Public Services International Research Unit (PSIRU)

www.psiru.org

WATER FINANCE A DISCUSSION NOTE

by David Hall d.j.hall@gre.ac.uk PSIRU, University of reen!ich

"his #a#er !as co$$issioned by Public Services International %PSI& 'orld Social (oru$ Delhi)*u$bai +anuary ,--.

Public Services International Research Unit (PSIRU) Email: psiru@psiru.org Website: www.psiru.org School of Co puting an! "athe atics# Universit$ of %reenwich# Par& Row# 'on!on S()* +'S U.,. Tel: -../(*)0*1/22)/++22 Fax: -.. (*)0*1/22)/1334 5irector: 5avi! 6all Researchers: ,ate 7a$liss# Steve 5avies# Robin !e la "otte# 8ane 'ethbri!ge# ( anuele 'obina# Steve 9ho as# Sa Weinstein PSIRU:s research is publishe! on its website# www.psiru.org . It is centre! aroun! the aintenance of an e;tensive !atabase of infor ation on the econo ic# political# financial# social an! technical e;perience with privatisation an! restructuring of public services worl!wi!e# an! the ultinational co panies involve! in these processes. 9his core !atabase is finance! b$ Public Services International (PSI / www.worl!/psi.org)# the worl!wi!e confe!eration of public service tra!e unions.

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WATER FINANCE A DISCUSSION NOTE...............................................................................# PREFACE $% &ANS ENGE'$ERTS( PSI..................................................................................) # INTRODUCTION........................................................................................................... * ) TOP DOWN G'O$A' APPROAC&+ CA,DESSUS( T&E WOR'D $AN- AND T&E ,U'TINATIONA'S...........* * FINANCE FRO, T&E $OTTO, UP...................................................................................... /.0 12""2* UP 3SS4SS*45"S6 3 P3R"I7IP3"2R8 3PPR237H "2 (I53574......................................................................
a. 2bjectives, finance and other $easures .............................................................................................................

3.1.1 Financing Cities: some considerations..............................................................................................................5 /., P38*45" "HR2U H 7H3R 4S 2R "394S : "H4 ISSU4 2( 7R2SS;SU1SID8...............................................................<
b. "a=ation and charges........................................................................................................................................<

/./ 745"R3> 35D >273> "393"I25...............................................................................................................................? /.. S"RU7"UR4S 35D 73P37I"86 72**U5I"I4S 35D PU1>I7 3U"H2RI"I4S...................................................................? 3.4.1 Faisalabad: micro-financed community water and sanitation.........................................................................6 . RAISING IN/EST,ENT FINANCE........................................................................................ 0
c. Sources of finance for invest$ent.....................................................................................................................@

..0 SURP>US 2( 2P4R3"I25S...........................................................................................................................................A .., >273> 73PI"3> 35D >273> 2B4R5*45" (I53574................................................................................................A 4.2.1 A medabad: local go!ernment munici"al bonds..............................................................................................# 4.2.2 $ ailand..............................................................................................................................................................# ../ 53"I253> 12DI4S 35D '3"4R 135CS.....................................................................................................................D 4.3.1 %ederlandse &atersc a"sban' .........................................................................................................................( ... 72RP2R3"IS4D '3"4R 3U"H2RI"I4S.......................................................................................................................0..< I5"4R53"I253> (I53574.........................................................................................................................................04.5.1 )eneral considerations....................................................................................................................................1* 4.5.2 +e!elo"ment ban's...........................................................................................................................................1* 4.5.3 ,nternational bonds..........................................................................................................................................1*
d. *unici#al bonds !ith international credit ratings, ,--/ %transition and develo#ing countries&.......................00

4.5.4 ,nternational commercial finance: intermediate mec anisms- ....................................................................11 1 CO,,ENTS AND CONC'USION.......................................................................................## NOTES..................................................................................................................... #)

Pref2ce 3y &2ns En"e43erts( PSI

"he issue of financing !ater services : and other #ublic services such as energy, healthcare, education : is at the core of the debate on #rivatisation and co$$ercialisation. "hose in favour of #rivatisation %or liberalisation& contend that the #ublic sector cannot afford to finance these services, that this is a job best done by the #rivate sector. "his is a s$okescreen, both to li$it the role of the govern$ent and to #lace #ublic services under the control of $arkets and o#en the$ u# to for;#rofit %and often $ultinational& cor#orations. 2ne need just look to the ErestructuringF of IraG to see this $odel in its $ost e=tre$e for$. In the !ater sector, this $odel is not !orking. "he $arket is not an a##ro#riate $echanis$ for ensuring the hu$an right to !ater. "he #rofit $otive does not ensure either better and $ore efficient services nor a $ore eGuitable access, es#ecially for the #oor. "i$e and again, the #ublic sector is called in to guarantee cor#orate #rofits and to assu$e cor#orate risks. 3nd unless the 'orld 1ank can create $ore cor#orate safety nets !ith the #ublic $oney it $anages, the $ajor !ater cor#orations say that they !ill no longer invest $oney in develo#ing countries. "his discussion note is an atte$#t to clear so$e of the s$oke around the issue of financing. 2ne thing is clear6 !ater services, !hether #ublic or #rivate, $ust be #aid for. 3lthough !ater is EfreeF, its treat$ent and distribution cost, and $ust be #aid for. In this note, the PSIRU tea$ revie!s so$e of the financing $odels and assesses their relevance to the current debate in the !ater sector.

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*uch $ore !ork $ust be done to develo# EalternativeF financing $odels %assu$ing that the central $odel is the one advanced by the 1ank and the cor#orations&. "his !ork !ill include solid critical research to deter$ine the li$its and #ossibilities of various $odels. 1ut a big #iece of the !ork is advocacy : unions, co$$unity grou#s, #ublic utility $anagers and #oliticians $ust be $uch $ore aggressive in de$anding that financing of ne! infrastructure not eGuate !ith #rivatisation and co$$ercialisation of #ublic services. 3nd advocates of the hu$an right to !ater $ust continue to $onitor the trade agree$ents such as the 3"S, !hich are being used to restrict the ca#acities of govern$ents and to entrench cor#orate control of #ublic services. PSI and its affiliated unions around the !orld !ill continue to !ork !ith co$$unity grou#s, 5 2s, utility $anagers and #oliticians to defend Guality #ublic !ater services.

Hans 4ngelberts PSI eneral Secretary

#
; ; ;

Intro7!ction

"his #a#er e=a$ines issues of financing !ater su##ly and sanitation syste$s, including6 3 critiGue of the Eto# do!nF a##roach to !ater finance of the 'orld 1ank, the 7a$dessus re#ort, and the !ater $ultinationals Pro#osing a different a##roach, based on a #artici#atory, Ebotto$ u#F, local assess$ent of needs, and of the best $eans available for fulfilling the$ a discussion of different $ethods of raising invest$ent finance for #ublicly run !ater syste$s

It does not atte$#t to identify a single best $ethod of financing, but to indicate so$e of the #ossibilities !hich are available, together !ith actual e=a$#les of these o#tions in #ractice.

) To 7own "4o324 2 8!4tin2tion24s

ro2ch+ C287ess!s( the Wor47 $2n9 2n7 the

"he key objective of international co$#anies and investors is al!ays to $ake a good and secure return on ca#ital, even in a vital service like !ater and sanitation. 3s a result, issues of #rotection fro$ risks, #rofit guarantees and global sources of finance are of central i$#ortance : the co$$ercial venture seeks #rotection fro$ all for$s of uncertainty. (or #ublic service !ater and sanitation, a financial return on invest$ent is a cost associated !ith loan finance, not an objective. "his a##roach is visible in the leading institutionsF a##roach to !ater finance. "he 7a$dessus re#ort on !ater finance to the /rd 'orld 'ater (oru$ at Cyoto in ,--/0 offered bold large figures of the scale of invest$ents needed in !ater, globally6 H"his re#ort, and its background #a#ers, indicated that additional annual invest$ent of c. I0-- bn. !as reGuired in all branches of the !ater sector. *ore should be done at the country and basin level to identify financial resources and invest$ent needs and #rovide incentives to encourage this finance...J It !ent on to reco$$end a nu$ber of devices for reducing the risks e=#erienced by #rivate !ater o#erators, in order to encourage their activities. "he 'orld 1ankFs !ater strategy has already introduced $echanis$s !hich follo! the 7a$dessus reco$$endations. "hese include develo#ing guarantee $echanis$s against #olitical risks, #rotection against currency risks, and even structuring $unici#al bond finances so that they su##ort #rivate sector involve$ent., "his e$#hasis on reducing #olitical risks for #rivate investors !as already #resent in the '1Fs strategy on urban and local govern$ent assistance in 0DDD, / !hich stated6 H(or #ublic;#rivate #artnershi# arrange$ents such as $unici#al service concessions, one #erceived source of local #olitical risk $ight be the $unici#alityFs continued role as su##lier or taker, regulator, lando!ner, or source of subsidy. In these cases 1ank guarantees or li$ited injections of the 1ankKs sovereign guaranteed lending could $itigate
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the $unici#al risk and hel# raise #rivate ca#ital... LI(7 can also #artici#ate in ca#ital $arket develo#$ent, including institution building and s#ecial risk $itigation o#erations benefiting #rivate investors.J . "his reassurance and re$oval of risk reflects #recisely the recent concerns of the !ater $ultinationals6 the #lea by S3UR for 'orld 1ank guaranteesM the insistence by SueN on a secure and high rate of returnM and the search by "ha$es for $echanis$s !hich reduce #olitical risk. < It also reflects the interests of international financial investors and their advisors, such as Price!aterhousecoo#ers, !ith a vested interest in #ro$oting the idea of insufficient #ublic funds in order to create a broader $arket for their financial services, and dis#lacing e=isting #ublic sector financing, even !here it is effective and chea#. (or e=a$#le, in the 5etherlands a #rivate !aste!ater 12" !as set u#, des#ite higher financing costs than !ould be incurred under the efficient #ublic financing sche$e, on the grounds that this !ould allo! better risk $anage$ent due to diversification of funding sources. ? Providing guarantees and #rotection for international investors ho!ever does nothing to hel# identify !here $oney is needed to #rovide better !ater services to #eo#le, ho! those needs can be $et, and !hat finance is reGuired to deliver this service. 4li$inating the risk of dying of cholera is different fro$ reducing the risk of an under#erfor$ing invest$ent.

Fin2nce fro8 the 3otto8 !

*.# $otto8 ! 2ssess8ents+ 2 2rtici 2tory 2 ro2ch to fin2nce 3n alternative a##roach should start by looking at the actual needs of #eo#le, s#ecifying the objectives to be achieved, !orking out !hat finance is needed, and ho! it can be best obtained. "his $ust be a Ebotto$ u#F a##roach, based on local assess$ents and decisions, because the objectives and needs de#end on local conditions. Public #artici#ation, !ith the associated trans#arency and accountability, should be an i$#ortant #art of the #rocess, together !ith #ublic o!nershi# and $anage$ent. Partici#atory syste$s, as o#erated in Porto 3legre %1raNil&, have financial advantages.@ Using the #artici#atory syste$, D*34 has succeeded in financing considerable e=tensions of service coverage in a decade, and all at a lo! cost for consu$ers. Partici#atory $echanis$s6 are better at identifying invest$ents of value to #oor localities can develo# consensus on #ricing levels necessary to fund the syste$ can develo# consensus on distribution of the costs6 Ethe !hole city is a ta= baseF

"he table belo! sets out so$e co$$on objectives for i$#roving !ater syste$s. "he actual objectives need to be assessed locally. "he table also sho!s the kind of financial $easures !hich $ay be #art of a solution, including ca#ital invest$ent, subsidy and cross;subsidy, and even higher #ay as a !ay of i$#roving finances of the o#erator %in Dakha, 1angladesh, doubling !orkersF salaries led to a big i$#rove$ent in the o#erationFs finances, because !orkers could Eafford to be honestF and the collection rates increased dra$atically&.
2. O3:ectives( fin2nce 2n7 other 8e2s!res
Some possible objectives Extension of system Improved affordability Reliability and continuity Improving water resources Sewerage treatment Financial measures Capital investment in new connections Subsidy, cross-subsidy, lifeline tariffs etter pay, capital investment in new technology Capital investment in reservoirs, pipes, treatment Capital investment in treatment plants Low cost measures Legalise peri-urban settlements, selfconnection Reduce costs, improve collection of charges !rganisation, training "aintenance to reduce lea#age, reduce demand Reed beds

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"here are also non;financial $easures !hich $ay be as i$#ortant, or $ore so. "he illegal status of #eri; urban settle$ents $ay be a $ore funda$ental barrier to connection to !ater su##lies than lack of ca#ital financeM i$#roving the $ethod for collecting !ater charges $ay be a si$#le !ay of reducing the costs of !ater to usersM reducing leakage, or reducing consu$#tion, $ay be better !ays of dealing !ith !ater shortage than building a ne! reservoir. 7a#ital invest$ent is not necessarily the best solution, even !here it is #ossible. "he notes on Efinancing citiesF highlight so$e !ays in !hich s#ending #ro#osals can distort #riorities, by leading to invest$ents !hich have little benefit to the #oor.
*.#.# Fin2ncin" Cities+ so8e consi7er2tions

*ore effective revenue collection %such as revaluing #ro#erty or enforce$ent& could increase resources significantly. 4=e$#ting lo! value #ro#erties and infor$al sector businesses !ould $ini$ise the ta= burden on the #oor. 3ccess to loans $ay enable cities to undertake ca#ital invest$ent, but can distort choices. "he gro!ing bond $arket has encouraged 1angalore to undertake E$ega;#rojectsF that have little benefit for the #oor, often forcing the$ out and under$ining fragile econo$ic and social relationshi#s. In +ohannesburg, the need to re;establish credit !orthiness !as the driving force behind the restructuring #rogra$$e and e=#enditure cuts in the late 0DD-s. Resources need to be distributed eGuitably throughout the city. Devolving so$e funds to the neighbourhood level can bring decisions about resource use closer to the #oor. 3 rea##raisal is needed of !ho benefits fro$ e=#enditures. Reorienting e=#enditure #atterns fro$ high standards that benefit a fe! to serving the $ajority !ho are #oor reGuires a radical change in official attitudes. 'hile the e=ecutive needs to $aintain control over a cityKs budget and use of resources, greater trans#arency is essential to counteract corru#tion and clientelistic #o!er relationshi#s and to strengthen the influence of the #oor through !ard councillors.

%e=tracted fro$ IDS Insights Issue O/A 5ove$ber ,--0 by 5ick Devas& A *.) P2y8ent thro!"h ch2r"es or t2;es the iss!e of cross<s!3si7y Ulti$ately all e=#enditure on !ater has to be #aid for either through ta=ation or through user charges. 4ven if !ater is distributed free of charge to the users, it is still #aid for : through the ta= syste$. 4ven loans have to be re#aid, !ith interest, through one of these $echanis$s. "he affordability of !ater for #oor users is affected by the distribution of the burden. In any syste$, there is nearly al!ays so$e ele$ent of cross;subsidy. "he $ore that costs are covered by ta=es, the less is #aid by users6 #eo#le !ith lo!er inco$es are e=#ected to #ay less ta=es, so they #ay less overall for the cost of the !ater syste$. "he sa$e is true !ith local ta=es, to a lesser e=tent, because the #o#ulation $ay consist over!hel$ingly of #oor #eo#le, and so there are fe! !ealthy #eo#le to subsidise the #oor. 7harges can also be distributed so as to assist the #oor, usually by a syste$ of Eblock tariffsF under !hich #eo#le #ay less for the first <- litres of !ater #er day, and #rogressively $ore #er litre for higher bands of consu$#tion. iving the first <- litres for free %so$eti$es called lifeline tariff& is an e=a$#le of this. It does not necessarily benefit the #oor, ho!ever, but lo! consu$ers6 a single rich #erson gets $ore benefit than a #oor large fa$ily. Ho!ever, charging for !ater is often su##orted as a !ay of reducing consu$#tion and conserving !ater, so environ$ental interests so$eti$es argue in favour of charging everyone for all the !ater they use.
3. T2;2tion 2n7 ch2r"es $ational Local Local )use-related* Taxation $ational taxes (roperty tax, water tax Charges Connection charge "etered charges Cross-subsidy mechanisms %ax base eg income tax, &'% %ax base eg property values Rising bloc# tariffs, +free water,

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*.* Centr24 2n7 4oc24 t2;2tion Historically central govern$ents have #layed a big role in financing !ater syste$s. "his has so$eti$es involved #aying directly for the !ater su##ly service as a !hole, so that there is virtually no role for charges %eg Ireland&M distributing so$e #art of central ta= revenue to su##ort local authority s#ending on !ater and other services %eg 7anada&M #roviding chea# loan finance for local authorities to use for ca#ital invest$ent %eg US3&M or collecting so$e #art of !ater charges centrally and redistributing it to authorities !hich need to invest %eg (rance&. "he great advantage of using central govern$ent financing is that it enables the greatest redistribution, by dra!ing on ta=es #aid by everybody in the country and directing it !here it is $ost needed. "he #oorer the #o#ulation of a co$$unity, the $ore they need finance fro$ a source !hich can dra! on richer co$$unities. "he disadvantage is the lack of local control over this revenue6 central govern$ent $ay cut back on the a$ount it is #re#ared to s#end on !ater, and so local co$$unities $ay de#end on decisions $ade at levels they cannot easily influence. In $any countries !ater and se!erage have been local govern$ent services financed, like other services, out of local ta=ation, such as a for$ of #ro#erty ta=. 4ven !here there is a se#arate charge for !ater, this charge $ay effectively be a #ro#erty ta= in countries !here $ost ho$es are not $etered : e.g. the UC or 7anada. *.. Str!ct!res 2n7 c2 2city+ co88!nities 2n7 !34ic 2!thorities 3tte$#ts to #rovide i$#roved services for the #oor are often Eco$$unity;basedF, through an organisation !hich is not a $unici#ality or any other state institution, but $ay be a coo#erative, a voluntary neighbourhood association, or so$e other for$ of 5 2. "he argu$ents in favour of co$$unity)5 2 based !ater services is that they avoid #roble$s e=#erienced !ith state organisations, including inefficient and)or corru#t bureaucracies, self;serving #oliticians and bureaucrats, and lack of trans#arency and accountability %though co$$unity leaders too $ay so$eti$es e=hibit these #roble$s&. D "here are a nu$ber of cases of local co$$unities develo#ing a self;hel# a##roach to e=tending !ater syste$s, es#ecially in #eri;urban areas6 one such case is (aisalabad %Pakistan& : see bo= belo!. 3 co$$unity ho!ever has $ore li$ited financial #o!ers than a $unici#ality or local govern$ent. It can only develo# !ater or other urban services on the basis of the ability to #ay of the actual or #otential users. 'ithout #o!ers of ta=ation, it !ill not be able to rely on the resources of #eo#le other than the users. Its ability to borro! !ill be li$ited by the inco$e fro$ users, and it !ill al$ost certainly be unable to issue bonds or take long;ter$ loans ; there are fe! coo#eratives !hose di$ension allo!s the$ to access long ter$ invest$ent finance at good ter$s and conditions6 one of these is S3 U3P37 in Santa 7ruN, 1olivia. 07o$$unities have the further disadvantage of not being able to e$#loy a significant nu$ber of staff either to carry out services or to #rovide #rofessional advice %for e=a$#le, in (aisalabad the co$$unity could not recruit and retain Gualified engineers&.
*...# F2is242327+ 8icro<fin2nce7 co88!nity w2ter 2n7 s2nit2tion

"!o;thirds of (aisalabadFs t!o $illion #eo#le live in 'atc i abadis %unofficial sGuatter settle$ents& !ith little or no official #rovision for services. 2ver half the #o#ulation are self;e$#loyed, and the settle$ents contain $any s$all businesses. >ess than half of the houses have #i#ed !ater and less than a third are connected to se!er syste$s. 3s the cityFs !ater and se!erage authority is chronically in debt, $any neighbourhoods develo# #rojects inde#endently, often using grants;in;aid allocated by individual #oliticians. "here is little co;ordination. 3lthough $ost settle$ents have trunk se!ers, $any local se!ers and drains are not connected to the$. "he 3S1 is a neighbourhood body !hich has introduced self;financed !ater and sanitation connections in 'atc i abadis. "his consciously e$ulates the 2rangi Pilot #roject %2PP& in Carachi, !hich develo#ed lo!; cost se!erage through co$$unity;financed connections in 'atc i abadis in Carachi. "hese #roved so

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successful that a se!erage sche$e for the !hole of Carachi !as revised to use the sa$e a##roach6 an earlier #lan to use an e=#ensive loan fro$ the 3sian Develo#$ent 1ank %31D& !as cancelled. "he 3S1 undertook a survey to docu$ent and $a# e=isting !ater and se!erage facilities in the areas in and around Dhuddi!alla. "he 2PP itself lent Rs 0--,--- fro$ !hich $icro;loans !ere $ade households and businesses to construct their o!n local se!erage and !ater connections in the lanes of the settle$ents, and re#ay the loans6 the re#ay$ent rate has been over AAP. 'hen '3S3 said it could not $ake the connection to !ater $ains for so$e years, the 3S1 took res#onsibility by creating a local !ater services co$$ittee %'S7&, raising a Rs ,--,--- loan %fro$ 'ateraid&, constructing the connection itself %illegally& and undertaking to collect user fees fro$ households. Households #ay both the 'S7 and '3S3 !hen they are connected. So$e households refused to #ay connection charges, but both '3S3 and the 'S7 took legal action to disconnect the$ and force the$ to #ay charges to both 'S7 and '3S3. 3 si$ilar #rocess of raising a loan fro$ 'ateraid and issuing $icro;credit !as used to develo# local se!erage links. 3S1 has effectively beco$e a #rovider of se!er $aintenance services, substituting itself for '3S3 in this res#ect. It has bought eGui#$ent for unblocking se!ers, and a truck, !ith grants fro$ 'ateraid. "he #roject has turned do!n funding offers fro$ other donors including the 7anadian 7ID3 in order to avoid #ressure fro$ big financiers. It has also declined finding fro$ the Social 3ction Progra$$e %S3P& of the govern$ent of Pakistan, and convinced the $unici#ality not to invest in !ater su##ly or se!erage at the lane level but to s#end their funds on building collector se!ers and #aving the lanes !here !ater su##ly and se!age lines have been co$#leted. "he 3S1 has tried but failed to recruit and retain #rofessional engineers. It is heavily reliant on the #ersonality and drive of one leader. 3lthough international donors have co$e to offer su##ort, this has rarely been acce#ted, lest it co$#ro$ise 3S1Fs belief that develo#$ent should be dictated by the co$$it$ents, #riorities and $eans of local inhabitants. 00 "he #olitical conte=t of (aisalabad is significant. "he (aisalabad Develo#$ent 3uthority %(D3& is the $ain #olicy;$aking body but is not elected and is funded fro$ central govern$entM the !ater and sanitation authority %'3S3& is under the direction of the (D3 but has irregular funding and very #oor collection of !ater and sanaitation fees. "he (aisalabad *unici#al 7or#oration is an elected local authority, but has no effective #o!er over the actions of the (D3, no reliable inco$e fro$ the #rovincial govern$ent, and also fails to collect its o!n ta=es efficiently. Individual #oliticians are an i$#ortant channel of finance, because the govern$ent gives Hgrants;in;aidJ to each national and #rovincial asse$bly $e$ber to s#end on their localities, !ith no coordination. 5eighbourhoods often take the initiative in trying to develo# !ater and sanitation sche$es, and seek funding fro$ the #oliticians. 3s a result local se!ers and drains are often not connected to nearby '3S3 $ains se!ers. "he 3S1 does not alter these #olitical and financial syste$s, but #rovides an initiative !hich delivers services !ithin these syste$s. %PSIRU su$$ary based on E"he !ork of the 3nju$an Sa$aji 1ehbood and the larger (aisalabad conte=t, PakistanF, Poverty Reduction in Urban 3reas Series, 'orking Pa#er @, International Institute for 4nviron$ent and Develo#$ent, by Sali$ 3li$uddin, 3rif Hasan and 3siya SadiG, Dece$ber ,--0.& 0,

R2isin" invest8ent fin2nce

"here is no single EcorrectF source of finance for invest$ent. It !ill de#end strongly on local conditions, including the financial health of the !ater o#eration, the Guality of de$ocratic institutions, on the state of local and central govern$ent finance, on the state of a local ca#ital $arket, etc. "he sources of invest$ent finance can be set out fairly si$#ly. 4ither it is generated by the o#eration itself running a sur#lus, or it is given by so$e agency, or it has to be borro!ed in so$e !ay fro$ investors. *oney can be borro!ed for$ inside the country, or internationally. "he table sets out these o#tions.
c. So!rces of fin2nce for invest8ent

Source of funds Sur#lus of o#erations rants >oans

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Domestic (inside country) 'ater o#erator overn$ent, national funds Do$estic banks

International ; 3id agencies, charities International banks, develo#$ent banks

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1onds

Do$estic bonds

International bonds

..# S!r 4!s of o er2tions "he si$#lest source is for the !ater authority itself to finance invest$ent out of a sur#lus. "his $eans raising inco$e above the levels reGuired just to #ay o#erating costs and debt service, so that there is e=tra cash !hich can be invested. Using sur#luses in this !ay avoids borro!ing costs. Ho!ever, !ater syste$s are so ca#ital intensive that it !ould reGuire large sur#luses %and high tariffs& to finance all invest$ents out of o#erating sur#luses. 1orro!ing $oney has the advantage of s#reading the cost across a nu$ber of years. ..) 'oc24 c2 it24 2n7 4oc24 "overn8ent fin2nce *oney can be borro!ed !ithin a country, fro$ banks or fro$ a local ca#ital $arket !here savings are invested. "his is the traditional for$ of borro!ing for local govern$ent services throughout the !orld. 2ne advantage of using local ca#ital $arkets is that there is no risk fro$ currency devaluation. "he $oney is leant and re#aid in local currency, and #aid for out of charges %or ta=es& collected in the sa$e currency. 3 second advantage is that it is not subject to conditionalities i$#osed by e=ternal lenders, es#ecially by develo#$ent banks. >ocal authorities or !ater co$#anies !ill still have to satisfy local investors that they are good credit risks, and !ill re#ay the loans on schedule. "he a$ount of $oney that can be borro!ed fro$ local sources varies bet!een countries. It $ay ho!ever be #ossible to borro! local savings for invest$ent in #ublic infrastructure such as !ater even in lo! inco$e countries. 2ne e=a$#le of this is the develo#$ent of $unici#al bonds in India, led by the city of 3h$edabad %see bo= belo!&.
..).# Ah8e72327+ 4oc24 "overn8ent 8!nici 24 3on7s

In the $id;0DD-s 3h$edabad *unici#al 7or#oration %3*7& !as in financial deficit, but needed to carry out $ajor i$#rove$ents to services, es#ecially invest$ent in !ater and sanitation infrastructure. It set about a #rogra$$e of increasing the efficiency of its ta= collection. "he $ain source of revenue !as fro$ an EoctroiF ta= levied on i$#orts into the city6 3*7 u#dated the rates of ta=, e$#loyed e=tra collectors, sta$#ed out corru#tion : and as a result increased the a$ount of $oney collected by ?-P. 'ithin #ro#erty ta=es, the ne=t $ajor source of revenue, the council created a co$#uterised database, i$#osed sanctions on #eo#le !ho !ere not #aying, and strengthened the collection staff : and ta= collected increased by <<P. 3*7 also co$#uterised, $odernised and #rofessionaliNed its accounting syste$. It then dre! u# a ca#ital invest$ent #rogra$$e !orth Rs <,D@/ $illion %I0<-$&, $ainly for !ater su##ly and se!erage sche$es, based on financing /-P of it fro$ revenue and raising the rest through loans and a $unici#al bond. In 0DDA 3h$edabad beca$e the first city in India to issue a $unici#al bond, !hich !as given a credit rating of 33. "he $ost significant invest$ent !as the Raska Project, a bulk !ater su##ly sche$e !hich no! su##lies !ater to ?-P of the cityKs #o#ulation. It !as co$#leted in a record five $onths, and financed ,-P fro$ the #roceeds of the bond, !ith the other A-P co$ing fro$ a loan fro$ the national govern$entFs Housing and Urban Develo#$ent 7or#oration. 2ther Indian cities follo!ed suit6 by ,--, si= other $unici#alities %1angalore, >udhiana, 5asik, 5ag#ur, *adurai and Indore& had issued bonds !orth Rs. <<- crores6 %one crore is 0- $illion& all of !hich !ere over;subscribed.
%e=tracted fro$ EPublic Services 'orkQF Public Services International %PSI& Se#te$ber ,--/ htt#6))!!!.!orld;#si.org) &

(or local govern$ents to borro! $oney or issue bonds there $ust be both a local source of ca#ital and financial $anage$ent structures in #lace in the $unici#ality. 2ne !ay of #roviding the funds is through a ca#ital $arket, another is through the govern$ent creating an inter$ediate fund. "he bo= belo! outlines the situation in "hailand, !here such conditions are being develo#ed.
..).) Th2i42n7

>ocal govern$ent in "hailand re$ains highly de#endent on the central govern$ent financial assistance. 2n the revenue side, the local govern$ents are unable to $obiliNe resources in their jurisdictions to finance an increased volu$e of e=#enditures. "hese are due to fe! and narro! ta= bases assigned for the$ and so they are li$ited in revenue generating ca#acity. H"he local govern$ents have to look for other sources of revenue to finance their e=#enditure burden. 1orro!ing has been suggested as an alternative revenue source
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for "hailand local govern$entsR 1ut it is necessary to design local fiscal syste$s... to $eet $andatory condition of a relatively !ell;develo#ed financial $arket to have a #rudent local financial syste$.J "he financial sector in "hailand is so#histicated and !ell develo#ed to international standards in $any as#ects. Rbut local bond financing in "hailand today does not e=ist. "here is lack of a!areness of the benefits of bond financing a$ong local govern$ent #eo#le. RHo!ever, if there is uncontrollable access to ca#ital $arkets and $is$anage$ent of budgets by local govern$ent, it could jeo#ardiNe stability on the national econo$y. (or this reason, local budget in "hailand is subjected to tight central control and $onitoring. Such rule $ay, on other hand, hel# to enhance credit!orthiness of local govern$ent, yet it can also render to infle=ibility or negative incentive for local bond $arket develo#$ent.J Historically borro!ing by local govern$ent has been restricted6 H"he only source of funds for local borro!ing is fro$ local trust fund, essentially the local govern$entFs saving !hich is i$#osed by the la!. "he second #roble$ that ha$#ers local govern$ent fro$ borro!ing is lack of local financial $anage$ent ca#acity. 3t the funda$ental level, local govern$ents in "hailand have !eak accounting and budgeting #ractices. In "hailand a regional fund has been set u# to develo# > ca#acity for borro!ing 6 the overn$ent Savings 1ank, !ith su##ort fro$ the 'orld 1ank created the Regional Urban Develo#$ent (und %RUD(& as a revolving fund for local borro!ing es#ecially for $unici#alities. "he siNe of the fund !as set at /- $illion USI to s#end on loan #rojects of less than 0< years. 3s #art of establish$ent the RUD(, considerable technical assistance !as #rovided to strengthen local govern$entFs ca#abilities in #re#aring and $anaging #rojects, financial re#orting, and enhancing local accountability. ..* N2tion24 3o7ies 2n7 w2ter 32n9s 2rganisations !hich are o!ned or su##orted by govern$ents, such as nationalised industries or banks, also borro! $oney. "he su##ort of the govern$ent is a crucial factor for their credit ratings, as it reassures investors that the $oney !ill be re#aid by so$eone, and so the credit rating agencies see #ublic o!nershi# as a #ositive virtue. "hese include #ublic sector financial agencies !hich are dedicated to #roviding loan finance for $unici#al investors. "he outstanding e=a$#le of such an agency, dedicated to funding invest$ent by !ater o#erators, is the Dutch !ater bank, 5ederlandse 'aterscha#sbank %5'1&. 5'1 receives the highest #ossible international credit rating fro$ S S P %see bo=&. 3n e=a$#le fro$ a develo#ing country is the >ocal 'ater Utilities 3d$inistration, !hich acts as develo#$ent bank, technical su##ort agency and infor$al regulator in the Phili##ines, !hich hel#s the #ositive #erfor$ance of the Phili##ine 'ater Districts. 0/ State financial institutions $ay #rovide loan finance $ore generally to local govern$ents. So$e of these have international credit ratings, for e=a$#le the +a#an (inance 7or#. for *unici#al 4nter#rises %+(*&. 2r the state $ay o!n a develo#$ent bank !hich has the re$it to #rovide lo!;cost invest$ents in order to develo# the national econo$y. 2ne such e=a$#le is the 1raNilian 1anco 5acional de Desenvolvi$ento 4cono$ico e Social %15D4S&, !hich has an international credit rating.
..*.# Ne7er42n7se W2tersch2 s32n9

Ratings 7o$$entary fro$ Standard 3nd PoorFs E overn$ent;Su##orted 4nter#rises S#ecial 4dition ,--/F 5ederlandse 'aterscha#sbank 5.B. 54"H4R>35DS 7redit Rating 6 333)Stable)3;0T "he ratings on 5ederlandse 'aterscha#sbank 5.B. %5'1& are based u#on the i$#licit su##ort that the bank receives fro$ the *inistry of (inance %*2(&. "he ratings on 5'1 are also su##orted by the bankFs effectively Nero credit risk %as a result of its strict #ublic;sector lending re$it&, strong ca#ital ratios, an e=ce#tionally lo! cost base, and stable $anage$ent. 3ccording to 5'1Fs articles of association, the bank cannot lend to nor be o!ned by the #rivate sector. "he $ajority of lending is to housing associations, $unici#alities, and !ater control boards. "he bank also acts as a central treasury for the !ater control boards. 3lthough 5'1 has co$$ercial inde#endence, central govern$ent su##ort is indicated by the bankFs shareholders, !hich are all #ublic;sector entities, !ith the central govern$ent holding 0@PM !ater control boards holding A0PM and #rovinces holding ,P. "he loan #ortfolio is e=tre$ely lo! risk, and is $ade u# of credits to Dutch #ublic authorities and li$ited;liability #ublic utilities. 5'1 has never suffered a loan loss, !ith the bankFs very conservative credit culture effectively leaving it i$$une to credit cycles. R.. "he

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$arket for #ublic;sector lending is a lo! $argin business, but 5'1 is !ell #laced as a lo!;cost, niche #layer !ith a strong #ublic;#olicy function.R..0. ... Cor or2tise7 w2ter 2!thorities So$e !ater o#erators re$ain 0--P o!ned and controlled by the #ublic sector, but have a greater degree of autono$y, like a !holly o!ned co$#any rather than a $unici#al de#art$ent. Such a cor#oratised !ater o#erator $ay then use its o!n revenues as the basis for borro!ing directly, !ithout going through local authorities. "his is done by a nu$ber of 4uro#ean $unici#ally o!ned !ater co$#anies6 Stockhol$ Batten for e=a$#le borro!s $oney itself, and even obtains lo!er interest rates than Stockhol$ 7ity council. "his kind of cor#oratised entity also e=ists in a nu$ber of develo#ing countries. In at least one case, 4$cali in 7olo$bia, the cor#oration concerned obtained an international credit rating %though 4$cali !as subseGuently under$ined by energy liberalisation, and #ut under great #ressure to be #rivatised&. In so$e countries !ater o#erators are o!ned by national govern$ents, as o##osed to local govern$ent, and then the i$#lied su##ort of the national govern$ent beco$es i$#ortant for obtaining loans. In South 3frica, for e=a$#le, although $unici#alities run !ater distribution to households, bulk !ater su##ly is $anaged by large regional state;o!ned o#erators. 2ne of these, Rand 'ater, has an international credit rating. ..1
..1.#

Intern2tion24 fin2nce
Gener24 consi7er2tions

"here are t!o i$#ortant Guestions to be addressed in considering the role of international finance6 / (irstly, it is i$#ortant to carry out an assess$ent of !hat invest$ent finance is actually needed, and ho! $uch of it can be financed locally, before looking for finance fro$ develo#$ent banks %or any other international source&. "his assess$ent should be carried out locally and trans#arently, as develo#$ent banks, #rivate co$#anies and consultants all have vested interests in $aking the largest #ossible esti$ates of invest$ent needs. Secondly, international finance by definition co$es fro$ outside the country and so by definition in a foreign currency, invariably the US dollar. "he interest and the loan itself $ust be #aid in dollars, !hereas inco$e fro$ ta=es or !ater charges co$es in local currency. If this currency falls against the dollar, then the cost of the loan $ay beco$e unaffordably high.
Deve4o 8ent 32n9s

..1.)

Develo#$ent banks should be the $ain source of international finance for #ublic infrastructure invest$ent. "his is a key role of a develo#$ent bank, and the advantage is that $oney is available at $uch better ter$s than the #ublic authority could obtain for itself. Proble$s arise, ho!ever, because the banks $ay a##ly conditionalities reGuiring #rivate sector involve$ent, and the loan $ay be used as !ay to i$#ose #olicies !hich da$age #ublic services. Des#ite this, the develo#$ent banks all continue to lend to #ublic sector bodies, and the conditionalities a##lied vary considerably.
..1.* Intern2tion24 3on7s

1onds are issued on the international $oney $arkets by $ost govern$ents. 1onds are also issued internationally, not only by $unici#alities in develo#ed countries, but by so$e local govern$ents in transition and develo#ing countries too. Standard and PoorFs s#ecify the factors they take into account for credit rating local govern$ents. 0< "he credit rating of the national govern$ent is usually the $ost i$#ortant factor, but S S P list factors !hich are s#ecially relevant to rating $unici#al bonds in Ee$erging $arketsF %develo#ing countries&. "hese include6 changing relationshi#s bet!een central and local govern$ent, lack of institutionaliNed accounting and audit, $anage$ent so#histication, culture of debt re#ay$ent, legal and regulatory fra$e!orks, debt #rofiles and liGuidity, inco$#lete de$ogra#hic and socioecono$ic data, scale of infrastructure needs, and level of uncollected ta=es and fees.

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(e! $unici#alities in develo#ing countries have obtained international credit ratings %e=ce#t for *e=ico&. "he $ajority are in eastern 4uro#e. "he table belo! e=cludes / cities in 3rgentina !hich no! have a EDefaultF credit rating.
7. ,!nici 24 3on7s with intern2tion24 cre7it r2tin"s( )55* @tr2nsition 2n7 7eve4o in"
co!ntriesA
Colombia Korea ogota )Capital .istrict of Santa -e de* Seoul )"etropolitan City 1overnment* %aegu )"etropolitan City 1overnment* Sofia )City of* 6agreb )City of* rno )City of* !lomouc )City of* !strava )City of* (rague )City of* udapest )City of* Riga &ilnius ydgos8c8 )City of* 1dans# )City of* 9ra#ow )City of* Lod8 )City of* S8c8ecin )City of* 5roclaw )City of* ash#ortostan )Republic of* Cherepovets )City of* Ir#uts# 9hanty-"ansiys# )'utonomous !#rung of* "oscow )City of* "oscow )!blast of* Samara !blast St: (etersburg )City of* Surgut )City of* Sverdlovs# )Region of* 9iev )City of* Local currency -/$egative/0 '2/Stable/'-3 2/5atch /Stable/0 /Stable/0 '-/Stable/'-4 '-/Stable/'-4 '-/Stable/'-4 '-/Stable/'-4 '/Stable/'-3 /(ositive/'-7 -/Stable/0 -/Stable/0 -/Stable/0 -/Stable/0 -/Stable/0 -/Stable/0 -/Stable/0 /(ositive/0 Ru !blast 0/0/0 Ru'' 0/0/0 Ru' 0/0/0 /Stable/0 Ru'-/Stable -/(ositive/0 /$egative/0 -oreign currency /$egative/0 '-/Stable/'-4 2/5atch /Stable/0 /Stable/0 '-/Stable/'-4 '-/Stable/'-4 '-/Stable/'-4 '-/Stable/'-4 '-/Stable/'-4 /(ositive/'-7 -/Stable/0 -/Stable/0 -/Stable/0 -/Stable/0 -/Stable/0 -/Stable/0 -/Stable/0 /(ositive/0 0/0/0 -/(ositive/0 -/Stable/0 /Stable/0 -/(ositive/0 2/Stable/0 /Stable/0 /Stable/0 -/(ositive/0 /$egative/0

Bulgaria Croatia C ech !epublic

"ungary Latvia Lithuania #oland

!ussia

$%raine

.ource: Standard and PoorFs E>ocal and Regional overn$ents ,--/F !!!.standardand#oors.co$ 0? ..1.. Intern2tion24 co88erci24 fin2nce+ inter8e7i2te 8ech2nis8sB

International investors include the !orldFs invest$ent funds, !ith ca#ital looking for the best)highest)$ost secure return. *ost of this is unlikely to be interested in investing in !ater infrastructure in develo#ing countries, !hich !ould be #erceived as too risky and not #rofitable enough, although so$e !ater bodies !ith international credit ratings !ill be able to attract such investors. E4thical investorsF $ay be $ore interested, as the value of the service is a #ositive factor for the$, but !ould still #refer to s#read the risks of such invest$ents. International #rivate ca#ital $ay be $ore interested in investing through Einter$ediate fundsF of various kinds, !hich s#read the risk of the investor, and carry out the s#ecialised function of assessing the different !ater o#erators or $unici#alities.

Co88ents 2n7 conc4!sion

(inancing !ater to $eet the needs of #eo#le does not necessarily reGuire international ca#ital. Poor co$$unities $ay be ca#able of $obilising the necessary resources to construct do$estic e=tensions even if the govern$ent, $unici#al and !ater authorities are failing to function. Public !ater services can be $ade affordable for the #oor through a co$bination of ta=ation, charges, efficient collection $ethods, and cross; subsidy. Invest$ent finance can be raised through loans or bonds issued !ithin the country itself, if basic reGuire$ents for ca#ital $arkets e=ist. overn$ents, and even local govern$ents, are the$selves ca#able of accessing international ca#ital if necessary, !ithout the need for #rivate co$#anies. Develo#$ent banks should have a role to #lay, but that de#ends on !hether it is #ossible to #revent the da$aging effects of #olicy conditionalities.

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Notes

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7a$dessus, *. %,--/& Financing &ater for All - /e"ort of t e &orld 0anel on Financing &ater ,nfrastructure. 7haired by *ichel 7a$dessus. Re#ort !ritten by +a$es 'in#enny. Presented at /rd 'orld 'ater (oru$, Cyoto, +a#an, 0?th;,/rd *arch ,--/ htt#6))!!!.!orld!atercouncil.org)do!nload)7a$dessusRe#ort.#df&. , Infrastructure 3ction Plan. at htt#6))!bln--0A.!orldbank.org)Urban7alendar)urban.nsf)-)b--Da/D@D/dcAcaAA<,<?d<c--@AD@?0)I(I>4)3""5CU>B)Inf rastructureP,-3citonP,-PlanP,-;P,-+uneP,-0D.doc . (or an analysis of the '1 strategy see EPublic solutions for #rivate #roble$s ; res#onding to the shortfall in !ater infrastructure invest$ent E Se#te$ber ,--/ at htt#6))!!!.#siru.org)re#orts),--/;-D;';strats.doc / H3 Strategic Bie! of Urban and >ocal overn$ent Issues6 I$#lications for the 1ankJ 2ctober 0DDD htt#6))!!!.!orldbank.org)ht$l)f#d)urban)strategy)full.ht$. Cey #olicy state$ents are fro$ 7ha#ter /, at htt#6))!!!.!orldbank.org)ht$l)f#d)urban)strategy)cha#/.ht$ . . (ro$ 7ha#ter /, at htt#6))!!!.!orldbank.org)ht$l)f#d)urban)strategy)cha#/.ht$ . < (or a discussion of the co$#anies and their strategies, see 'ater $ultinationals ; no longer business as usual htt#6))!!!.#siru.org)re#orts),--/;-/;';*57s.doc ? *array, *ichael, HDoes anyone give a PPPUJ, Project (inance, 0st +uly ,--0 6 HR"he Dutch V!ater financeW $arket has traditionally been Guite closed to any e=ternal #artici#ants, !ith a lot of reliance u#on #ublic sector banks ;; 1ank 5ederlandse e$eeten and 5ederlandse 'aterscha#sbank ;; in #roviding finance for all of the activities of the #rovinces and $unici#alities, and that is Guite a hard culture to break,X co$$ents a local banker.J @ See E'ater in Porto 3legre, 1raNil ; accountable, effective, sustainable and de$ocraticF 3ugust ,--, htt#6))!!!.#siru.org)re#orts),--,;-A;';d$ae.#df A Insights Issue O/A 5ove$ber ,--0 htt#6))!!!.id,0.org)insights)insights/A)inde=.ht$l D In #ractice there is no guarantee that co$$unity leaders !ill not #ursue self;interest in the sa$e !ay as bureaucrats or #oliticians. >eaders of a #articular grou# $ay act in their o!n interests rather than that of the co$$unity as a !hole, for e=a$#le !here co$$issions are $ade available to co$$unity leaders for collecting !ater charges3s #ractised by SueN in *anila, for e=a$#le. 0See >obina and Hall 0DDD6 E"itle E htt#6))!!!.#siru.org)re#orts)DD-A;;';U;Pubalt.doc 00 E"he !ork of the 3nju$an Sa$aji 1ehbood and the larger (aisalabad conte=t, PakistanF, Poverty Reduction in Urban 3reas Series, 'orking Pa#er @, International Institute for 4nviron$ent and Develo#$ent, by Sali$ 3li$uddin, 3rif Hasan and 3siya SadiG, Dece$ber ,--0 htt#6))!!!.iied.org)docs)urban)urb#ovY!#-@.#df . 3 su$$ary of the $ain #oints is also available at htt#6))!!!.id,0.org)Ninter)id,0Ninter.e=eUaZ.SiZs,bsa0g0SuZ/ff?00DA 0, E"he !ork of the 3nju$an Sa$aji 1ehbood and the larger (aisalabad conte=t, PakistanF, Poverty Reduction in Urban 3reas Series, 'orking Pa#er @, International Institute for 4nviron$ent and Develo#$ent, by Sali$ 3li$uddin, 3rif Hasan and 3siya SadiG, Dece$ber ,--0 htt#6))!!!.iied.org)docs)urban)urb#ovY!#-@.#df 0/ See >obina and Hall 0DDD6 E"itle E htt#6))!!!.#siru.org)re#orts)DD-A;;';U;Pubalt.doc 0. E overn$ent;Su##orted 4nter#rises S#ecial 4dition ,--/F (ebruary ,--/ [ 0/D !!!.standardand#oors.co$ 0< See E>ocal and Regional overn$ents ,--/F , criteria and definitions at htt#6))!!!,.standardand#oors.co$)53S3##)cs)7ontentServerU #agena$eZs#)Page)(i=edInco$e1ro!sePgSrZ0SbZ,SsZ0?SigZSiZSlZ45SfiZSfigZSfsZSfrZSftZSfZ, 0? Standard and PoorFs E>ocal and Regional overn$ents ,--/F !!!.standardand#oors.co$