workshop on water and health# 1 15.05.08 bucharest financing strategies and feasible jesper karup...

Workshop on Water and Health115.05.08 Bucharest

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Financing Strategies and FEASIBLE

Jesper Karup Pedersen ([email protected])

Bucharest

15 May 2008


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Content

Environmental financing strategies - what and why?

Three phases

In fact, a policy dialogue

Toolbox, including FEASIBLE

Major challenges

Advantages


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Environmental Financing Strategies - What and Why?

Possible definition

– A time-bound plan for sustainable financing of capital investments and O&M costs in an environment sector adopted by a national, regional or local government and embraced by major stakeholders involved in environmental management and operation in the country, region or municipality in question with a view to achieving a set of targets that are SMART.

"Sustainable financing" implies that expenditures (investment expenditure and operation and maintenance expenditure) are balanced with revenues (from public budgets, user charges and loans/grants from domestic and international sources).

Rationale is simple: Lack of financial realism is to be replaced by "sustainable financing" (this is particularly true in SEE and EECCA)


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Consensus that environmental financing strategies may be used to:

– Assess total investment needs of alternative policy targets

– Bring about practical implementation programmes taking into considerations what the economy and households can afford

– Identify investment projects and build short to medium-term project pipelines

– Identify the policies and measures which are necessary to ensure effective financing of the project pipelines

– Support claims of environment to other ministries

– Measure and report on the progress in the implementation of programmes and policies

– Improve financial planning and budgeting

– Improve legal and regulatory framework


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Three Phases

1. Preparation

– Need acknowledged

– ToR

2. Development

– Set-up of Steering Committee

– Baseline scenario

– Development scenarios

– Final financing strategy

3. Implementation

– Implementation plan

– Approval

– Implementation and monitoring


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In fact, a policy dialogue

Development of an environmental financing strategy is, in fact, nothing but a policy dialogue

The work on the development scenarios is an iterative process during which the financing gap is closed due to changes in policy variables

Policy variables include:

– Service levels

– Technology options

– Coverage of population

– Spread of investment over time

– Affordability of households

– User charges

– Public budget spending

– Level of support from donors and IFIs


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Key issues discussed in Armenia - an example:

– Country-specific interpretation of MDGs through introduction of Minimal Water Supply Standards (MWSS):

• Water quantity (minimal 50 lcd for ALL rural population)

• Regularity (min 8 hours/day)

• Distance (< 100 meter from home)

• Safe (chlorination, safety checks)

– Targets - on plot supply to be increased to 70% of rural households

– Increase user charges (and collection rates)

– Affordability - max % shares of rural household income and public budget available for WSS (threshold for affordability set at 3%)


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– How to improve institutional framework?

responsibilities and ownership

scale of operations

ability for cross subsidisation

private or public operators

– Steps towards implementation

• implementing agency

• adopt MWSS and adjust targets on WSS in Poverty Reduction Strategy Paper (PRSP)

• integrate the financing strategy into Medium-Term Expenditure Framework (MTEF) and annual budgets

• mobilise additional international loans and grants


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– In baseline scenario accumulated financing gap totals AMD 16.5 bln (till 2015)

-1000

0

1000

2000

3000

4000

5000

2007 2008 2009 2010 2011 2012 2013 2014 2015

mln AMD

O & M planned renovations renovation re investmentscharge revenues budget loans grants financing gap


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Toolbox, including FEASIBLE

Many tools…

… which complement each other

FEASIBLE, which originally was developed by COWI under supervision of the OECD and with financial support from the Danish EPA, is only one tool in the toolbox

FEASIBLE facilitates the iterative process of balancing the required finance with the available finance

It is in the public domain (e.g. www.cowi.dk/feasible)


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FEASIBLE Model - Overview


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Ukraine, Example (profiles of expenditure needs and supply of finance to safely operate the infrastructure)

0.0

0.3

0.5

0.8

1.0

1.3

1.5

1.8

2.0

2.3

2.5

2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023

EU

R b

illio

n

LoansEnvironmental fundsPublic budgetCollected non-HH user charges

Collected HH user chargesOperating costs incl. Loan serviceO&M incl. Loan serviceTotal cost


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0

50

100

150

200

250

300

350

400

millio

n E

UR

20032007

20132017

2022

User Charge Operation Maintenance and Reinvestment

Turkey, Example (realistic financing:Affordability by agglomeration size)

>1,000,000 150,000

1,000,000

50,000

150,000

2,000

50,000<2,000

Policy recommendationsEstablish territory-wide water and sewerage corporations

Implement needs-based transfers from central government


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EECCA, Example (affordability of water bills for households)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Novgorod Georgia Ukraine Pskov Moldova Kazakhstan Potentialaffordability

limit

wat

er b

ill as

% o

f hou

seho

ld in

com

e


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Scope of FEASIBLE

– Costing of water supply, wastewater and municipal waste

– Assessing supply of finance from user charges, public budgets and external sources

– Assessing affordability of households

Structure and functionality

– General module to define and delineate the modelled area

– Water supply, wastewater and municipal waste modules

– Supply of finance module

– Results module to assess financing gap

Autonomy

– Stand-alone tool

– Requires limited out-of-model calculations

Underlying concepts

– Assesses expenditures using generic cost functions (not unit costs) which easily may be adjusted to local context


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Entry data requirements

– Large amount of input data, though much less than for a feasibility study, but…

– … FEASIBLE uses a lot of default values, which can substitute for missing data

– No need to derive country-specific cost functions


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FEASIBLE Technology Options, Rural Module, Sanitation

Collection

– Simple dry pit latrine

– Improved latrine

– Pour flush latrine with holding tank

– Small communal sewerage with septic tank, reed bed, biological sand filter and stabilisation ponds

– Sewered interceptors

– Simplified sewerage

– Conventional waterborne sewerage

Treatment

– Conventional mechanical and biological/chemical treatment

– Reed bed treatment

– Biological sand filters

– Stabilisation ponds


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Major strengths

– Costing analysis in stand-alone model

– Limited data requirements

– Allows to model large number of regions and municipalities

– Allows to model a large number of policy variables

– Helps anticipating affordability problems for income groups and calculating the budget needed for social protection measures

Major constraints

– Supply of finance module is relatively simplistic (e.g. aggregates all public finance in one line)

– Affordability module with income distribution not yet inside the FEASIBLE

– Can not substitute for feasibility studies (in this case other tools are relevant - e.g. Financing Planning Tool for Water Utilities)


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Major Challenges

True policy dialogue is anything but simple to ensure - leadership, transparency and iterations matter

Development targets have to be SMART - if not, the credibility of the whole process and all parties involved will be undermined

Tools should be solid - it is not only about process

Attention should be paid to implementation - a well-developed environmental financing strategy takes you only half way


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Advantages

Environmental financing strategies offer a wide range of advantages to governments, donors and IFIs, including:

– They support the introduction of good governance, which is just as important as finance to improve the situation in the environmental sectors

– They facilitate a change in the minds of decision-makers - e.g. from focus on wish-lists to Santa Claus to focus on realistic targets

– They assist in establishing a regulatory framework for financial sustainability and promote cost-effective use of resources.

– They offer a way out of the vicious circle of financial un-sustainability and declining service provision that many countries are caught in

– They contribute to the development of road maps for achieving the MDGs - and may be used by all parties to check realism

workshop on water and health# 1 15.05.08 bucharest financing strategies and feasible jesper karup...

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