"By not addressing the global water crises, none of the UN Sustainable Development Goals will be achievable. Clean Water & Sanitation [SDG 6] is interconnected to all SDGs"
The water crisis is a tragedy of epic proportions. A large part of humanity - more than 2 billion people - do not have access to safe drinking water. An equal number of people do not have access to safe sanitation as well.
This post is part 3 of a series of 8 posts by TIGRIS co-founder, Saud Siddique, detailing thoughts on the current global water crisis, and recommendations on how it can be effectively addressed.
3. PPPs to Address the Growing Challenges of Urbanization
The rapid urbanization trend in developing countries is expected to continue, and by 2050, nearly 7 of 10 people in the developing world will live in cities. Notably, growth of urbanization is (and will continue to be) the fastest in secondary cities and towns with a population of less than 1 million. Large urban centres, capital cities and metropolitan areas, will account for less than 10% of the population.
There are approximately 5000 public water utilities operating in these second-tier cities and towns. In general, the subnational urban water bodies have relatively low coverage in terms of water supply and sanitation. An important focus of PPPs should be to be support such utilities expand their coverage.
Building-Block Approach
Any complex reform requires a phased, step-by-step approach to problem solving. For example, dividing the city into zones to manage and control NRW is an example of a “bite size” practical strategy to implement reform. A building block approach to problem solving needs to be applied not just from a technical standpoint, but also as a part of overall strategy (including specialized financing mechanisms).
Subnational Pooled Financing Mechanisms
One of the key financial innovations at the institutional level for green finance has been the use of a structure known as subnational pooled financing mechanisms (SPFMs) as means of raising sustainability-oriented capital from financial markets. An SPFM aggregates the financial needs of members into a pooled vehicle, which then issues debt.
SPFMs have secured finance for both large and small local projects, obtaining over $1 trillion in finance in the US and Europe, and over $2.6 billion in developing countries. Pooled financing combines the financing needs of several public entities into a single financing transaction to achieve the best possible terms for all participating entities. The entities that access such financing are usually relatively small and have financing requirements that are too small to attract capital on their own.
SPFMs have been structured to have a high-level of creditworthiness. This was achieved by using several levels of credit enhancements, which would have been cost-prohibitive if applied to individual projects.
Municipal Bond Insurance Companies
Municipal bond insurance was instrumental in helping develop the $4.2 trillion US municipal bond market. The predictability of cashflows of municipalities, which in turn depended on revenues from state transfers, property taxes, and levies for basic services such as water treatment and sewage treatment, allowed the bond insurance companies to be highly leveraged in terms exposure to bond issues, and yet maintain high investment grade ratings.
The high investment grade ratings of the bond insurance companies assure timely payment of principal and interest to bond holders. With the help of innovative structured finance, and various credit enhancement mechanisms, investment grade bond insurance companies are able insure bonds 50 to 100 times its capital at attractive rates for borrowers.
While municipal financing is still in its infancy in developing countries, the ability of water projects to provide predictable revenues allows for the development of bond insurance platforms for single or pooled-bond issues, once reforms take hold.
International development agencies should play an instrumental role in supporting the development of municipal bond insurance in developing countries which can substantially enhance capital flows from domestic and international investors for water and sanitation.