By: Peter TwesigyeSenior Economist

NWSCUganda

OVERCOMING CHALLENGES IN SECURING FUNDING FOR

INFRASTRUCTURE DEVELOPMENT;

Case Study of NWSC Uganda

Outline

� Introduction� WSS Infrastructure Requirements

� Typical Utility Challenges� Overcoming Challenges: NWSC Experience &

Management Interventions

� Financing Options Available: NWSC Experience� Benefits & Limitations

� Key Lessons� Conclusion

Introduction

� The provision of Water and Sanitation Services is of paramount importance as it provides the foundation for sustainable development.

� Global trends show provision of water and sanitation services is still inadequate: � 1.1 billion people have no access to safe water services, and 2.6 billion have no

access adequate sanitation services

� Halving this by 2015 requires investments of about USD 72 million per year

� The challenges facing the Water and Sanitation Industry in the developing countries are generic and homogenous in nature.

� Question is what are the typical Utility Challenges?

WSS Infrastructure Requirements

� Investment in water infrastructure brings economic benefits e.g the WHO estimates that for US$ 1 invested brings returns of US$ 3 – US $34; depending on region & technology used.

� The Economic loss to Africa due to lack of water infrastructure is US $ 28.4 billion per year, or 5% of global GDP.

� In 2010, the World Bank called for doubling of investments in water infrastructure from USD 80-180 billion over the next 20-25 years.

� To cope with population growth and climate change, which are expected to leave about 4 billion people living in water stressed area.

WSS Infrastructure Requirements...

� Infrastructure costs of providing access to safe water & sanitation will vary;

� High => when standards are high and sophisticated technology is used,

� Lower => when simple technology that demands low maintenance is used.

Responsibility� In many countries, public goods/infrastructure is a

responsibility of Government .� Failure to deliver has led to calls for Private sector

involvement which often leads to creation of monopolies

Typical Utility Infrastructure Challenges-The Financing Gap

� The financing gap has been noted as one of the major bottlenecks to adequate and sustainable service delivery world wide

� AfDB estimates a gap of US$45-60 billion to meet Africa’s infrastructure requirements

� In Uganda, the financing gap in urban water sector is estimated at US$ 300 million

� Government funding is steadily declining due to competing needs from same resource envelope. Decline in budget support is cascaded downwards to Local Governments and agencies like NWSC

Typical Utility Challenges� Full cost recovery tariffs are still a myth

� User fees not sustainable for capital investments� Change in tariffs would significantly result in over 90% increase� Sewerage investments costs are unviable and socially unacceptable

� Private Sector Financing is not readily available� Contributions from private foundations still holds prospects� Foundations give conditions of reforms which are sometimes non existent in

some developing country utilities i.e good governance & accountability, appropriate financial instruments

� IWOs Prefer RISK FREE contracts that make business sense

� Returns in the water sector are long term in nature� Dis incentive to private practitioners since they are interested in a profit in

short term� Consideration for viable urban towns only- What will happen to unviable urban

towns, the poor?

Typical Utility Challenges� Returns in the water sector are long term in nature

� Dis incentive to private practitioners since they are interested in a profit in short term

� Consideration for viable urban towns only- What will happen to unviable urban towns, the poor?

� Donor funding ebbing� Compared with total ODA, water & sanitation commitments have dropped from

7% in1999 to under 5% in 2010� In Sub-Saharan Africa average funding for water & sanitation has declined

from US$603 mullion in 1999 to under US$583 in 2010 whereas total ODA flows have increased

� In Uganda Donor support has declined from 66.3% in 2002 to 29.5% in 2011

� But even where financing is not a major problem, there are still gaps in the provision of water and sanitation services.

Typical Utility Challenges-Poor Planning

� Failure to plan adequately affects the quality & cost of water infrastructure. � Infrastructure is made in response to emergency cases� Role of infrastructure planning hijacked by Politicians for political gains –

compromises quality� Lack of coordination in sanitation makes it difficult to pool resources- results

in peace meal installations of low quality - Sustainability not guaranteed

� Government Budgeting inadequacies� Budgets made on an annual basis and not linked to long term infrastructure

development needs� Poses cash flow challenges due to late releases; makes Contract

management difficult� Cost financing rises to more than 50% due to delayed payments – Clients

opt for cheaper & inferior contractors� Need to de-link infrastructure budgets from recurrent budgets

Typical Utility Challenges-Restrictive Procurement Guidelines

� The Quality and Cost of any infrastructure exhibits a Symbiotic Relationship� Needs through assessment of whether to provide infrastructure under PPPs

or purely Public arrangements� In Uganda, PPDA regulations most often require selection of lowest bidder-

to save public money� The competence and constitution of Contracts Committee Members is non-

genuine� Public procurements often compromise quality of infrastructure

� Citizens attitudes & Perceptions: Corruption tendencies & diversion of funds meant for infrastructure – Substandard works

� Poor maintenance of infrastructure due to poor leadership, management, culture, compromise quality of water. Asset Stripping likely to occur

Overcoming Challenges-NWSC Experience & Management Interventions

� In the later part of 1990s, faced with risk of Privatization, the Corporation awoke to the need to improve her commercial Viability

� Corporation granted Autonomy, Adopted private sector like commercial orientation. Key infrastructural interventions adopted include;

� The New Connection Policy: aimed at increasing access to safe water, incorporated small10% charge to cater for system development & rehabilitation: New Connection Fund to pool resources for future infrastructure developments

� Hedging Donor funds with Internally Generated Funds; Corporation through reform process built strong financial position, leveraged internal profits for donor funding

Overcoming Challenges-NWSC Experience & Management Interventions

� Donors have contributed to sustainable water infrastructure e.g Gaba& Jinja Offshore pipeline projects= Euros 9 million, KampalaSanitation Master Plan = Euros 69 million; Kampala Water LV.WATSAN project =Euros 212 million

� Hedging Government Funds with Internally Generated Funds: Government guarantees grants & loans of large capital investments for social objectives

� Debt Restructuring: In 2008, Government Capitalised NWSC debt of €61.4 million to enable NWSC finance from its internal resources key investments in water production and service delivery

� Corporate Plans: Corporation adopted 3 year corporate planning cycle that aligns infrastructural requirements to budgetary provisions

Overcoming Challenges-NWSC Experience & Management Interventions

� Good Leadership and Management: The turnaround account of NWSC was enabled by

good leadership and managerial solutions that favored building sustainable infrastructure with strong M&E systems

� Establishment of an Asset Management Register

Financing Solutions Available-NWSC Experience

� Loans� In the early 1980s and 1990s all loans to government were passed on to

utilities under stringent terms (Commercial rate plus 3%)

� Corporation then was inefficient & couldn’t cover O&M costs; loans culminated into debt obligation of UgSh 135 billion (€61.4 million)

� Corporation unable to repay, or increase tariff by 90%. �reduced service coverage, water for rich only

� Fortunately loans were restructured into equity by Government:- But that’s the reality of loans

� ODA and Direct Grants� Grants extended to Corporation after realising huge debt burden� Some DPs made conditions that all funds to capital investment be passed

on as Grants, as opposed to commercial rate plus 3%� However how sustainable are grants? – dwindling , discontinuous and

unpredictable

� Because of efficient management, NWSC recently obtained a Grant/Loan of 212 million for Kampala Water LV-WATSAN Project from EU/EIB, AFD, KfW

Financing Solutions Available-NWSC Experience

� Government Budget Funding� NWSC continues to get government financial support through the

Medium Term Budget Expenditure Framework- For Social Mission and New Facilities

� Government budget support increasingly declining (Only Ushs 2.5 billion or US $960,000 in FY 2010/2011)

� Private Sector Funding� PSP was adopted as one of the reforms recommended by World Bank� Gauff Ingeniueres & ONDEO were tried out in Kampala Area� One justification for PSP was belief that it brings increased managerial

efficiencies and more private financing� However the anticipated financing did not materialize� IWOs prefer risk free contracts that make business sense, and hold the

view that the Client must shoulder the investment funding responsibility

Financing Solutions Available-NWSC Experience

� Market Finance/ Bond Issue� In 2009 the NWSC with the help of WSP (World Bank) attempted to float

Bond worth US$ 10 million

� Bond was preferred because it would allow NWSC to;� Raise sufficient capital for planned investments sustainably� Mitigate interest rate risks and achieve flexibility in financing� Extend repayment periods to correspond to economic life of assets being created� Meet country level objectives of deepening the capital market

� However due to the economic volatility of the time, this process did not come through

� In 2009, the NWSC obtained a concessionary loan of Euros 9 million from AFD of which Euros 2.5 million was grant for Construction of intakes in Kampala & Jinja

� In 2010, NWSC obtained a loan of 86 million Euros for the Kampala Sanitation Master Plan

� In 2011 Obtained a Grant/Loan to Government of Euros 212 million for LV WATSAN Project

Financing Solutions Available-NWSC Experience

� Output Based Aid� Partnership with World Bank� NWSC uses internally generated funds to carry out interventions to increase

access to water in informal/poor settlements- and is reimbursed� Over 30,000 new water connections & yard taps made� Method is efficient & promotes cost effective approaches & appropriate

technologies

� User Fees or Funding through Tariffs� Most reliable and should be main source of funding� Since 1998, NWSC carried out reforms which have led to operational &

financial efficiency gains; Turnover improved from US $11m to US$50 million in 2011. Op Profit rose from loss of US$3m to US$5m

� Through this improved efficiency NWSC now has managed to generate internal finances to effectively cover O&M, Deprecation & Minor Investments (US$ 4 M annually)

� Tariff however are not full cost recovery & cannot finance key capital investments

Benefits and Limitations of EachSource of Source of Source of Source of

FundsFundsFundsFunds

AdvantagesAdvantagesAdvantagesAdvantages DrawbacksDrawbacksDrawbacksDrawbacks RisksRisksRisksRisks

Commercial Commercial Commercial Commercial

Bank LoansBank LoansBank LoansBank Loans

•Quick to obtain

•Easy to terminate through early

payments

•More expensive (17%- 18%)

•Rigid payment terms

•Shorter loan tenors (5-7

years)

•Stringent supervision from

lender

•High Interest

rate risk

Bond Bond Bond Bond

IssuanceIssuanceIssuanceIssuance

•Cheaper (10-14% interest rate)

•Longer tenor (10-12 years) and

therefore matches the funding

maturity profile to the asset life

profile.

•Fixed interest rate over the debt

service period giving certainty for

planning purposes

•Greater flexibility for fund

management

•Can be opened to financing a

longer term investment programme

•Helps establish a credit curve and

build a track record in the capital

markets.

•More complex to develop

•First issue takes a longer

time to realise

•Risk of

issuing bond

before project

is ready,

thereby

encumbered

with idle

funds.

Concessionary Concessionary Concessionary Concessionary

Finance from Finance from Finance from Finance from

External External External External

Lending Lending Lending Lending

AgenciesAgenciesAgenciesAgencies

•Relatively cheaper in cost 4% •Foreign currency

denominated loans.

•Complexity in utilisation of

funds.

•Exchange

rate risks

Unexploited Future Financing Opportunities� Taxes (for Sanitation)The costs of sewerage services/sanitation can be recovered through taxes levied at

the national or regional/local level: Two options� Sanitation charges could be applied to all properties passed by the sewer network� Costs could be recovered through property taxes or general taxation (local property

taxes)

� Commercial Banks� Can be a source of funding for viable projects with promising stable & rising revenue

streams which can be leveraged for capital

� Debt Finance� either lent directly by the central government (from international agencies) or� borrowed against guarantee from central government

� System Availability Charges – access charge reflecting cost of proving consumer with access irrespective of whether or not he receives the service.

� System Development Charges- one time fees imposed on new developments to cover cost of providing infrastructure as a result of development

Challenges Still Existing

� Inadequate Internal Revenues for large infrastructure projects

� Backlog of deferred Infrastructure Investments due to inadequate funds

� Restrictive Procurement Guidelines� Non- Full cost recovery Tariff

� Sanitation Challenge

Challenges Still Existing� A combination or cocktail of financing should be adopted. No

single financing option is sustainable in long run in developingcountries.

� Internal reforms are necessary as a prerequisite to looking outwards so as to promote bankability through harnessing of internal resources.

� Need for stakeholders to appreciate the evolution of a company and avoid making assumptions not based on factual evidence.

� Need for sensitizing of all stakeholders both internal and external and at all stages of accessing market finance.

� Need to have a clear investment policy and plan in place, differentiating between viable and social related investments.

� Need for an active financial Market, with sufficient liquidity. This will reduce the cost of capital

� Need for skilled staff who can effectively evaluate financing options.� Credit rating helps reduce cost of credit.

Conclusion� Utility infrastructural challenges are a reality� The NWSC has adopted itself to these challenges by implementing

tailor made strategies. Some of these strategies can be replicated to other utilities

� Maintenance of infrastructure critical to sustainable service delivery� Full cost recovery Tariffs still a myth.� Market finance helps leverage internal resources.� However Finance to the sector should be based on a combination or

cocktail of funding sources each corresponding to the nature of investment.

� Investments of a Social nature should be financed by Grants, while viable investments may opt for loans.

Special Thanks toMr David Isingoma; NWSC