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Small-scale finance for water and sanitation: World Water Week 2011 - Sophie Trémolet
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Small-scale finance for water and sanitation: World Water Week 2011 - Sophie Trémolet


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  • More on PSSPs - 1 st column: e.g. equipment suppliers, masons, small construction companies, private land & housing developers 2 nd column: NB in all cases, non financial constraints appear to be more pressing than financial ones e.g. legal constraints but can become addressed by financial efforts e.g. guarantees. Some issues need to be addressed from the national institutional level, such as in Kenya there was a change in the law to enable small scale private operators to operate legally thereby creating the opportunity for financial instruments to be used to fund WATSAN on a small scale. NB 2 It is easy to get confused here between the providers of the service at the infrastructural level and where the donor funding is being received, and what institutions are being used to channel the funding. E.g. an MFI will not implement a small scale WATSAN project but it may be used to channel the funding to whoever ultimately installs the pumps for example. In this typology we are mainly concerned with giving donors an idea of what small scale providers look like on the ground. Next we will move on to how donor funds might get there.
  • APEX organisations Réseaux d’organismes de microfinance : PlanetFinance, réseaux sur le web (mixmarket), réseaux régionaux (Africa microfinance network, ).
  • 1 2 GIZ strongly disagreed with funding SSF for water but agreed with funding it for sanitation – due to desire to stress the government ‘ s responsibility in utility and network provision 3 Regarding inerest rates -
  • Guidelines for EU donors: lists indicative areas where grant funding can be used at macro level (funding of research on policy/regulatory frameworks, training for regulators, TA on regulatory aspects), at meso level (design and setting up of credit bureaus, enhancement of rating practices, support to professional networks and trade associations to build member capacities, etc…) and at micro level (TA to MFI for development Mention about EU-ACP microfinance programme: Approach: building capacities of microfinance actors, supporting ratings and information systems and enhancing transparency and efficiency in microfinance market Mention that the European Investment Fund is also involved with microfinance but it is focused on Western Europe and Accession countries Extra Sophie A on DGIS Instruments used include loans to commercial banks and grants to MFIs and local public institutions. The main thing that is interesting about DGIS is their preference for channelling funds through NGOs. According to CGAP this also included channelling 80% of funds to MFIs through 4 Dutch NGOs. HOVIB, NOVIB, ICCO, BILANCE
  • APEX organisations Réseaux d ’organismes de microfinance : PlanetFinance, réseaux sur le web (mixmarket), réseaux régionaux (Africa microfinance network, ).
  • Transcript

    • 1. The Small Scale Finance “puzzle” Sophie Trémolet, Stockholm, 25 August 2011
    • 2. Presentation overview
      • Why look at Small Scale Finance?
        • Financial needs
        • Limitations of domestic private financing markets
      • The role of public finance
        • How can public finance help?
        • What are EU donors currently doing?
      • Case study: supporting sanitation microfinance in India
      • Key messages
      • Group discussion
    • 3. Introduction
      • What is small scale finance?
      • Small-scale finance (SSF) includes:
        • Microfinance: primarily to households, upper bound: ~ USD 5,000
        • Mesofinance: to small-scale enterprises, upper bound: ~ USD 500,000
      • Provided to Small Scale Agents (SSAs)
        • Households, SSIPs, SMEs, CBOs, NGOs, local governments
      • Why look at small scale finance?
      • Small Scale Agents finance and serve a substantial portion of the WATSAN market, particularly for the poor
        • Households are primary investors in on-site sanitation and water
        • SSIPs serve a high percentage of the population (40 to 90%)
      • SSAs face a number of constraints, including financing:
        • Lack of legal recognition e.g. informal status of operator, land tenure issues
        • Poor institutional capacity (insufficient training, lack of business skills)
        • Lack of capital or collateral for small private enterprises
        • Limited access to liquidities for consumers
    • 4. Financing needs and instruments Small Scale Agents Type of infrastructure for which they need finance Financing needs Households Water Sanitation Household connections or water tanks On-site sanitation facilities
      • Microfinance mechanisms such as:
      • Micro loans
      • Savings and loans combined
      • Group lending and solidarity mechanisms
      Community Based Organizations (CBOs) Water Sanitation CBOs, user committees, cooperatives, neighbourhood organizations and self-help groups. Upgrading, rehabilitation and extension of small piped networks/ point source operators Management of public toilets e.g. latrine cleaners and O&M
      • Medium term loans (for community contribution and O&M management)
      • Savings (savings first policy)/current accounts, short-term loans for repair
    • 5. Financing needs and instruments Small Scale Agents Type of infrastructure for which they need finance Financing needs Private Enterprises Water Sanitation
      • Small Scale Providers
      • Water kiosk operators & carters
      • Latrine emptiers
      • Masons, small construction companies
      • Small scale equipment e.g. gloves, carts, protective clothing
      • Building materials
      • Short term loans (working capital)
      • Capital investment loans
      • Leasing of expensive assets
      • Savings instruments
      • Current accounts
      • Overdraft facilities
      Water tankers Vacuum tankers
      • SME Private Operators
      • Equipment suppliers
      • Small water network operators (e.g. Aguateros)
      • Small sewerage network operators
      • Private land & housing developers
      - Larger scale investments for equipment (as above) - Distribution networks e.g. building small bore sewer network
    • 6. Gaps in SSF provision
      • Domestic financing markets often inadequate
        • Financial institutions unaware of the needs of WATSAN sector
        • Lending terms inadequate (high interest rates, short maturities)
      Households CBOs Small Scale Providers
    • 7. The “ missing middle ”
    • 8. How can public finance help?
      • Public finance can help catalyse domestic private finance
        • Bridge the capacity / awareness gaps
        • Support the development of tailored products for WATSAN
        • Soften financial terms
      • Potential financing instruments
        • Grants (for capacity building, market research, product development, seed financing for revolving funds, OBA subsidies)
        • Equity (participation to investment funds or MFIs)
        • Loans on concessional terms, guarantees
      • Main difficulties and risks in using donor funding
        • Grant financing overall limited
        • High transaction costs for donors to get involved at this level
        • Donor intervention can distort local financial markets
    • 9. Potential uses of public funding
    • 10. Maximising the leveraging effect Sanitation financing model Source: Trémolet, Kolsky & Perez (2010) for WSP Sanitation revolving fund
    • 11. How to get funds from A to B? A: Donor (source of funds) B: Small-scale Agents (SSA) Implausible? MFI / NGO (Microfinance Institution) Microfinance loan Repayment, savings Local commercial bank Commercial loan Repayment APEX (at national level) MIVs/ Multi-donor Trust Fund Donor flow: loan, equity, grant Private flow: loan, (occasional savings)
    • 12. What are EU donors doing?
      • Survey objectives
        • Understand what EU donors are doing in the area of SSF in general and whether they are providing/supporting SSF for WATSAN
      • Results of EU donor survey
        • Responses from AFD, ACP-EU/DEVCO, DGIS, DFID, EIB, GIZ, SIDA and DANIDA
        • More information expected from Finland and Norway
      • Overall findings
        • EU donors have limited experience in this area
        • Most EU donors are focused on lending at national level to public actors (Ministries, public utilities, more rarely local governments)
        • Information is difficult to track (partly due to multiplicity of financial channels and decentralised nature of many EU donor institutions)
        • Some have expressed strong interest (e.g. EIB or AFD) in developing their activities in that area going further, others have decided against (e.g. GIZ)
    • 13. What are EU donors doing?
      • Other information (not completed a full survey)
      • DFID has experience in SSF in general (e.g. CLIFF) but not specifically in WATSAN, except through its involvement in GPOBA (link to the K-Rep program)
      • EIB has ample experience in SSF in general (especially through European Investment Fund) but limited in WATSAN sector
      Donor Support to SSF?   Support to SSF for WATSAN? Comments   Micro Meso Micro Meso   AFD Y Y N N Interested in exploring SSF for WATSAN ACP-EU/DEVCO Y Y Y Y One project financed by the Water Facility (Kenya, via co-financing with WB via GPOBA) EU-ACP microfinance program (limited impact) GIZ Y Y N N Decided after extensive research in Kenya & Uganda not to support SSF for WATSAN DGIS Y Y Y Y Only 0.4% of their SSF portfolio goes to WATSAN (USD 0.3mn in 2009) and only for mesofinance SIDA Y Y Y Y Only general support via core funding provided to WSP DANIDA Y Y N N They foresee starting support to MF in Vietnam in the near future
    • 14.
      • Broadly agree that SSF for WATSAN can be a tool to help the poor but not the ultra-poor
      • Mostly agreed that improving access to SSF can enhance poor people ’ s access to WATSAN and that donors have an important role to play (although GIZ was more circumspect)
      • Diverging views as to whether on-lending terms should be restricted (AFD: conditions on passing down loan concessionality could be imposed; GIZ: strive not to distort the market)
      • Mostly agree that the lack of revenue-generation associated with water investments (for households) is not a constraint on microfinance (revenue generation exists for SSIPs, masons, etc…)
      EU donor views on SSF
    • 15. Case study: “Toilet loans” in India
      • High demand for sanitation at household level
        • Low coverage rates in rural areas in particular (~ 27%)
        • Total Sanitation Campaign aimed at boosting coverage
      • Growing number of NGOs and MFIs getting involved in the “toilet loan” business in urban and rural areas
      NGO/MFI Number of toilet loans BISWA 115,000 in last 2 yrs Guardian 12,000 in last 3 yrs BWDC 9000 in last 3 yrs ESAF 3600 Grameen Koota 5050 RDO Trust 700 IIRD 552 SAMBAV 1710 Sample total ~ 150,000 loans ~ 750,000 people
    • 16. The microfinance context in India SHG NGO Commercial Bank JLG MFI Commercial Bank NABARD
    • 17. Guardian: supporting an NGO-MFI
      • First “ water and sanitation-focused” MFI (spun-off from an NGO, Gramalaya) operating since 2008
      • Still small-scale (1 district in Tamil Nadu) but growing fast (20,000 loans disbursed over 3 years, 60% for sanitation)
      • Operating in rural areas and urban slums
      • “ Toilet loans”: between USD 180 to 225, over 18 months, 18% yearly interest rate (reducing) + 3% charges
      • Strong demand for toilet loans, 100% repayment rates
      • Recognize can only reach ~ 30-40% population in villages
      • Financial sources
        • Grant support: ~ USD 165,000 ( – 6% funding
        • Commercial funding: ~ USD 2.6 mn (local commercial bank, social investors incl. Acumen Fund and Milaap)
        • High “Leverage ratio” (16)
    • 18.
      • FINISH: Financial Inclusion Improves Sanitation and Health
      • A 5-year multi-partner programme in India set up in 2008
      • Goal: support 1 million sanitation systems by 2013 through a combined approach (with microfinance focus)
      • Acts as an umbrella fund contributing to 6 partner NGOs who dedicate 10% of their MF portfolio to sanitation
      • Sanitation loans of 88 USD to 7,777USD
      • Innovative aspects:
        • OBA-type payments to implementing partners and field workers for increased coverage (up to 100%). Accounts for 40% total budget
        • Life & health insurance component, linked to sanitation investment
      • 132,000 toilet loans made thus far in 7 states across India
      • Grant contributions by DGIS and BMGF estimated at 9% total funding whilst the rest of financing is leveraged from banks
      FINISH – Innovative partnership
    • 19. FINISH project in India (2)
    • 20. Community-Led Infrastructure Financing Facility
      • Community financing of housing & slum improvement projects (including sanitation)
      • Phase 1 (2002-2010)
      • Initially piloted in India in 2002, later extended to Kenya & Philippines
      • Managed by Homeless International
      • Donor funding: DFID (USD 11.2mn) and SIDA (USD 4.6mn) – grants used as seed funding for revolving fund and leverage commercial financing
      • Leveraged financial & non-financial resources: USD 87mn (leverage: 5)
      • Implemented 29 projects (4 of which sanitation)
      • Type of support:
        • 75% capital grants: enable partners to provide loans to projects (these funds are later revolved to support new projects)
        • Operational grants to cover costs of project preparation & management
        • Loan guarantees from Homeless International guarantee fund
      • Phase 2 (2010-15)
      • Increased funding: DFID (USD 24mn) and SIDA (USD 6.5mn)
      • Looking to expand range of implementing partners and number of countries
    • 21. “ Take home” messages
      • Limited access to financing is a key obstacle for SSA to deliver sustainable services (by no means the only one and not necessarily the most important)
      • Few MFIs/ NGOs are involved in channelling financing to SSAs in WATSAN
        • There is a need for building their capacity and awareness of financing needs in WATSAN sector
      • Small-scale finance is not limited to micro-credit
        • Consider a broad range of financial instruments at various scales and combining them for maximum effect
      • SSF is only one instrument amongst many others, not a panacea
        • Best suited to meet the needs of the “ missing middle ” rather than BOP
      • Donors can use a variety of channels to transfer finance to SSAs
        • Consider channelling financing via multi-donor bodies and APEXes at national level rather than directly
      • Sanitation may be the sub-sector where needs are greatest and holds most potential
    • 22. Questions for group work
      • How can donors contribute to supporting SSF: what works and what does not work?
      • How can we scale up support for SSF? 
      • Group work: 45 minutes – then reporting back and conclusions
    • 23. Questions for panel participants
      • Meera Mehta (perspective from India)
      • Can MF make a significant contribution to improving access to water and sanitation (in particular) in India? [in answering this question, could allude to the current difficulties faced by some MFIs following the Andhra Pradesh crisis and how this has impacted the MF market so far]
      • What can the Rest of the World (and in particular East Africa, where she has worked extensively) learn from the India experience? What is “special” there that could not easily be transferred and what adjustments to the model may need to be done?
    • 24. Questions for panel participants
      • April Rinne (perspective from international NGO)
      • In the experience of, is it preferable to “bet” on supporting WATSAN NGOs to become more financially savvy or to “educate” financial institutions so that they better understand the financial needs of WATSAN actors?
      • Does she see more potential in microfinance for households or for small-scale entrepreneurs? Where should the emphasis go?
    • 25. Questions for panel participants
      • Dick Van Ginhoven (perspective from bilateral EU donor)
      • Can MF be a key tool to meet the MDGs?
      • If so, how can bilateral grant donors best support the development of microfinance markets: any lessons from the FINISH project?
    • 26. Questions for panel participants
      • Monica Scatasta
      • How can development banks incorporate micro and meso finance in the design of their lending projects?
      • Do they need to rely on broader efforts by grant donors in order to stimulate a market response?
      • How can coordination be achieved?