Grzegorz Peszko

Environmental Finance Program ManagerNMC Division, OECD Environment Directorate

FINANCING STRATEGIES FOR FINANCING STRATEGIES FOR WATER AND ENVIRONMENTAL WATER AND ENVIRONMENTAL

INFRASTRUCTUREINFRASTRUCTUREGlobal Forum on Sustainable Development Global Forum on Sustainable Development

Paris 18 December 2003 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?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 MDGsBridging financing gaps to meet MDGs

Focus of this presentation

How much we spend? 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 expendituresOECD: 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 We do not know well how much we spendspend

Environmentally Extended Expenditure Environmentally Extended Expenditure in Selected Economies in Transition in Selected Economies in Transition (as share of GDP in 2000)(as share of GDP in 2000)

Source: OECD0 1 2 3 4 5 6

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 Environmentally Extended Investment Expenditure in Selected countriesExpenditure in Selected countries(as share of GFCF in 2000)(as share of GFCF in 2000)

Source: OECD 0 2 4 6 8 10 12 14

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?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)

Bu

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hat

are

wei

gh

ts o

f d

iffe

ren

t so

urc

es?

Operation and maintenance – to ensure sustainability

Return on investments and debt service – to attract commercial finance

Financing capital investments is not Financing capital investments is not enoughenough

… 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 innovationsReforms and innovations in financi in financial al architecture neededarchitecture needed

ONE POSSIBLE ONE POSSIBLE MODELMODEL FOR DEVELOPING FOR DEVELOPING FINANCING STRATEGIES: FINANCING STRATEGIES: „FEASIBLE”„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» LESSONS LEARNED FROM «FEASIBLE» FINANCING STRATEGIESFINANCING STRATEGIES

Shares of different sources in financing Shares of different sources in financing water and wastewater utilitieswater and wastewater utilities

0%

20%

40%

60%

80%

100%

Novgorod PskovKaliningrad

oblastRostov MoldovaGeorgia Ukraine KazakhstanEastern

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 Lessons learned from FEASIBLE financing strategies: Users must payfinancing 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?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 Governments (taxpayers) will always have to payhave 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 Local financialfinancial and capital markets 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)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 Private operators and strategic investorsinvestors

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 assistanceDevelopment 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» LESSONS LEARNED FROM «FEASIBLE» FINANCING STRATEGIESFINANCING 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» LESSONS LEARNED FROM «FEASIBLE» FINANCING STRATEGIESFINANCING 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 2001.

For publication “Financing Strategies for Water and Environmental Infrastructure” visit www.SourceOECD.org

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: http://oecd.hybrid.pl

ACCESS TO ’FEASIBLE ’ TOOLKITACCESS TO ’FEASIBLE ’ TOOLKIT

www.oecd.org/env/finance

www.cowi.dk/publications/div01pub/index.htm

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