Home FWFA > Glossary



The financial world is full of jargon and expressions which may need some explanations to be understood by the majority. For this purpose we are proposing the following list of terms along with a short presentation.


If you would like to add terms or correct some of the definitions, you may contact us by clicking here.




AFFERMAGE: type of leasing arrangement under which an operator takes over and runs public infrastructure (e.g. water services) and collects revenue from customers, but does not undertake and finance new investment. The operator either makes a specified lease payment to the contracting authority (under a simple lease), or shares revenues according to a predetermined formula (under an affermage).


B LOAN: A loan syndicated by a Multilateral Financing Institution (MFI) in which the participating bank or other lender receives the same legal preferred creditor status as the MFI. This reduces the risk to the lender and improves the terms of the bond issue from the borrower's point of view.


BOND: A method of borrowing used by private companies, governments or municipalities consisting of the issue of fixed-interest securities, repayable on a specified date. Certain government bonds have no fixed redemption date, and can be sold at their prevailing market price.


BOOT, BOT, BOO: forms of concession in which a public authority contracts with a private company to Build, Own and Operate a specified piece of infrastructure (BOO), and possibly later Transfer it (BOOT) back into public ownership. The contracting firm expects to recover its outlays from charges to customers or to the public authority (offtaker) buying its services. In a BOT the operator Builds, Operates and eventually Transfers the assets back to the public authorities, without legally owning the assets.


CONCESSION: contract between the authority owning public service infrastructure (e.g. roads, power, water, telecommunications) to another party (usually private) allowing the latter to operate the public assets and retain the revenues for a specified period (usually 20-30 years). The contract typically requires the concessionaire to invest in extending or modernizing the assets, which revert to the authority at the expiry of the contract period. The operating company arranges its own finance, which does not appear on the authority's account (See BOOT and BOT).


CONCESSIONAL LOAN: loan, usually to poor countries or needy borrowers, on more favourable terms than market rates (e.g. lower interest, longer maturity, grace periods before payment of interest or payment of principal). Also known as soft loan.


CREDIT RATING: An independent assessment of the creditworthiness of a borrower or bond issuer undertaken by a credit rating agency, of which the three best known are Standard and Poor's, Moody's and Fitch. Each agency has a slightly different scale for rating, using A, B and C categories, with fine gradations of each, and different criteria are applied to assessment of national and international borrowings. Securities with a rating of BBB and above (on the Standard & Poor's scale) are considered to be "investment grade", while those below are reckoned to be "speculative" and attract financing on inferior terms.


CROSS-SUBSIDISATION: using the revenues from one consumer category to subsidize the tariffs paid by another. A method widely used in water, power and other public services to ensure affordable tariffs for poorer or smaller consumers.


DECENTRALISED FUNDS: money available for regional development coming from state budget, European Union budget…


DIRECT FOREIGN INVESTMENT: situation where a foreign investor (individual, company or public enterprise) owns 10% or more of the ordinary shares or voting power of a local company.


DERIVATIVES: Financial instruments such as futures contracts, hedges or options that are intended either to reduce the uncertainty of future transactions or to speculate for gain on future outcomes. A put option is the right to sell an asset at a fixed predetermined price during a particular period. A call option is the right to buy at a specified price during a future period.


DEVALUATION BACKSTOPPING FACILITY: possible method of alleviating devaluation risk. The Facility would be a fund created to make payments in local currency to projects or borrowers unable to meet their overseas financial commitments because of a major devaluation of the local currency. Repayments into the fund would be made over a period of time by raising local tariffs.


DEVALUATION RISK: possibility of a fall in the exchange value of local currency relative to foreign currency, which would make it more expensive for local entities to service their foreign debts, make overseas dividend payments and meet future service fees or payments for essential imports.


DEVESTITURE: sale of publicly owned assets (e.g. water or power infrastructure) to private owners.


EFFICIENCY RATIO (aka Working Ratio): measure of financial performance expressing total annual operational expenses as a % of pretax revenues. A ratio greater than 1.0 indicates a loss on current account. A ratio well below 1.0 is needed to contribute to capital investment.


EQUITY: shares in a company, owned by equity investors, entitling them to dividend payments out of profits. Ordinary shares entitle their owners to vote at the company's Annual General Meetings, but have a residual claim on profits available for distribution. Preference shares have a prior claim on profits, but their dividend level is capped.


ESCROW ACCOUNT: deposit held in trust by a third party available to pay debt service.


FACILITY: available fund constituted in order to finance projects and programs related to a specific object. For example: Global Environment Facility, Devaluation Liquidity Backstopping Facility…


FINANCIAL INSTRUMENT: There are two basic types: (1) a debt instrument, which is a loan with an agreement to pay back funds with interest; (2) an equity security, which is share or stock in a company. They do not exist outside the context of financial markets. Their diversity of forms mirrors the diversity of risk that they manage.


FISCAL TRANSFER: financial transfer from the national budget to sub-sovereign bodies such as local governments, parastatal bodies, regional development authorities, etc. Such transfers may be an instrument of subsidy to specific types of public services, a means of redistributing tax revenues from richer to poorer regions, etc.


FISCAL INTERCEPT is a form of guarantee given to borrowings made by sub-sovereign bodies: any default on their debt servicing is recovered from their fiscal transfer from central government.


GOVERNANCE: shorthand term for political, social, economic and administrative institutions and policies that affect the supply of public services. Increasing the flow of finance into public services such as water usually entails reforms to governance of the sector to enable it to make effective use of the resources and make it more attractive to suppliers of funds.


GUARANTEE: contract by a third party C to underwrite a financial commitment entered into by A to B. Used by national governments to reduce the risks of borrowing and bond issues by their sub-sovereign bodies, and by international agencies to increase the creditworthiness of developing country institutions and to support specific projects within them. Common types of guarantees are Political Risk Insurance, Partial Credit Guarantees, Partial Risk Guarantees and Participations.


INSTITUTIONAL INVESTOR: Institution such as an insurance company, pension fund or fund manager holding the savings of others and able to invest in bulk in suitable outlets.


INVESTMENT RATING: evaluation of the creditworthiness of a debt issuer. Investment rating reflects both "capacity and willingness" of obligors as to the timely payment of interest and principal in accordance with the terms of their obligations. Investment rating has become important parameters in market acceptance and pricing of debt. The ability of governments and municipalities to raise funds is crucially affected by the rating, which is given by one or other of the ratings agencies on different credit rating scales (Standard and Poors, Moody's…).


LEVERAGE EFFECT, LEVERAGING: using an injection of finance to induce other contributions, thereby generating a multiple of the original amount. Also the ratio of loan finance to equity in a company's capital structure.


LOCAL CAPITAL MARKET: some larger countries have well established local capital markets (India, China, Brazil, South Africa…), able to satisfy a good part of local borrowing needs. Funds raised on the local capital market immune the borrower or investor to devaluation risk. These markets typically offer short-term loans, and need to evolve to satisfy the needs of water sector.


LOCAL CURRENCY MARKET: exchange rates between the local currency and all the foreign ones. The devaluation of the local currency (reduction of the value of the local currency relative to foreign currencies) is by far the number one reason why most good projects do not yield returns promised.


LOCAL SAVING: households' money put in domestic bank. As savings are the source of loans, banks and other financial intermediaries will have to take part in well-structured schemes to satisfy the demand for secure savings.


MICRO-CREDIT: Schemes for extending loans to small businesses, farmers and other borrowers who cannot get access to normal bank loans.


MULTILATERAL FINANCIAL INSTUTIONS: International agencies set up for the purpose of promoting economic development, whose shareholders are national governments. The largest and best known are the World Bank and the main regional development banks (Asian Development Bank, Inter-American Development Bank, African Development Bank,. Islamic Development Bank, European Bank for Reconstruction and Development, etc). Aka Multilateral Development Banks and International Financial Institutions. All the above borrow most of their funds and offer long term loans to their clients, who include governments, sub-sovereign agencies and private companies. May also include the International Monetary Fund whose main purpose is to promote international financial stability by lending to countries in financial difficulty in return for agreements on measures to remedy the situation.


MUNICIPAL CREDIT POOL: group of municipalities needing to borrow, formed in order to join their liabilities. This gives sub-sovereigns an interest in their peers’ self-governance. By lending to multiple municipalities in a pooled structure, the overall security of the investment is enhanced. This method of financing infrastructure is particularly useful in developing countries where investment markets are nascent.


MUTUAL FUNDS: investment tool that enable investors to pool their money and place under professional investment management. The manager makes the trades, realizing gain or loss, and collect the dividend or interest income.


NON-RECOURSE LENDING: form of project financing in which lenders looks solely to the cash flow of a project to repay their debt (avoiding recourse to host governments or other guarantors).


OFF-BALANCE SHEET FINANCE: finance that does not need to be reported as a debt obligation on a sponsor's balance sheet. An attraction of concessions and other forms of private participation from a government's point of view is that the initial investment does not register in the national budget. Finance is raised on the account of the private partner, and the cost to the nation arises in future, through off take payments and customer charges.


OFFICIAL DEVELOPMENT ASSISTANCE: the formal term for "aid". Most of this is of the bilateral variety, namely, government-to-government transfers from OECD member states to developing countries. Some ODA is provided by multilateral sources such as the United Nations, the European Development Fund and special funds of the World Bank and elsewhere. To qualify as ODA, the finance has to include a minimum 25% grant element.


PENSION FUNDS: scheme for collecting contributions from, or on behalf of, employees during their working lives and investing them to yield a return to finance their retirement pensions. Pension funds have to take a long term view, and are potentially interested in investing in infrastructure, provided it offers a safe and adequate return. Guarantees can enhance the credit rating of infrastructure bonds to the point where they can legally be bought by pension funds.


POOL FINANCING: collaboration amongst different borrowers to obtain better financial terms on loans or bond issues. Used by a group of municipalities, each of which is too small to raise finance on affordable terms, but which collectively can achieve critical mass. Collective security for a loan or bond can be provided either by creating a reserve fund or by mutual underwriting of each party's debt (joint and several liability).


PORTFOLIO INVESTOR: Person or institution holding a fixed-interest security, such as a bond with a predetermined yield. Also applies to a minority equity holder with less than 10% of the ordinary shares or voting power in a company.


POVERTY REDUCTION  STRATEGY PAPER (PRSP): It's a participatory process involving domestic stakeholders as well as external development partners, including the World Bank and International Monetary Fund. PRSPs describe the country's macroeconomic, structural and social policies over a three years or longer horizon to promote broad-based growth and reduce poverty, as well as associated external financing needs and major sources of financing.


PRIVATE SECTOR PARTICIPATION: situation where a private company or investor bears a share of the project's operating risk. For this purpose a foreign state-owned enterprise is considered to be a private entity. Aka Private Sector Participation (PSP)


PUBLIC PRIVATE PARTNERSHIP (PPP): involvement of private companies in the operation, management, financing and/or ownership of public service providers. This can take various forms, such as service and management contracts, leases, concessions, etc.


REVOLVING FUNDS: special financing bodies that make loans to many borrowers from an initial supply of lending capital, and then use the repayments from those borrowers to make additional loans, thus "revolving" or reusing their capital.


RISK MITIGATION: Financing long term infrastructure such as water supply incurs risks of many kinds, such as country (sovereign) default, devaluation, foreign exchange transfer restrictions, expropriation, breach of contract, regulatory failure, commercial misjudgment, etc. Lenders, investors and suppliers can insure against many of these risks through official agencies or private markets. Development agency guarantees have a similar purpose.


SECURITIES: a tranferable financial instrument entitling the owner  to specified types of financial benefits. It may take the form of shares of corporate stock or mutual funds, bonds issued by corporations
or governmental agencies, stock options or other options to buy and sell, and other kinds of formal investment instruments.

SECURITIZATION: the process of creating a financial instrument by
combining other financial assets and then marketing them to investors (e.g. consolidating a bank loan portfolio and offering its capitalised value in the fiorm of sercurities to new investors).


SEED CAPITAL: money used for initial investment in a project, for proof-of-concept, market research, or initial product development.


SOLIDARITY MECHANISMS: schemes enabling affluent citizens to provide aid and subsidies to less fortunate citizens in their own or some other country. Within the water sector, can take the form of a surcharge on the bills of consumers in a particular social group or country, the proceeds of which are used to subsidize the consumption of the target group.


SOVEREIGN RISK: financing made with the national government as contracting party. This is normally less risky than dealing with sub-sovereign bodies or local private companies (depending on the creditworthiness of these bodies). However, lenders are exposed to such acts of government as expropriation, transfer restriction, contractual and regulatory interference, breach of contract, devaluation and sovereign default, as well as political instability and civil commotion. Some of these risks can be insured, e.g. through the Multilateral Investment Guarantee Agency of the World Bank.


STRUCTURED FINANCE: usually refers to the various kinds of credit enhancement made to financial deals, e.g. guarantees, placing revenues into escrow accounts, fiscal intercepts, pool financing, etc.


SUBORDINATED LOAN: Loan having a lower priority in the event of repayment difficulties, compared to other categories of lender.


SUPPLIER CREDIT: offer of credit as part of a contract for the export of goods and services. Such a contract is often insured by an official export credit agency.


SWAPS: opportunity to change key terms of a financing transaction, in pre-defined circumstances, e.g. interest rates, currency used for repayment, maturity of the loan, etc.


SYNDICATION: financing by a group of lenders, usually financial institutions, combining to make up the total sum required for a project or bond issue.


TAKE OR PAY AGREEMENT: Common form of concession contract for BOOT, BOT, BOO in which the purchaser (offtaker) of the service (usually a public authority) undertakes to buy a predetermined amount at an agreed price, failing which the purchase has to compensate the supplier for the full agreed amount.


TRUST FUNDS: financial and administrative arrangements with an external donor that leads to grant funding of high-priority development needs (technical assistance, debt relief, postconflict transition, and cofinancing); accounted for separately from the bank's own resources.