Grzegorz Peszko

1
FINANCING STRATEGIES FOR WATER AND ENVIRONMENTAL
INFRASTRUCTURE Global Forum on Sustainable
Development Paris
18 December 2003

• Grzegorz Peszko
• Environmental Finance Program Manager
• NMC Division, OECD Environment Directorate

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Do we know how much we need?

• to achieve the water and environment-related
  international development goals in the Millennium
  Declaration?
• Worldwide estimates for water-related MDGs
  additional 16Bln p/a (GWP), 9Bln to 30Bln p/a
  (WB), 25Bln p/a (Wateraid).
• Uncertainties about interpretation of the MDG
  goals, assumptions, costing methodologies remain
• But no panic necessary - costs are not magic
  figures cast in stone, depend on how we want to
  achieve MDGs, what exactly this imply in the
  field, and when.
• Catastrophic cost estimates breed inaction

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Bridging financing gaps to meet MDGs

• Rescheduling or modifying targets
• Finding cheaper ways of achieving given targets
• Knowing better how much we spend already to
  achieve the MDGs targets
• Increasing and diversifying finance

Focus of this presentation
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How much we spend?
OECD Pollution Abatement and Control expenditures

• Total PAC expenditures in the range of 0.8 to
  2.8 (Poland) of GDP
• PAC investments in the range of 0.9 - 3.8
  (Czech Republic) of GFCF
• Growing share of current expenditure
• Uneven but progressive application of PPP and UPP

Developing countries Estimates of present
expenditures in water sector 10Bln-80Bln/a
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We do not know well how much we spend

• Different classifications and definitions used
• Problems with double counting expenditure data
  by abater and by financier principle
• Treatment of specialised producers (e.g.
  utilities)
• Problems with comparing apples with oranges
  e.g. expenditures with costs, investments with
  total
• Problems with discretionary judgments e.g.
  integrated technologies
• Problems with data coverage cross-country
  comparison and time trends difficult

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Environmentally Extended Expenditure in Selected
Economies in Transition (as share of GDP in 2000)
Moldova
Kazakhstan
Ukraine
Russian Fed.
Georgia
Uzbekistan
Armenia
Turkmenistan
Kyrgyz Republic
Azerbaijan
Estonia
Romania
Bulgaria
Latvia
Lithuania
Slovenia
Czech Republic
Poland
Slovak Republic
Hungary
Germany
Portugal
0
1
2
3
4
5
6
Source OECD

7
Environmentally Extended Investment Expenditure
in Selected countries(as share of GFCF in 2000)
Russian Fed.
Georgia
Ukraine
Armenia
Uzbekistan
Turkmenistan
Kyrgyz Republic
Azerbaijan
Moldova
Romania
Bulgaria
Lithuania
Poland
Czech Republic
Hungary
Portugal
Germany
Source OECD
0
2
4
6
8
10
12
14

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Who finances and who ultimately pays?

• National and sub-national governments
• Local governments
• Local communities
• Service providers (specialised producers)
• Private intermediaries - institutions of
  financial and capital markets
• International financial institutions
• Foreign governments (ODA, export credits)

But what are weights of different sources?

• Users
• Domestic taxpayers
• Foreign taxpayers
• Future users
• The poor
• (for low level of infrastructure services)

• Data by financing sources not collected
  systematically even in OECD countries
• Transfers are difficult to trace (especially
  subsidies)

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Financing capital investments is not enough

• Operation and maintenance to ensure
  sustainability
• Return on investments and debt service to
  attract commercial finance

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Reforms and innovations in financial architecture
needed

• but no paradigm shift around the corner
• Every financial institution has a role to play
  with large menus of financial products
• Smart blending needed, leveraging, not crowding
  out
• Constituency for efficiency, especially in public
  sector
• Realism and innovations, rather than one size
  fits all solutions
• No magic bullet, such as public budget, ODA or
  private sector participation, will alone hit the
  MDGs
• Strategic, realistic and systematic approaches to
  exploit synergies between financial sources
  needed financing strategies

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ONE POSSIBLE MODEL FOR DEVELOPING FINANCING
STRATEGIES FEASIBLE
Affordability assessment
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LESSONS LEARNED FROM FEASIBLE FINANCING
STRATEGIES

• In most FSU and in China baseline finance is not
  sufficient to cover even regular OM and modest
  infrastructure development targets
• Policy and institutional failures are usually
  responsible for low investments and funding

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Shares of different sources in financing water
and wastewater utilities
100
80
60
40
20
0
Kaliningrad oblast
Eastern
Novgorod
Pskov
Rostov
Moldova
Georgia
Kazakhstan
Ukraine
Sichuan Province
Kazakhstan
User charges
Other
Public budgets
Source OECD, data from the base year of analysis
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Lessons learned from FEASIBLE financing
strategies Users must pay

• User fees the key to any sustainable financing
  system of water and environmental infrastructure
• No sustainable alternative to cover operational
  and maintenance costs (typical full cost coverage
  in OECD countries)
• Increasing coverage of investment costs (e.g.
  return on equity) and debt service precondition
  to attract external private finance
• Governments need to ensure that tariffs are
  established at realistic and affordable levels,
  often in the face of political opposition

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Can users pay? Want to pay?

• Users often are able to pay (ATP) more -
  affordability benchmarks vary
• Willingness to pay (WTP) can be higher or lower
  than ATP WTP can be influenced by policy.
• Another bottleneck willingness to charge by
  government (WTC).
• Models of social safety nets
• income support to households or regions
• cost/price subsidies
• mixed

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Governments (taxpayers) will always have to pay

• Provision of pure public goods and subsidising
  quasi private goods (e.g. drinking water,
  district heat)
• Correction for externalities (wastewater, solid
  waste financing incremental costs)
• Market creation (regulation, institutions
  building)
• Market access (risk sharing, credit enhancement,
  subsidies)
• Social safety nets

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Local financial and capital markets

• Financing water/environmental infrastructure in
  developing countries still at infant stage, but
  growing
• Benefits more sustainable than public budgets
  and ODA, reduce currency mismatches
• Maturity mismatch a problem access to long term
  savings
• Credit market architecture a problem low
  institutional capacity, no credit record,
  disclosure of financial information, rating
• Local finance a problem unclear
  responsibilities not matched with access to
  revenues, unclear property regimes, ineffective
  supervision of local borrowing
• Risk profile difficult to estimate. Interim risk
  sharing with public sector needed. Clear risk
  allocation and enforceable contracts are part of
  enabling framework.

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International financial institutions (IFI)

• Important role in capital investments
• Demonstration and catalytic function quality of
  projects
• Engineering, financial and management discipline
• Paving the way for greater reliance on debt
  financing risk mitigation
• Development of long term local credit systems

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Private operators and strategic investors

• Service providers (it costs, but gains are
  efficiency, financial viability, know-how
  transfer)
• Usually management rather than financing
  solution.
• Credit enhancement of public utilities
• Equity and strategic management
• Need for effective regulation of private monopoly

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Development assistance

• Generally decreasing, but some regions are
  politically trendy
• Emerging trend to use donor assistance to finance
  sustainable local financial mechanisms rather
  than individual projects
• Untied procurement became common
• More strategic perspective needed (commitments
  for multiyear programs rather than individual
  projects)
• Better integration between investment support, TA
  and support for policy reforms

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LESSONS LEARNED FROM FEASIBLE FINANCING
STRATEGIES

• Good data and information essential
• Unrealistic targets can undermine progress and
  breed cynicism
• water supply and wastewater infrastructure need
  to be integrated
• Financing strategies are no self-fulfilling
  prophecies - need to be implemented (policies,
  institutions, instruments)
• Good governance, right policies and regulations
  are as important as finance

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LESSONS LEARNED FROM FEASIBLE FINANCING
STRATEGIES

• Without specific incentives, infrastructure will
  be excessively costly and inefficient
• Strategic framework needs to be filled with
  rolling mid-term investment program and solid
  project pipelines

• FEASIBLE analyses already made impacts in many
  countries
• More transparent, rational dialogues
• More realistic targets
• More diversified financing

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ACCESS TO FEASIBLE  TOOLKIT

• FEASIBLE-1Beta Excel model has been available
  as public domain and widely used for 2 years.
• FEASIBLE-2 in testing. Fully operational in
  public domain since January 2001.
• For publication Financing Strategies for Water
  and Environmental Infrastructure visit
  www.SourceOECD.org
• For information how to receive the FEASIBLE model
  and users manual visit
• To get more information on country studies in FSU
  and download documentation, visit visual projects
  database at http//oecd.hybrid.pl

www.oecd.org/env/finance www.cowi.dk/publication
s/div01pub/index.htm www.mst.dk/homepage