We are pleased to announce the winners for Dreampipe Challenge Stage One!
Stage One of the Dreampipe prize competition was designed to explore the potential range of solutions, involving financing, to the vexing problem of non-revenue water (NRW) in developing countries’ water utilities. (For background, see background document).
The three winning entries of Stage One – as determined by Dreampipe’s panel of judges – exemplify the wide range of possible solutions. They also lend support to the idea that the problems of water utilities in developing countries are systemic in nature, and no solution addressing just one piece of the puzzle will be adequate by itself. Certainly no “magic bullet” emerged capable of solving the problem of financing NRW-reduction programmes in all water utilities.
Each of the winning entries approaches the issues from a different angle. Yet they have similarities. All three winning concepts make use of service providers separate from the water utilities and who are incentivised by bearing performance risk. All three winning ideas bring in additional financing in part by finding ways to reduce credit risk. And all three solutions highlight the key role to be played by an entity of some kind that can serve as facilitator or catalyst; it is not enough for a water utility simply to be willing and ready.
The winning entries also suggest that the need for subsidies for the highest-priority (and quick payback) interventions to reduce NRW is limited. These interventions can easily pay for themselves in terms of increased revenue or reduced costs. But subsidies or grants can be useful and may be needed to fund preparatory work and, as first-loss capital, to enhance the creditworthiness of deals so as to encourage commercial source of finance to participate.
Without further ado, here are the winners of Dreampipe I Challenge (in alphabetical order):
— Concessional debt fund: a specialised, institutionally separate debt-financing facility intended for a wide range of NRW-reduction investments.
— Financing from industrial company: financing and support from an industrial company that shares a scarce water resource with a municipality.
— Mobile technology for meter reading and billing: a mobile-based system – financed in large part by the service provider – that improves metering and billing in water utilities, thus reducing commercial losses.
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.
FINANCING FROM INDUSTRIAL COMPANY
► Winning entry submitted by WRP Pty Ltd (South Africa)
The concept relies on the presence of a water-intensive industrial company sharing an increasingly scarce water resource (river, aquifer or other water resource system) with a municipality. The industrial company has an interest in contributing to efforts to reduce water losses in the municipal system to help alleviate the water shortage that presses on both parties.
In the concept, the industrial company engages a jointly selected service provider (e.g. a consulting firm) to undertake activities with the municipal water utility to reduce water losses. The service provider (a private-sector or public-sector entity) is paid by the industrial company and operates on the basis of a three-to-five-year tripartite performance-based contract (PBC).
The industrial company is reimbursed on the basis of the gains realized by the utility from reducing water losses. The industrial company, based on its long-term relationship with the municipality, is willing to take the risk of non-payment by the utility, and this encourages service providers to participate.
Building on WRP’s experience implementing three projects along somewhat similar lines, the proposed PBC would be designed following current best practice principles, including incentive payments against a performance baseline, ring-fencing of relevant cash flows, and use of an independent auditor.
The project activities would consist of small-scale interventions (typically US$2–3 million for each project) that give the most value for money – the “low-hanging fruit”. Payback is expected to be six months to one year.
Typical activities would include repairing visible leaks in reticulation systems, internal household leak repairs, pressure management, logging, bulk metering, and community awareness efforts.
The project can be structured so that only a small amount of external funding is injected in the first instance. This generates savings which can then be used in combination with additional financing from the industrial company to fund larger projects – and so on for several more rounds.
MOBILE TECHNOLOGY FOR METER READING AND BILLING
► Winning entry submitted by Wonderkid Multimedia (Kenya)
The concept is a mobile-based system that improves metering and billing in water utilities, thus reducing commercial losses. Using the Mobile Field Assistant (MFA) software, meter readers use basic GPS-enabled smartphones to read meters and send readings directly to the utility’s billing system. A bill is then generated and the customer is alerted by SMS. This reduces opportunities for error and fraud and cuts billing-cycle times.
The technology has a proven track record. It is designed for the reading of traditional (non-networked, non-smart) meters, which are much more common in developing countries. In 2014 and 2015, within just one year of deployment at Nairobi City Water and Sewerage Company (NCWSC), MFA resulted in a significant reduction in commercial losses and improved revenue collection. The platform, based largely on open-source software, is also used in seven other water utilities in Kenya.
Although comparable systems exist elsewhere, the MFA system is, and will continue to be, continually adapted to local operating conditions and capabilities so that it can function well with water companies of different sizes and with different data challenges.
To get around the difficulty for many water utilities of finding funds to put such a system in place, the service provider finances 75% of the set-up costs of the system – through a loan from a commercial bank. (The other 25% of set-up costs and an annual fee will be paid by the water utility.) The service provider recovers the 75% from the water utility only if MFA performs well enough to bring in sufficient additional revenue to the water utility, as verified by (roughly) the difference between average revenue per customer before and after the introduction of MFA. The concept therefore goes beyond a simple service contract: the provider provides financing and bears a substantial part of the risk of non-performance.