Microtomografía ósea

The traditional manner of financing infrastructure throughout the world is through money

appropriated by municipal or national governments, which money is used to pay the capital costs of such infrastructure as it is constructed.

As there are not sufficient public resources, alternative methods for financing municipal water and sanitation projects are used in a few parts of the world. This alternative method recognizes that a pool of capital can be used repeatedly as a “revolving fund”. The revolving fund may be capitalized by government or may be raised using private capital. The municipality or local water company takes a loan and repays it over time back to the revolving fund and pays some interest costs. There are a number of revolving funds in the world, including in India, Mexico, Philippines, serving the water sector. In the USA all water and sanitation projects are financed with loans. In the OECD report “ Innovative financing mechanisms for the water sector “(2010) a good overview is provided.

The revolving fund model is of interest for several reasons:

1. The revolving fund model is replicable elsewhere. It is not unique to the laws of any one country;

2. The revolving fund model permits governments to better meet their infrastructure needs; 3. The model permits municipalities to access more money than would otherwise be not available; 4. It relies on commonly understood financial tools. Each of the individual tools is well known in the

capital markets of the world;

5. The revolving fund model can attract private capital. Private capital in general helps to increase the financial discipline and quality of infrastructure services;

6. The credit structure permits projects to be financed at lower annual debt service costs; 7. The revolving fund model’s credit structure permits longer term borrowing than would normally

be available;

8. The model enhances credit ratings and therefore reduces the interest costs for the lenders.

Where private capital is used, it is normally raised in the capital markets, through the sale of bonds or other securities to private investors. For many reasons, private investors find these securities or bonds to be attractive investments. The investors include (local) pension funds, provident funds and insurance companies. These models are in use in India, Mexico, Colombia and US. As mentioned, in the latter all water and sanitation projects are financed with long-term loans and the loan repayment history of US municipalities is good. There have been very few defaults.

The building blocks for the revolving fund model are rather straightforward. There is wide latitude to create and manage a program consistently within the policies and traditions of each government.

The revolving fund model may come with variations. The basic elements include:

1. Private capital and grants to capitalize the revolving fund model using credit enhancement techniques (grants, pooling and other, see below);

2. A legally dedicated, inviolate fund or account into which the capitalization is placed, which fund is legally isolated from serving any purpose other than that for which it is established; 3. A clear definition of the use of the funds, for example, for drinking water, sanitation, industrial

and agricultural and for other wastewater projects.

There is great latitude given to the fund managers in selecting which projects to fund.

Credit enhancement may be necessary to encourage lending of private capital to municipal water projects. Frequently used credit enhancement mechanisms include:

1. The dedication of a specific source of revenue to the support of the debt obligation;

Comment [HG1]: Reference to Martin

S Baker’s paper on the Sustainable Fund Model (Guyana 2013)

2. The pledge of the general revenues of the borrower, including a pledge to raise taxes if necessary;

3. The pledge of funds which they are legally entitled to receive from others such as from the national government (such as an aid intercept);

4. The creation of reserve funds;

5. The pledge to raise tariffs or revenues to meet any unanticipated costs; and 6. The use of third-party guarantees or credit insurance.

Other ways of increasing the credit structure is by aggregating and pooling small and medium sized water projects by local utilities into legal entities such as pools, trusts or limited purpose companies. Consequently the pool or trust can issue securities, bonds or other financial instruments to provide the financing for water and sanitation projects on a long tenor basis. This is achieved because the credit of a pool of projects is stronger than the credit of most water projects individually (and transaction costs for the financial institutions are per dollar credit provided lower for the pool as a whole). There are many credit enhancement techniques at the pool level available to permit the bonds to have sufficient credit for them to qualify as suitable investments for such institutional investors.

This model permits the active participation of local financial institutions and local investors. The model will work better with such participation. Substantial involvement of local investors is important because it provides a local fiscal discipline for municipal loan repayment. That is, with local lending, the failure of a municipality to timely repay a loan will have local consequences. The local

consequences of default have has greater local political meaning than similar defaults solely to international lenders whose recourse is not as immediate or as locally meaningful.

Simply put, the model can involve the combination of i) a revolving fund funded by international and local investors and by a possible grant, ii) a portfolio of (pooled) individual loans to small and medium size projects and iii) independent or third party credit support possibly via reserve fund or at project level. Collectively, a very strong credit structure can be created.

Figure 5.1 Pooled financing model

69 Innovative financing and positioning of the water sector

The European Investment bank (EIB) and European Commission have launched the joint initiative InnovFin under Horizon 2020 (i.e. the EU research programme 2014-2020). The objective of this initiative is to facilitate and accelerate access to finance for innovative businesses and other innovative entities in Europe. It is providing a series of integrated and complementary financing tools and advisory services covering the entire value chain of research and innovation in order to support investments from the smallest to the largest enterprise. It is available across all eligible sectors under Horizon 2020, in EU Member States and Associated Countries. By 2020, InnovFin is expected to make over EUR 24bn of debt and equity financing available to innovative companies to support EUR 48bn of final R&I investments.

Under the initiative an interesting financial innovation has been set-up in Italy: the Viveracqua

Hydrobond. The structure comprises of the issuance of bonds in order to attract investments to

finance small water companies in the region of Veneto in Italy. The problem for water companies in the region of Veneto is that they have:

• difficulties in accessing bank financing for long maturities;

• no access to the EIB direct lending given the companies size and low individual rating.

In order to generate more private financing resources for these companies an innovative financing structure has been set-up. A Special Purpose Vehicle (SPV) has been created for loans

disbursements to the companies. EIB and investors van invest in Notes issued by the SPV. In the picture below an overview of the structure is provided.

Figure 5.2 Structure of the Hydrobond initiative in Italy

In principle the creation of funds with a bond structure can raise capital on the capital markets and could step in gaps in the water market where traditional banks do not offer the right products. The interest rates paid by the utilities can be substantially lower than in case commercial bank credits would have been accessible (especially if back-up is provided by some EIB guarantee funding).

These type of revolving fund bond structures can fill in a market gap for financing revenue generating projects by either private or public sector. Pooled revenues possibly backed by guarantees at project or fund level can be used to strengthen the repayment capacity. It may take the form of viability gap funding; providing subsidies for the non profitable part of projects.. Utilities that supply water in urban areas or treat industrial waste water may be easier to finance. Water operations without revenue generating capabilities like traditional water safety projects might be less appropriate for this type of financing schemes.

HYDRO SPV 130/99 Issuer 1 Issuer 2 ………. Issuer 9 Issuance of Bonds Subscription price Remuneration and repayment of Bonds Issuance of Notes Subscription price

Interest and principal on the Notes

Liquidity and credit support on the Notes EIB + Investors Cash reserve (20%) Veneto Sviluppo

Liquidity and credit support on the Notes

5.6 Conclusions: overall lessons learned

• Blending (combining) different financing instruments (grants, debt, guarantees) is a powerful vehicle to step up projects, attract private repayable finance and use government or donor resources to create leverage and mitigate risk in an efficient way;

• Microfinance is increasingly used in the drinking water and sanitation sector, often backed-up by guarantee funds. Careful allocation of risk between the microfinance provider and guarantee provider and prevention of market distortions are key lessons. It is advisable to gradually diminish guarantees or subsidies (aiming at reducing interest rates below market levels) and to have them as much as possible result based as a long term subsidy might not be sustainable; • Crowdfunding platforms can only play a role for small sized and easy to communicate water

projects. Often these organisations are profit oriented, so fees have to be paid even in case the total amount needed to kick-start the project is not reached;

• Pooled finance vehicles bundle utilities or projects and increase the creditworthiness of projects and reduce transaction costs. These vehicles can therefore attract capital market resources into the water and sanitation sector. Guarantee funds can be used to take out (or diminish) some default risks. It is important that the structures are set up at arms length of governments in order to limit political influence as much as possible. Blending with grants, guarantees and TA is often needed in less developed countries on order to improve the financial performance of water utilities or increase the bankability of project proposals.

71 Innovative financing and positioning of the water sector

Part II: Positioning instruments for the water