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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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Opening Speech by Jamal Saghir Director, Energy and Water, The World Bank

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Opening speech by jamal saghir director energy and water the world bank

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


Opening speech by jamal saghir director energy and water the world bank

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.


  • Opening speech by jamal saghir director energy and water the world bank

    • 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


    Opening speech by jamal saghir director energy and water the world bank

    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


    Opening speech by jamal saghir director energy and water the world bank

    200%

    150%

    Financial autonomy

    100%

    50%

    0%

    Telecom

    Gas

    Power

    Water

    Reasons NOT to invest in the water business…

    Degree of cost recovery


    Opening speech by jamal saghir director energy and water the world bank

    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


    Opening speech by jamal saghir director energy and water the world bank

    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


    Opening speech by jamal saghir director energy and water the world bank

    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


    Opening speech by jamal saghir director energy and water the world bank

    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.


    Opening speech by jamal saghir director energy and water the world bank

    2.Change to longer term financing


    Opening speech by jamal saghir director energy and water the world bank

    • 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


    Opening speech by jamal saghir director energy and water the world bank

    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


    Thank you

    Thank you


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