Opening the flow from local capital markets

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Netherlands-based Water Finance Facility aims to connect utilities in developing countries with local capital markets. The Source spoke to CEO Jean-Pierre Sweerts.


To achieve the SDG 6 goal of universal access to safe, clean water and sanitation, a great deal of investment is required. It is becoming increasingly clear that this cannot be met by government actions alone, or by soft loans from Development Finance Institutions. “Money is needed from the commercial banks and the local capital markets, and the question is how to unlock that,” says Jean-Pierre Sweerts, CEO of the Netherlands-based Water Finance Facility (WFF). “There are several ways to unlock it, and we, at WFF, work on one way – and that is unlocking the local capital market.”

WFF’s aim is to connect local capital markets, even where these may only be relatively small, with creditworthy water companies that are not yet in receipt of commercial finance, targeting the world’s 100 poorest nations on the Development Assistance Committee list of official development assistance recipient states.

“We are active on three sides,” says Sweerts. “We talk with the local capital markets – the pension funds and insurance companies – and discuss whether they are interested in investing in the water sector.” These businesses need to know any investment opportunity is in line with their risk profile, so WFF structures the offer by putting in place guarantees and other measures designed to prove they are safe investments.

Second, WFF talks to water companies. “For example, in Kenya, there are about 100 water companies and around 15 of them are triple-B plus, and we consider them to be bankable,” says Sweerts. “If you pool them together, a few in a pool, the credit rating goes up. As well as guarantee structures, the interest of the local capital market can be attracted to provide loans by the issuing of bonds.”

“You need creditworthy water companies and you need sound legal and governance systems”

This is not a new approach: it is a tried and tested part of water sector financing in countries such as the US. However, it is new in the sense that it aims to tap local capital markets and the regulation that comes with them, leveraging an existing type of financing in a context where it currently cannot work.

The third aspect of WFF’s approach is to interact with national governments. Water companies in Kenya, for instance, are often public organisations, and their shareholders are their counties. They fall under the State Corporations Act (which controls and regulates ‘state corporations’), so the buy-in of the central government is vital, explains Sweerts.

Alongside this, WFF also partners with organisations such as the United States Agency for International Development (USAID) and other donors, as well as major development finance institutions, such as the World Bank.

Progress in Kenya

The Kenya Pooled Water Fund is the first outcome of WFF’s activity. Sweerts hopes the first loans can be achieved via a bond issuance in the first quarter of 2020 to finance two to four water companies. The intention is then to follow this pattern each year, with an issue of around $10 million in the local currency, Kenyan shillings.

Ultimately, Sweerts believes the Fund can become a Kenyan financial institution in its own right, along the lines of the NWB Bank water sector financing bank in the Netherlands. In the meantime, financing through the Fund can be seen as transitional, guiding companies over the coming few decades until the capital market is fully organised and the water companies have a triple-A rating.

WFF’s work in Kenya began in early 2017 and, so far, it has helped 14 water companies with project development, from determining their aims to detailed project plans. Some of these companies are now ready to move forward, explains Sweerts. Considerable effort has gone into transaction support, which is essentially assistance with the process of obtaining a commercial loan, ensuring that the water companies understand their obligations and the signatures they need from their county and the central government.

WFF is also discussing the sector with the proposed investors, says Sweerts, explaining the risk profile to them. One of the reasons this is needed is because the sector is close to the government. “If you look at central or local governments, or government companies all over the world, investors in general are reluctant to invest in them.” WFF undertakes sessions – one to one or with several institutional investors – and holds conferences to help the process.

More broadly, WFF liaises closely with the central government in Kenya and has a steering committee including the ministers for water and finance. It is also talking with the capital markets authority, stock exchange, regulator, and others in this complex world. A new water law has been in place in Kenya for some years and the legislation is strong, notes Sweerts, who adds that the country also has a “very good, solid and strong regulator”, WASREB (the Water Services Regulatory Board).

A flexible blueprint

Sweerts sees the system established in Kenya as offering a blueprint for other countries, although he notes that WFF is flexible and can work on a transaction basis. “If in a country, for example, there is a big public-private water and sanitation project – such as a wastewater treatment plant that has to be built – and it wants to unlock the market for that specific project, we are ready to assist it in that process,” he says.

There are countries that already have financial institutions for infrastructure, Sweerts adds. “In Indonesia, for example, there is an institution called PTSMI, which is the infrastructure finance corporation of the Indonesian government.” Here, if the WFF were to assist Indonesia – and Sweerts says there is considerable interest in doing that – it would work with PTSMI. Indeed, it is in discussions with the institution to see what value WFF could add. He notes that talks with Indonesia are advanced, and that the WFF is also looking at a group of countries in West Africa to see if it is possible to add value there.

The creditworthiness key

Sweerts stresses that there are a number of key factors in progressing the local capital approach, not least that potential lenders have to be confident that clients will repay the loan and interest, and that they are well managed. That can be assessed by metrics such as ratings from the well-known global credit rating bodies – such as Moody’s, S&P or Fitch – or organisations that focus on ratings in Africa.

Sweerts sees the opportunity for parallel efforts to improve the creditworthiness of water companies, perhaps running over a period of a few years. This is not something the WFF does directly. “However, with the project development that we do, and the transaction support we provide – plus the rigour of our borrowing guidelines, with which the companies must all comply – we are kind of giving them the rigour of the market,” he says.

“By taking such a loan, if you do that all well, you become a more creditworthy company. It is a bit like reading a recipe and baking at the same time.”

Clearly, a country, its government and its institutions also need capacity to develop the regulatory framework that enables this work to take place. “This absolutely has to be there,” Sweerts notes, adding that “you need creditworthy water companies and you need sound legal and governance systems”.

There is a further need, he explains. The loan support provided to utilities will come from local capital markets, but grant money is also needed to set up organisations, such as the Kenyan Pooled Water Fund, that can provide guarantees. This type of body will, ultimately, become a financially sound organisation in its own right; in the beginning, however, external funding is needed, which means the involvement of partners who can provide support is important.

Sweerts looks forward to getting the first tranche of projects running in Kenya, which is a landmark he hopes to realise. With the Kenyan government’s active support, he is confident it will succeed. “There are a number of very good water companies in Kenya, with excellent staff who really want the best for their companies. With those who have good governance – which is critically important for the water company and at county and national level – that will work very well.”

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