Capital Subsidies Implicit in Concessional Finance : How to Make Them More Transparent and Better Targeted

Multilateral Development Banks (MDBs) finance a significant share of developing country water sector investments in Vietnam. Much of this financing is concessional and often on-lent by national governments, at similar concessional terms, to water utilities. This concessionality carries an implicit subsidy, i.e., the difference between MDB financing terms and commercial financing terms priced more in line with the underlying credit risks. As such concessional financing is most often used for capital investment projects, the implicit subsidy can be considered a capital subsidy. This working paper asks whether there is an opportunity to increase the value of concessional financing for water sector investments by making implicit capital subsidies more explicit and targeting them to a clearly defined public policy objective. Specifically, the paper (i) considers the extent to which implicit subsidies exist in MDB lending for the water sector; (ii) identifies a possible approach to quantify the amount of subsidies involved; (iii) outlines an emerging framework to make subsidies more explicit as a basis for improved targeting; and (iv) discusses operational implications. By investigating these issues, the paper intends to be a first step for governments and donors to evaluate how best to use the implicit capital subsidies provided by concessional financing in the water sector. The paper also suggests areas of future research.

Bibliographic Details

Main Authors:	Kingdom, William, Baeumler, Axel, Guzman, Alfonso
Language:	English en_US
Published:	World Bank, Washington, DC 2012-02
Subjects:	ACCOUNTABILITY, ACTUAL COST, AFFORDABILITY, BANKING RELATIONSHIPS, BANKS, BENCHMARK, BENCHMARKS, BENEFICIARIES, BOND ISSUANCE, BOND YIELD, BORROWER, BORROWING, CAPITAL COST, CAPITAL INVESTMENT, CAPITAL INVESTMENTS, CAPITALIZATION, CASH FLOW, CASH FLOWS, CASH TRANSFERS, COMMERCIAL BANK, COMMERCIAL BANKING, COMMERCIAL BANKS, COMMERCIAL LENDERS, COMMERCIAL LENDING, COMMERCIAL LOAN, COMMERCIAL TERMS, CONSUMERS, CREDIT RISKS, CREDITS, CROSS SUBSIDY, DEBT, DEBT SERVICE, DEBT SERVICE PAYMENTS, DEVELOPING COUNTRIES, DEVELOPING COUNTRY, DEVELOPMENT ASSISTANCE, DEVELOPMENT BANK, DEVELOPMENT BANKS, DIRECT PAYMENTS, DISBURSEMENT, DISBURSEMENTS, DISCOUNT RATE, DOMESTIC CAPITAL, DONOR FUNDS, ELIGIBILITY CRITERIA, EXPENDITURE, EXPENDITURES, EXPLICIT SUBSIDY, FEDERAL GRANTS, FEDERAL TAX, FINANCE MINISTRIES, FINANCIAL INSTITUTIONS, FINANCING SOURCES, FIXED SUBSIDY, FUTURE RESEARCH, GOVERNMENT BOND, GOVERNMENT BONDS, GOVERNMENT POLICIES, GOVERNMENT REGULATION, GRACE PERIOD, GRACE PERIODS, HOUSEHOLDS, IMPLICIT SUBSIDIES, IMPLICIT SUBSIDY, INCOME TAX, INSTRUMENT, INTEREST PAYMENTS, INTEREST RATE, INTEREST RATES, INTEREST RATES ON LOANS, INTERNATIONAL BANK, INTERNATIONAL DEVELOPMENT, INVESTMENT PROJECTS, LACK OF TRANSPARENCY, LENDER, LEVELS OF ACCESS, LOAN, LOAN AGREEMENT, LOAN PRINCIPAL, LOAN PROCEEDS, LOAN REPAYMENT, LOAN REPAYMENTS, LOAN TERMS, LOCAL GOVERNMENTS, MATURITIES, MATURITY, MDB, MINISTRIES OF FINANCE, MULTILATERAL DEVELOPMENT BANKS, MUNICIPAL BONDS, MUNICIPALITIES, NEGATIVE EXTERNALITIES, OPERATING EXPENDITURES, OPPORTUNITY COST, OPPORTUNITY COSTS, POSITIVE EXTERNALITIES, PRESENT VALUE, PRESENT VALUE OF DEBT, PRIVATE SECTOR FINANCING, PUBLIC FUNDS, PUBLIC INVESTMENTS, PUBLIC POLICY, REPAYMENT, REPAYMENT PERIOD, REPAYMENT PERIODS, RETURN, REVOLVING FUND, REVOLVING FUNDS, RISK PREMIUMS, RISK PROFILE, SUBSIDIARY, SUBSIDY PAYMENTS, TARGETED SUBSIDIES, TARGETED SUBSIDY, TAX EXEMPT, TAX EXEMPT MUNICIPAL BONDS, TAX EXEMPTION, TAX-EXEMPT, TRANSPORT, TRUST FUND, USER FEES, VALUE ADDED, WATER SUPPLY,
Online Access:	http://documents.worldbank.org/curated/en/2012/02/16350069/vietnam-capital-subsidies-implicit-concessional-finance-make-more-transparent-better-targeted https://hdl.handle.net/10986/12977
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