Infrastructure – roads, telecommunications, water, electricity – is essential for economic growth and poverty reduction. In its absence, individuals and nations suffer economic and social costs. Goods cannot be brought to markets without roads and few businesses can operate without water or electricity. Health improvements and other social development gains will not be fully realized without investing in infrastructure. Developing infrastructure is capital intensive and an array of public and private financing options exist, but investment gaps persist.
While infrastructure development tends to bring to mind mega-projects, in many emerging economies, small private operators have played a role in asset development and providing water and electricity in the absence of public service providers. Cambodia is one such country – private water operators and rural electricity enterprises supply millions of Cambodians in rural areas and small towns with these essential services. Cambodia has experienced high rates of economic growth and poverty reduction but has struggled to translate the benefits of growth and poverty reduction into equitable access to water and electricity throughout the country. Public utilities are estimated to provide 1.2 million Cambodians with water, complemented by an estimated 300 private water operators in Cambodia that supply over 1.4 million Cambodians with piped water in small towns and rural areas. Many of these operators could expand to unserved areas but are constrained by capital for investment and information about payback time.
To address these constraints, Palladium’s Investing in Infrastructure (3i) program decided to test a known public subsidy financial tool – viability gap funding (VGF) – in the Cambodian water market. VGF is a subsidy tool that governments use to incentivise private investment in infrastructure projects that are economically and socially viable but are not financially viable in the short term. It has been used by governments in many countries to encourage private investment in infrastructure projects, but most of these examples have been at a very large scale and in lucrative sectors, such as transportation and energy. It has been less applied for smaller infrastructure investments and in less profitable sectors, such as water.
To date, 3i has successfully demonstrated that by providing business viability information and viability gap funding, private water operators will invest and expand into unserved areas. The program has triggered investment from 53 private water operators. With a total contractual commitment of $10.5 million USD by 3i to date, the 53 companies have committed to investing over $15.6 million USD in expanding water sources, constructing water treatment plants, and extending piped networks. This is equivalent to private investment of $1.56 USD for every $1 invested by 3i. 5,392 households – equivalent to 24,264 people – have connected. Future connections of 155,347 households and companies may reach nearly 700,000 Cambodians. It is estimated that a further 100 or 200 sites could be made commercially viable with similar viability gap funding.
Demonstrating that the concept is not limited to the water sector, 3i has also applied the concept to the electricity sector. To date, commitment from 3i of $2.1 million USD has leveraged a commitment of $6.5 million USD from 18 electricity companies, enabling 8,555 households to connect. Expected future connections of 33,532 households will enable over 150,000 Cambodians to enjoy and benefit from electricity services that would otherwise have not been provided.
Although the political economy of Cambodia’s water sector has contributed to the success of the viability gap funding to date, many countries share similar characteristics to Cambodia – low levels of coverage, a weak domestic resource allocation, some existence of private operators, and a post-conflict history. Public agencies and donors operating in countries with such characteristics may benefit from considering viability gap funding in their portfolios.
This article was written by Kate Fogelberg for Springield Centre and was republished with permission.
Investing in Infrastructure (3i) is a 5-year, Australian-funded program working in the rural water and electricity markets in Cambodia and is implemented by Palladium.