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Talking Point - Blended Finance

Philippines Water Revolving Fund - A facility for blending public and private sector funds and delivering affordable long term financing for public water utilities.

 

More than a decade ago, the Government of the Philippines (GoP) committed to achieving Millennium Development Goals for water supply by expanding access to safe water to 16 million Filipinos -- about one-fifth of the country's population. At that time, the World Bank estimated that this would require annual investments of PhP6-7 billion (US$150-$175 million); however, public sector spending on water supply remained frozen at PhP3-4 billion per year due and the GoP had reached the limit of its ability to borrow from international donors and banks. The only way to achieve the goal would be to mobilize private sector financing and investment. However, private bank financing was high cost (in excess of 14%) and short term (maximum of five to seven years) making pure private bank financing unfeasible for water utilities that need long term (15-plusyear) financing at more affordable rates to make many network expansion projects feasible. Out of this crisis emerged the Philippines Water Revolving Fund (PWRF) - a facility that blends public and private sector funds and delivers the affordable and long-term financing that water utilities needed.

The development of the PWRF and particularly the initial mobilization of private bank financing for public water utilities required a partnership between the GoP, USAID, and the Japan International Cooperation Agency (JICA). Private banks perceived the public water utilities as very high risk clients, so securing their participation required two types of guarantees to lower this risk: (1) a credit default guarantee from a domestic private guarantee corporation that was backed up by a co-guarantee agreement with USAID's Development Credit Authority - combined these guarantees would repay private banks up to 85% of outstanding loans should the public water utility default; and (2) a guarantee from the Development Bank of the Philippines (DBP), a government financing institution, to repurchase private bank loans to water utilities after an initial five to seven year period should the private banks want out of the deal. JICA provided a low interest loan to the DBP that served as the GoP's capital contribution to the PWRF. With this capital and credit enhancements, the PWRF was able to blend the lower cost funds from the JICA loan with private bank financing at market rates and deliver affordable 15 - 20 year financing to water utilities. The ensuing transactions led to improvements in governance and efficiency of water utilities and contributed to deepening the financial markets in the Philippines. The referenced paper discusses the formation of the PWRF and the related activities that have strengthened public water service delivery and mobilized more than PhP10.5 billion (US$234 million) in financing for water and sanitation projects that are expanding services to more than 1.8 million people. Sixty percent (60%) of this funding is from private banks and developers.

Read the full report in our library here