Concessional debt fund

► Winning entry submitted by Michael Goldblatt (South Africa), who works for a private equity firm

The concept consists of a country-wide concessional debt fund, designed to finance capital investments for non-revenue-water (NRW) reduction to be implemented by service providers (private-sector or public-sector entities) under performance based contracts (PBCs) procured by municipal water utilities. Typical investments and activities financed will be for pressure control, leak detection and repair, and pipe replacement. For large-scale users, identification of unmetered connections and meter replacement could be included.

The fund, which will focus on the reduction of physical (rather than commercial) losses, will act as both a financing mechanism and as a facilitating instrument for PBCs targeted at NRW reduction, and will be designed to allow expansion to behind-the-meter non-municipal NRW reduction initiatives as well.

The debt fund will allow commercial and concessional debt to be blended into a single instrument providing support to projects that would otherwise not be funded by commercial debt providers alone. The fund will also provide technical assistance to municipalities free of charge or at low cost for the design and procurement of PBCs.

Key constraints to providing debt to NRW reduction projects on the basis of PBCs are typically the low creditworthiness of municipal water utilities and the contractual complexity of PBCs. The fund will address these constraints by securing debt from local and international development finance institutions, impact investors, and climate financing, and by reducing transaction costs and timeframes through standardised contracting and loan procedures.

The grants and concessional financing obtained would be used in two ways: (i) at-risk funding for project development and procurement costs; and (ii) first-loss capital in the debt-payment waterfall, which will allow the fund to raise additional capital at market rates from more conservative institutional investors.