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FINANCING OPTIONS FOR DRINKING WATER, WASTEWATER TREATMENT AND SANITATION IN INDIA

Version 14-8-2004

Meine Pieter van Dijk iA contribution to EU Working group on Finance, meeting on 18-8-2004 during the World Water Week in Stockholm, August 15-21, 2004

Introduction

What are the options for an Indian local government to finance the necessary investments in urban infrastructure; in particular what are the financing options for drinking water, wastewater treatment and sanitation. The issue will be illustrated for two states and a program to link local governments and capital markets will be discussed. All local government bodies could eventually be linked up to capital markets (Van Dijk, 1999). This requires for most local governments a substantial improvement of their municipal accounting and other financial management system reforms, which will also be discussed.

There are generally several option to finance urban infrastructure. The major ones are listed in table 1, but we will deal with issuing bonds mainly.

Table 1 Instruments for infrastructure

(from more traditional to

finance

to more alternative)

Loans

Bonds

Municipal Infrastructure Development funds, for example

- Investment/capital funds

- Trust fund

- Endowment fund

BOT (Build-Operate-Transfer)

Subsidized entry fees

Microcredit to finance connections

Rotating savings and credit associations (ROSCAs) to link traditional savings with credit

Private sector involvement

Project finance

Hedging (futures/options) to cover risks

Pooled Finance Development Fund

ROT (Rehabilitation-Operate-Transfer)

City Challenge Fund

It may not be efficient for the municipalities individually to issue bonds, but some organization could do it for them, to pass on the money in the forms of loans for bankable infrastructure projects. State Level Financial Institutions (SLFIs), which currently function as an intermediary between the local governments and the capital market will not be discussed (Van Dijk, 2004a). The differences between using a bond bank (indirect issuing of bonds) versus direct issuing of bonds by local governments will be presented. The latter model is also known as the United States (US) model and that country supports a introducing this approach in India. A good functioning SLFI (the Karnataka Urban Infrastructure Development Finance Corporation or KUIDFC) can be used as an example. In Gujarat for the contrast, at present no institution seems to play the role of an intermediary financial institution, providing loans to local governments and issuing bonds on their behalf to allow them to invest in infrastructure.ii

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