Transcript Financing Water and Environmental Infrastructure for All

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
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.
AND
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.
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
The costs of not investing in water are
very large
Correlation between GDP and Rainfall in Zimbabwe
3.0
1.0
5.0
0.0
-1.0
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0.0
1979
Real GDP growth (%)
2.0
10.0
-2.0
-5.0
-3.0
Real GDP grow th (%)
Variability in Rainfall (Meter)
15.0
Variability in Rainfall (Meter)
-10.0
-4.0
Years
Correlation between GDP and Rainfall in Zimbabwe
 Governments must raise the priority of water
investments (including through the PRSP)
The MDGs – A Startling Reminder of
the Financing Challenge Ahead

Halve by 2015 the proportion of people
without sustainable access to safe drinking
water
Investment needs per
annum (B USD)
50
?

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)
25
?
0
present
MDG needs
wastewater treatment
sanitation
water supply
The finance challenge - an uphill battle
for developing world and infant sectors
Current
Coverage
Years to Full Coverage at Annual Growth Rates
5%
10%
15%
35%
30 years
13 years
8 years
50%
20 years
9 years
6 years
75%
8 years
4 years
2 years
100%
Less Than One Year
Assumes 1.3 population growth rate.
The WSS market poses special
challenges
Size of population centre
 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)
cities
(>1m)
secondary
cities
(>100k)
towns
(>10k)
villages
(>500)
rural
(<500)
high potential for private financing
low potential for private financing
medium potential for private financing
Household &micro-financing
Need for public investment
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
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
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
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?
LET’S DISCUSS THOSE ISSUES
Domestic public finance remains the
dominant source for water & sanitation
Financing flows into water in 2000
Estimates from “GWP Framework for Action”
80
Billion USD
60
international
domestic
40
20
0
public
Public is dominant ~85%
private
Domestic is dominant ~ 85%
Recent collapse of private flows to
infrastructure
Annual Private Investment in Infrastructure in
1990-2002, in US$ billion
140
120
100
80
60
40
20
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
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
200
East Asia and Pacific
Europe and Central Asia
150
Latin America and the Caribbean
Middle East and North Africa
100
South Asia
Sub-Saharan Africa
50
0
Energy
Telecom
Transport
Water & Sewerage
Reasons NOT to invest in the water
business…
200%
150%
Financial autonomy
100%
50%
0%
Telecom
Gas
Power
Degree of cost recovery
Water
The financing paradox must be resolved
Who Pays
How Financed
User Tariffs
Consumers
Govt.
Subsidies
Taxpayers
Public or
Private Debt
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
Risk mitigation instruments
• Currency risk
– Dollar debt and local currency earnings
• Regulatory risk
– Regulatory framework not
implemented or untested
• Payment/performance risk

Partial risk guarantees

Partial credit
guarantees

Political risk
insurance

Breach of contract
coverage
– Government fails to pay amounts due
• Sub-sovereign risk
– Water investments are often at the subsovereign level
IFI risk mitigation instruments 2001 - 03
Number of Guarantees Issued
Value of Guarantees Issued
140
$6,000
123
$4,972
Total Value of guarantees ($ millions)
Total number of guarantees
120
100
80
60
51
40
20
$5,000
$4,000
$2,825
$3,000
$2,000
$1,000
3
0
$39
$0
Total value of
guarantees
Of which,
infrastructure
guarantees
Of which, water
guarantees
Total value of
guarantees
Of which,
infrastructure
guarantees
Of which, water
guarantees
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
Guarantees and subsovereign financing:Application in
the WSS sector: How to increase effective demand?
Poland
3 Projects
Mexico
1 Project
Romania
3 Projects
Lithuania
1 Project
Croatia
1 Project
Colombia
1 Project
Ecuador
1 Project
Risk mitigation
instruments
Direct subsov
lending
Russia
4 Projects
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
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.
2.
Change to longer term financing
Effect of Loan Maturities on Tariffs
90
80
70
Tariff
60
Sugbon
50
Bohol
Malabuyoc
40
OBA Cambodia
30
20
10
0
0
5
10
15
Ma turity in Ye a rs
20
25
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
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
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
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
6. Unbundle Finance And Management -Looking at
Sustainable Hybrid Solutions
Divestitures
Mixed Company
Operating
Company plc
Concessions
BOTs
Corporatized
Muni. Service
Leases/Affermage
Municipal
Department
Public
Mgnt. Contracts
Management
Private
Public & Private sector roles in the WSS sector:
An World Bank evolving model for
Water Service Delivery
Public
Private
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
7. Increase sustainability of
Infrastructure (and thus Investments)

Before building new infrastructure, make sure
that you have $$s for both construction and
O&M
Lagos State Water
Corporation in 1999: 96%
unaccounted-for-water
8.
The Instruments: Needed, Available ? Used?
Issue of Effective Demand?
Size of population centre
 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
cities
(>1m)
secondary
cities
(>100k)
towns
(>10k)
villages
(>500)
rural
(<500)
Do not require risk mitigation, Adequately credit worthy
Risk mitigation instruments will be ineffective:
Non-creditworthy and low performing or instruments
too expensive
Risk mitigation instruments could be effective:
Nearly/marginally creditworthy & reforming
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
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.

And.... grow the economy
Access to water and GDP
Moldov a
100
Y emen
wateracc00
Maldiv
Lebanon
es
Belarus
Mauritiu
Slov
akiaBarbados
Slov
Malta
enia
Cy prus
Macedoni
Samoa
Russia
Hungary
St. Luci Costa
Uruguay
Ri St.Kitts
Jordan
Bahamas
Suriname
Egyana
pt AlgeriaIran
Croatia Saudi Ar
Guy
St.VinceGrenada Chile
Guatemal
Lesotho
Kazakhst
Colombia
Antigua
Lao
Honduras
PakistanIndia Vanuatu Philippi Panama Brazil
Trinidad
Mexico
South Af
Uzbekist
Zimbabwe
Venezuel
Sri Lank
Turkey
Morocco
Nepal
Sy ria Paraguay
Thailand
Nicaragu
Boliv ia
Dominica
Argentin
Senegal
Cote d'I
KyGeorgia
rgy
zst
Peru
Namibia
Indonesi
Belize
Sudan
China
ElCape
Salv aVer
Solomon
Ecuador
Jamaica
Gabon
Banglade
Comoros
Mali
Zambia
Ghana
Benin
Bhutan
Cameroon
Gambia
Mozambiq
Central
Mongolia
Niger
Malawi Nigeria
Vietnam
Tanzania
Togo
Congo
Guinea-B KenyUganda
a
Guinea
Madagasc
Eritrea
Haiti
Turkmeni
Romania
Fiji
Equatori
Papua Ne
Rwanda
Angola Mauritan
Cambodia
Sierra L
24
Chad
Ethiopia
6.17379
10.0579
lynppp00
Source: UN Millennium Project
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
Thank you