Economic and Financial

Instruments for IWRM

Introduction to water finance

Goal and objectives of the session

To explain how the main constituent parts of the water sector obtain their finance.

To consider how a financing structure can be put together that is coherent, adequate and sustainable.

Outline presentation

Financial and economic instruments Finance for the water sector Cost categories and funding sources Building a financing strategy for IWRM The range of financial instruments Case study: two examples of coherent

financing, the Netherlands and France

Introduction

A nation’s water sector comprises a range of functions

and services. The starting point in constructing a

financing strategy is to consider, for each part of the

sector, its sources and modalities of finance, the

financial status of the entities involved, and their

estimated future financial requirements.

Financial and economic instruments Some instruments can perform both

economic and financial purposes: 1. economic instruments influence the

behaviour of users and hence the allocation of the resource.

2. financial instruments generate financial revenues for the operation and development of the sector.

However, the two effects may overlap, and the same instrument may perform one or both purposes in different circumstances.

For example a tariff can serve both purposes.

Catalogue of the national water sector

Water sector policy setting & coordination

Environmental & economic regulation & performance monitoring

Water resource development & management

Distribution of water &bulk supply Sanitation and wastewater collection,

transport & treatment

Cost categories and funding sources

Recurrent costs are the continuous expenses involved in operating all parts of the water sector, including wages & salaries, fuel, electricity, chemicals, spare parts and minor capital items.

Capital costs are for large items of investment: -infrastructure (dams, distribution networks, etc.)-resource development (e.g. protection of catchments, drilling groundwater wells, etc)- major repairs & modernisation (e.g. upgrading a water treatment plant) -rehabilitation of old or broken installations, etc

Sources of capital funding in the nineties

Domestic public sector 65-70%;

Domestic private sector 5%; International donor

agencies and International Finance Institutions 10-15%;

International private companies 10-15%

Building a financing strategy for IWRM (1)

Using public finance for public goods

Recover costs from users for directly productive services

Appropriate delegation of financial power to sub-sovereign & local bodies

Increased self-financing of service providers

Take up of external grants

Building a financing strategy for IWRM (2)

Co-financing should be sought for transnational projects and those with international benefits

The cost of multipurpose schemes can be shared with other sectors

Some externalities of water can be captured in monetary form and the proceeds applied to IWRM

Partnerships are a good way to tap new sources of finance

Tapping finance from commercial sources

The range of financial instruments

Charges for use or benefits National or local government grants or

other support External grants (oda) Philanthropy Commercial loans and equity

Instruments for financing the water sector (1)

i) Charges for the use of water and water services:

-Water abstraction charge -Water tariffs for households, industries, farmers & other major users-Sewerage & effluent charge-Water pollution charges and taxes-Licence fees & charges for use of specific services-Flood protection levies

Instruments for financing the water sector (2)

ii) National government grants, soft loans & guarantees, from National, state or municipal budgets and/or financial intermediaries & development banks.

iii) External grants & concessional loans (oda)

iv) Philanthropic agencies & partnerships

v) Commercial loans, equity & PSP, for example, IFI loans, Commercial bank loans & microfinance, Bonds, Private equity, External guarantees & risk sharing, PSP contracts of various kinds (BOTs, concessions, etc).

Case: example of coherent financing in France

Paymentby users

subsidyBasin agency

Polluter’s tax

Local authority(municipality or syndicate)

Costrefund

Atthe country level water pays for water only,

Water users

Distinctive features of the Dutch model

Public sector ownership model for Water Boards & Drinking Water companies (plcs);

Democratic structure of Water Boards, with strong stakeholder representation;

Strong revenue streams for WBs & water supply plcs; Water Bank a dedicated source of long term loans; Water supply & wastewater collection & treatment

now self-financed (through cash flow & loans) Strong sub-sovereign agencies attracting long term

finance on fine terms High degree of self-regulation & benchmarking by

WBs & plcs

Think about it

Is there any scope for involving private equity and commercial finance in the water sector your country?

Which are the main constituent parts of your country's water sector? Which are finance sources for each? (distinguishing recurrent spending from capital investment items)

Is the current financing structure rational and sensible? Suggest ways in which it could be improved.

Make suggestions for attracting more financial resources into the water sector of your country.

There are always things not seen!

End

The next chapter will give some examples of financial instruments used in the water sector in developing countries.