Importance of Private Financing for Infrastructure

Current estimates suggest that developing and transitional countries spend approximately $90 billion annually in the water sector. These estimates also indicate that more than double that amount will be needed to meet global commitments toward the Millennium Development Goals. Donor funding and government subsidies will not be enough. For much of the world, access to clean drinking water and adequate sanitation cannot be fully developed without greater private-sector investment and access to domestic capital markets.

Tools that Increase Access to Credit

The United States has increased private investment in water and sanitation both domestically and internationally through the use of the mechanisms listed below. Their success has generated numerous inquiries from foreign donor organizations and multi-lateral financial institutions, interested in learning how each mechanism is used to mobilize private capital and expand local currency financing from the capital markets in developing countries.

Partial credit guarantees from USAID

USAID partial credit guarantees promote greater investment from the private sector by reducing lenders' risk in making loans to particular areas, sectors or borrowers. A USAID guarantee is intended for use when, without it, the loan would not be made. Each credit guarantee covers a lender on up to 50 percent of principal for a particular loan, series of loans (portfolio) or investment. This risk-sharing methodology enables lender to invest while reducing their exposure to loss. By engaging lenders' capital, the guarantees leverage American taxpayers' dollars with more sustainable financing from local capital markets. USAID credit guarantees are already being used to leverage public funds ($5.3 million) that have attracted over $171 million in private financing for water-sector projects. Below is one example:

• In Morocco , a USAID loan portfolio guarantee is supporting the Agency's work to boost development of municipal water resources management. The guarantee covers 50 percent of the principal on loans up to US$4.7 million from the Fonds d'Equipment Communal (FEC), a private Moroccan bank, to municipal and local governments for infrastructure projects related to wastewater treatment and reuse. With USAID's guarantee, FEC is able to provide local governments with commercial financing for eligible projects and extend part of the guarantee to commercial banks to promote additional commercial lending for infrastructure development.

“Pooled” Financing

“Pooled” financing allows municipalities to group infrastructure projects together and use government grants, credit enhancements or future revenues as collateral to tap local private capital. The pooling of risk across multiple projects reduces the overall potential for default and increases the bond investors' assurance of repayment. By grouping their often relatively small individual infrastructure needs, municipalities can attract private capital and obtain affordable interest rates, while at the same time reducing the risk to investors. The borrowers (municipalities) also benefit from economies of scale related to marketing, origination and monitoring costs. This financing model is gaining attention as an effective way to substantially increase the amount of capital available, reduce the cost for borrowed funds and develop local capital markets.

• In India , the United States and the Government of Karnataka signed a financing agreement that provides access to clean water to 1.2 million residents living in eight towns around Bangalore . The agreement established the use of a partial credit guarantee from USAID to help the “pooled” municipalities issue a bond on the local capital market. The pooled financing structure was developed by USAID to support smaller municipalities' ability to access private capital from debt markets and to attract private investment to water and sanitation projects. Funds raised by the bond issuance are financing water and sanitation infrastructure projects as part of a major $150 million water and sanitation public works project for the area.

The U.S. Clean Water State Revolving Fund

The U.S. Clean Water State Revolving Fund (SRF) is receiving international attention for its particular effectiveness in attracting private financing to critically-needed drinking water and wastewater projects. The SRF model was created as a sustainable financing mechanism to pay for infrastructure projects. SRFs leverage public funds to raise private capital in U.S. capital markets. The model is now recognized as a leading vehicle for international donor agencies and nations to consider replicating, in part, due to the following beneficial factors :

• By providing low-cost financing for water and sanitation projects, small and mid-sized municipalities can access domestic capital from the local financial market rather than rely on public funds and subsidies.
• By expanding access to capital, SRFs can provide investors with greater investment opportunities, strengthening the development of local capital markets.
• By enabling municipalities to obtain commercial financing, at lower rates, the number of projects implemented may increase. USAID credit guarantees already being used under the model partially guarantee repayment of bonds from a local revolving fund to municipal entities.