1. Gordon Hughes Gordon.Hughes@nera.com QUALIDADE DO GASTO PÚBLICO NO BRASIL Recursos hidricos e saneamento

2. 2 Public spending and water Water is a key resource for Brazil :public spending decisions critical to the management and allocation of this resource :highly ‘political’ because these decisions affect the distribution of income & wealth :how far is it possible to minimise conflicts between different groups of users - e.g. hydro-power vs irrigation vs urban consumption Geographical dimension - river basins not States :fundamental role of ANA to promote fair allocation mechanisms :spending should follow allocation, not drive it

3. 3 The key players Federal ministries, etc :Agriculture, Minas e Energia, Saude, Transportes, Communicacoes, Meio Ambiente, Desenvolvimento Agrario, Integracao Nacional, Cidades +... :ANA, ANEEL, CONAMA/IBAMA State goverments & municipalities Public & private entities :hydro-power companies, water companies, infrastructure managers, … :financial institutions - CEF, BNDES

4. 4 Principles of allocation Traditional approach :first come, first served (prior appropriation) :no charges but no property rights :hence no mechanism for re-allocating water to more valuable uses :problems in managing variability (drought protection) The economic approach :allocate water to purposes/sectors where its value is highest, net of infrastructure & operating costs valuing the benefits of water in competing uses directly leads to the principle of cost recovery for infrastructure and other services of water management

5. 5 Valuing the benefits of water use Hydro-power :time dimension & value of storage Irrigation :income generation and poverty alleviation :distribution : subsistence vs cash crops, size of farm :capital investment to use water efficiently Urban & industrial uses :typically high willingness to pay, but tendency to treat these uses as cash cows (eg Ceara) Environmental quality :amenity benefits - recreation, protection of aquatic eco-systems

6. 6 Cost-benefit & water projects Development of cost-benefit analysis linked to evaluation of water projects in the USA :unfortunately, all too often the results are ignored! :trade-offs between competing uses of water involves same issues as environmental valuation Example : CB analysis of Sao Francisco transfer :basic goals are distributional but the major benefits come from urban/industrial uses :how should the contribution to poverty alleviation be assessed and valued? :difficulties of evaluating reductions in risk : alternative approaches to drought relief and rural water supply

7. 7 Charging for bulk water 1 Basic principles :charges should at least cover administration, operating and maintenance costs (A, O & M) :investments only justified if the discounted sum of the rents generated by project water exceeds the capital costs of the infrastructure and the net value of water in competing uses :where possible, award concessions or establish public companies to finance and operate infrastructure - e.g.CHESF or COGERH :role of public expenditure - targeted capital grants or loan finance for specific social/economic objectives

8. 8 Charging for bulk water 2 Subsidies for bulk water are not an efficient mechanism for income transfers :promote excessive use of a scarce resource :most of the benefits go to large farmers, etc Specific external benefits - perhaps flood control, drought protection - may justify foregoing a return on past investments However, geographical bundles of water infrastructure (eg in a river basin) should be self- financing so that there is no need for continuing budgetary transfers

9. 9 Water supply Social objective to serve the 5% of urban households with no piped water of any kind :these tend to be among the poorest households :cost could easily be financed by efficient water utilities :average WTP for water supply easily exceeds the marginal cost of providing services :problem is largely one of mismanagement rather than public expenditure Water supply in rural & peri-urban areas :network extension may be efficient :real issue for public expenditure is organisation rather than cost (incl role of Min of Health / FNS)

10. 10 Sewers & sewage treatment 1 The expensive item in the urban agenda :important to think carefully about the justification for investments in sanitation :many people have reasonable arrangements without sewers - hence unwilling to pay extra cost If the justification for sanitation is health or environmental benefits, then where should public expenditure be allocated? :link to incidence of water-borne diseases :protection of important recreational facilities such as beaches or specific rivers

11. 11 Sewers & sewage treatment 2 Much expenditure driven by environmental standards which create peverse incentives :are households willing to pay for collection and treatment of sewage? :if not, are the amenity benefits of investments large enough to justify their cost? Focus on output-based assistance :example : ANA’s Compra dos Esgotos grants :limited rather than full funding :promote competition among alternative solutions :clearly identify and monitor the health, environmental or other goals for assistance is given

12. 12 Lessons : USA & Europe Coverage of sewers & sewage treatment has taken over 100 years :many targets for Brazil are much too ambitious :in practice, priority was given to places where the return on investment was greatest Recent expenditures have been driven by Federal or EU standards :no proper consideration of the costs & benefits :extremely expensive and wasteful investments :large transfers of Federal/EU funds to finance investments - often poorly managed and inefficient

13. 13 Conclusions Consider how the benefits of water as a valuable resource are distributed :inefficient incentives, unequal distribution Cost recovery for the sector as a whole should be the basic principle Use cost-benefit analysis for investments :identify what are the goals and who will benefit :are the intended beneficiaries willing to pay for the service and how will they pay? Target public subsidies for identifiable social or environmental objectives - then monitor the results!