Tapping local capital markets
The Water Finance Facility (WFF) mobilises large-scale private investment from domestic institutional investors such as pension funds, insurance companies and other qualified investors, by issuing local currency bonds in the capital market in support of their own country’s national priority actions on water and sanitation service delivery. The aim is to develop several country level water finance facilities, which can issue bonds in their capital markets to provide long-term loans to public or private water utilities that have little or no access to commercial finance or that have access at unfavorable terms, such as short tenors. Through the pooling of projects of credit worthy water and sanitation companies, the bonds will have lower risk. This risk can be further reduced, if reserve funds, guarantees, soft loans or grants for blended finance can be incorporated into the capital market structures.
The availability of financing and safe management of water and sanitation for all (SDG 6) cannot be achieved by public sector funding and management alone. WFF, as a non-bank, public benefit financial company, can make a difference by using its capital to develop local water financing facilities that can bring private, large-scale and long-term capital market financing into the water sector. At the same time, WFF will enhance local capital market development by providing alternative, credit worthy, long term investments opportunities for the local pension funds and other investors of the domestic capital market. WFF’s target is to help local water utilities develop financeable projects and obtain access to financing and thus provide approximately 20 million people with sustainable access to safe water and adequate sanitation services.
The benefits of Pooled Funds
A pooled bond transaction involves aggregating or bundling loans from several credit worthy water and sanitation companies and issuing a single bond to the capital market. The local pooled transaction is appropriately credit enhanced with de-risking instruments (e.g. guarantees) to become a viable investment proposition for the local institutional investor community. Pooling a number of loans into a single transaction for financing has three advantages over single issuance vehicles: (1) the common financing structure spreads the transaction costs among all borrowers, creating an economy of scale, (2) larger capital market financings attract more investors, and (3) pools diversify risk and are less costly to credit enhance.
Achieving a target business volume of €1 billion by the end of 10 years
WFF’s goal is to catalyse the issuance of an aggregate of circa €1 billion in water bonds in 5-8 countries. At that point, the WFF is expected to have achieved financial self-sustainability, such that its operations can be maintained at scale via its interest revenues (margin between borrowing and lending rates ) without further donor support. This results from the objective to establish because of the revolving character the WFF as a revolving fund, such that (repayment by the NWFFs) of a substantial part of the development expenses made funding provided by WFF directly for the NWFFs will be in the form of a repayable loan.