Water Supply and Sanitation in The Philippines - Financial Aspects - Financing

Financing

Outside the privatized services in Metro Manila, one source of finance for water supply are government grants channeled through the Local Water Utilities Administration (LWUA) and the Municipal Development Funds Office (MDFO). But these are far from sufficient to meet investment needs, which is why loan financing is necessary. Some LGUs obtain loans from public banks such as the Development Bank of the Philippines (DBP) and the Land Bank of the Philippines (LBP), which in turn obtain some of their funds from the World Bank or JICA from Japan (see below).

In order to partly fill the remaining financing gap, an innovative mechanism has been introduced to blend limited public donor funds with commercial lending in local currency from private banks: the Philippine Water Revolving Fund. Prior to its launch in 2008 LGUs and water districts did not know how to prepare business plans for commercial banks and commercial banks did not know much about these potential clients and perceived water supply as an excessive risk. In order to overcome this problem, USAID, JICA and the Department of Finance set up the Revolving Fund which is the first of its type in a developing country. Technical assistance trained LGUs in writing business plans and bank staff in appraising loan requests for water supply projects. In addition, a credit rating system for borrowers in the water sector was set up and a guarantee system was set up to lower the risk for the banks. Under this system, the LGUGC (Local Government Unit Guarantee Corporation) guarantees 85% of loans from commercial banks, with a counterguarantee from USAID's Development Credit Authority. In parallel to the loans from commercial banks, the Development Bank of the Philippines (DBP) provided co-funding in the form of subsidized loans that were refinanced with a loan from JICA. The "Revolving Fund" mobilized USD 58 million in loans from commercial banks for 22 projects over three years, in addition to USD 37 million from DBP/JICA. While banks normally extended loans only for up to 10 years, under this arrangement they provided loans with a maturity of up to 20 years that match the long-term nature of infrastructure investments. The initial perception that lending in the water sector was very risky could be overcome, so that some commercial banks now lend without guarantees and without co-funding from the DBP.

In Metro Manila, investments are financed by the two private concessionaires. In the case of Manila Water, one of the concessionaires, water supply investments are refinanced through the stock market, loans and equity from the International Finance Corporation, as well as local currency bonds. Investments in sanitation are financed by the World Bank through MWSS.(see also Water privatization in Metro Manila, section on financial arrangements).