FINANCING STRATEGIES FOR
WATER AND ENVIRONMENTAL
INFRASTRUCTURE
Global Forum on Sustainable Development
Paris 18 December 2003
Grzegorz Peszko
Environmental Finance Program Manager
NMC Division, OECD Environment Directorate
Do we know how much we need?

… 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
Bridging financing gaps to meet MDGs

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
Focus of this
presentation
How much we spend?
OECD: Pollution Abatement and Control expenditures

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
We do not know well how much we
spend

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
Environmentally Extended Expenditure
in Selected Economies in Transition
(as share of GDP in 2000)
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
0
Source: OECD
1
2
3
%
4
5
6
Environmentally Extended Investment
Expenditure in Selected countries
(as share of GFCF in 2000)
Russian Fed.
Georgia
Ukraine
Armenia
Uzbekistan
Turkmenistan
Kyrgyz Republic
Azerbaijan
Moldova
Romania
Bulgaria
Lithuania
Poland
Czech Republic
Hungary
Portugal
Germany
Source: OECD
0
2
4
6
8
10
12
14
But what are weights of different sources?
Who finances and who ultimately pays?
National and sub-national
governments

Users

Local governments

Domestic taxpayers

Local communities

Foreign taxpayers

Service providers
(specialised producers)

Private intermediaries institutions of financial and
capital markets


International financial
institutions

Foreign governments (ODA,
export credits)


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)
Financing capital investments is not
enough


Operation and maintenance – to ensure
sustainability
Return on investments and debt service –
to attract commercial finance
Reforms and innovations in financial
architecture needed

… 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
ONE POSSIBLE MODEL FOR DEVELOPING
FINANCING STRATEGIES: „FEASIBLE”
Affordability assessment
LESSONS LEARNED FROM «FEASIBLE»
FINANCING STRATEGIES

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
Shares of different sources in financing
water and wastewater utilities
100%
80%
60%
40%
20%
0%
Sichuan Novgorod Kaliningrad
oblast
Province
User charges
Pskov
Georgia
Rostov
Public budgets
Source: OECD, data from the base year of analysis
Ukraine
Moldova
Other
Eastern Kazakhstan
Kazakhstan
Lessons learned from FEASIBLE
financing strategies: Users must pay

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
Can users pay?… Want to 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
Governments (taxpayers) will always
have 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
Local financial and capital markets

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.
International financial institutions (IFI)





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
Private operators and strategic
investors

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
Development assistance

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
LESSONS LEARNED FROM «FEASIBLE»
FINANCING STRATEGIES

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»
FINANCING 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
ACCESS TO ’FEASIBLE ’ TOOLKIT




“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:
www.oecd.org/env/finance
www.cowi.dk/publications/div01pub/index.htm
www.mst.dk/homepage

To get more information on country studies in FSU and
download documentation, visit visual projects database at:
http://oecd.hybrid.pl