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Public Services International Research Unit (PSIRU) www.psiru.org

WATER FINANCE A DISCUSSION NOTE

by David Hall [email protected], University of reen!ich

"his #a#er !as co$$issioned by Public Services International %PSI&'orld Social (oru$ Delhi)*u$bai +anuary --

Public Services International Research Unit (PSIRU)Email:[email protected]: www.psiru.orgSchool of Coputing an! "atheatics# Universit$ of %reenwich# Par& Row# 'on!on S* +'S U.,.

Tel: -/(*)0*1/22/++22 Fax: - (*)0*1/22/13345irector: 5avi! 6all Researchers: ,ate 7a$liss# Steve 5avies# Robin !e la "otte# 8ane 'ethbri!ge# anuele 'obina#

Steve 9hoas# Sa WeinsteinPSIRUs research is publishe! on its website#www.psiru.org. It is centre! aroun! the aintenance of an e;tensive

!atabase of inforation on the econoic# political# financial# social an! technical e;perience with privatisation an!
mailto:[email protected]:[email protected]:[email protected]://www.psiru.org/http://www.psiru.org/http://www.psiru.org/mailto:[email protected]:[email protected]://www.psiru.org/http://www.psiru.org/

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PSIRU University of Greenwich www.sir!.or"

WATER FINANCE A DISCUSSION NOTE...............................................................................#

PREFACE $% &ANS ENGE'$ERTS( PSI..................................................................................)

# INTRODUCTION...........................................................................................................*

) TOP DOWN G'O$A' APPROAC&+ CA,DESSUS( T&E WOR'D $AN- AND T&E ,U'TINATIONA'S...........*

* FINANCE FRO, T&E $OTTO, UP.....................................................................................

/.0 12""2*UP3SS4SS*45"S6 3P3R"I7IP3"2R83PPR237H"2(I53574.....................................................................a. 2bjectives, finance and other $easures ............................................................................................................

3.1.1 Financing Cities: some considerations..............................................................................................................5

/. P38*45""HR2UH7H3R4S2R"394S: "H4ISSU42(7R2SS;SU1SID8...............................................................35D>273>"393"I25...............................................................................................................................?/. S"RU7"UR4S35D73P37I"86 72**U5I"I4S35DPU1>I73U"H2RI"I4S...................................................................?

3.4.1 Faisalabad: micro-financed community water and sanitation............................................................ ......... ....6

RAISING IN/EST,ENT FINANCE........................................................................................0

c. Sources of finance for invest$ent.....................................................................................................................

.0 SURP>US2(2P4R3"I25S...........................................................................................................................................A. >273>73PI"3>35D>273>2B4R5*45"(I53574................................................................................................A

4.2.1 Amedabad: local go!ernment munici"al bonds.......................................................................................... ....#4.2.2 $ailand..............................................................................................................................................................#

./ 53"I253>12DI4S35D'3"4R135CS.....................................................................................................................4.3.1 %ederlandse &atersca"sban' .........................................................................................................................(

. 72RP2R3"IS4D'3"4R3U"H2RI"I4S.......................................................................................................................0-.< I5"4R53"I253>(I53574.........................................................................................................................................0-

4.5.1 )eneral considerations....................................................................................................................................1*

4.5.2 +e!elo"ment ban's...........................................................................................................................................1*

4.5.3 ,nternational bonds..........................................................................................................................................1*d. *unici#al bonds !ith international credit ratings, --/ %transition and develo#ing countries&.......................00

4.5.4 ,nternational commercial finance: intermediate mecanisms .............................................................. ......11

1 CO,,ENTS AND CONC'USION.......................................................................................##

NOTES.....................................................................................................................#)

Pref2ce 3y &2ns En"e43erts( PSI

"he issue of financing !ater services : and other #ublic services such as energy, healthcare, education : is atthe core of the debate on #rivatisation and co$$ercialisation. "hose in favour of #rivatisation %orliberalisation& contend that the #ublic sector cannot afford to finance these services, that this is a job bestdone by the #rivate sector.

"his is a s$okescreen, both to li$it the role of the govern$ent and to #lace #ublic services under the controlof $arkets and o#en the$ u# to for;#rofit %and often $ultinational& cor#orations. 2ne need just look to theErestructuringF of IraG to see this $odel in its $ost e=tre$e for$.

In the !ater sector, this $odel is not !orking. "he $arket is not an a##ro#riate $echanis$ for ensuring thehu$an right to !ater. "he #rofit $otive does not ensure either better and $ore efficient services nor a $oreeGuitable access, es#ecially for the #oor. "i$e and again, the #ublic sector is called in to guarantee cor#orate

#rofits and to assu$e cor#orate risks. 3nd unless the 'orld 1ank can create $ore cor#orate safety nets !iththe #ublic $oney it $anages, the $ajor !ater cor#orations say that they !ill no longer invest $oney indevelo#ing countries.

"his discussion note is an atte$#t to clear so$e of the s$oke around the issue of financing. 2ne thing is

clear6 !ater services, !hether #ublic or #rivate, $ust be #aid for. 3lthough !ater is EfreeF, its treat$ent anddistribution cost, and $ust be #aid for. In this note, the PSIRU tea$ revie!s so$e of the financing $odelsand assesses their relevance to the current debate in the !ater sector.

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*uch $ore !ork $ust be done to develo# EalternativeF financing $odels %assu$ing that the central $odel isthe one advanced by the 1ank and the cor#orations&. "his !ork !ill include solid critical research todeter$ine the li$its and #ossibilities of various $odels. 1ut a big #iece of the !ork is advocacy : unions,co$$unity grou#s, #ublic utility $anagers and #oliticians $ust be $uch $ore aggressive in de$anding thatfinancing of ne! infrastructure not eGuate !ith #rivatisation and co$$ercialisation of #ublic services.

3nd advocates of the hu$an right to !ater $ust continue to $onitor the trade agree$ents such as the 3"S,!hich are being used to restrict the ca#acities of govern$ents and to entrench cor#orate control of #ublicservices.

PSI and its affiliated unions around the !orld !ill continue to !ork !ith co$$unity grou#s, 52s, utility$anagers and #oliticians to defend Guality #ublic !ater services.

Hans 4ngelbertsPSI eneral Secretary

# Intro7!ction

"his #a#er e=a$ines issues of financing !ater su##ly and sanitation syste$s, including6

; 3 critiGue of the Eto# do!nF a##roach to !ater finance of the 'orld 1ank, the 7a$dessus re#ort,and the !ater $ultinationals

; Pro#osing a different a##roach, based on a #artici#atory, Ebotto$ u#F, local assess$ent of needs, andof the best $eans available for fulfilling the$

; a discussion of different $ethods of raising invest$ent finance for #ublicly run !ater syste$s

It does not atte$#t to identify a single best $ethod of financing, but to indicate so$e of the #ossibilities!hich are available, together !ith actual e=a$#les of these o#tions in #ractice.

) To 7own "4o324 2ro2ch+ C287ess!s( the Wor47 $2n9 2n7 the8!4tin2tion24s

"he key objective of international co$#anies and investors is al!ays to $ake a good and secure return onca#ital, even in a vital service like !ater and sanitation. 3s a result, issues of #rotection fro$ risks, #rofitguarantees and global sources of finance are of central i$#ortance : the co$$ercial venture seeks #rotectionfro$ all for$s of uncertainty. (or #ublic service !ater and sanitation, a financial return on invest$ent is acost associated !ith loan finance, not an objective.

"his a##roach is visible in the leading institutionsF a##roach to !ater finance. "he 7a$dessus re#ort on

!ater finance to the /rd'orld 'ater (oru$ at Cyoto in --/0offered bold large figures of the scale ofinvest$ents needed in !ater, globally6 "his re#ort, and its background #a#ers, indicated that additionalannual invest$ent of c. 0-- bn. !as reGuired in all branches of the !ater sector. *ore should be done atthe country and basin level to identify financial resources and invest$ent needs and #rovide incentives toencourage this finance...J It !ent on to reco$$end a nu$ber of devices for reducing the risks e=#erienced

by #rivate !ater o#erators, in order to encourage their activities.

"he 'orld 1ankFs !ater strategy has already introduced $echanis$s !hich follo! the 7a$dessusreco$$endations. "hese include develo#ing guarantee $echanis$s against #olitical risks, #rotection againstcurrency risks, and even structuring $unici#al bond finances so that they su##ort #rivate sectorinvolve$ent. "his e$#hasis on reducing #olitical risks for #rivate investors !as already #resent in the'1Fs strategy on urban and local govern$ent assistance in 0,/!hich stated6 (or #ublic;#rivate

#artnershi# arrange$ents such as $unici#al service concessions, one #erceived source of local #olitical risk$ight be the $unici#alityFs continued role as su##lier or taker, regulator, lando!ner, or source of subsidy. Inth 1 k t li it d i j ti f th 1 kK i t d l di ld iti t

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the $unici#al risk and hel# raise #rivate ca#ital... LLI(7 can also #artici#ate in ca#ital $arket develo#$ent,including institution building and s#ecial risk $itigation o#erations benefiting #rivate investors.J

"his reassurance and re$oval of risk reflects #recisely the recent concerns of the !ater $ultinationals6 the#lea by S3UR for 'orld 1ank guaranteesM the insistence by SueN on a secure and high rate of returnM and thesearch by "ha$es for $echanis$s !hich reduce #olitical risk.

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"here are also non;financial $easures !hich $ay be as i$#ortant, or $ore so. "he illegal status of #eri;urban settle$ents $ay be a $ore funda$ental barrier to connection to !ater su##lies than lack of ca#italfinanceM i$#roving the $ethod for collecting !ater charges $ay be a si$#le !ay of reducing the costs of!ater to usersM reducing leakage, or reducing consu$#tion, $ay be better !ays of dealing !ith !atershortage than building a ne! reservoir.

7a#ital invest$ent is not necessarily the best solution, even !here it is #ossible. "he notes on Efinancing

citiesF highlight so$e !ays in !hich s#ending #ro#osals can distort #riorities, by leading to invest$ents!hich have little benefit to the #oor.

*.#.# Fin2ncin" Cities+ so8e consi7er2tions

*ore effective revenue collection %such as revaluing #ro#erty or enforce$ent& could increase resources

significantly. 4=e$#ting lo! value #ro#erties and infor$al sector businesses !ould $ini$ise the ta=burden on the #oor.

3ccess to loans $ay enable cities to undertake ca#ital invest$ent, but can distort choices. "he gro!ing

bond $arket has encouraged 1angalore to undertake E$ega;#rojectsF that have little benefit for the #oor,often forcing the$ out and under$ining fragile econo$ic and social relationshi#s. In +ohannesburg, theneed to re;establish credit !orthiness !as the driving force behind the restructuring #rogra$$e and

e=#enditure cuts in the late 0-s. Resources need to be distributed eGuitably throughout the city. Devolving so$e funds to the

neighbourhood level can bring decisions about resource use closer to the #oor.

3 rea##raisal is needed of !ho benefits fro$ e=#enditures. Reorienting e=#enditure #atterns fro$ high

standards that benefit a fe! to serving the $ajority !ho are #oor reGuires a radical change in officialattitudes.

'hile the e=ecutive needs to $aintain control over a cityKs budget and use of resources, greater

trans#arency is essential to counteract corru#tion and clientelistic #o!er relationshi#s and to strengthenthe influence of the #oor through !ard councillors.

%e=tracted fro$ IDS Insights Issue O/A 5ove$ber --0 by 5ick Devas&A

*.) P2y8ent thro!"h ch2r"es or t2;es the iss!e of cross

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*.* Centr24 2n7 4oc24 t2;2tion

Historically central govern$ents have #layed a big role in financing !ater syste$s. "his has so$eti$esinvolved #aying directly for the !ater su##ly service as a !hole, so that there is virtually no role for charges%eg Ireland&M distributing so$e #art of central ta= revenue to su##ort local authority s#ending on !ater andother services %eg 7anada&M #roviding chea# loan finance for local authorities to use for ca#ital invest$ent%eg US3&M or collecting so$e #art of !ater charges centrally and redistributing it to authorities !hich need toinvest %eg (rance&.

"he great advantage of using central govern$ent financing is that it enables the greatest redistribution, bydra!ing on ta=es #aid by everybody in the country and directing it !here it is $ost needed. "he #oorer the

#o#ulation of a co$$unity, the $ore they need finance fro$ a source !hich can dra! on richerco$$unities.

"he disadvantage is the lack of local control over this revenue6 central govern$ent $ay cut back on thea$ount it is #re#ared to s#end on !ater, and so local co$$unities $ay de#end on decisions $ade at levelsthey cannot easily influence.

In $any countries !ater and se!erage have been local govern$ent services financed, like other services, out

of local ta=ation, such as a for$ of #ro#erty ta=. 4ven !here there is a se#arate charge for !ater, this charge$ay effectively be a #ro#erty ta= in countries !here $ost ho$es are not $etered : e.g. the UC or 7anada.

*. Str!ct!res 2n7 c22city+ co88!nities 2n7 !34ic 2!thorities

3tte$#ts to #rovide i$#roved services for the #oor are often Eco$$unity;basedF, through an organisation!hich is not a $unici#ality or any other state institution, but $ay be a coo#erative, a voluntaryneighbourhood association, or so$e other for$ of 52. "he argu$ents in favour of co$$unity)52

based !ater services is that they avoid #roble$s e=#erienced !ith state organisations, including inefficientand)or corru#t bureaucracies, self;serving #oliticians and bureaucrats, and lack of trans#arency andaccountability %though co$$unity leaders too $ay so$eti$es e=hibit these #roble$s&.

"here are a nu$ber of cases of local co$$unities develo#ing a self;hel# a##roach to e=tending !ater

syste$s, es#ecially in #eri;urban areas6 one such case is (aisalabad %Pakistan& : see bo= belo!.

3 co$$unity ho!ever has $ore li$ited financial #o!ers than a $unici#ality or local govern$ent. It canonly develo# !ater or other urban services on the basis of the ability to #ay of the actual or #otential users.'ithout #o!ers of ta=ation, it !ill not be able to rely on the resources of #eo#le other than the users. Itsability to borro! !ill be li$ited by the inco$e fro$ users, and it !ill al$ost certainly be unable to issue

bonds or take long;ter$ loans ; there are fe! coo#eratives !hose di$ension allo!s the$ to access long ter$invest$ent finance at good ter$s and conditions6 one of these is S3U3P37 in Santa 7ruN, 1olivia.0-

7o$$unities have the further disadvantage of not being able to e$#loy a significant nu$ber of staff eitherto carry out services or to #rovide #rofessional advice %for e=a$#le, in (aisalabad the co$$unity could notrecruit and retain Gualified engineers&.

*..# F2is242327+ 8icro

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successful that a se!erage sche$e for the !hole of Carachi !as revised to use the sa$e a##roach6 an earlier#lan to use an e=#ensive loan fro$ the 3sian Develo#$ent 1ank %31D& !as cancelled."he 3S1 undertook a survey to docu$ent and $a# e=isting !ater and se!erage facilities in the areas in andaround Dhuddi!alla. "he 2PP itself lent Rs 0--,--- fro$ !hich $icro;loans !ere $ade households and

businesses to construct their o!n local se!erage and !ater connections in the lanes of the settle$ents, andre#ay the loans6 the re#ay$ent rate has been over AA. 'hen '3S3 said it could not $ake the connectionto !ater $ains for so$e years, the 3S1 took res#onsibility by creating a local !ater services co$$ittee%'S7&, raising a Rs --,--- loan %fro$ 'ateraid&, constructing the connection itself %illegally& andundertaking to collect user fees fro$ households. Households #ay both the 'S7 and '3S3 !hen they areconnected. So$e households refused to #ay connection charges, but both '3S3 and the 'S7 took legalaction to disconnect the$ and force the$ to #ay charges to both 'S7 and '3S3. 3 si$ilar #rocess ofraising a loan fro$ 'ateraid and issuing $icro;credit !as used to develo# local se!erage links. 3S1 haseffectively beco$e a #rovider of se!er $aintenance services, substituting itself for '3S3 in this res#ect. Ithas bought eGui#$ent for unblocking se!ers, and a truck, !ith grants fro$ 'ateraid.

"he #roject has turned do!n funding offers fro$ other donors including the 7anadian 7ID3 in order toavoid #ressure fro$ big financiers. It has also declined finding fro$ the Social 3ction Progra$$e %S3P& of

the govern$ent of Pakistan, and convinced the $unici#ality not to invest in !ater su##ly or se!erage at thelane level but to s#end their funds on building collector se!ers and #aving the lanes !here !ater su##ly andse!age lines have been co$#leted. "he 3S1 has tried but failed to recruit and retain #rofessional engineers.It is heavily reliant on the #ersonality and drive of one leader. 3lthough international donors have co$e tooffer su##ort, this has rarely been acce#ted, lest it co$#ro$ise 3S1Fs belief that develo#$ent should bedictated by the co$$it$ents, #riorities and $eans of local inhabitants.00

"he #olitical conte=t of (aisalabad is significant. "he (aisalabad Develo#$ent 3uthority %(D3& is the $ain#olicy;$aking body but is not elected and is funded fro$ central govern$entM the !ater and sanitationauthority %'3S3& is under the direction of the (D3 but has irregular funding and very #oor collection of!ater and sanaitation fees. "he (aisalabad *unici#al 7or#oration is an elected local authority, but has noeffective #o!er over the actions of the (D3, no reliable inco$e fro$ the #rovincial govern$ent, and also

fails to collect its o!n ta=es efficiently. Individual #oliticians are an i$#ortant channel of finance, becausethe govern$ent gives grants;in;aidJ to each national and #rovincial asse$bly $e$ber to s#end on theirlocalities, !ith no coordination. 5eighbourhoods often take the initiative in trying to develo# !ater andsanitation sche$es, and seek funding fro$ the #oliticians. 3s a result local se!ers and drains are often notconnected to nearby '3S3 $ains se!ers. "he 3S1 does not alter these #olitical and financial syste$s, but

#rovides an initiative !hich delivers services !ithin these syste$s.

%PSIRU su$$ary based on E"he !ork of the 3nju$an Sa$aji 1ehbood and the larger (aisalabad conte=t,PakistanF, Poverty Reduction in Urban 3reas Series, 'orking Pa#er , International Institute for4nviron$ent and Develo#$ent, by Sali$ 3li$uddin, 3rif Hasan and 3siya SadiG, Dece$ber --0.& 0

R2isin" invest8ent fin2nce"here is no single EcorrectF source of finance for invest$ent. It !ill de#end strongly on local conditions,including the financial health of the !ater o#eration, the Guality of de$ocratic institutions, on the state oflocal and central govern$ent finance, on the state of a local ca#ital $arket, etc.

"he sources of invest$ent finance can be set out fairly si$#ly. 4ither it is generated by the o#eration itselfrunning a sur#lus, or it is given by so$e agency, or it has to be borro!ed in so$e !ay fro$ investors.*oney can be borro!ed for$ inside the country, or internationally. "he table sets out these o#tions.

c. So!rces of fin2nce for invest8ent

Source of funds Domestic (inside country) International

Sur#lus of o#erations 'ater o#erator ;rants overn$ent, national funds 3id agencies, charities

>oans Do$estic banks International banks develo#$ent banks

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1onds Do$estic bonds International bonds

.# S!r4!s of oer2tions

"he si$#lest source is for the !ater authority itself to finance invest$ent out of a sur#lus. "his $eansraising inco$e above the levels reGuired just to #ay o#erating costs and debt service, so that there is e=tracash !hich can be invested. Using sur#luses in this !ay avoids borro!ing costs. Ho!ever, !ater syste$s

are so ca#ital intensive that it !ould reGuire large sur#luses %and high tariffs& to finance all invest$ents outof o#erating sur#luses. 1orro!ing $oney has the advantage of s#reading the cost across a nu$ber of years.

.) 'oc24 c2it24 2n7 4oc24 "overn8ent fin2nce

*oney can be borro!ed !ithin a country, fro$ banks or fro$ a local ca#ital $arket !here savings areinvested. "his is the traditional for$ of borro!ing for local govern$ent services throughout the !orld. 2neadvantage of using local ca#ital $arkets is that there is no risk fro$ currency devaluation. "he $oney isleant and re#aid in local currency, and #aid for out of charges %or ta=es& collected in the sa$e currency. 3second advantage is that it is not subject to conditionalities i$#osed by e=ternal lenders, es#ecially bydevelo#$ent banks. >ocal authorities or !ater co$#anies !ill still have to satisfy local investors that theyare good credit risks, and !ill re#ay the loans on schedule.

"he a$ount of $oney that can be borro!ed fro$ local sources varies bet!een countries. It $ay ho!ever be#ossible to borro! local savings for invest$ent in #ublic infrastructure such as !ater even in lo! inco$ecountries. 2ne e=a$#le of this is the develo#$ent of $unici#al bonds in India, led by the city of 3h$edabad%see bo= belo!&.

.).# Ah8e72327+ 4oc24 "overn8ent 8!nici24 3on7s

In the $id;0-s 3h$edabad *unici#al 7or#oration %3*7& !as in financial deficit, but needed to carry out$ajor i$#rove$ents to services, es#ecially invest$ent in !ater and sanitation infrastructure. It set about a

#rogra$$e of increasing the efficiency of its ta= collection. "he $ain source of revenue !as fro$ anEoctroiF ta= levied on i$#orts into the city6 3*7 u#dated the rates of ta=, e$#loyed e=tra collectors, sta$#edout corru#tion : and as a result increased the a$ount of $oney collected by ?-. 'ithin #ro#erty ta=es, the

ne=t $ajor source of revenue, the council created a co$#uterised database, i$#osed sanctions on #eo#le !ho!ere not #aying, and strengthened the collection staff : and ta= collected increased by

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for "hailand local govern$ents 1ut it is necessary to design local fiscal syste$s... to $eet $andatorycondition of a relatively !ell;develo#ed financial $arket to have a #rudent local financial syste$.J "hefinancial sector in "hailand is so#histicated and !ell develo#ed to international standards in $any as#ects.but local bond financing in "hailand today does not e=ist. "here is lack of a!areness of the benefits of

bond financing a$ong local govern$ent #eo#le. Ho!ever, if there is uncontrollable access to ca#ital$arkets and $is$anage$ent of budgets by local govern$ent, it could jeo#ardiNe stability on the nationalecono$y. (or this reason, local budget in "hailand is subjected to tight central control and $onitoring.Such rule $ay, on other hand, hel# to enhance credit!orthiness of local govern$ent, yet it can also render toinfle=ibility or negative incentive for local bond $arket develo#$ent.J Historically borro!ing by localgovern$ent has been restricted6 "he only source of funds for local borro!ing is fro$ local trust fund,essentially the local govern$entFs saving !hich is i$#osed by the la!. "he second #roble$ that ha$#erslocal govern$ent fro$ borro!ing is lack of local financial $anage$ent ca#acity. 3t the funda$ental level,local govern$ents in "hailand have !eak accounting and budgeting #ractices. In "hailand a regional fundhas been set u# to develo# > ca#acity for borro!ing 6 the overn$ent Savings 1ank, !ith su##ort fro$ the'orld 1ank created the Regional Urban Develo#$ent (und %RUD(& as a revolving fund for local borro!inges#ecially for $unici#alities. "he siNe of the fund !as set at /- $illion US to s#end on loan #rojects of lessthan 0< years. 3s #art of establish$ent the RUD(, considerable technical assistance !as #rovided tostrengthen local govern$entFs ca#abilities in #re#aring and $anaging #rojects, financial re#orting, and

enhancing local accountability.

.* N2tion24 3o7ies 2n7 w2ter 32n9s

2rganisations !hich are o!ned or su##orted by govern$ents, such as nationalised industries or banks, alsoborro! $oney. "he su##ort of the govern$ent is a crucial factor for their credit ratings, as it reassuresinvestors that the $oney !ill be re#aid by so$eone, and so the credit rating agencies see #ublic o!nershi# asa #ositive virtue.

"hese include #ublic sector financial agencies !hich are dedicated to #roviding loan finance for $unici#alinvestors. "he outstanding e=a$#le of such an agency, dedicated to funding invest$ent by !ater o#erators,is the Dutch !ater bank, 5ederlandse 'aterscha#sbank %5'1&. 5'1 receives the highest #ossibleinternational credit rating fro$ S P %see bo=&. 3n e=a$#le fro$ a develo#ing country is the >ocal 'ater

Utilities 3d$inistration, !hich acts as develo#$ent bank, technical su##ort agency and infor$al regulator inthe Phili##ines, !hich hel#s the #ositive #erfor$ance of the Phili##ine 'ater Districts. 0/

State financial institutions $ay #rovide loan finance $ore generally to local govern$ents. So$e of thesehave international credit ratings, for e=a$#le the +a#an (inance 7or#. for *unici#al 4nter#rises %+(*&. 2rthe state $ay o!n a develo#$ent bank !hich has the re$it to #rovide lo!;cost invest$ents in order todevelo# the national econo$y. 2ne such e=a$#le is the 1raNilian 1anco 5acional de Desenvolvi$ento4cono$ico e Social %15D4S&, !hich has an international credit rating.

.*.# Ne7er42n7se W2tersch2s32n9

Ratings 7o$$entary fro$ Standard 3nd PoorFs Eovern$ent;Su##orted 4nter#rises S#ecial 4dition --/F5ederlandse 'aterscha#sbank 5.B. 54"H4R>35DS 7redit Rating 6 333)Stable)3;0T

"he ratings on 5ederlandse 'aterscha#sbank 5.B. %5'1& are based u#on the i$#licit su##ort that the bankreceives fro$ the *inistry of (inance %*2(&. "he ratings on 5'1 are also su##orted by the bankFseffectively Nero credit risk %as a result of its strict #ublic;sector lending re$it&, strong ca#ital ratios, ane=ce#tionally lo! cost base, and stable $anage$ent. 3ccording to 5'1Fs articles of association, the bankcannot lend to nor be o!ned by the #rivate sector. "he $ajority of lending is to housing associations,$unici#alities, and !ater control boards. "he bank also acts as a central treasury for the !ater control

boards. 3lthough 5'1 has co$$ercial inde#endence, central govern$ent su##ort is indicated by the bankFsshareholders, !hich are all #ublic;sector entities, !ith the central govern$ent holding 0M !ater control

boards holding A0M and #rovinces holding . "he loan #ortfolio is e=tre$ely lo! risk, and is $ade u# of

credits to Dutch #ublic authorities and li$ited;liability #ublic utilities. 5'1 has never suffered a loan loss,!ith the bankFs very conservative credit culture effectively leaving it i$$une to credit cycles. .. "he

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$arket for #ublic;sector lending is a lo! $argin business, but 5'1 is !ell #laced as a lo!;cost, niche#layer !ith a strong #ublic;#olicy function...0

. Coror2tise7 w2ter 2!thorities

So$e !ater o#erators re$ain 0-- o!ned and controlled by the #ublic sector, but have a greater degree ofautono$y, like a !holly o!ned co$#any rather than a $unici#al de#art$ent. Such a cor#oratised !ater

o#erator $ay then use its o!n revenues as the basis for borro!ing directly, !ithout going through localauthorities. "his is done by a nu$ber of 4uro#ean $unici#ally o!ned !ater co$#anies6 Stockhol$ Battenfor e=a$#le borro!s $oney itself, and even obtains lo!er interest rates than Stockhol$ 7ity council.

"his kind of cor#oratised entity also e=ists in a nu$ber of develo#ing countries. In at least one case, 4$caliin 7olo$bia, the cor#oration concerned obtained an international credit rating %though 4$cali !assubseGuently under$ined by energy liberalisation, and #ut under great #ressure to be #rivatised&.

In so$e countries !ater o#erators are o!ned by national govern$ents, as o##osed to local govern$ent, andthen the i$#lied su##ort of the national govern$ent beco$es i$#ortant for obtaining loans. In South 3frica,for e=a$#le, although $unici#alities run !ater distribution to households, bulk !ater su##ly is $anaged bylarge regional state;o!ned o#erators. 2ne of these, Rand 'ater, has an international credit rating.

.1 Intern2tion24 fin2nce

.1.# Gener24 consi7er2tions

"here are t!o i$#ortant Guestions to be addressed in considering the role of international finance6

/ (irstly, it is i$#ortant to carry out an assess$ent of !hat invest$ent finance is actually needed, andho! $uch of it can be financed locally, before looking for finance fro$ develo#$ent banks %or anyother international source&. "his assess$ent should be carried out locally and trans#arently, asdevelo#$ent banks, #rivate co$#anies and consultants all have vested interests in $aking the largest

#ossible esti$ates of invest$ent needs.

/ Secondly, international finance by definition co$es fro$ outside the country and so by definition ina foreign currency, invariably the US dollar. "he interest and the loan itself $ust be #aid in dollars,!hereas inco$e fro$ ta=es or !ater charges co$es in local currency. If this currency falls againstthe dollar, then the cost of the loan $ay beco$e unaffordably high.

.1.) Deve4o8ent 32n9s

Develo#$ent banks should be the $ain source of international finance for #ublic infrastructure invest$ent."his is a key role of a develo#$ent bank, and the advantage is that $oney is available at $uch better ter$sthan the #ublic authority could obtain for itself. Proble$s arise, ho!ever, because the banks $ay a##lyconditionalities reGuiring #rivate sector involve$ent, and the loan $ay be used as !ay to i$#ose #olicies!hich da$age #ublic services. Des#ite this, the develo#$ent banks all continue to lend to #ublic sector

bodies, and the conditionalities a##lied vary considerably.

.1.* Intern2tion24 3on7s

1onds are issued on the international $oney $arkets by $ost govern$ents. 1onds are also issuedinternationally, not only by $unici#alities in develo#ed countries, but by so$e local govern$ents intransition and develo#ing countries too.

Standard and PoorFs s#ecify the factors they take into account for credit rating local govern$ents. 0

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(e! $unici#alities in develo#ing countries have obtained international credit ratings %e=ce#t for *e=ico&."he $ajority are in eastern 4uro#e. "he table belo! e=cludes / cities in 3rgentina !hich no! have aEDefaultF credit rating.

7. ,!nici24 3on7s with intern2tion24 cre7itr2tin"s( )55* @tr2nsition 2n7 7eve4oin"

co!ntriesLocal currency oreign currency

Colombia ogota )Capital .istrict of Santa e de* -/$egative/0 /$egative/0

Korea Seoul )"etropolitan City 1overnment* '2/Stable/'-3 '-/Stable/'-4

%aegu )"etropolitan City 1overnment* 2/5atch 2/5atch

Bulgaria Sofia )City of* /Stable/0 /Stable/0

Croatia 6agreb )City of* /Stable/0 /Stable/0

Cech !epublic rno )City of* '-/Stable/'-4 '-/Stable/'-4

!lomouc )City of* '-/Stable/'-4 '-/Stable/'-4

!strava )City of* '-/Stable/'-4 '-/Stable/'-4

(rague )City of* '-/Stable/'-4 '-/Stable/'-4

"ungary udapest )City of* '/Stable/'-3 '-/Stable/'-4

Latvia Riga /(ositive/'-7 /(ositive/'-7

Lithuania &ilnius -/Stable/0 -/Stable/0#oland ydgos8c8 )City of* -/Stable/0 -/Stable/0

1dans# )City of* -/Stable/0 -/Stable/0

9ra#ow )City of* -/Stable/0 -/Stable/0

Lod8 )City of* -/Stable/0 -/Stable/0

S8c8ecin )City of* -/Stable/0 -/Stable/0

5roclaw )City of* -/Stable/0 -/Stable/0

!ussia ash#ortostan )Republic of* /(ositive/0 /(ositive/0

Cherepovets )City of* Ru 0/0/0

Ir#uts# !blast 0/0/0 -/(ositive/0

9hanty-"ansiys# )'utonomous !#rung of* Ru'' -/Stable/0

"oscow )City of* 0/0/0 /Stable/0

"oscow )!blast of* Ru' -/(ositive/0

Samara !blast 0/0/0 2/Stable/0

St: (etersburg )City of* /Stable/0 /Stable/0

Surgut )City of* Ru'-/Stable /Stable/0Sverdlovs# )Region of* -/(ositive/0 -/(ositive/0

$%raine 9iev )City of* /$egative/0 /$egative/0

ource:Standard and PoorFs E>ocal and Regional overn$ents --/F!!!.standardand#oors.co$0?

.1. Intern2tion24 co88erci24 fin2nce+ inter8e7i2te 8ech2nis8sB

International investors include the !orldFs invest$ent funds, !ith ca#ital looking for the best)highest)$ostsecure return. *ost of this is unlikely to be interested in investing in !ater infrastructure in develo#ingcountries, !hich !ould be #erceived as too risky and not #rofitable enough, although so$e !ater bodies!ith international credit ratings !ill be able to attract such investors. E4thical investorsF $ay be $oreinterested, as the value of the service is a #ositive factor for the$, but !ould still #refer to s#read the risks ofsuch invest$ents. International #rivate ca#ital $ay be $ore interested in investing through Einter$ediatefundsF of various kinds, !hich s#read the risk of the investor, and carry out the s#ecialised function ofassessing the different !ater o#erators or $unici#alities.

1 Co88ents 2n7 conc4!sion

(inancing !ater to $eet the needs of #eo#le does not necessarily reGuire international ca#ital. Poorco$$unities $ay be ca#able of $obilising the necessary resources to construct do$estic e=tensions even ifthe govern$ent, $unici#al and !ater authorities are failing to function. Public !ater services can be $adeaffordable for the #oor through a co$bination of ta=ation, charges, efficient collection $ethods, and cross;subsidy. Invest$ent finance can be raised through loans or bonds issued !ithin the country itself, if basicreGuire$ents for ca#ital $arkets e=ist. overn$ents, and even local govern$ents, are the$selves ca#able ofaccessing international ca#ital if necessary, !ithout the need for #rivate co$#anies. Develo#$ent banks

should have a role to #lay, but that de#ends on !hether it is #ossible to #revent the da$aging effects of#olicy conditionalities.
http://www.standardandpoors.com/http://www.standardandpoors.com/http://www.standardandpoors.com/

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Notes

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07a$dessus, *. %--/&Financing &ater for All - /e"ort of te &orld 0anel on Financing &ater ,nfrastructure. 7hairedby *ichel 7a$dessus. Re#ort !ritten by +a$es 'in#enny. Presented at /rd'orld 'ater (oru$, Cyoto, +a#an, 0?th;/rd*arch --/ htt#6))!!!.!orld!atercouncil.org)do!nload)7a$dessusRe#ort.#df&.Infrastructure 3ction Plan. athtt#6))!bln--0A.!orldbank.org)Urban7alendar)urban.nsf)-)b--a//dcAcaAA

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