Innovative financial mechanisms for sustainable sector financing

A growing financing gap and the building up of unmet demands for improved quality of service and expanded coverage forced governments and public utilities to seek private capital, at home and abroad, through both debt and equity participation by the private sector. At the same time, technological progress and institutional innovations made possible wide private sector participation, ranging from management contracts through concessions to full-fledged privatization of energy, Water and sanitation utilities and state-owned public transport companies. During this time, the financial markets also evolved in conducive directions by developing new and innovative financing instruments that made possible the tapping of new sources of financing-insurance, pension funds and a variety of other institutional investors. The emergence of new forms of credit guarantees, the availability of instruments to finance private and municipal projects without sovereign guarantees, and the proliferation of new modalities for private-public sector partnerships opened up opportunities for resource mobilization and risk sharing which were not available to most developing countries a decade ago. While these innovative financing mechanisms have accessed new, previously inaccessible sources of funds for sector investments and, in combination with a more realistic pricing of services, have enhanced the financial sustainability of sectors such as power, water, sanitation, and transport, they have not necessarily enhanced environmental sustainability. Furthermore, despite the obvious similarities in the innovative financing instruments in these four sectors, there are also significant differences arising from both different sectoral features and historical reasons. This paper explores innovative instruments for sector financing, focusing particularly on energy, transport, water, sanitation, and forestry. It identifies the similarities and differences between different sectors, analyzes their implications for sustainable development and the potential for replicability in other sectors.