OECD Global Forum on Sustainable Development Financing Water and Environmental Infrastructure for All

1
OECD Global Forum on Sustainable Development
Financing Water and Environmental Infrastructure
for All

• Opening Speech
• by
• Jamal Saghir
• Director, Energy and Water,
• The World Bank
• OECD Headquarters, Paris, 18 December 2003

2

• TO KEEP IN MIND
• Over 1 billion people without safe water, 2 b
  without sanitation
• Pervasive under-pricing and mismanagement of WSS
  services
• 10 of the world's food is grown with water from
  aquifers which are being depleted faster than the
  rate of recharge.
• What does this mean for ordinary people in the
  developing world?
• A farmer in Kenya "Water is life and because we
  have no water, life is miserable."
• A young man in Russia "How can we sow anything
  without water? What will my cow drink? Water is
  our life."
• An old woman in Ethiopia "We live hour to hour,
  wondering whether it will rain."
• In many parts of the world, access to water
  distinguishes the poor from the non-poor.

3

• In the next 15 minutes about 90 children in
  developing countries - six children per minute -
  will have died from disease caused by unsafe
  water and inadequate sanitation.
• In 1990, 3 million deaths worldwide were
  attributed to diarrhea but there were over 4
  billion episodes, or more than a thousand times
  as many. Children under five are the most
  vulnerable, accounting for 55 of all episodes
  but for 85 of the deaths from diarrhoeal
  diseases.
• Mortality is high but morbidity is higher still.

AND
4
Overview of Presentation

• The Water Financing Challenge
• Towards Realistic Solutions
• Innovative IFI Financial Instruments Follow-up
  of Camdessus/G8- June 2003 Evian meeting
• What More Needs to be Done

5
The costs of not investing in water are very large
Correlation between GDP and Rainfall in Zimbabwe
? Governments must raise the priority of water
investments (including through the PRSP)
6
The MDGs A Startling Reminder of the Financing
Challenge Ahead

• Halve by 2015 the proportion of people without
  sustainable access to safe drinking water
• Halve by 2015 the proportion of people without
  access to basic sanitation
• Translates into a doubling of investment needs
  from 15 billion to 30 billion per year for
  water supply sanitation alone (as part of 180B
  a year for all water)

7
The finance challenge - an uphill battle for
developing world and infant sectors
Years to Full Coverage at Annual Growth Rates
Current Coverage
10
15
5
35
30 years
13 years
8 years
50
20 years
6 years
9 years
75
8 years
2 years
4 years
100
Less Than One Year
Assumes 1.3 population growth rate.
8
The WSS market poses special challenges

• Limited number of developers/operators
• Generally low margins
• Complexity and risks in the contractual and
  regulatory framework

• Sub-sovereign risk
• Limited pool of bankable projects (size,
  condition, readiness)

9
Word Development Report 2004 Main Messages

• Services are failing poor people
• They can work, the question is how?
• By empowering poor people to
• Monitor and discipline service providers
• Raise their voice in policymaking
• By strengthening incentives for service providers
  to serve the poor

10
How are services failing poor people?

• Public spending benefits rich more than poor
• Money fails to reach frontline service providers
• Uganda only 13 percent of non-wage recurrent
  spending on primary education reached primary
  schools
• Service quality is low for poor people
• Bangladesh absenteeism rates for doctors in
  primary health care centers 74 percent
• Zimbabwe 13 percent of respondents gave as a
  reason for not delivering babies in public
  facilities that nurses hit mothers during
  delivery
• Guinea 70 percent of government drugs
  disappeared

11
Overview of presentation

• The water financing challenge
• Towards Realistic Solutions
• Innovative IFI financial instruments follow-up
  of Camdessus/G8
• What more needs to be done

12
Are we Realistic?

• Investment needs are enormous
• Public funding stable or even decreasing
• International Aid is (and probably will remain)
  small percentage of WSS financing
• Thus how to fill the gap?
• The private sector?
• Taxpayers?
• Tariff?
• A combination?
• LETS DISCUSS THOSE ISSUES

13
Domestic public finance remains the dominant
source for water sanitation
Financing flows into water in 2000
Estimates from GWP Framework for Action
Billion USD
14
Recent collapse of private flows to infrastructure
Annual Private Investment in Infrastructure in
1990-2002, in US billion
15
Private investment in water supply and sanitation
has been low
Total (interternational) private investment in
infrastructure in 1990-2002 by
sector and region, US billion
16
Reasons NOT to invest in the water business
Degree of cost recovery
17
The financing paradox must be resolved
Who Pays
How Financed
User Tariffs Govt. Subsidies Public or Private
Debt
Consumers Taxpayers
18
Overview of presentation

• The water financing challenge
• Towards realistic solutions
• Innovative IFI financial Instruments Follow-up
  of Camdessus/G8
• What more needs to be done

19
Risk mitigation instruments

• Partial risk guarantees
• Partial credit guarantees
• Political risk insurance
• Breach of contract coverage

• Currency risk
• Dollar debt and local currency earnings
• Regulatory risk
• Regulatory framework not implemented or untested
• Payment/performance risk
• Government fails to pay amounts due
• Sub-sovereign risk
• Water investments are often at the sub-sovereign
  level

20
IFI risk mitigation instruments 2001 - 03
Number of Guarantees Issued
Value of Guarantees Issued
21
Where risk mitigation can make a difference

• Adequately Creditworthy Do Not Require Risk
  Mitigation
• Near Creditworthiness
• Marginally Creditworthy, but Reforming
• Non Creditworthy and Low Performing

Risk Mitigation Instruments Could Be Effective
22
Guarantees and subsovereign financingApplication
in the WSS sector How to increase effective
demand?
Lithuania 1 Project
Poland 3 Projects
Russia 4 Projects
Romania 3 Projects
Croatia 1 Project
Mexico 1 Project
Colombia 1 Project
Ecuador 1 Project
Risk mitigation instruments
Direct subsov lending
23
Overview of presentation

• The water financing challenge
• Towards realistic solutions
• Innovative IFI financial instruments follow-up
  of Camdessus/G8
• What More Needs to be Done

24
1. Going Forward Long-Term Sustainability A Must

• Improve Sector Performance Closing the Revenue
  Gap is Key
• With Decentralization, There is a Need to Bring
  in Local Governments as Key Stakeholders in the
  Financing of Water Investments (ie.
  contributors of equity, guarantors, or direct
  borrowers)
• Cost Recovery Critical But At A Realistic Pace
• The Use of Subsidies Should be Transparent and
  Primarily Aimed at Serving Poor Communities.
• Make Use of All Sources of Financing Public or
  Private and Create Framework Where Risks Are
  Properly Allocated and Bound By Enforceable
  Contracts.

25
2. Change to longer term financing
26
3. Closing the Revenue Gap

• Only if sustainable cashflows, investments for
  expanding services can be attracted
• Only few choices to finance investments
• Tariffs (consumers)
• Taxes (tax payers)
• Bilateral and multilateral aid limited extend
• So Move to cost-recovery but at a realistic pace

Predictable cash flow ? secure debt service ?
investment loan ? better services
27
4. Effectively demand international funding

• The needs are obvious, but how to translate
  needs into effective demand
• Lobby to get water into your PRSP
• Develop bankable projects
• Develop creditworthy utilities
• Engage with public, private, communities and
  stakeholders
• Nobody has A or THE solution.
• Look at various ways and learn by doing

28
5. Redirect funds to the poor

• Stop subsidizing the rich, they can pay for
  themselves
• Target subsidies better (subsidize connections
  rather than consumption)
• Invest in differentiated service levels, giving
  consumers a choice
• Decentralize funds (not only responsibilities) to
  local governments

29
5. Improve Creditworthiness

• Agreed programme of tariff increases, taking into
  account social considerations
• Clear / predictable allocation from central/local
  tax revenues
• Improved operational management/collections
• Increase data availability to make informed
  decisions

30
6. Unbundle Finance And Management -Looking at
Sustainable Hybrid Solutions
Public Private sector roles in the WSS sector
31
An World Bank evolving model for Water Service
Delivery
Private
Public
Engagement Anywhere Along the Spectrum
World Bank Group Combine Instruments IBRD/IDA
Loans, Credits and Guarantees IFC Loans and
Investments MIGA Guarantees
Cost Recovery Critical But At A Realistic Pace

• Targeted Subsidies OK
• For Connections
• For Usage Charges

32
7. Increase sustainability of Infrastructure (and
thus Investments)

• Before building new infrastructure, make sure
  that you have s for both construction and OM

Lagos State Water Corporation in 1999 96
unaccounted-for-water
33
8. The Instruments Needed, Available ? Used?
Issue of Effective Demand?

• The instruments in greatest need may be least
  available
• Contractual/regulatory instruments
• Foreign exchange risk instruments

• The instruments available may be tailored for the
  wrong kind of current investment
• Limited current capital investments
• Increase in management , lease and service
  contracts

Expand Application of Risk Instruments
Do not require risk mitigation, Adequately credit
worthy Risk mitigation instruments will be
ineffectiveNon-creditworthy and low performing
or instruments too expensive
Risk mitigation instruments could be effective
Nearly/marginally creditworthy reforming
34
Recapping (1)

• The Water Sector is Facing an Uphill Battle to
  Expand Coverage.
• The Debate is Not Between Public or Private, But
  Improving Sector Performance and efficient
  quality service delivery to the poor at lowest
  cost
• There is No Magic Solution! Cost Recovery is
  critical and Should Be the Foundation to A
  Sustainable Tariff Policy but At Realistic Pace
• Targeted Subsidies OK
• For Connections
• For Usage Charges
• If Utilized Prudently targeted subsidies and
  Long-Term Financing Can Contribute Significantly
  Towards Expanding Investments and service
  delivery
• Public funding to shift from input based to
  output based financing

35
Recapping (2)

• Mobilizing balanced mix of public and private
  funding sources more innovative use of public
  funds and subsidies
• Powered by sustained cashflows instead of taxes
• Private funding to increasingly comprise local
  currency alternatives
• Make PPI contracts "pro-poor".
• A Fund Channeling and Governance Framework Based
  on the Appropriate Allocation of Risks and Third
  Party Agreements is the Mechanism Needed to Align
  Incentives and Improve Governance
• Partial Risk and Partial Credit Guarantees, IFC
  loan and Guarantees and MIGA instruments
• Hybrid Models Mixing Public - Private Finance and
  Management Options Offers a Pragmatic Approach in
  An Environment of Increased Perceived Risks.

36
And.... grow the economy
Access to water and GDP
Source UN Millennium Project
37
Water high on the agenda CSD 12

• Selected thematic cluster water, sanitation and
  human settlements
• No more assessment and problem identifications
  and more promises
• The political and substantive outcomes of CSD 12
  need to be transformed into specific Actions
• Provide Realistic Guidance and Actions on the
  Ground to improve efficiency and coherence of
  policies
• Focus on implementation, including identifying
  constraints and obstacles at the country level
  and possible approaches for implementation and
  scaling up
• Review and forward looking session not a
  negotiating session government and other
  stakeholders
• New York City, 19-30 April

38
Thank you