Financing water and sanitation: Realistic strategies for developing and OECD

countries

Fifth World Water Forum, Istanbul, March 2009

James WinpennyConsultant to OECD Task Team on Sustainable Financing to Ensure

Affordable Access to Water Supply and Sanitation

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Financing WSS – The challengeFinancing WSS – The challenge

•WSS is underfinanced in practically all countries, and faces huge financing needs over coming decades

•In developing countries: USD 18 bn per year of investment to achieve the MDG targets & up to $72 bn. p.a. through 2015 to maintain & modernise (WHO estimates.)

•In the OECD and BRICs: USD 800-1000 bn per year up to 2030

•Current spending well short of these levels – leaving a large financing gap

•Results: systems badly maintained; failing services; no funds to extend services to those without access

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Closing the gap - The demand for financeClosing the gap - The demand for finance

•Closing the financing gap entails minimising costs as well as raising funds

•Huge scope for increased efficiency of WSS systems & enhancing cash flow (e.g. leakage, bill collection, energy efficiency)

•Opportunities to reduce costs through better planning and low-cost technologies

•Level of services, coverage targets and speed & timing of implementation are all variables to be reviewed

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Closing the Gap - The supply of financeClosing the Gap - The supply of finance

•There are only three ultimate sources of finance for WSS - the 3Ts:

– Tariffs

– Taxes, and

– Transfers from ODA & other external grants

•Loans and bonds need to be repaid: they “bridge the gap”, by funding large up-front investment costs. Equity likewise needs to be compensated.

Figure 1:Shares of Tariffs, taxes and transfers (ODA) in WSS finance in various countries

Source: OECD

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TariffsTariffs

•User charges are normally the most important and sustainable source of funding for WSS

•In many countries there is scope to increase cash flow from this source (by improving collection rates and tariff levels)

•But affordability concerns need to be dealt with

•Key issues: how to manage tariff increases, affordability and willingness-to-pay, ensuring that tariff reforms are socially and politically acceptable and that the poor are not excluded from access to water

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TaxesTaxes

Message for Ministers of Finance:

Given constraints in household affordability, many poor countries will need to provide more support for water and sanitation through public budgets

Example: Countries such as Armenia, Moldova and Georgia need to spend 2-5% of public budget expenditure on WSS to achieve financial sustainability and the MDGs

Message for Ministers of Water:

In order to get more funds from public budgets, the water and sanitation sector needs to be more efficient, reduce corruption, plan better, and be fully keyed into national budget processes

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TransfersTransfers

•ODA can only provide a limited part of funding needs

•But has important catalytic effects and needs to be spent strategically

•Key issues: what should ODA be used for, and what are the best modalities?

Chart 1. Trends in aid to water supply and sanitation1971-2007, commitments, 5-year moving averages and annual figures, constant 2006 prices

Source: OECD

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Strategic financial planning can helpStrategic financial planning can help

•To improve coordination of sector actors, by providing a framework to achieve common understanding of status and future direction

•To enhance allocation of scarce resources, ensuring that they go where they can achieve the biggest impact

•To improve implementation of sector plans, by making them more realistic

•To increase financial resources for the sector from all feasible sources; to increase revenues from users; & to improve the financial standing of WSS in the eyes of the Ministry of Finance, donors and private investors

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What is strategic financial planning?What is strategic financial planning?

•A process aiming to develop a national consensus on what water supply and sanitation services the country can or should afford over a 20-30 year horizon and how will it pay for them.

•The process involves dialogue amongst interested parties with the aim of producing feasible scenarios whose implications can be tested through a model

•The financial model aids consensus through a sequence:

– (i) assessment of current financing gap,

– (ii) discussion of policy options that could help to close the financing gap,

– (iii) development of alternative scenarios to improve water services,

– (iv) identification of most appropriate scenario and associated policy mix.

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Making SFP work: lessonsMaking SFP work: lessons

•National ownership; needs a champion & involvement at suitably high level; MOF needs to be involved

•Engagement of stakeholders; patience will be rewarded

•Process: link SFP to regular budgetary processes, esp. MTEF; align with sector institutions

•Analytical base: methodology must be credible, with robust data, but intelligible to parties involved

•Donors as midwives, but should not undermine « ownership »

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Key messages for policyKey messages for policy

• WSS generates important economic benefits, yet underfunding prevents these benefits materialising.

• Increasing finance from the 3Ts (tariffs, taxes, transfers) is key to financial sustainability and to attract funds from capital and financial markets

• Governance reforms are a pre-condition in many cases

• WSS sector plans need to have much greater financial realism; SFP helps by contributing to a consensus on hard policy choices

• “Financing requirements” are not fixed and immutable – they emerge from an iterative process of adjustment of levels of service, supply of finance and affordability

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Issues for discussionIssues for discussion

•What is the best use of scarce national public budgets to effectively support sustainable water and sanitation services?

•How can development partners best support SFP and what are its implications for capacity development?

•What is the likely impact of the current international financial and economic crisis on the financing prospects of WSS? How can its financial needs be secured in the current climate?

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Thank YouThank You

www.oecd.org/waterwww.oecd.org/water

Peter.Borkey@oecd.orgRemy.paris@oecd.org

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