What does it take to finance sustainable water supply and sanitation? The World Bank Group takes this question very seriously indeed. That’s why during the recent Global Water Summit, the World Bank Group partnered with the organizer, Global Water Intelligence, to present the key concepts of Blended Finance to participants from all over the world.
But what is blended finance and why is the World Bank talking about it?
Blended finance is when service providers use public or concessional funds with commercial funds to finance water infrastructure projects. It can draw private sector financing into these projects, while leveraging and maximizing scarce public funds. Blending finance is key if we are to achieve the Sustainable Development Goals, simply because the SDGs have such substantial financing unmet needs. So, we need to look for every opportunity to gear the limited government resources and/or concessional funds with the domestic commercial finance to finance water supply and sanitation projects.
World Bank staff and clients from a number of countries and the staff got together to learn more about how to make blended finance a reality. Many of those present gave examples from their own experience of how this approach to financing development is effective:
- Kenya. Engr. Karugendo, Managing Director of Embu Water, explained what made their experience with blended finance so successful. They have benefited from a mix of grants (both on asset improvement and household connections), concessional loans and partial credit guarantees from development partners, and commercial finance. Because of improved operational performance leads to improved creditworthiness, Engr. Karugendo was proud to report that Embu has accessed the commercial market four times. Each time, they have got longer tenors (that’s the period over which a loan is due) and better interest rates because they developed a proven track record.
- Philippines. Atty. Ricardo de los Reyes of the Maynilad Water Services, Inc. (Maynilad) spoke to the value of incremental efficiency improvements of a water utility. He spoke of the importance of: (i) sequencing operational efficiency from increasing collection efficiency; (ii) reducing non-labor costs, such as energy costs; (iii) reducing non-revenue water (water that is lost through leaks; (iv) invoicing and collecting tariffs from customers; and (v) to gradually and affordably increasing tariffs. All these add up ultimately to improving creditworthiness.
Maynilad is one of the two private sector concessionaires in the Manila Metro area of the government-owned utility, Metropolitan Waterworks and Sewerage System (MWSS). Maynilad, which serves over 10 million people, benefited from a World Bank loan in 2012 to scale up sanitation coverage which was only at 17% at the time. Maynilad used a concessional loan to fund sanitation (which helped make the tariffs affordable) while accessing domestic commercial finance for water supply projects. They recently accessed international commercial loans, which will help them to both improve operational efficiencies for water supply and to serve more customers. Maynilad plans to further utilize blended financing to build additional sewerage treatment plants and conveyance networks to increase sanitation coverage from 47% in 2022 to 100% by 2037.
These experiences show that, when coupled with operating efficiencies, blended finance can really work, raise capital, and help to expand coverage and services. When water utilities are efficient, they become creditworthy which enables them to access commercial loans at very competitive rates and longer tenors. This, in turn, facilitates the implementation of water utility projects which increases service coverage and quality at affordable tariff rates. Going back to the case of MWSS (the public utility in Metro Manila), this service provider benefited from Maynilad’s business management expertise, technical capacity, financial resources and creditworthiness. These qualities helped them facilitate access to domestic and even international commercial finance.
But perhaps the biggest advantages of blended finance are best appreciated first-hand. I know this because as a university student in Manila, I had to wake up very early each morning or stay up late each night just to use the water which was stored in and supplied to my family via huge containers which I can still picture to this day. Thankfully, after implementing operational efficiencies and undertaking the necessary investments funded from blended finance, reliable and good quality water supply is now the norm across Manila. This is a far cry from my university days and it is thanks, in part, to blended finance.
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