Grzegorz Peszko Environmental Finance Program Manager NMC Division, OECD Environment Directorate FINANCING STRATEGIES FOR WATER AND ENVIRONMENTAL INFRASTRUCTURE Global Forum on Sustainable Development Paris 18 December 2003

… 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 Do we know how much we need?

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 Bridging financing gaps to meet MDGs Focus of this presentation

How much we spend? 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 OECD: Pollution Abatement and Control expenditures

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 We do not know well how much we spend

Environmentally Extended Expenditure in Selected Economies in Transition (as share of GDP in 2000) Source: OECD 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 %

Environmentally Extended Investment Expenditure in Selected countries (as share of GFCF in 2000) Source: OECD Russian Fed. Georgia Ukraine Armenia Uzbekistan Turkmenistan Kyrgyz Republic Azerbaijan Moldova Romania Bulgaria Lithuania Poland Czech Republic Hungary Portugal Germany %

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) Who finances and who ultimately pays? 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) But what are weights of different sources?

Operation and maintenance – to ensure sustainability Return on investments and debt service – to attract commercial finance Financing capital investments is not enough

… 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 Reforms and innovations in financial architecture needed

ONE POSSIBLE MODEL FOR DEVELOPING FINANCING STRATEGIES: FEASIBLE Affordability assessment

In most FSU and in China baseline finance is not sufficient to cover even regular O&M and modest infrastructure development targets Policy and institutional failures are usually responsible for low investments and funding LESSONS LEARNED FROM «FEASIBLE» FINANCING STRATEGIES

Shares of different sources in financing water and wastewater utilities 0% 20% 40% 60% 80% 100% NovgorodPskov Kaliningrad oblast RostovMoldovaGeorgia Ukraine Kazakhstan Eastern Kazakhstan User charges Public budgets Other Sichuan Province Source: OECD, data from the base year of analysis

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 Lessons learned from FEASIBLE financing strategies: Users must 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 Can users pay?… Want 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 Governments (taxpayers) will always have to pay

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. Local financial and capital markets

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 International financial institutions (IFI)

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 Private operators and strategic investors

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 Development assistance

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 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 LESSONS LEARNED FROM «FEASIBLE» FINANCING STRATEGIES

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 For publication Financing Strategies for Water and Environmental Infrastructure visit 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: ACCESS TO FEASIBLE TOOLKIT