CASE STUDIES IN BLENDED FINANCE FOR WATER AND SANITATION Water Revolving Fund in the Philippines August 2016 CHINA Summary Overview LAO P.D.R. Location: Philippines, Southeast Asia THAILAND PHILIPPINES Approach to Blended Finance: The Philippine Water VIETNAM Revolving Fund (PWRF) was set up in 2008 to provide CAMBODIA loans to water service providers—local government units (LGUs) and water districts (WDs)—to finance local water and wastewater projects. Loan repayments made into BRUNEI DARUSSALAM the fund are revolved to finance other projects. PALAU M A L AY S I A The PWRF blends Official Development Assistance (ODA) and domestic public funds with commercial financ- SINGAPORE ing to lower borrowing rates, and to market water and sanitation projects to private finance institutions (PFIs). I N D O N E S I A Concessional seed financing from the Japan Bank for International Cooperation (JBIC), was provided to the PWRF at the start of the program. The financing is backed by a standby credit line (to protect against liquid- ity risk) and a co-guarantor credit guarantee. were not familiar IBRD 42431 with utilities and saw them as weak and | AUGUST 2016 inefficient. Context To address those challenges, the United States Agency for International Development (USAID) and Japan Bank In the Philippines, financing for the water and sanita- for International Cooperation (JBIC) worked in partner- tion sector traditionally came from a combination of ship with the Government of the Philippines to create international development funds, domestic public funds, the Philippine Water Revolving Fund (PWRF) and help and revenues from bill collection. In the 1990s, such mobilize additional domestic commercial financing for funds proved insufficient to cover infrastructure invest- water utilities through blending with ODA funding. The ment costs, which generated increased attention for PWRF was set up in 2008 as a co-financing facility with mobilizing private sector financing. Legal and regula- the purpose of facilitating private institutional financing to tory reforms were initiated to make way for mobilizing support municipal water and wastewater projects. The domestic finance. In 2004, Executive Order 279 modified PWRF program is multifaceted in its approach to address the financing policies for local water service providers. obstacles that prevent the flow of commercial finance This led to the establishment of a system to categorize into the water sector, and involved support in three key water service providers, including local government units areas: innovative financing, operational strengthening, (LGUs) and water districts (WDs) according to their levels and regulatory reforms. of creditworthiness: those qualifying as creditworthy were expected to shift away from government financing Innovative financing includes the establishment of and mobilize market-based financing sources. However, a revolving fund mechanism, the Philippine Water lending from private banks to water utilities was virtu- Revolving Fund (PWRF) as well as two complementary ally nonexistent at that time, as local commercial banks Case Studies in Blended Finance for Water and Sanitation: Water Revolving Fund in the Philippines financial market-enabling components: (1) a credit rating concessional terms, specifically an effective interest rate system to help inform investors; and (2) a water project that is slightly lower than the prevailing market rate and appraisal training program to build the capacity of lend- longer maturities. This helps address two key barriers for ers with little prior experience of investing in the water the mobilization of private finance: short tenors and high sector. For the operational strengthening component, the costs of borrowing. objective was to help utilities improve internal operations and creditworthiness, thereby allowing them to develop Typically, utilities require a 15-20 year repayment term, bankable projects. Finally, regulatory reform efforts in order to amortize up-front investments in capital helped improve the enabling environment for commercial infrastructure and ensure affordable water services to finance lending to water utilities. households. In the Philippines, bank loans could not be obtained for periods longer than seven to ten years. This obstacle was removed through a PWRF mechanism Financial Structure and Approach to that used public funds, from the Development Bank of Blended Finance the Philippines/Municipal Development Finance Office (MDFO), to provide a standby credit line to cover the liquidity risk of private finance institutions, and refinance The PWRF on-lends concessional funding sourced the private bank loans, if required. In this way the liquidity originally from JBIC through the Development Bank of enhancement allowed the PWRF to extend longer loans. the Philippines (DBP), blending it with funds from domes- tic private commercial banks to be lent out in support Two guarantee types have been utilized by PWRF of water projects. The average financing ratio has been to boost investor confidence. The original JBIC loan about 50–75 percent from a DBP/JBIC loan, and 25–50 provided to DBP was backed by a sovereign guarantee percent from private lenders. The loans offer favorable from the Government of the Philippines. At the same FIGURE 1  Philippine Water Revolving Fund (PWRF), Philippines: Financial Structure Government of the LGU Guarantee Private Finance Institutions (PFIs) Philippines—Department Corporation (LGUGC) Domestic Banks Credit Risk of Finance Guarantee Sovereign Standby Debt Service Co-Guarantee Guarantee Credit Line Japan Bank for United States Agency International Cooperation Development Bank of the for International (JBIC/JICA) Philippines (DBP) Development (USAID) Concessional Funds Legend Supply of Finance Philippines Water Revolving Fund (PWRF) Commercial Loans Repayment Flows Credit Enhancement Loans Debt Repayment Public/Donor Agencies Private Financiers Water Service Providers Financial Intermediary (LGUs and Water Districts) Service Provider 2 Water Global Practice Case Studies in Blended Finance for Water and Sanitation: Water Revolving Fund in the Philippines time, PWRF maintains a credit risk guarantee option projects, of which approximately 60 percent came from from the LGU Guarantee Corporation (LGUGC). Formed private banks. An estimated six million people have ben- in 1998, the LGUGC is a private third-party guarantor efited from the new or improved access to piped water. that helps LGUs access financing by offering guarantees on LGU loans and bonds for all types of infrastructure To date there have been no defaults on loan repayment. projects. The guarantee reduces the risk of an LGU Domestic banks have started lending to water districts default through the use of the LGUGC ability to intercept on their own, and this is credited to the confidence build- the tax revenues from the central government to the ing and impetus of using a blended finance approach LGU. The LGU guarantee functions so as to replace hard implemented through the revolving fund. collateral with the assignment of revenues, an option that offers protection in the case of default because the revenue sources can be accessed to pay lenders. The Lessons Learned LGUGC is itself backed by a guarantee from the USAID Development Credit Authority for up to 50 percent of the Blending through the revolving fund has resulted LGUGC’s exposure. in lower borrowing costs for water service provid- ers and longer tenors. Longer tenors are achieved through use of standby credit lines. To extend loans that Results reflected the lifetime of utility assets, PWRF included a In 2010, the Puerto Princesa City Water District received liquidity risk protection mechanism that allowed private one of the first loans from PWRF. The loan was used finance institutions the option to extract their loan early, to finance the rehabilitation and expansion of the city’s by ensuring refinancing through the standby credit line water system. The loan was co-financed by the state- from the DBP. This enabled the utilities to access financ- owned Development Bank of the Philippines (DBP) and ing without having to substantially increase tariffs. the Bank of the Philippine Islands (BPI), the third largest commercial bank in the Philippines. The co-financing The different credit enhancements offered with agreement was for a PhP 562 million (US$13 million) PWRF lowered investment risk. The blending design loan. DBP contributed 75 percent, which was on-lent of the PWRF, facilitated by the different credit enhance- from the JBIC loan contribution. BPI used its own funds, ments, offers a mechanism whereby local private which constituted 25 percent of the total loan. Eighty-five financial institutions can invest in the sector with low risk, percent of the BPI loan was guaranteed by LGUGC and transforming the way banks assess and finance water USAID. The Puerto Princesa City Water District provided projects. However, such instruments vary according to equity in the amount of 10 percent of total project cost. availability in country (LGUGC type entities do not exist The tenor on the DBP loan was 15 years, while the in other countries) and from donors like USAID/DCA. tenor on the BPI loan was 10 years with an extendable five-year option. Both loans came with a two-year grace The multi-layered approach of PWRF to mobilize period. The Water District effectively received a 15-year commercial finance is important to bear in mind. tenor for the full loan amount because of the DBP under- Blended finance was accomplished through the revolv- taking to provide liquidity cover (through the standby ing fund mechanism, but additional technical support credit line) if BPI would not extend the loan. and regulatory changes helped improve the enabling environment and access to commercial finance. From inception through 2014 the PWRF successfully Technical assistance to both investors and utilities channelled more than US$234 million in loans for water helped them assess risk and improve their performance and sanitation projects to finance 21 water and sanitation respectively. www.worldbank.org/water 3 Case Studies in Blended Finance for Water and Sanitation: Water Revolving Fund in the Philippines References This case study is part of a series prepared by the World Bank’s Water Global Practice to highlight existing blended DAI. Loan from Philippine Fund Means Clean Water for Tens of Thousands. Development Alternatives Inc. (DAI). Accessed finance experiences in the water sector. July 10, 2016. http://dai.com/news-publications/news/ loan-philippine-fund-means-clean-water-tens-thousands Blended finance refers to “the strategic use of develop- ment finance and philanthropic funds to mobilize private DAI. Water Revolving Fund Support Program (PWRF). capital flows to emerging and frontier markets,” as per the Development Alternatives Incorporated (DAI). Accessed OECD definition (WEF OECD, 2015). Concessional funds June 15, 2016. http://dai.com/our-work/projects/ philippines%E2%80%94water-revolving-fund-support- can be used in a catalytic manner to open up new oppor- program-pwrf tunities for commercial financing, by providing technical assistance to borrowers and lenders to help them become Kehew, Robert, Tomoko Matsukawa, and John Petersen. more familiar with each other, help structure transactions, 2005. “Local Financing For Sub-Sovereign Infrastructure In provide credit enhancement mechanisms, etc. Developing Countries: Case Studies of Innovative Domestic Credit Enhancement Entities and Techniques.” Discussion Paper No. 1, Infrastructure, Economic and Finance Private capital flows can help with meeting immediate department. Washington, DC: The World Bank. financing needs for investment in the water sector but ultimately need to be repaid. Repayable financing from Paul, J. 2011. Making Water Reform Happen: The experience private sources to the water sector can come in vari- of the Philippine Water Revolving Fund. OECD Global ous forms, including as commercial bank loans, bonds Forum on Environment. Paris: OECD. or equity. To obtain such financing, water-sector actors Porciuncula, Alma. 2014. “Innovative Fund Enables need to be able to repay the borrowed amounts and the Philippine Water utilities to Invest, and Deliver Safe associated funding costs, which means that they need to Water to New Customers.” DAI Newsletter. Bethesda, be deemed “creditworthy” by providers of finance. Maryland: Development Alternatives Incorporated (DAI). http://dai-global-developments.com/articles/ Contact Us innovative-fund-enables-philippine-water-utilities-to-invest/ For further information please contact Joel Kolker Trémolet, S. 2010. Innovative Financing Mechanisms for the (jkolker@worldbank.org) or Sophie Trémolet Water Sector. Paris: OECD. (stremolet@worldbank.org). USAID. “Innovative Funding Removes Barriers to Water and Sanitation in the Philippines.” Accessed July 28, 2016. www.usaid.gov/global-water/march-2011/ innovative-funding. Disclaimer USAID. 2011. The Philippine Water Revolving Fund Support © 2016 International Bank for Reconstruction and Development / The World Bank. Some rights reserved. The findings, interpretations, and Program (Final Report). Washington, DC: USAID. conclusions expressed in this work do not necessarily reflect the views WEF OECD. 2015. Blended Finance Vol. 1: A Primer for of The World Bank, its Board of Executive Directors, or the governments Development Finance and Philanthropic Funders. Geneva: they represent. The World Bank does not guarantee the accuracy of World Economic Forum. the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgement on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. This work is subject to a CC BY 3.0 IGO license (https://creativecommons. org/licenses/by/3.0/igo). The World Bank does not necessarily own each component of the content. It is your responsibility to determine whether permission is needed for reuse and to obtain permission from the copy- right owner. If you have questions, email pubrights@worldbank.org. Water Global Practice www.worldbank.org/water 1274