Access to Finance for Utilities in The Developing World by Mangangole Tskinyane

Access to Finance for Utilities in The Developing World by Mangangole Tskinyane

The national flag of Lesotho

The national flag of Lesotho

Earlier this year we featured an article on the 19 unique challenges that water suppliers and utilities in the developing world face.  In this article we hear directly from our partner utility, the Water and Sewerage Company of Lesotho (WASCO), about their struggles to get access to finance.

Thank you very much WASCO and Ntate Mangangole Tskinyane for this insight into the unique challenge you face. We hope that others can learn from this and that there will be a greater appreciation for the work you do and the service you give to your communities despite the major obstacle you face.

Our founder and President, Peter Macy has been working in Lesotho in the water sector since 2008. Lesotho and its people, the Basotho, is close to his heart. “I feel incredibly blessed to have had the opportunity to work with the people of Lesotho for more than a decade”.

 

Access to Finance for Utilities in The Developing World by Mangangole Tskinyane

As Finance Director for Lesotho’s national water and sanitation utility (Water and Sewerage Company of Lesotho, or WASCO), I have had the benefit of thinking through challenges and financial hardships faced by our utility.  Thanks to ROCKBlue, I was also able to participate in a multi-day workshop, where I had a chance to learn from experts and explore some of the ways in which other utilities have similarly tried to combat the most difficult problem: access to finance for daily operating expenses (OpEx) as well as capital improvements (CapEx). 

All opinions expressed in the following document are my opinions based on the data that I have been able to review as well as my personal perception and observations.

Executive Summary

Like many utilities in the developing world, the Water and Sewerage Company (WASCO) struggles to access sufficient funds to meet its operating expenses, largely due to an inability for much of the population to pay for water and sanitation services, no matter how modest the charges.  This funding shortfall makes it nearly impossible to achieve the goals of the capital investment plans.  WASCO’s challenges are driven by the fact that (1) it does not receive direct financial support, in the form of subsidies, from the government (despite being wholly government owned) and (2) it cannot set its own tariffs for the provision of water and sanitation services.  The Government has made firm commitments to providing funds for necessary capital improvements but has faced its own difficulties given the nature of shifting priorities, and conversations with potential sources of capital have stalled out either due to a lack of confidence in WASCO’s ability to honor its debt service obligations without an external guarantee or due to challenges associated with the introduction of certain instruments (such as corporate bonds).  If WASCO is unable to borrow for its capital projects, though, the citizens of Lesotho, particularly some of its most vulnerable populations, will continue to suffer without access to clean water and improved sanitation.

The context: WASCO’s corporate status within Lesotho
Kingdom of Lesotho

Kingdom of Lesotho

Lesotho, officially known as the Kingdom of Lesotho, is completely surrounded by the territory of another country (the Republic of South Africa).  Lesotho is just over 30,000 km2 (11,583 sq mi) and has a population of around 2 million. Its capital and largest city is Maseru. The official language is Sesotho.  According to the IMF, Lesotho ranks 152 of 185 countries around the world as far as its GDP per capita.

WASCO is a company duly established under the Water and Sewerage Company (Propriety) Limited (Establishment and Vesting) Act, 2010, enacted by the Parliament of Lesotho. It is fully owned by the state, but the company’s Act established the Water and Sewerage Company (Proprietary) Limited and provided for the vesting of the assets, liabilities, rights and obligations of the Water and Sewerage Authority in the company.

Financial flows to WASCO: tariff-setting and the availability of funds

WASCO is unique relative to other utilities because of the peculiarities of government’s involvement. Although it is government-owned, WASCO is expected to be fully self-sustaining and does not enjoy any government subsidy; but, at the same time, it has not been given full autonomy to determine water tariffs as it is regulated by Lesotho Electricity and Water Authority (LEWA). This unique situation poses financial difficulties for WASCO as it is expected to be profitable, yet it cannot set the price of water charged to its customers to achieve that profitability. Effectively, this means that even if operational expenditures are rising due to economic or other factors, if LEWA determines/decides to keep tariffs unchanged, it is upon WASCO to improve its operational efficiency and effectiveness to maintain operational sustainability.

WASCO has a customer base made up of individual households (domestic), government, industries, and charity organisations. Currently, WASCO has a debt book of approximately M140 million (USD7.4 million). About 65 percent of this debt is from domestic households. A debt age analysis of WASCO will reveal that almost 60 percent of the debt book is irrecoverable as it is from poor households who depend on little income to service their debts. On the other hand, even though these debts are likely to be uncollectible, WASCO continues to face mounting operating costs which are unavoidable despite these challenges in revenue collection.

Funding Capital Expenditure: Availability of Financing for WASCO

Government support

To help meet the needs of the population, the Government of Lesotho (GoL) has offered to finance WASCO’s capital expenditure, along with other country priorities, during the country’s budget allocations. A large portion of these funds will be targeted for the expansion of networks or infrastructure to enable distribution of water to the people of Lesotho, hence an increase in WASCO’s customer base. However, due to governmental prioritisation of other pressing matters, these commitments are often not fulfilled, and WASCO often needs to look for external financing.

Domestic market

The financial market in Lesotho comprises banks and financial institutions (e.g. insurance companies, pension funds); these are the main providers of finance in the country and each have different types of finance they offer.

a) Banks

Banks mostly offer balance sheet financing in the form of loans to utilities, but these types of financing are relatively expensive for struggling utilities like WASCO. Being the most preferred type of financing, where banks doubt the ability to pay on the side of the utility, they require government guarantees. Government retains full control over the issuance of a guarantee depending on any other financial responsibilities (contingent liabilities) that may influence its own creditworthiness and financial flows.

b) Financial Institutions

This sector, which largely includes local insurance companies or pension funds, prefers investments where they get predictable, good returns for their investors over a long period of time. They normally invest via corporate bonds issued in the local capital markets but require certain preconditions which WASCO does not meet.

International donors or financiers

Another form of financing comes from donor funders or financiers especially those that are interested in the water sector. This may be in a form of foreign direct investment (FDIs). WASCO as the company, is at liberty to solicit financing from the international financiers but must pursue this with the permission of the Minister in charge of Finance and/or of Water. The funders may offer either loans or grants to the utility. Frequently, despite interest from counterparties, loans under discussion face challenges as the lender expects a government guarantee, which can be difficult to obtain.

Conclusion

Having discussed the financing available to WASCO either locally and/or internationally, it is not easy for the utility to access financing from any of the sources of capital. WASCO’s operating expenditures are financed by the revenue it collects and as discussed there are challenges due to the demographics of the country and the level of income that citizens have.  WASCO’s capital expenditures are even more of a challenge, given the preference for long-term debt and the relative inability to secure funding without a government guarantee.

We understand that WASCO’s challenges are not unique, as utilities across the developing world are all searching for creative solutions to their financing needs.  However, some of the specific constraints that WASCO faces based on the situation in Lesotho makes the likelihood of success lower even as the need for universal access to water and sanitation continues to grow.