Financing Water Service Providers in Africa: Current Progress, Future Ideas

There are many hurdles to achieving United Nations Sustainable Development Goal (SDG) 6 — access to water and sanitation for all by 2030 — in sub-Saharan Africa. Climate change, local customs, ingrained inefficiencies and graft, lack of knowledge/training and aging infrastructure all play a part. But one of the largest — if not the largest — setback is that local utilities are nearly always operating at a deficit. Access to capital finance is consistently ranked as a major barrier toward local utilities’ chances of success.

The ACORN initiative
One way that ROCKBlue has been addressing the situation is with an initiative called ACORN (Access to Capital, Oversight, and Reporting Nexus).

ACORN is attempting to close the gap between smaller, “second tier” water service providers and potential lenders by mentoring the provider and facilitating links with financiers. ACORN is currently working with water service providers (WSPs) in Lusaka, Zambia and Lilongwe, Malawi.

We’ve undertaken the following steps:

• Financial review and assessment
• Obtaining credit ratings from a 3rd party credit bureau
• Specific recommendations regarding day-to-day operations
• Financial performance improvement plan

With each of these partnerships, there has been improvement:

• Increase in collections
• Decrease in some expenses
• Much deeper understanding amongst management regarding how to put together a finance package for potential lenders
• Realization of how much debt they currently have
• Basis for determining how much more debt could be assumed (i.e., what projects can they afford to do and how much money would be needed)
• Utilities introduced to potential new sources of capital

A quick note on funding sources for WSPs
The water and sanitation (WASH) sector has three main sources of funding: tariffs, taxes and transfers.
Tariffs are fees for service paid by the user. In sub-Saharan Africa, end user tariffs rarely cover the full cost of operation and maintenance costs as the tariffs are set to take into account the low-income communities which would not be able to afford the true costs of service provision.

Taxes come from a government source. While taxes are a sufficient source of capital in the world’s most developed countries, 80% of countries surveyed by the World Health Organization report insufficient financing to meet national water, sanitation and hygiene targets or the higher levels of service outlined in Goal 6 of the SDG1.

Transfers are funds provided by an external aid agency and are known as Official Development Aid. Global aid commitments have declined steadily in sub-Saharan Africa over the last several years.

When all of the above prove insufficient, WSPs can turn to public or private lenders. One of the most attractive options, both in terms of available cash and reasonable interest rates, is the development finance institution, or DFI. These are specialized development banks or subsidiaries set up to support private sector development in developing countries. DFIs are usually majority-owned by national governments and either benefit from government guarantees or source their capital from national or international development funds. As such, DFIs are creditworthy, enabling them to raise large amounts of money on international capital markets.

Many smaller WSPs have a good chance of acquiring a loan from a DFI, but the process is complicated, many WSPs are unaware of their existence, and those that are don’t know how or where to apply.

Jeremy Gorelick, ACORN Manager and a development economist, is very familiar with this knowledge gap and has a potential solution.

“There is a need for an agnostic intermediary to connect WSPs with DFIs: one central repository of information, detailing current terms, contact info, and application procedures. This repository should be maintained by one DFI or better yet, a completely agnostic entity, and updated quarterly,” he says. “With this information, the WSP could prepare just one application instead of multiples, and submit it to any likely lender. For example, WSP managers would see which funders have an interest in certain countries, which have no capital left to invest in the water sector, and so on.”

Is this a workable scenario?
The short answer is, yes, according to Gorelick; but the process would need to start with the utilities themselves asking for this database. Then, DFIs would need to agree to come together to plan the resource and how it would be hosted. He feels that ACORN, with its considerable WASH financial expertise, would be an ideal host. “Each DFI would contribute a small amount of money,” Gorelick added, “and once it’s built, it would be very cost-effective to maintain.”

Taking it a step further, the host of the database/repository could act as gatekeeper, explains Gorelick. “When one WSP makes an application, the host could review and perform due diligence on the project, deciding if and where to submit the application. In this way, one entity is performing the work of multiple DFIs, saving labor costs industry-wide. Ultimately and ideally, the reviewer could also connect the applicant with technical assistance to enhance the project’s chances of success.”

The bottom line: funding for small WSPs has long been deficient in sub-Saharan Africa. While ROCKBlue is working to help make WSPs more credit-worthy, this is just one part of the solution. An easily accessible repository of loan information would benefit all parties, most significantly, the end users—those millions of urban dwellers who still lack regular access to clean water.

1. UN-Water. 2017. Global Analysis and Assessment of Sanitation and Drinking-Water. Financing universal and sustainable WASH under the SDGs. Geneva: World Health Organization; 2017