Water utilities strapped for cash? Liquidity facilities could be the solution

Water utilities are critical for fighting COVID-19

In the absence of a vaccine or treatment for COVID-19, there is no better cure than prevention. Access to water, especially for hand-washing, (along with social distancing) is proven to be the most important method in preventing the spread of the pandemic, particularly in high density, low income communities. Keeping the taps running at this critical juncture, and expanding access to safe water, can save perhaps millions of lives as the scale of the COVID-19 pandemic unfolds.

But the effects of COVID-19 are making it difficult for water utilities to continue operations

At this time, when the sustainability and resilience of water service provision is paramount to the COVID-19 response, water utilities are finding it increasingly difficult to cover their costs. This is caused by the double burden of increased costs and decreased revenues. In many instances, costs are increasing due to pandemic-related operational costs like personal protective equipment and workplace adjustments; and government-mandated obligations like the expanded provision of public standpipes, water tankers, and hand-washing facilities. At the same time, revenue collection is falling due to a drop in industrial demand and the inability of household customers to pay their bills. Indicative information from World Bank client countries shows that the financial crisis has already reached many water utilities and that the impact on revenues is dramatic. Some figures indicate that revenue collected could have decreased by as much as 70% in the first few weeks of the pandemic. This dramatic drop in revenues could cause catastrophic declines in service, especially because most utilities in developing countries do not have cash reserves to fall back on.

Under normal operating conditions, utilities use disconnection of service to ensure payment of bills. But, for understandable reasons, utilities are not using this tool now, because they are choosing not to or because they have been told not to by governments and regulators. US’s National Association of Clean Water Agencies estimated that the impact of suspending water shutoffs, restoring connections to delinquent accounts, and reductions in non-residential water will result in a US$12.5 billion loss in utility revenues across the country.

A Liquidity Facility could be the solution

Given the essential services provided by water utilities, national leaders need to prioritize getting money to water utilities. A Liquidity Facility could be the vehicle to achieve this.

• What is it? A Liquidity Facility is an entity or instrument to channel funds to water utilities to enable them to provide essential services
• How would it work? In most cases, the national government[1] would first need to find a source of finance (examples include their own-source revenues, government commercial borrowing, government proceeds from the IMF, government borrowing from international development banks). The money would then flow from the national government to the Facility (often through their Ministry of Finance). Finally, the money would flow from the Facility to the utilities
• How could this solve the problem? This could solve the problem because the Facility would be able to pay out a large amount of money fairly quickly to utilities
• When would it be appropriate? A Facility would be most appropriate in countries with many water utilities. For a country with one national water utility a solution tailored to that utility, rather than a Facility serving multiple utilities, could be more appropriate .

The detailed design of the facility will take many different forms, depending on the local context. To set up a liquidity facility, the designer of the facility needs to answer a set of questions, including:

• What is the scale of financing required?
• Where is the money going to come from?
• Who should manage the Facility?
• What should be the modality of disbursement?

Several development agencies are currently working on these questions with governments in several countries. The issues described above must urgently be addressed so that water utilities can deliver and expand services during the COVID-19 crisis. We encourage all policy makers, utilities, international finance institutions, donors,  NGOs, and other water sector stakeholders to begin the discussion to answer these questions now.

Thank you!

To all of our readers who work at utilities, thank you for your continued public service in the face of COVID-19 risks and implications. We, at Castalia, are proud to call you our valued partners and we are energized to support and work in solidarity with you during this difficult time.

Please let us know how we can help, including if you need assistance related to this topic (such as advising on the development of the argument to advocate for the prioritization of water sector funding; or on the design of the liquidity facility).

[1] Note that we say, “In most cases, the national government would first need to find a source of finance” because there are cases where water utilities in developing countries are able to access commercial finance. In these cases, a Facility would not be needed. However, in most developing countries, water utilities are not commercially viable. Therefore, the national government will be required to provide the money that will keep them operational.

Authors: Lisa Nations and Shannon Riley.