Financing community water supply: Loans, guarantee funds and their supporting institutions

Within the context of the currently declining interest in and funding of development assistance, the outlook for public sector funding for water supply and sanitation is not positive. Private sector funding and management is increasingly sought and used for large-scale investments in urban areas serving the better-off consumers. Since funding for the urban and rural poor has traditionally been the domain of public sector grant funding, including subsidies, and therefore stagnant at best, new approaches need to be explored to attract private sector finance. Full self-financing by poor communities is often not feasible. But communities may be able to generate cash flows that will enable them to meet all costs of a project, including the cost of debt incurred. Drawing on experience from both inside and outside the water sector this paper identifies a promising approach: attracting loans from local banks for community water supply, the repayment of which is guaranteed by a loan guarantee fund. The success of this approach hinges on a number of factors including community organization and management, an enabling policy, legal and regulatory environment, choice of appropriate technology, and the support of an intermediary (a government agency or an NGO). The intermediary is instrumental in supporting the community in getting organized, developing the ability to apply for a loan, bookkeeping, choice of technology, contracting, operation and maintenance, the collection of water charges and the repayment of the loan. National and international agencies are encouraged to test and demonstrate this funding modality.