B3. Case 3: Alternative Financing for Water Utilities — Lessons from a Failed Bond Issue in Indonesia
B3a. Background and Environment
PUBLIC INVESTMENT IN THE WATER SECTOR HAS BEEN VIRTUALLY ABSENT IN INDONESIA. ACHIEVING INDONESIA’S MILLENNIUM DEVELOPMENT GOAL, TO HALVE THE PROPORTION OF PEOPLE WITHOUT SUSTAINABLE ACCESS TO SAFE DRINKING WATER AND BASIC SANITATION BY 2015, WOULD REQUIRE A TENFOLD ANNUAL INCREASE IN INVESTMENTS IN THE SECTOR FROM THE CURRENT LEVELS OF APPROXIMATELY USD $50 MILLION TO $450 MILLION. THROUGH ITS ENVIRONMENTAL SERVICES PROGRAM (ESP), USAID EXPLORED A NUMBER OF ALTERNATIVE FINANCING STRATEGIES TO ENCOURAGE NEW INVESTMENT IN WATER AND SANITATION INFRASTRUCTURE. THE STRATEGIES INCLUDED THE POSSIBILITY OF SUPPORTING DISTRICT WATER UTILITIES (OR PDAMS IN INDONESIAN) TO ACCESS THE CAPITAL MARKET TO HELP BRIDGE THE FINANCING GAP.
Ultimately, ESP concluded that the most promising approach in the immediate term was the issuance of corporate bonds by PDAMs in the domestic capital market, and establishing a complementary new nationwide pool financing facility to be denominated the Indonesia Water Fund (IWF). Unlike the management of other municipal infrastructure services, district water utilities in Indonesia operate as separate legal entities, and their municipal governments are generally reluctant to borrow on their behalf. A straight corporate issue by a PDAM would demonstrate the viability of accessing the capital markets to meet the huge infrastructure financing needs of the sector.
To structure a corporate bond issue to finance a water treatment facility, ESP selected and worked intensively with PDAM Bogor, a strong regional water utility that supplies drinking water to the municipality of Bogor (Kabupaten Bogor). Complementing this initiative, the creation of the IWF would also allow several water service providers access to long-term financing at