The Development Bank of Southern Africa (DBSA) provided grant funding and technical assistance in the project preparation stage. The Infrastructure Investment Programme of South Africa (IIPSA) provided grant funding for the feasibility study. Grant funding from both DBSA and IIPSA will likely be involved in the financing of the project. DFIs are expected to part finance the project.
Making Blended Finance Work for Water and Sanitation
Unlocking Commercial Finance for SDG 6
OECD Studies on Water
Annex D. Case Studies: Multipurpose water infrastructure and landscape-based approaches
Municipal Water Conservation, Water Demand Management and Cost Recovery Programmes in South Africa
Development finance
Commercial finance
Commercial investors are expected to partly finance the capital expenditure for the project.
Challenge
The City of Tshwane Metro (“the municipality”) loses millions of rand annually due to water losses in the transmission and distribution network and poor cost recovery. Estimates of physical losses (leaks) in the municipality’s network range between 25% and 40%. The impact of deteriorating water distribution and transmission infrastructure is not limited to physical losses only. In an environment of limited maintenance, water meters are typically the type of device where maintenance falls short or is neglected completely. As a result, the proportion of non-functional water meters is growing rapidly. This has a direct impact on billing and cost recovery. Inadequate management systems, lack of capacity, poor credit control, consumer resistance to pay more for services due to poor service levels as well as corrupted databases are all contributing factors to poor cost recovery. A turnaround of the status quo is required. However, significant capital is required to implement a holistic municipal Water Conservation and Water Demand Management Programme (WCWDM). Thus, funding for such a programme will often not fit within standard balance sheet financing instruments given debt sustainability issues and requires an alternative financing approach.
Solution
The envisaged financing approach for the programme is a hybrid between conventional balance sheet finance and project finance. The intention is to strengthen the financial position of the municipality over the programme duration. This will be achieved by generating alternative future cash flows stemming from the interventions that are implemented on a sub-project level. Funding for future sub-projects will be progressively advanced to the municipality in tranches by the participating financiers against strict criteria for the achievement and maintenance of key performance indicators of the sub-projects already implemented. As the programme is rolled out, less debt will be required to finance the new sub-projects as the municipality will be able to fund a larger portion through own funds generated from the savings and improved revenues stemming from already implemented sub-projects.
Figure A D.1. Envisaged funding structure
Source: Undisclosed project documentation.
The programme under development consists of a number of sub-projects that will cover a distinct supply area (also termed a district metering area [DMA]). Each DMA will be able to be managed and monitored on a continuous basis, including the monthly rolling annual water balance estimates, ongoing active leak detection, as well as tracking of financial performance. To implement the programme, each of sub-projects will be rolled out sequentially. The performance of sub-projects that already implemented can then be monitored and verified on a continuous basis. The overarching aim is an integrated approach across the various municipal functions and divisions to ensure financial benefits with regard to the key performance and strategic measures. These include the reduction of the recoverable real losses, reduction in over-consumption and improved cost recovery. The programme will consists of two phases (pre- and post- financial close) as outlined in Figure A D.2.
Figure A D.2. Programme outline
Source: Undisclosed project documentation.
Phase 1 of the programme focusses on the preparation stage up to financial close in order to identify, assess and mitigate all of the relevant risks. The bankable feasibility study is currently underway and will contain detailed recommendations on the technical, institutional, legal, and financial risks. The recommendations in the feasibility study will impact the final definition and implementation of the programme, and needs to be approved by the municipal council. This will form the basis of the future credit evaluation and approval process for the financing and implementation of the identified sub-projects in the programme.
Impact
One of the main conclusions from the holistic approach to WCWDM programme methodology is that it allows for the deferment of significant investment in bulk supply infrastructure by expediting the programme implementation period. The impact assessment is yet to be concluded but it is anticipated that the key benefits for the municipality will include reduced water losses in the distribution system, reduction in over consumption and improved billing and cost recovery rates.
Jordan Compact - Blended finance and the expansion of the As-Samra Wastewater Treatment Plant
Development finance
The Millennium Challenge Cooperation (MCC) provided technical assistance and viability gap funding for the expansion of As-Samra Wastewater Treatment Plant.
The Government of Jordan under the compact agreed to partly finance the expansion of the wastewater treatment plant and related projects.
Commercial finance
Suez contributed equity financing to the special purpose vehicle for the expansion of the wastewater treatment plant and raised USD 110 million in debt financing from a syndicated loan arranged by Arab Bank.
Challenge
Jordan is one of the driest countries in the world and is facing severe water shortages. Jordan is a relatively resource poor country with no oil or natural gas, and only around 3% arable land. With limited access to surface water, Jordan ranks among the world’s most water scarce countries. Population growth projections suggest that on a per capita basis, available fresh water supplies are expected to decline significantly over the next 15 years, increasing the risk of higher water costs impacting households and industrial productivity.
Solution
MCC (a US aid agency) and Jordan signed a USD 275.1 million five-year compact in 2010, addressing the growing water needs of the Zarqa Governorate. Zarqa is the third largest Governorate of the Country and experiencing rapid growth in population as well as industrial and commercial activity. The objective of the MCC investment in Jordan was to maximise economic growth by making more fresh water available for municipal and industrial use. This was accomplished through three projects to promote water substitution and water saving:
1. The Water Network Expansion Project (water savings) with the objective of reducing water losses from the secondary and tertiary network and making more water available in the system. High-quality treated effluent from As-Samra is now conveyed to the Jordan Valley for use in agricultural production.
2. The Wastewater Network Expansion Project (water substitution), which was designed to collect more household wastewater through expanding the network to previously unserviced areas.
3. Expansion of the As-Samra Wastewater Treatment Plant (water substitution)1 to provide the treatment capacity for the additional wastewater collected with the Wastewater Network Expansion Project. High-quality treated effluent from As-Samra is conveyed to the Jordan Valley for use in agricultural production. Freshwater used in Jordan Valley is conveyed to Amman and Zarqa for municipal and industrial use.
The As-Samra Wastewater Treatment Plant in Jordan was constructed in 2008 with support from USAID. However, the wastewater treatment plant was overburdened and required capacity expansion. The MCC committed to assist the Ministry of Water and Irrigation (MWI) in Jordan by conducting advisory services and at the same time viability gap funding of a USD 93 million in the form of a grant. The current private operator Suez, a French multinational, submitted a proposal that mobilised funding from the Arab Bank contingent on the grant funding from MCC. The viability gap funding for the brownfield project and a USD 20 million grant for the Government enabled Suez to raise USD 110 million in private financing arranged by the Arab Bank through a loan syndication process involving Jordanian local banks and other financial institutions. The syndicated loan is Jordanian dinar-denominated and has a tenor for 13 years with the option to extend to 20. This was the longest maturity that had been obtained for a Jordanian dinar-denominated loan in 2012. While the interest rate during the three-year construction period for the treatment plant expansion was fixed, following the commissioning of the plant, the loan evolved to a floating rate linked to the average prime lending rate of four local banks.
The expansion was conducted through a build-operate-transfer (BOT) contract, a form of public-private partnership (PPP). The BOT contract was signed between MWI and Samra Wastewater Treatment Plant Company Limited (SPC); consortium members include Suez, Morganti and Infilco Degrémont. The total project cost for the expansion of the treatment plant was USD 223 million, with the private sector covering over 50% of the cost. SPC will operate and maintain the plant for 25 years. The presence of a private partner Suez, with experience successfully operating the treatment plant, from the outset provided security and reduced the perception of risk and actual risks for the additional investors. At the end of the concession period, in 2037, the agreement requires that the facility be transferred back to the Government of Jordan for free and in good working order. The financing structure is illustrated in Figure A D.3.
Figure A D.3. Viability financing for the As-Samra Wastewater Treatment Plant expansion: Financial structure
Source: (World Bank, 2016[9])
The Water Network Project was composed of two parts; infrastructure investment in transmission and distribution pipes and improvements in the quality of plumbing in the homes of 3 958 poor families as well as schools. The infrastructure investment activity rehabilitated 864.7 kilometres of water pipes, built a new pump station, and installed 41 650 household water meters. It established more efficient district metering areas, enabling better operation and management of the water utility. The activity is also expected to contribute to a decline in commercial and physical water losses from 61.6% to 50.7% across the Zarqa Governorate. The reduction of physical losses will improve the cost recovery of the Zarqa water utility and a result the utility expects to achieve full cost recovery by 2019.
The Waste Water Network Project extended service to households that were not connected to the sewer network by constructing over 300 kilometres of new sewers in the neighbourhoods of East Zarqa and West Zarqa. The extension raised wastewater service coverage rates from 72% to approximately 84% of the estimated Jordanian population. In addition, USD 18.9 million of unused budget from the Water Network Project was used to add 65 kilometres of sewage collection pipes to the Princess Haya neighbourhood of the Zarqa and to purchase high pressure jet cleaning vehicles for the water utility to enhance system maintenance.
Impact
The expansion allowed the Government to treat 70% of the country’s wastewater and provides 109 million cubic meters of treated water per year for irrigation in the Jordan Valley. In addition, the As-Samra plant has improved the long-term sludge management and disposal practices further helping to preserve Jordan’s water resources.
At the end of the Compact between the Government and MCC, approximately 375 000 households (2 023 000 individuals) had benefitted 2010-15 from additional supplies of freshwater released as larger volumes wastewater were used for agricultural production in the Jordan Valley. Approximately 8 500 households in the Jordan Valley or 46 000 individuals now receive a consistent supply of high-quality treated wastewater that can be used for irrigation. The As-Samra plant also provides bio-solids for potential reuse in fertilizer and fuel, and produces 80% of its own energy needs, from biogas and hydropower. The plant is as a result one of the most energy efficient treatment plants in the Middle East. In addition, the involvement and grant funding from MCC helped reduced the cost of capital, which in turn allowed for lower tariff to consumers.
However, whilst the expansion and related compact projects have been successful, the new plant is already nearing full capacity. The intention to expand the plant again with funding from the EU and EBRD was announced in December 2018. A deal is expected to be finalised with the Ministry of Water and Irrigation.
Multipurpose Hydropower Project in Lao People’s Democratic Republic (PDR)
Development finance
Lao People's Democratic Republic (PDR), World Bank, Asian Development Bank (ADB), Nordic Investment Bank, French Development Agency (AFD), Proparco, European Investment Bank (EIB)
Commercial finance
The Nam Theun 2 Power Company (25% Lao PDR, 40% Électricité de France [EDF] , 35% Electricity Generating Public Company Limited), EDF, Export-Import Bank of Thailand, Export Credit Agencies (COFACE EKN, GIEK) and seven Thai commercial banks (Bangkok Bank, Bank of Ayudhya, Kasikornbank, Krung Thai Bank, Siam City Bank, Siam Commercial Bank and Thai Military Bank).
Challenge
Lao People's Democratic Republic is a landlocked country that was one of the poorest countries in the East Asia region in 2003 with human development indicators among the lowest in the region (World Bank, 2018[10]). With extensive water resources, the development of hydropower was key pillar of government plans for economic growth and the achievement of poverty reduction targets. However, constraints such as limited government financing capacity, lack of experience of developing large scale hydropower projects for export and limited ability to attract private sector investment hindered the development of hydropower infrastructure.
Solution
The idea for a large scale hydropower project, Nam Theun 2 (NT2), was three decades in making, with the World Bank first recommending that the Government of Lao undertake a feasibility study to assess the potential for a power station in 1988. The feasibility study was conducted in 1991 (MacGeorge, 2009[11]). In 1994, EDF and the Italian-Thai Development Company of Thailand started the project. Thus, NT2 moved from a conceptual to a development phase. The design and preparation of a complete set of economic, environmental and social safeguards took more than ten years.
The Government of Lao prepared a National Growth and Poverty Eradication Strategy in 2003, which focused on the need to create sustained economic growth to achieve poverty reduction. The large scale hydropower project NT2 was a key part of the strategy. The purpose of NT2 was to generate electricity from hydropower for export to the Electricity Generating Authority of Thailand (EGAT). In addition, there was a social and environmental management programme, which included wildlife management and watershed protection (4 000 km2 of forested watershed, which ensures a continuous supply of water to the reservoir). Project financing was gradually put in place and full construction activities commenced in June 2005.
The NT2 hydropower project aimed to produce 1 070 MW, providing 995 MW of power for export, and 75 MW for domestic consumption. A 25 year power purchase agreement (PPA) was signed between the Nam Theun Power Company, Electricity Generating Authority of Thailand (EGAT) and Électricité du Lao – the state-owned power company of Lao PDR. The agreement conditions included the sale of 5 636 GWh/year to EGAT at a predefined tariff, which is paid half in US dollars and half in local currency in order to mitigate currency risks and avoid local currency devaluation.
The USD 1 300 million project is the world’s largest private sector hydroelectric project financing. A special purpose company, the Nam Theun 2 Power Company (NTPC) was created as a public-private partnership (PPP), which is partly controlled by the government which has a 25% stake. The government of Lao PDR and NTPC signed a concession agreement in 2002 contracting NTPC to finance, develop, construct, own, and operate the hydroelectric plant and facilities for 25 years. The financial closure of the project and environmental and social programme occurred in December 2017. After the 25-year period, the plant will be transferred back to the government free of charge (it is a Build, Own, Operate, Transfer [BOOT] project).
Due to the large scale of the project, the financing plan was complex, with 27 institutions involved (see Figure A D.4.) including MDBs, DFIs, Export Credit Agencies (ECAs) and Thai banks. A range of instruments were used to mobilise private finance including guarantees, grants and debt. Around 85% (over USD 1 000 million) of the total financing for capital costs of the scheme was mobilised by the private sector. USD 350 million raised through ECA's with partial guarantees from IDA and MIGA. Thai commercial banks provided USD 500 million in local currency debt financing towards the project. In terms of equity financing, the Government of Lao invested USD 93 million, which came from a mix of concessionary grants and loans from the World Bank's IDA fund, EIB, ADB and AFD. EDF contributed USD 131 million in equity financing.
In addition, USD 78.6 million was provided by NTPC to cover the costs of the social and environmental management programme, including resettlements of affected populations, social services, environmental protection, wildlife management and watershed protection.
Figure A D.4. Stylised financing scheme – Nam Theun 2
Source: Authors based on (Naughton, DeSantis and Martoussevitch, 2017[12]).
The project was repeatedly delayed and faced many setbacks (World Bank, 2010[13]). These included equity owners selling stakes, and the transfer of responsibility of the BOT contract from Transfield Holdings to EDF. In addition, the Asian financial crisis in 1997 led to delays in project development and re-negotiation of the PPA between the government and EGAT; the project was originally scheduled to be built by 2000 but delays meant that the government could not fulfil the contract with EGAT. In terms of private financing, two equity investors representing 20% of equity financing sold their holdings mid-way through the process.
Designs for the project went through several phases with the original hydropower plants on a smaller scale. The cost of the project was also revised several times. First, the cost was revised upward from the original estimation of USD 900 million to USD 1.1 billion. Later, it was revised upwards again to USD 2 billion. However, the onset of the 1997 Asian financial crisis and concerns from investors led NPTC to revise the costs down to USD 1.3 billion.
Impact
The NT2 hydropower plant began commercial operations in 2010. The power generated is exported to Thailand and used domestically. Over USD 170 million in revenue was received by the Lao treasury in income from the project between 2010 and 2017. In line with legal agreements, all revenue is allocated to projects and programmes contributing to poverty reduction or environmental management. The education and health sectors received the largest shares of revenue, with 39% and 14% of total revenue disbursed (see Table A D.1).
Table A D.1. Disbursement of NT2 Government Revenues
Source: State Audit Organization (SAO) Audit Reports 2009/10 - 2015/16, MoF Data FY15/16 and FY17 & World Bank 2018, Implementation Completion and Results Report – Nam Theun 2. (World Bank, 2018[10])
In addition, significant efforts were made to mitigate the negative externalities of the project. Environmental and social management plans for the project include the establishment of long term watershed protection and management systems for the Nakai Nam Theun National Protected Area and associated corridors; compensatory forestry to offset the loss of primary forest in the reservoir; livelihood development initiatives for people to be resettled, with clearly-specified poverty reduction objectives; and reservoir fisheries managed by local people, with extensive independent monitoring, including penalties for non-compliance. Resettlement villages and farms have been established and compensation for livelihood losses resulting from the river diversion has been carried out. For example, all of the 6 300 people displaced by the project were resettled and 100% of them met the income target of reaching at least the rural poverty level.
Water funds: A financial, technical and institutional mechanism that promotes public and private sector participation for watershed conservation.
Development finance
Inter-American Development Bank (IADB), The Nature Conservancy (TNC), FEMSA Foundation, the Global Environment Facility (GEF) provide grant funding and technical assistance to set up and scale Water Funds as well as technical assistance for project development.
Commercial finance
The source of funding from commercial actors and level of funding is different for each water fund. Funding from commercial actors, such as corporates, is usually sourced from companies operating within the spatial area with a stake in improved water resource management. For instance, Heineken operates a brewery in Monterrey and plays a large role in funding the Monterrey Metropolitan Water Fund.
Challenge
Despite numerous efforts to improve watershed management, few programs provide the legal and financial mechanisms to allocate funding for water source conservation and climate adaptation. On the one hand, protected areas, which in many cases were originally created to shelter water sources, often lack the financial support needed for conservation activities in upstream farmlands. In Colombia, for example, 50% of the population receives water from public protected areas, but market and institutional failures prevent these areas from getting the necessary financial resources to be soundly managed. On the other hand, upstream private and communal lands that provide hydrologic, environmental and climate adaptation services are typically not compensated by downstream users. Current incentives often lead to upstream farmers continue to employ land practices that negatively affect water quantity and quality. In most cases, it would be more cost-effective to compensate farmers to improve their land practices, set aside private areas for conservation or improve the management of public protected areas than bear the costs of poorly managed water resources. Access to predicable and sufficient funding is critical to implement improved watershed management. Thus, there is a need to establish financial and institutional mechanisms to provide downstream users the incentive and opportunity to proactively engage in conservation and climate adaptation practices in upstream catchment areas. Such interventions help to balance upstream and downstream interests within the watershed for water and land use.
Solution
Water Funds provide a financial, technical and institutional mechanism that promotes public and private sector participation for watershed conservation. This mechanism offers opportunities to promote the sustainable management of watersheds and improved water security for downstream users, whether they are city dwellers, corporates or agricultural users. The water funds model, first set up by TNC and the Municipality of Quito, brings together different types of public and private actors in a pooling mechanisms that provide long-term, sustainable finance to contribute to water security through nature-based solutions.
Since that initial effort, IADB, in partnership with TNC, the FEMSA Foundation, and GEF launched the Latin American Water Funds Partnership in 2011. The partnership creates and strengthens Water Funds across the Latin American region to improve watershed management. The partnership started with USD 21 million (USD 5 million from an IADB - GEF grant, USD 6 million grant from the FEMSA Foundation, and USD 10 million from other supporters through TNC). Since 2011 the partnership has created and strengthened 24 Water Funds across the region.
In June 2016, IADB, GEF, TNC and the FEMSA Foundation launched the second phase of the Water Funds Partnership in Bogota for the 2016-20 period. Thus far, more than USD 150 million from 215 public and private organisations have been provided to nature-based solutions via the Water Funds.
Water Funds provide funding for a range of activities related to watershed management. These include: (i) feasibility studies; (ii) conservation projects; (iii) monitoring and evaluation; (iv) endowment; (v) governance, technical assistance, and communication products. The conservation projects can be grouped in three categories: (i) payment for environmental services, including watershed management and biodiversity conservation; (ii) water resource management such as sustainable land use; and (iii) conservation projects for further protection of the natural habitat where these services originate. These categories include the creation of protected areas, reforestation, helping landowners switch to conservation-friendly practices, and supporting community-driven conservation initiatives.
While contributions to the water funds do not generate financial returns to capital providers, the benefits of more effective watershed management can attract capital contributions from large water users such as water supply companies, hydropower plants, irrigation districts, agricultural associations and other private sector actors, such as breweries and soft drink companies. Large water supply companies for instance benefit as improvements in water quality result in reduced treatment costs. This can lead to significant savings in terms of avoided costs in large urban centres that may exceed conservation investments. Similarly, investments in nature-based solutions to manage watersheds can reduce the recurring costs for hydropower plants by reducing sediment accumulation and silting of dams. The only TNC supported water fund that has mobilised repayable financing so far is in the US, San Antonio, Texas.
Figure A D.5. The Water Fund Endowment Model
Source: (TNC, 2011[14]).
Many of the existing water funds in Latin America have developed an “endowment fund” approach (see Figure A D.5), whereby philanthropy funding is used to capitalise a fund and proceeds from investing those funds are used for annual investments in nature-based conservation. A notable example is the Fondo Para La Protección Del Agua (FONAG) in Ecuador.
Water funds can have a variety of funding sources. For example, the Monterrey Metropolitan Water Fund (FAMM) in Mexico is predominantly funded by private capital, with over 75% of the funds provided by the private sector, with the remainder of funding provided by bilateral and multilateral development agencies. Heineken operates a brewery within the region and provides funding for FAMM. The fund was set up in 2013 to increase the water security for the city of Monterrey located on the banks of the Santa Catarina River. Over 60% of the water used in the metropolitan areas derives from Cumbres de Monterrey National Park, located within the San Juan River Basin. In the basin, soil erosion and the loss of vegetation cover have negatively impacted run off control. In addition, changes in land use and forest have also contributed to the degradation of the water supply to Monterrey metropolitan area. The region is also prone to hurricanes which can have further devastating effects on the city. FAMM funds reforestation, restoration and soil management to improve water infiltration in the San Juan River Basin and to reduce the potential impact of natural disasters. FAMM has more than 40 partners including the federal government, local government, businesses and NGOs. As of 2016, USD 8 million had been pledged by the private sector to FAMM.
Impact
After five years spreading the water fund concept, the partnership found that five elements (inclusion, scalability, fundability, adaptability, and stack ability) enable multi-stakeholder collaboration in a way that allows for activities to go beyond simply conservation, but to pursue watershed sustainability over the long-term.
In total, the Latin American Water Funds Partnership implemented by the IADB has led to the creation of 24 Water Funds and the implementation of watershed conservation projects that have potentially benefitted 89 million people as of June 2018. In addition, 525 684.5 hectares of natural habitat has been conserved or positively impacted by water fund operations (The Latin American Water Funds Partnership, 2018[15]). The aim is for the programme to continue to expand and generate collective action towards water security.
Infrastructure Services and Renewables Projects - Transforming Bugala Island’s Infrastructure
Development finance
Four organisations affiliated with the Private Infrastructure Development Group (PIDG) helped to finance the project at different stages of its development:
The Emerging Africa Infrastructure Fund2 (EAIF) provided USD 9.4 Million in debt financing.
InfraCo Africa provided USD 11.8 million of equity funding.
PIDG’s Technical Assistance Facility (TAF) provided a USD 6.04 million grant to cover upfront capital costs incl. USD 5 million of output based aid to fund ferry and water connections.
GuarantCo in co-operation with USAID provided a guarantee that was critical in attracting commercial finance from NedBank.
In addition, the Uganda Development Committee contributed USD 9.9 million in equity funding and the Industrial Development Corporation of South Africa, USD 11.4 million.
Commercial finance
USD 5.2 million debt financing from Nedbank was guaranteed jointly by GuarantCo and USAID (GuarantCo, 2011[16]).
Challenge
Bugala Island is the largest of 84 islands that make up the Ssese archipelago in Lake Victoria, covering 275 square km. Bugala Island was previously one of Uganda’s poorest districts and had a prevalent shortage of potable water. The majority of the population used lake water, which is not safe for bathing and consumption (Valahu, 2015[17]). In addition, the existing pipe network in Kalangala town was in poor condition and in need of replacement.
Solution
In 2005 InfraCo Africa established the Kalangala Infrastructure Investment Services (KIS) to address these issues. KIS operates as a multi-donor public-private partnership with the KIS responsible for the investment and maintenance of the infrastructure for 15 years. The government signed a memorandum of understanding with InfraCo in 2006. In January 2009, following the approval of Cabinet of the InfraCo project development plan, KIS and the Government of Uganda entered into an Implementation Agreement.
The KIS investment in water infrastructure was part of a broader multi-sector initiative, aiming to improve access to water, safer transportation, and more reliable, renewable (solar powered) electricity. The project had four infrastructure components; including the development of two passenger ferries and the development of a 1.6 MW Solar-Thermal hybrid power generating station, water infrastructure investment and road upgrade (Valahu, 2015[17]). The total investment for the four projects was USD 54 million in addition to USD 6.3 million for project development costs.
In respect to water infrastructure, the project involved:
Rehabilitation of the existing transmission and distribution piped water system in Kalangala Town. Expansion of the network will entail installing pipes and standpipes to areas currently not served by the piped water network.
Creation of a water treatment plant in Mweena Village designed to treat 418 cubic metres a day with a rated output of 376 cubic metres a day (the difference being for plant use).
KIS operates the water treatment plant providing the water at a tariff rate agreed between KIS and the Government.
The special purpose vehicles KIS and Kalangala Renewables were created and the project was financed through a PPP.
KIS was financed with a commercial loan of USD 3.3m from Nedbank as well as a combination of debt and equity from various DFIs, including EAIF and a joint debt guarantee from USAID/GuarantCo. TAF provided an output based aid (OBA) grant of USD 5 million, used initially to fund the ferry construction and then reallocated to subsidise power and water connections as well as the ferry service to poor households on Bugala Island. OBA grant of USD 1.7 million for KIS was directly targeted at enabling affordability for the local, poorer community. InfraCo Africa maintains a 54% equity stake in the project.
Kalangala Renewables funded its investment with an OBA grant from TAF of USD 3.3 million and a USD 1.8 million commercial loan from Nedbank, alongside DFI loans and equity funding totalling USD 13.8 million, including USD 2.4 million from EAIF. InfraCo Africa will maintain a 54% equity stake in the project. Both projects reached financial close in December 2012.
Collective financing breakdown for both projects:
USD 6.3 million in development costs; USD 6.04 million in grants, of which USD 5 million is OBA;
USD 5.2 million debt financing from Nedbank which benefitted from a joint GuarantCo and USAID guarantee;
USD 42.5 million by development finance institutions divided in: USD 33.1m in the form of equity from 1) Uganda Development Committee (USD 9.9 million); 2) Industrial Development Corporation of South Africa (USD 11.4 million); and 3) PIDG though InfraCo Africa (USD 11.8 million); USD 9.4 million debt financing from EAIF.
Figure A D.6. Kalangala financing model
Source: Authors.
Impact
KIS constructed the Mwena water treatment plant, which has a capacity of producing over 400 000 litres of water per day and the reservoir tanks/storage facilities of 200 000 litres. The improvement has enabled KIS to supply water to Bugala Island 24 hours a day. As a result of safe water supply services, the population on Bugala Island has experienced a reduction in medical expenses due to reduction water in borne diseases and improved sanitation. Those villages now supplied with clean, safe water have seen an 80% drop in waterborne disease.
In addition, the multi-sector nature of the project has enabled it to have a much larger impact on living standards than each element could have achieved in isolation. The project will provide much needed access to infrastructure for the Bugala inhabitants, which will have further effects on economic development - including provision of tourism and on the fishing which is traditionally one of the main industries - and quality of life.
The project took InfraCo Africa seven years to develop and reach financial close. During this time it has contributed to several improvements in the regulatory environment including the creation of the first private sector water authority in Uganda.
Improving the financial viability of the Songwe River Basin Development Programme through the use of blended finance
Development finance
The Government of Tanzania and the Government of Malawi are jointly engaged in development plan for the Songwe River Basin. Both governments are expected to contribute equity financing to the programme.
In collaboration with the Climate Resilient Infrastructure Development Facility, the Africa-EU Water Partnership Programme being implemented by the Stockholm International Water Institute (SIWI) is supporting the Songwe River Basin Commission to mobilise blended financing for the Songwe River Basin Development Programme.
The Africa-EU Water Partnership Project is a joint undertaking by the European Union, the African Ministers Council on Water and the Government of Sweden through Sida. The partnership aims to enhance the financial viability of water infrastructure projects in Africa by making more public and private capital accessible for water-related infrastructure projects and encouraging and supporting African governments to invest in water governance through capacity building. The Africa-EU Water Partnership Programme is financed by the European Commission and project implementation is assigned to SIWI.
The African Development Bank and DFIs are expected to provide significant debt financing.
Commercial finance
Private investors to be determined.
Challenge
Water supply services within the Songwe River Basin in Tanzania and Malawi are in a poor state and experience challenges due to mismanagement and ageing water supply infrastructure. Additionally, new tariff regimes that improve the financial viability of the water service providers are challenging to introduce. Currently, 80% of the basin’s population are classified as rural poor, with 30–50% lacking access to a safe water supply and 75% without access to electricity.
Solution
The governments of Tanzania and Malawi are currently jointly engaged in the implementation of the Songwe River Basin Development Programme (SRBDP), a 10-year programme with integrated industrial irrigation, water supply, and hydropower schemes, which jointly aim to enhance food and energy security for the basin communities in the context of the overall socio-economic development of the countries. Under the SRBDP, water supply projects for small towns around Kasumulu (Tanzania) and Songwe (Malawi) will be implemented, tapping water from the Lower Songwe dam reservoir after producing hydropower (180.2 MW). The Irrigation and Drainage scheme participants will be required to pay a fee for water provided from the new dam through the canals being planned. In collaboration with the Climate Resilient Infrastructure Development Facility, the Africa-EU Water Partnership Programme being implemented by SIWI is supporting the Songwe River Basin Commission to mobilise blended financing for the SRBDP.
SIWI is working with the SRBDP to develop a commercially sound business model for the agri-businesses that will underpin the irrigation schemes along the Songwe River. At the same time, the Climate Resilient Infrastructure Development Facility supports the project preparation of the water supply to Kasumulu and Songwe. With the socially oriented components having limited commercial potential, the bankability of the project rests on the revenue generating capacity of the lower dam and the associated hydropower plant and water supply. To improve the financial viability of the project, a blended finance approach will be used that would involve significant concessional debt from Development Finance Institutions (DFIs) and/or Multilateral Development Banks (MDBs), equity from the governments of Malawi and Tanzania, as well as commercial debt and equity from private investors. Originally planned as a PPP, in April 2019, the two governments agreed to finance the Lower Songwe Dam and hydropower plant through soft loans from financiers instead.
Dependent upon the construction of the dam and hydropower plant, a mix of grant funding and concessional debt from DFIs could meet the capital expenditure needs of the irrigation scheme and a nominal levy to fund the operational and recapitalisation costs of the scheme. The two irrigation schemes totalling 6 200 Ha will benefit farmers operating in the area with the ability to farm in two season per year leading to increased crop yield and revenues. There is therefore an opportunity for private sector investment in the agri-business sector. The positive economic and social viability of the irrigation schemes enhances the possibility of securing concessional debt finance for the capital cost of the project, with grants from development partners targeting the social projects.
Impact
The project is currently in the planning stage so the impact of the proposed development plan are as yet unknown.
Landscape-based blended financing approaches in the Kafue River Basin
Development finance
The World Wide Fund for Nature (WWF) thus far has provided technical assistance through its Bankable Water Solutions Initiative. The Government of Zambia and FMO are expected to provide financing.
Commercial finance
Anheuser-Busch InBev (AB InBev), a brewing company have committed funding for projects in the basin.
Challenge
The Kafue River Basin is an area of major ecological, industrial, and socio-economic significance for Zambia. Approximately 50% of the population of Zambia live in this area; food, water, energy, and ecosystem challenges are strongly dependent on it. According to the World Bank Group, an estimated 58% of the Zambian population lives below the poverty line and depend on ecosystems services like those provided by the Kafue Flats (World Bank, 2018[18]). The fisheries in the lower basin are also one of Zambia’s most productive, supplying both urban and rural markets. Water resources management in the Kafue Flats is the cornerstone of economic activity which has an estimated GDP effect of USD 5.1 billion (WWF, 2018[19]).
There are several interlinked challenges that the basin faces going forward. The planned expansion of hydropower power plants, which will represent half of Zambia’s electricity generation, will at the same time affect livelihoods. For example, hydrological processes such as annual flooding are critical in the regeneration of fish populations, while a receding flood line is an important area for grazing cattle. Planned agricultural expansion and increased water abstraction, which irrigates sugar (among other crops) as a domestic and export crop will impact water resource management. By 2011, the total area under sugarcane in the Kafue flats has grown over the past decade (currently at 27 054 ha compared to 16 140 ha in 2003). In addition, the water supply to the capital, Lusaka is predominantly from groundwater (which is already under stress) and more will need to be abstracted from the Kafue Basin. The groundwater supply and the rate of expansion of municipal services is not sufficient to keep pace with population growth. This has led to increased unplanned settlements, use of septic tanks and industrial waste seepage into the karstic geology.
Solution
The current trade-offs in the basin hence require landscape investment prototypes that will aim at a positive net impact on the landscape and ensured sustained growth. WWF has partnered with the Zambian government, private sector firms, and the Dutch development finance institution FMO to tackle this challenge in a landscape that is critical for the Zambian economy. The Kafue Flats provide a case for piloting bankable projects, because of the inter-related risks described above. Through WWF’s Bankable Water Solutions Initiative, a landscape finance plan will be developed with a suite of pipeline projects that will develop water resources with a positive net impact in the Kafue Flats Landscape.
WWF has secured seed funding to execute a pre-feasibility study for an industrial wastewater treatment plant as the first step in assessing the bankability of such a project. This project would address some of the water risks faced by government and businesses.
The project has also attracted funding from AB InBev, which have a direct interest in the supply system risks/reliability for Lusaka of their own operations and their customers’ wellbeing, as well as the sugar supply chain. This funding will enable WWF to further flesh out the landscape finance plan as well as to investigate the institutional and financial requirements at national level to properly execute bankable projects. An illustrative schematic of how such a plan could combine different investments across the landscape in provided in Figure A D.7.
Figure A D.7. Schematic of proposed blended finance projects that will have a net positive impact on the Kafue Flats
Source: (WWF, 2018[20]),
The WWF’s Bankable Water Solutions Initiative has currently identified 37 projects in 24 river basins globally. The broader initiative includes a WWF enabling team, an advisory panel of experts from financial institutions, an investment platform and seed funding.
Impact
The feasibility study will provide insights into the ex ante view on outcomes.
References
[4] Basile, I. and C. Neunuebel (n.d.), “Blended finance in fragile contexts”, OECD, Paris.
[8] Bhavsar, D. et al. (2019), IT enabled online monitoring systems for scheduled septic tank desludging in Maharashtra, India, https://fsm5.susana.org/images/FSM_Conference_Materials/Tuesday/Morning/Industry/IT-enabled-online-monitoring-systems-_maharashtra_CEPT_sent.pdf (accessed on 19 August 2019).
[16] GuarantCo (2011), GuarantCo - Portfolio - Kalangala Infrastructure Services, https://guarantco.com/portfolio/kalangala-infrastructure-services/ (accessed on 19 August 2019).
[11] MacGeorge, R. (2009), Lessons from Asian Experience: The Nam Theun 2 Hydroelectric Power Project (Lao PDR), Carec Institute, https://www.carecprogram.org/uploads/05-The-Nam-Theun-2-Hydroelectric-Power-Project-Lao-PDR.pdf (accessed on 19 August 2019).
[12] Naughton, M., N. DeSantis and A. Martoussevitch (2017), “Managing multi-purpose water infrastructure: A review of international experience”, OECD Environment Working Papers, No. 115, OECD Publishing, Paris, https://dx.doi.org/10.1787/bbb40768-en.
[1] OECD (2018), Making Blended Finance Work for the Sustainable Development Goals, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264288768-en.
[5] OECD (2017), OECD DAC Blended Finance Principles for Unlocking Commercial Finance for the Sustainable Development Goals, https://www.oecd.org/dac/financing-sustainable-development/development-finance-topics/OECD-Blended-Finance-Principles.pdf (accessed on 6 August 2018).
[2] OECD/UNCDF (2019), Blended Finance in the Least Developed Countries 2019, OECD Publishing, Paris, https://dx.doi.org/10.1787/1c142aae-en.
[15] The Latin American Water Funds Partnership (2018), IMPACTS - Fondos de Agua, http://waterfunds.org/esp/impacts/ (accessed on 25 April 2019).
[14] TNC (2011), Water Funds Conserving green infrastructure: A guide for design, creation and operation, https://waterfundstoolbox.org/ (accessed on 25 April 2019).
[3] UNCDF (2018), Blended Finance in the Least Developed Countries, New York, https://www.uncdf.org/bfldcs/home (accessed on 28 May 2019).
[7] UNEP (2015), WASTEWATER MANAGEMENT PLATFORMS FOR THE WIDER CARIBBEAN REGION, http://cep.unep.org/publications-and-resources/technical-reports/cep_tr_85-en.pdf/@@download/file/CEP_TR_85-en.pdf (accessed on 8 July 2019).
[17] Valahu, P. (2015), Kalangala (Uganda) Infrastructure Services and Renewables Projects-Transforming Bugala Island’s Infrastructure, OECD/WTO Aid for Trade Stories, https://www.oecd.org/aidfortrade/casestories/CaseStory2015_99_Uganda_EconomicInfrastructure.pdf (accessed on 19 August 2019).
[6] WHO/UNICEF (2019), Data | JMP, https://washdata.org/data (accessed on 8 July 2019).
[21] WHO/UNICEF (2017), Progress on Drinking Water, Sanitation and Hygiene Update and SDG Baselines 2017, https://www.who.int/mediacentre/news/releases/2017/launch-version-report-jmp-water-sanitation-hygiene.pdf (accessed on 14 August 2019).
[10] World Bank (2018), Implementation Completion and Results Report: Nam Theun 2 Social and Evironment Project, http://documents.worldbank.org/curated/en/134811549388324604/pdf/p049290-icr-01302019-636846554068325875.pdf (accessed on 25 April 2019).
[18] World Bank (2018), Zambia Overview, https://www.worldbank.org/en/country/zambia/overview (accessed on 14 August 2019).
[9] World Bank (2016), Blended Financing for the Expansion of the As-Samra Wastewater Treatment Plant in Jordan Summary Overview, http://documents.worldbank.org/curated/en/959621472041167619/pdf/107976-Jordan.pdf (accessed on 31 July 2019).
[13] World Bank (2010), Doing a Dam Better: The Lao People’s Democratic Republic and the Story of Nam Theun 2, https://openknowledge.worldbank.org/bitstream/handle/10986/2540/584400PUB0ID161Better09780821369852.pdf?sequence=1&isAllowed=y (accessed on 19 August 2019).
[20] WWF (2018), Banking on financial institutions to save our basin, https://d2ouvy59p0dg6k.cloudfront.net/downloads/banking_of_financial_solutions_to_save_our_basins_1_1.pdf (accessed on 19 August 2019).
[19] WWF (2018), Water Situational Analysis of the Lower Kafue Basin, http://awsassets.panda.org/downloads/water_situational_analysis_of_the_lower_kafue_basin.pdf (accessed on 14 August 2019).
Notes
← 1. To complement this, the Government of Jordan funded a conveyance pipeline to carry high-quality treated wastewater to the Jordan Valley for use in agricultural production.
← 2. EAIF is a member of PIDG that mobilises public and private funds to lend to public and private infrastructure projects in Sub-Saharan Africa.