Challenge. An estimated 84 million people in Asian cities do not have access to safe drinking water, and 255 million people lack basic sanitation. With Asia’s urban population predicted to increase to over 2.60 billion by 2030, the demand for water and sanitation services in urban areas will only continue to grow.
For many water service providers, expanding their services to meet this growing demand is a significant challenge, since operating revenues are often insufficient, due to low tariffs and relatively high costs brought about by inefficient operations. In many cases, governmental subsidies are not sufficient to finance investments, and often service providers cannot borrow from international development banks, due to in part constraints imposed by national governments or development bank policies.
Domestic banks also typically offer credit at expensive rates and with conditions that most utilities cannot meet. In any case, chronic revenue shortfalls seriously impact utilities’ ability to repay debt, and the majority of Asia’s water service providers are not deemed creditworthy by most lenders.
As a result, water services providers are developing innovative strategies for leveraging their capabilities in providers are approaching counterparts to develop joint investment projects and seek “pooled financing.” Such arrangements can create economies of scale and reduce financing risks, and have proven successful in some Indian states. A few countries allow utilities and municipalities to issue bonds. Overall, efforts to establish financing facilities that specialize in lending to water and sanitation utilities will not accomplish much unless the number of creditworthy water service providers grows dramatically.
ECO-Asia Response. ECO-Asia works with progressive partners to develop and implement country and regional activities that demonstrate and disseminate innovative policies and practices on financing water and sanitation services. ECO-Asia supports credit strength assessments of service providers to identify interventions that can help service providers transition from underperformers into successful and trustworthy borrowers. ECO-Asia also supports financing initiatives for water sector investments, such as issuance of municipal bonds, pooled financing arrangements, and revolving funds, as well as facilitates access to USAID’s loan guarantee program known as the Development Credit Authority (DCA).
Pilot Activities. At present, ECO-Asia implements pilot water sector financing initiatives in Indonesia and the Philippines, and works with the Association of Development Financing Institutions in Asia and the Pacific to promote development bank participation in water sector financing.
Efficiency Improvement Loans, Philippines. ECO-Asia works with the Local Water Utilities Administration (LWUA) of the Philippines to develop a new loan product called an Efficiency Improvement Program (EIP) Loan. EIPs target small-scale loans in the range of US$50,000 to $500,000 for efficiency improvements. EIP lending focuses on enhancing financial and operational performance in order to improve the creditworthiness of water service providers.
The EIP project supports implementation of Presidential Executive Order 279 or EO 279, (see box)), which classifies water districts into four categories: creditworthy, semi-creditworthy, pre-creditworthy, and non-creditworthy. EO 279 requires creditworthy water districts to seek financing from government financing institutions and eventually from private banks. LWUA is mandated to refocus its lending and technical assistance on the three less creditworthy groups by establishing financing products specifically targeted to each group’s specific needs. EIPs target the semi-credit worthy and pre-credit worthy water districts. Resulting improvements will enable water districts to pursue more comprehensive capital investments through LWUA’s existing conventional lending windows.
Municipal Bonds Legislation, Indonesia. To facilitate lending for municipal infrastructure, ECO-Asia works with the Indonesian Ministry of Finance on developing implementing regulations and standard operating procedures for the issuance of municipal bonds. ECO-Asia has been a catalyst in bringing Indonesian cities together to understand bond issuance requirements and benefits. ECO-Asia also facilitates linkages between Indonesian policymakers and counterparts from the Ahmedabad Municipal Corporation (AMC), the first Indian municipality to issue a municipal bond, and CRISIL, a ratings, research, risk, and policy advisory company.
Regional Replication through ADFIAP. To encourage development banks to finance water sector improve-ments, ECO-Asia works with the Association of Development Financing Institutions in Asia and the Pacific (ADFIAP) to assist member banks with the development of new loan products. ECO-Asia and ADFIAP also promote regional dialogue on water financing sector among banks, credit rating agencies, capital market representatives (e.g., trust funds, pension funds, life insurance companies) and donors. One important objective of this dialogue is to determine what financing institutions require from potential borrowers.
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