Economic and Financial

Instruments for IWRM

Introduction to water finance based on chapter 5 of a manual on Finance for IWRM published by the above organizaitons and written by James Winpenny, slides produced by Meine Pieter van Dijk UNESCO-IHE, 28-8-7

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.

Learning objectives: to

Analyse and understand the variety and

complexity of a national water sector and

the specific financial needs of its

component parts

Differentiate financial and economic

instruments

Apply a critical approach to different

sources of finance

Structure of the 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

Financial and economic instruments

Some instruments can perform both economic and financial purposes: 1. economic instruments influence the behavior 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

Fundability of water functions

Some functions are easier to fund than

others:

1. Easier to fund

2. More difficult to fund

3. More likely to be neglected & underfunded

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

Financial intermediaries & development banks

iii) External grants & concessional loans (oda)

iv) Philanthropic agencies & partnerships

Partnerships involving NGOs and civil society groups

v) Commercial loans, equity & PSP, f or 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

Payment by users

subsidy Basin agency

Polluter’s tax

Local authority (municipality or syndicate)

Cost refund

At the 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: three exercises

Break down your country’s water sector into its main constituent parts and draw up an inventory of the sources of finance 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

End

Is there any scope for involving private

equity and commercial finance in the water

sector your country?

The next chapter will give some examples

of financial instruments used in the water

sector in developing countries.