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U.S. Agency For International Development

Financing Water

Using Partial Loan Guarantees

Jacqueline E. Schafer

Deputy Assistant Administrator

Bureau for Economic Growth, Agriculture & Trade

John Wasielewski,

Director, Office of Development Credit

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USAID’s Approach to Water Finance

Adapted from US experience with Clean Water Act of 1972

• Grant funding: limited and unsustainable• Pressing need to mobilize private funding for public

services • New approach provides for increased security over

direct investment in emerging economies • New approach uses a combination of grant

funds/technical assistance, and loan guarantees as security to attract private investors

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Water Revolving Funds (WRF)

• WRFs offer pooled-financing mechanisms that can mobilize private sector investment on commercial terms

• Each WRF will raise capital from local markets for on-lending to municipal & private entities for water infrastructure

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Supporting Activities:• Technical assistance in local financial market

development• Partial loan or bond guarantees• Intercept agreements on inter-governmental

transfers• Initial capital funds from donors & reserve

fund support

Water Revolving Funds (WRFs)

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USAID Approach: Using Loan Guarantees

• Over the past 4 years USAID has used partial loan guarantees to mobilize local capital for investment in a variety of sectors

• We believe that this approach can work for the provision of potable water and for waste water treatment

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• A financial tool used by USAID to achieve its development objectives

• Loan Guaranty Authority allowing USAID to issue partial guarantees to private sector lenders

• Available for all sectors: SME, Microfinance, Infrastructure, Water, Health, Energy, Environment, etc

• Projects are financially sound and economically viable• Financial risk is shared with local financial institutions; lenders

typically carry 50% of the risk

What is DCA?

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Housing23.37%

SME15.44%

Micro13.44%

Agri.12.97%

Infra.16.89%

Water11.62%

Health/Educ..21%Env.

4.06%

Energy2.00%

DCA Projects by SectorAs of December 1, 2003

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Financing Clean Water in India Through DCA Municipal Bond Guarantees:

Tamil Nadu Water & Sanitation Pooled Fund,Karnataka Water & Sanitation Pooled Fund Trust

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Activity Description

Tamil Nadu

• The pooled financing mechanism supported by guarantee will provide investment funds to small and medium Urban Local Bodies (ULBs) in Tamil Nadu, India, to implement water and sanitation projects, which will benefit low-income populations in these localities

• 50% bond guarantee of equivalent of US$6,400,000 for TNUDF

• Individual bonds will carry a face value equivalent to US$2,000 with 9.5% interest rate and 15 year maturities

• Guarantee is embedded in the project structure behind two payment mechanisms: 1) an escrow account and 2) debt service reserve fund backed by intercepted state transfers

• Supports USAID/India’s Strategic Objective (SO) 4.3, “Improved urban environmental infrastructure built and services delivered in selected cities”

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Project Diagram, Tamil Nadu

•Country: India

•Type: Bond Guarantee

•Amount: $6,400,000

•Guarantee Ceiling: $3,200,000

•Leverage Ratio: 16 to 1. The estimated cost to the US Government for issuing the Guarantee on the $6,400,000 bond amount is approximately $392,960.

Debt Service Payments (Semi - annual Interest and Annual Principal )

Water & Sanitation Pooled Fund (WSPF)

Funds from Bond Issue

Private Placement Bondholders

DCA

Loan/Bond Disbursement

Debt Service

Payments

Escrow

DSRF

Projects

Municipalities

ULB Cash Flows

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Activity Description

Karnataka

• The guarantee facility will provide credit enhancement to the issuance of a bond to raise capital for a water supply and sewerage infrastructure development project in 8 municipalities within the Bangalore Metropolitan Area

• 50% bond guarantee of equivalent of $21,700,000 for Karnataka Urban Infrastructure Development & Finance Corp.

• Guarantee is embedded in the project structure behind two payment mechanisms: 1) an escrow account and 2) debt service reserve fund backed by intercepted state transfers

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Project Diagram, Karnataka

•Total Loans Available for coverage: $21,700,000•Term: 15 years•Portion Guaranteed: $10,850,000•Bond Guarantee Type: Double-barreled•Coupon: 7.5% - 8.0%•Trustee: WSPF (KUIDFC)•Investors: Private placement

Debt Service Payments (Annual Interest and Principal )

Water and SanitationPooled Fund (WSPF)

Managed by KUIDFCFunds from bond issue

Third-Party Guarantee• USAID guarantees 50% of principal.• Possible guarantee from financial institutions, such as

IDECK, IDFC, ICICI for the balance 50% of principal and interest.

Private Placement Bondholders

Escrow Account(Water Project Account)

• Funded up-front by the ULBs from general funds (Current Account) and State Annual Operating Grants to cover 1.5 times annual debt service requirements on market borrowing.

• Held in secure, short-term fixed deposit investments or other liquid instrument.

• Replenished by ULBs’ Current Accounts and State Annual Operating Grants, and intercept of SFC devolution funds.

Bond Service Fund (BSF)• Established by separate funds of GOK contributed up-

front. May be reimbursed by PFDF of GOI as per its guidelines.

• Maintained to Rs 255 million at any given time.• Held in secure, short-term fixed deposit investments or

other liquid instrument in the name of WSPF.• GOK, via a government order, may divert transfer

payments (intercept) to replenish BSF in case of short-fall.

Loan/Bond

DebtServicePayments

BWSSB for Implementation Of Water Supply Projects

Urban LocalBodies (ULBs)

ULB Cash Flows

Debt Service Payments (Annual Interest and Principal )

Water and SanitationPooled Fund (WSPF)

Managed by KUIDFCFunds from bond issue

Third-Party Guarantee• USAID guarantees 50% of principal.• Possible guarantee from financial institutions, such as

IDECK, IDFC, ICICI for the balance 50% of principal and interest.

Private Placement Bondholders

Escrow Account(Water Project Account)

• Funded up-front by the ULBs from general funds (Current Account) and State Annual Operating Grants to cover 1.5 times annual debt service requirements on market borrowing.

• Held in secure, short-term fixed deposit investments or other liquid instrument.

• Replenished by ULBs’ Current Accounts and State Annual Operating Grants, and intercept of SFC devolution funds.

Bond Service Fund (BSF)• Established by separate funds of GOK contributed up-

front. May be reimbursed by PFDF of GOI as per its guidelines.

• Maintained to Rs 255 million at any given time.• Held in secure, short-term fixed deposit investments or

other liquid instrument in the name of WSPF.• GOK, via a government order, may divert transfer

payments (intercept) to replenish BSF in case of short-fall.

Loan/Bond

DebtServicePayments

BWSSB for Implementation Of Water Supply Projects

Urban LocalBodies (ULBs)

ULB Cash Flows

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Expanding Access to Sustainable Utility Services in Egypt Through DCA Loan Portfolio Guarantees:

Commercial International Bank (CIB)

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Activity Description

• Equivalent of US$40,000,000 loan portfolio guarantee for CIB

• Guarantee has a 12 year term and covers 50% principal on the portfolio of loans

• Estimated number of sub-loans to be extended is twenty at approximately $2,000,000 per borrower for a term of 5-7 years

• All borrowers must be Private Sector Provision (PSP) enterprises, offering goods or services pursuant to an agreement with a public water or wastewater utility

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Project Diagram

•Country: Egypt

•Type: Loan Portfolio Guarantee

•Amount: $40,000,000

•Guarantee Ceiling: $20,000,000

•Leverage Ratio: Mission funding of approximately $1 million will leverage the Egyptian pound equivalent of approximately $56 million in loans from local private banks to PSPs.

Commercial International Bank (CIB)

Private Sector Provision (PSP)Enterprises

50%DCA

Guarantee

Loan Loan Loan

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Latin America & Caribbean (17)EcuadorGuatemala (2)Honduras (3)JamaicaMexico (2)NicaraguaPeru (5)Regional (2)

Asia & Near East (20)Bangladesh (2)Egypt (2)India (2)Morocco (9)Philippines (2)Vietnam (3)

Europe & Eurasia (22)Armenia (4) KazakhstanBosnia (4) RomaniaBulgaria (5) RussiaCroatia UkraineMoldova (4)

Africa (17)Ghana (2)Kenya (3)Mali (2)South Africa (3)Uganda (7)

Note: Number in parentheses represents the number of deals per country/region

DCA Global ReachAs of December 1, 2003

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U.S. Agency For International Development

US Agency for International Development

Ronald Reagan Building

1300 Pennsylvania Ave NW

Washington, DC 20523-3800

Phone: +1.202.712.1380

Fax: +1.202.216.3593

Email: odc@usaid.gov

http://www.usaid.gov/our_work/economic_growth_and_trade/

development_credit/index. html