Country Water Action: Testing Innovative Financing

Feature | 31 December 2008

Ballooning borrowings

India, has increased its loans from the Asian Development Bank (ADB) in the past couple of years, more than any of its Asian neighbors, after being introduced to the bank's new financing modalities. In particular, Indian states are keenly tapping ADB's multitranche financing facility (MFF), with its reduced commitment fees and flexible long-term management set-up.

Already ongoing are four MFFs for urban development investment programs in North Karnataka (US$862 million), Jammu and Kashmir (US$1,260 million), Rajasthan (US$450 million), and Uttarakhand (US$1,589.2 million). Included in these MFFs are major investments for the development of urban water supply and sanitation services.

Out to become India's hydropower state, Himachal Pradesh also tapped US$800 million worth of MFF for clean energy advancement, including the development of four medium to large hydropower projects. In agriculture-dependent Orissa, one of the country's poorest states, an MFF of US$188.2 million is promoting investments to modernize irrigation infrastructure and water resources management systems.

Besides these, 6 more MFFs are financing infrastructure developments and investment programs on energy, roads, and railways. More are being processed, and others are bound to be proposed in the next few years as the deadline for the Millennium Development Goals draws near.

Cities in need

India's deplorable infrastructures, such as those for water supply, give it more than enough reason to borrow from ADB. Ground-level reality shows that India badly needs infrastructure developments.

Many cities in India suffer serious environmental and health problems, often directly caused by rapid urbanization, under-investments in infrastructure, and poor management and operation of public services. Many urban households, particularly the poor, have limited access to potable water and improved sanitation facilities. These services are beset by inefficiencies in service delivery plus inadequate funds to maintain and expand service coverage.

India needs better urban infrastructure and services to attract more investors, but the scale of the investments needed is so massive that even pooling government resources with multilateral and bilateral financing will not be enough.

Flexible financing

ADB's investments in the water sector over the last 15 years have been modest, to say the least, and not nearly enough to address the burgeoning water problems of the Asia-Pacific. To close this gap, ADB launched the Water Financing Program (WFP) to double investments in the sector between 2006 and 2010. ADB aims to invest roughly $12 billion of its own resources to deliver specific outcomes on drinking water, sanitation, irrigation, flood management, integrated water resources management, and water governance.

ADB's new financing products, which include the MFF, subsovereign and nonsovereign public sector lending, local currency financing for the public sector, refinancing, and others, complement this drive to increase water investments. Among these products, the MFF is seen to be opening wider doors for development, and India has entered those doors.

The MFF is a flexible financing framework that allows ADB to finance, using future loans and guarantees, an agreed and interrelated investment program. In India's case, the investment program is derived from a sector roadmap designed by the local or state government, and these roadmaps identify the most urgent investment requirements.

MFF's loans and guarantees are spread over time in "slices" or tranches. The tranches are committed only as programmed investments become ready for financing. As such, commitment fees are only applied on committed amounts, rather than on the total value available under the facility. To avail of MFF, a country requires:

  • an existing policy framework
  • a client-owned sector roadmap
  • an investment program and financing plan

India's water sector meets these criteria.

How it works

To implement each MFF, ADB and the National Government entered into a Framework Financing Agreement (FFA), which outlines the specific terms and conditions under which tranches can be made. Both parties also prepared and agreed upon a Facility Administration Memorandum (FAM) to facilitate the implementation of the investment program.

All subprojects proposed under the MFF should meet the established selection criteria comprising technical, environmental, social, institutional, economic, and financial considerations. Succeeding loans under the MFF will only be made when proposed subprojects have been properly appraised, designed, and readied for implementation.

Financing the future?

Three years after its creation, the MFF has demonstrated the flexibility necessary to meet Asia's development and financing needs.

However, not all countries are like India, with its sufficiently developed roadmaps and investment programs. Those that have availed of the MFF to date include Afghanistan, Bangladesh, Pakistan, and the People's Republic of China.

An MFF, or even an individual MFF tranche, has yet to be completed and the full benefits from this financial package have yet to be realized. It will probably take a few more years to fully assess MFF's effectiveness as an innovative development financing modality. But lessons are being learned from each MFF that moves to the next stage, or the next tranche.

Will the MFF live up to its promises? And will the challenges facing current MFFs be overcome? Asia will just have to wait and see.