Operator Financing

Increasing investment depends on the ability of service providers to generate more cash flow from operations by increasing revenues and reducing costs. Public finance is and will continue to be as the main source of funding WSS investments. In the past years, public investment declined in many countries. Public investment in infrastructure bore a disproportionate share of the burden, as it is one of the few discretionary spending categories of governments.

Private financing in water supply and sanitation has accounted for less than 10 percent of investment in water utilities over the last decade. It also declined in recent years, alongside declines in private flows for other infrastructure sectors. Overseas Development Assistance (ODA) has also been a minor source of funds for developing countries. ODA to the water sector is declining since the middle of the 1990s, although there are some preliminary indications that the trend is being reversed.

The overall ability of governments to leverage funds for investments is a major factor in improving WSS service delivery. It is imperative to find ways to leverage funds from other sources, while steering scarce public funds towards increasing access and maintaining adequate service to the poorest households.

Water supply and sanitation sector priorities can only be achieved if they are integrated into government’s strategic objectives and resources are allocated through the government’s public financing policy. To do this, on accurate, timely, consistent and disaggregated data per local jurisdictions are required.

Traditionally, central governments used their grants to local governments and utilities to bail out poorly performing utilities. In the past decade, however, many governments have managed to change the use of their financing by making their transfers conditional on performance of local governments of utilities. Performance based intergovernmental grants and loans impose a set of obligations upon local governments and on autonomous utilities and stipulate the resources that will be made available as an incentive to fulfill those obligations.

In the WSS sector, private sector involvement in management and private finance are increasingly unbundled. Most new public-private partnership transactions bring the professional competence of the private sector, but bring little or no private financing. On the other hand, some reformed autonomous and accountable public utilities have been able to attract private financing. Development of new transaction models for public-private partnerships and the use of risk mitigation instruments can attract more private finance and management into the water supply and sanitation business. 

However, new approaches for mobilizing private investment need to look beyond operator companies. Pension funds, insurers, banks and other institutional investors such as mutual funds are potentially large sources of funding for WSS projects, if utilities offer more secure long term investment. Again, creditworthiness - starting with generating revenues sufficient to cover recurrent costs - is the key to access to these sources of financing. Creating domestic capital markets is important over the longer term, as limited domestic capital markets obstruct access of utilities to local currency financing in most developing countries.

Donor grants and loans will remain a minor financing source for water infrastructure in developing countries in the coming years. In some instances, debt relief can be looked at as a source of financing for reforms. ODA can only be a supplement to other sources of financing; however it often is a critical in spurring reforms.

The World Bank supports improvd efficiency of public spending on a number of fronts, including:

	Support utilities in financial stress to deal with unmanageable debts, improve financial management, and increase cash flows.
	Promote and support introduction of more incentive based  fiscal transfer systems to local governments and utilities.
	Encourage the design of more hybrid finance schemes as a way to attract private investors with different risk allocation profiles.
	Develop capacity of local governments as more reliable financial stakeholders and increase sub-sovereign creditworthiness.
	Provide direct capital investment to municipalities and other local public entities in the developing world without central government guarantees, through the  Municipal Fund, a combined initiative of the World Bank and the International Finance Corporation.
	Support financing mechanisms to extend services to the poorest segment of the population, through results-based approaches such as  output-based aid.
	Re-focus  risk instruments and guarantees, such as Partial Risk Guarantees for local capital market development.