Facility, a financing instrument spearheaded by the African Ministers Council on Water (AMCOW) and hosted by the African Development Bank. The paper shows how the African Water Facility responds to issues of increased volume of financing as well as creating the right conditions for water sector investments.
The African Water Facility makes funds available to eligible water projects on demand from central or local Governments, Municipalities, NGOs, civil society organisations, community-based organizations (CBOs), Regional, sub-regional and sectoral organization (Regional Economic Organization, River Basin Organizations. Direct funding at sub-sovereign, non-non-sovereign entities, community-based organisations and CSOs will channel funds to stakeholders responsible for implementing water sector development and water services provisioning.
Eligible activities are those aimed at creating the right environment for sustainable investments such developing and implementing IWRM policy at the national and transboundary basin levels, water information and knowledge management systems, Monitoring and evaluation systems. The Facility also makes strategic direct capital investments aimed leveraging additional inflows and include pilot or demonstration projects, promoting innovative and appropriate technology and multiple water use schemes.
AWF funding has great flexibility by targeting not only state actors but also non-state actors in the water sector. The great flexibility, fast accessing and quick disbursing features make it suitable leveraging other bigger more formal financial inflows to the sector.
Financing Instruments to Facilitate Investment for water Sector Infrastructure
The issue of financing water development remains a major challenge in Africa where public budgets are inadequate and often inefficient in spending decisions. While these are still clearly necessary, opportunities for sub-sovereign (i.e. government) and non-sovereign (i.e. private sector, including NGOs) finance should be explored. The objectives of the study are two-fold: First, to develop a strategy for the African Development Bank and other donors to support direct lending to sub-sovereign public sector organizations in the water sector, and strategies for the expansion in scope of coverage of guarantees. The study reviews the African situation with respect to sub-sovereign lending and support instruments, and recommends a strategy to assist sub-sovereigns in the water sector to have better access to financial resources; and second, to identify methodologies, modalities, or instruments that would enable the Bank and other donors to support IFIs and local African financial institutions to increase their investments in the water sector, including for medium and small-scale service providers.
- Findings from this study were drawn from a series of interviews conducted over four weeks’ time, during country visits in Zambia, South Africa, Kenya, and Burkina Faso. Respondents drew from the public, private, NGO, and donor sectors. Findings from interviews were supplemented by extensive review of literature both from within the African Development Bank and on trends in financing for water sector infrastructure. The main findings include the following:
- Sub-sovereign and non-sovereign finance is possible and needed in middle and low- income countries throughout Africa. However, considerable capacity building is needed to improve the quality of demand for more commercial forms of finance.
- There is a strong need for large-scale water storage facilities and bulk water transmission to be developed in Africa. Financing these systems with private funding is a challenge due to cost recovery, investment period, and institutional capacity. However, there are some very skilled South African companies (e.g. TCTA, Umgeni, and Rand Water in South Africa) with potential to assist in bulk water finance and delivery elsewhere in Africa.
- Through the African Rural Water Supply and Sanitation Initiative (RWSSI), there is considerable scope to leverage finance, from policy advice (e.g. assistance to governments to harmonize technical standards and include scope for PSP); to lines of credit and TA to the private sector (e.g. supply chains, drilling and/or cement companies, artisans), to improve the quality of demand and access to finance.
- Microfinance institutions have some experience, including pre-financing household connections for networked service provision and project finance for small-scale networks.
Mobilizing Resources for Sanitation
Water and Sanitation program
This innovative financing mechanism for sanitation has been implemented in two cities in Burkina Faso – Ouagadougou and Bobodillasso. The resources from surtax on the water bills are channeled to a special fund to market/promote on-site sanitation in the city. The innovations are about (i) sourcing funds for marketing and promoting on-site sanitation for poor people living in peri-urban areas of the city (ii) targeting subsidy to unlock potential demand for sanitation, and (iii) supporting the domestic private operators to deliver services and improving their products.
An independent body is in charge of the management of the special fund, which is exclusively dedicated to on-site sanitation promotion and development. The national utility managed to use the resources to construct about 6,000 facilities per year for the last 10 years with a subsidized of only 30% of the capital cost. The fund is also used to promote school sanitation.
Micro-Finance for Community Managed Water Projects
Water and Sanitation program
This project is developed jointly with the Government of Kenya and K-Rep Bank and aims to leverage resources from the micro-finance sector for community-managed rural water supply projects. Facilitated by the Water and Sanitation Program, Africa and the Global Partnership for Output-based Aid (GPOBA) about 30 community projects are expected to be implemented with a plan for country-wide scaling-up.
Use of market-based resources will enable introduction of rigour to enhance sustainability in community-managed water projects. The output based structure of the subsidy also increases incentives to ensure quality in project development.
The Output Based Aid pilot program envisages supporting the financing of about 30 Community Water Projects including both greenfield and rehabilitation of existing schemes. The average estimated costs (including capitalized interest for construction period) for each type are USD 110,000 and 140,000 respectively. The funding is expected to be mobilized through Community Water Project’s own contribution (20%), loan from the k-Rep Bank (40%) and an OBA subsidy (40%).