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close this bookBetter Water Services in Developing Countries - Safeguarding the Interests of the Poor (DFID, 2000, 22 p.)
View the document(introduction...)
View the documentWater is Essential for Life
View the documentThe Need
View the documentRequirements for Successful PPP
View the documentProblems and Opportunities
View the documentInvestment Needs
View the documentFinance and Risk Mitigation
View the documentThe Opportunity for PPP
View the documentBack Cover

Finance and Risk Mitigation

In addition to direct finance and guarantee facilities, measures to promote and protect investment include the establishment of country infrastructure funds, the development of local capital markets, advisory services to investors, and project appraisal against increasingly well developed criteria. A discrete mix of finance is usually required.

DEBT CAPITAL

Debt capital from international agencies may be broadly available as loans direct to the water utility (with a guarantee from the host country), loans to the host country for on-lending to the utility company, and in the form of export credits. Agencies which provide debt capital under various terms include IBRD, IDA, ADB, IADB1 and country Export Credit Agencies. The terms of international agency loans vary from market lending rates to highly concessional terms for poorer countries.


Figure

Sources of Finance for the First 5 Years of the Buenos Aires Water and Sewerage Concession

EQUITY CAPITAL

Equity capital can be provided direct to a PPP utility by some of the major multilateral agencies - for example ADB, EBRD, IIC and IFC1. In other cases a loan can be made to a country, for example to enable a parastatal to hold an equity stake in a joint venture with the private sector.

1 For contact details see inside rear cover


Figure

IBRD Loan to Water Company

International funding agencies are playing a major role in the promotion of PPP by developing a range of finance facilities and guarantee instruments.

Partial risk guarantees - cover specific risks arising from non-performance of government contractual obligations which are critical to the viability of projects.

Partial credit guarantees - typically extend the maturities of loans and cover all events of non-payment for a designated part of the debt service; they are therefore particularly valuable to projects which need long-term funds in order to be financially viable.

Political risk - this covers the major non-contractual risks such as expropriation by government without sufficient compensation, currency inconvertibility and exchange transfer, and political violence. Most of these can be covered by investment treaties and insurance together with guarantees, if provided in the specific contract.

Apart from the facilities available from the major multilateral funding agencies, many forms of assistance are provided by bilateral agencies such as ECGD and CDC in UK and OPIC in USA. International funding agencies are continually revising the range of their services, and can be expected to be highly flexible in devising forms of assistance which will suit the circumstances of particular projects.

Multilateral and Bilateral Guarantees and Insurances are Widely Available

Facility

International Funding Agency


IBRD

MIGA

ECGD

ADB

IDB

Partial Risk

Partial Credit



Political Risk







· War



· Revolution



· Expropriation



· Nationalisation



· Transfer


· Inconvertibility

Quasi-Commercial risks - these risks arise from governmental management of the infrastructure and can be resolved by insurance and guarantees if included in the specific contract. Enforcement can be secured by resort to international arbitration.