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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

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slide1

OECD Global Forum on Sustainable DevelopmentFinancing Water and Environmental Infrastructure for All

Opening Speech

by

Jamal Saghir

Director, Energy and Water,

The World Bank

OECD Headquarters, Paris, 18 December 2003

slide2
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.
slide3

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

overview of presentation
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

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)

the mdgs a startling reminder of the financing challenge ahead

Investment needs per annum (B USD)

?

?

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)
the finance challenge an uphill battle for developing world and infant sectors
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

9 years

6 years

75%

8 years

2 years

4 years

100%

Less Than One Year

Assumes 1.3 population growth rate.

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)

cities (>1m)

secondary cities (>100k)

towns (>10k)

Size of population centre

attractiveness

least

less

villages (>500)

medium

more

# of population centres

most

rural (<500)

high potential for private financing

medium potential for private financing

low potential for private financing

Household &micro-financing

Need for public investment

The WSS market poses special challenges
word development report 2004 main messages
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
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 presentation1
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
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
slide13

Domestic is dominant ~ 85%

Public is dominant ~85%

Domestic public finance remains the dominant source for water & sanitation

Financing flows into water in 2000

Estimates from “GWP Framework for Action”

Billion USD

recent collapse of private flows to infrastructure

140

120

100

80

60

40

20

0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Recent collapse of private flows to infrastructure

Annual Private Investment in Infrastructure in 1990-2002, in US$ billion

private investment in water supply and sanitation has been low
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

slide16

200%

150%

Financial autonomy

100%

50%

0%

Telecom

Gas

Power

Water

Reasons NOT to invest in the water business…

Degree of cost recovery

slide17

The financing paradox must be resolved

Who Pays

How Financed

User Tariffs

Govt. Subsidies

Public or Private Debt

Consumers

Taxpayers

overview of presentation2
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
slide19

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
ifi risk mitigation instruments 2001 03
IFI risk mitigation instruments 2001 - 03

Number of Guarantees Issued

Value of Guarantees Issued

slide21

Whererisk 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

slide22
Guarantees and subsovereign financing:Application 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

overview of presentation3
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
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.
slide26

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
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
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
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
slide30

6. Unbundle Finance And Management -Looking at Sustainable Hybrid Solutions

Divestitures

Mixed Company

Concessions

Operating

Company plc

Private

BOTs

CorporatizedMuni. Service

Finance

Leases/Affermage

Municipal

Department

Public

Mgnt. Contracts

Public

Private

Management

Public & Private sector roles in the WSS sector:

an world bank evolving model for water service delivery
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
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

cities (>1m)

secondary cities (>100k)

attractiveness

least

towns (>10k)

less

Size of population centre

medium

more

# of population centres

most

villages (>500)

rural (<500)

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

Risk mitigation instruments could be effective: Nearly/marginally creditworthy & reforming

Do not require risk mitigation, Adequately credit worthy

Risk mitigation instruments will be ineffective:Non-creditworthy and low performing or instruments too expensive

recapping 1
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
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
And.... grow the economy

Access to water and GDP

Source: UN Millennium Project

water high on the agenda csd 12
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

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