Interactive Discussion on Water

Thank you for your kind introduction. I’m happy to be here and have the opportunity to share some of our experiences in mobilizing private-sector funds for a resource such as water. I would like to thank the United Nations Economic and Social Council, the Commission on Sustainable Development, and Chairman Brende for organizing and hosting this forum.

We all know that access to financing from the private sector is crucial to providing water and sanitation services. Simply put, without a reliable and steady infusion of private capital into bankable infrastructure projects there will not be enough money. And without a concerted and sustained effort to strengthen the planning and financing skills of public authorities this will never happen. We all understand the health and political consequences of inaction on all these fronts.

Currently, developing countries spend about $75 billion a year for these services. Nearly 70% of the funds come from the public sector through taxes and fees, but only 5% comes from private investments. This latter number is incredibly low. Making up this deficit should be our primary goal.

Banks and other private financial institutions like insurance companies and more and more pension funds in developing countries have billions in liquid assets such as cash and government debt. Some of this money could be profitably invested in infrastructure projects. These banks must be convinced that they can prudently lend that capital to new areas and provide higher levels of credit to both private-sector borrowers and local governments.

The banks’ financial and operational resources are a valuable source for establishing local and sustainable access to credit. These resources just need to be more actively engaged at the local level. By doing so, the private sector is investing in local development, which can reduce or potentially eliminate the reliance on a growing level of ODA or lending from multi-lateral institutions.

Bank lending coupled with a concerted effort to establish or broaden properly functioning capital markets should be high on our list of priorities if we hope to increase financing options for water and sanitation in the developing world.

Let me describe one mechanism we developed 5 years ago to do just that. The Development Credit Authority -- or DCA, as the credit guarantee facility is known, enables USAID to offer local banks and financial institutions partial guarantees to stimulate the availability of credit to areas and sectors where it is typically inaccessible. By guaranteeing 50% of the lender’s risk, USAID creates an opportunity for lenders to develop and use their own resources to perform thorough due diligence, properly screen borrowers, and carefully oversee the projects they have financed. We have a double return on our investments in this regard. We leverage their money and their management and focus both on the needs of large underserved populations in the developing world. This is, in our mind, a fully functioning public-private partnership.

Loan guarantees are not enough to stimulate development of a broader capital market. They can, however, be very effective as part of a larger effort, along with policy and regulatory reforms, to create an enabling environment that can substantially improve the banking sector. Local banks and financial institutions, for example, often require guidance to improve their capacity to assess and manage risk in preparation for lending to new sectors. As USAID’s Administrator Andrew Natsios recently commented, “[W]orking with new partners in the private sector and marrying our talents with the energy, creativity and expertise of the private sector -- is what animates our Development Credit Authority.”

At the end of the day, the proof of success for any financial or technical support is whether sufficient local capacity has been developed to provide similar assistance once external aid is gone. Countries must, on their own, be able to attract the trade and investment needed in order for development to have any lasting effect.

These approaches can work. Since September 2002, USAID has signed 55 guarantee agreements mobilizing over $488 million in new loans, and $136 million for loans targeted specifically to the water and sanitation sector. Remember this isn’t official development assistance; this is domestic private-sector capital being invested in country! The official development assistance cost is the 50% guarantee. As a result, there is huge potential to leverage local resources.

As lenders earn profits from new loans and expand their capacity to conduct due diligence and evaluate risk, USAID expects them to continue making similar loans without the need for donor credit support.

Another approach we are taking is to foster the capacity of countries to develop public-private partnerships, where appropriate, that balance the interests of private investors and the needs of government. In South Africa, for example, we established the Municipal Infrastructure Investment Unit -- or MIIU -- to provide technical assistance to medium and small municipalities. As a part of its activities, MIIU conducts feasibility studies and detailed financial viability assessments of infrastructure projects such as water and sanitation system development.

Through MIIU, USAID recently established a $17.5 million guarantee facility that will offer credit enhancement on debt issued for projects evaluated and developed by MIIU. The first project in the pipeline is a significant private investment in water and sewer infrastructure for a major township. The combination of the U.S. Government’s credit enhancement and MIIU’s technical assistance enables municipalities to obtain bank financing for the first time.

There is another component in mobilizing resources -- sound business practices and cost recovery, in other words, creating projects that are good investments. In Egypt, USAID has been working for several years with municipalities and utilities to improve their transparency and financial record-keeping, as well as to devise important policy reforms that will allow for cost-recovery tariffs and service provision by private-sector companies.

To complement these efforts and get banks to finance new projects, USAID has loan guarantees with two leading commercial banks. These guarantees are for a portfolio of loans to private-sector service providers that will cover everything from the repair and upgrading of pipe infrastructure, to improved metering, collection services, and additional sewage evacuation vehicles. Private companies will be able to obtain firm contracts with local utilities, and banks will be able to consider loan requests based on the expected revenues from these contracts.

The powerful combination of policy reform, improved transparency, and partial loan guarantees can provide the appropriate information for financial institutions to use when considering new water and sanitation finance requests. As USAID’s mission director in Egypt put it recently, “This is the first time we have used the DCA mechanism in Egypt, but we are optimistic that successes in this area will lead to new partnerships in the future that will put DCA loans in the hands of more Egyptian business people.”

As I said before, our goal is to get the private wealth in developing countries invested in local development. The risks are reduced, and the process itself strengthens local capital markets -- building a financing infrastructure that can sustain itself. To get this process going, capacity building among project developers and planners, bankers, and government policy and regulatory officials is essential -- as is the small amount of resources needed to support investment in the water sector.

Our experience has demonstrated that through the combined efforts of developed and developing country governments at all levels, working with the private sector and other relevant stakeholders, we can make a substantive and lasting impact in the water and sanitation sectors. Although we have made good progress in the year and a half since WSSD, there is much more that needs to be accomplished. Over the next eight days, and beyond CSD-12, we look forward to discussing ideas with you and working with other donors to break new ground in financing water and sanitation in the developing world. Together we will make a difference. Thank you.