Financing Strategies for
Water and Environmental
Infrastructure
Lessons learned from case-studies
Alexander
Martusevich
OECD
in FSU
OECD Global Forum on Sustainable Development
Financing Water and Environmental Infrastructure for All
18-19 December 2003, OECD Headquarters, Paris
Financing Strategies applying FEASIBLE approach –
case-studies in FSU
Country
Region
Georgia
National
Moldova
National
Kaliningrad
Novgorod
Pskov
Russian
Federation
Rostov on Don
Yaroslavl
Khanty-Mansijsk (KhMAO)
Leningrad Oblast + St.Petersburg
Caucasus Mineral Water region
Kazakhstan
National
Eastern Kazakhstan Oblast
Ukraine
National
Armenia
National
Latvia
Riga
Urban water
supply
Urban
wastewater
collection and
treatment
Municipal
Solid Waste
MAIN OBSERVATIONS FROM CASE-STUDIES IN FSU

Water and wastewater infrastructure in former
Soviet Union is rather extensive, more than in
other countries with similar level of income,
but inefficient and deteriorating

Connection rates in FSU are high (70%-100% in
urban areas), but service level is rather low
due to lack of proper maintenance and
investments

Low incentives for rational water use by
consumers
MAIN OBSERVATIONS FROM CASE-STUDIES IN FSU
Water balance in Yerevan
Sold to
consumers
Delivered to
Yerevan
Volume
Water
abstraction
0
100
200
300
400
500
million m3 per annum

Efficiency is low (water losses amounts to 30-75%,
excessive energy consumption per 1m3 by water utilities)
In case of Yerevan: Huge excessive energy consumption at
14,000 MWth per annum to pump water from Ararat valley
can be avoided as gravity flow from mountains is almost
sufficient to meet the demand
MAIN OBSERVATIONS FROM CASE-STUDIES IN FSU

Little incentives to optimise infrastructure and
public capital expenditure and increase efficiency
of public investments (e.g. FEASIBLE simulations
proved that in oil rich Khanty-Mansijsk province
WSWW infrastructure development targets could
be achieved with lower public expenditure than it
was initially projected / or actually spent )

Very little proportion of public capital expenditure
targeted to rural area

In FSU there is not enough finance to cover even
baseline (O&M) expenditure needs – with few
exceptions (e.g. KhMAO)
BASELINE SCENARIO: O&M EXPENDITURE NEEDS COMPARED
WITH TOTAL FINANCING AVAILABLE
EUR per connected inhabitant per year
51
42
34
25
17
8
0
Pskov
Ukraine Georgia Novgorod Kazakhstan Moldova Rostov Kaliningrad Eastern
Kazakhstan
O&M expenditure needs
Supply of finance
FOCUS ON TWO ISSUES:
(1) BALANCING O&M EXPENDITURE NEEDS
WITH AFFORDABLE USER CHARGES



(2) PRESENT AND FUTURE ROLE OF MAIN
SOURCES OF FINANCING:
User charges
Public funds
Debt financing and private strategic and equity
investments
BALANCING O&M EXPENDITURE NEEDS WITH
AFFORDABLE USER CHARGES




Reduce excessive or illegal water
consumption - demand side incentives for
rational water use
Increase operational efficiency (reduce water
losses, excessive staff, energy savings) –
supply side incentives
Create incentives for infrastructure and capital
expenditure optimisation, utilise economy of
scale
Improve collection (often poor in FSU)
and/or increase user charges (not much
room in most poor countries)
LESSONS LEARNED FROM CASE-STUDIES IN FSU
(1) Demand and Supply side incentives
are equally important:


Billing based on Metering does create strong
incentives for rational water use but needs to be
supported by appropriate Tariff policy not to make
Water utility a bankrupt
Huge water and energy saving potential could be
utilised in the short term (and may counter balance
upward trend in electricity prices)
(2) User charge revenues
- at present are not sufficient to cover O&M
expenditure
PRESENT USER CHARGES AS % OF EXPENDITURE
NEEDED TO IMPLEMENT BASELINE SCENARIO
100%
80%
60%
40%
20%
0%
Moldova Kazakhstan Novgorod Rostov
Ukraine Georgia Kaliningrad Pskov Eastern
oblast
Kazakhstan
User charges as % of O&M expenditure requirements
User charges as % of O&M and re-investment expenditure requirements
MAIN FINDINGS FROM CASE-STUDIES IN FSU
… are present User charges affordable ?

In most of cases present user charges
are affordable for majority of households
(HHs) – applying 3-4% threshold

Even in poor countries there is some
room for user charges increase to
affordability limit

However, there is little sense to further
increase user charges until collection is
substantially improved (Armenia)
… are HHs able and willing to pay more ?
MAIN FINDINGS FROM CASE-STUDIES IN FSU
Some proportion of HHs is able to pay for water more
(and even willing to pay more for improved services) 
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
Novgorod Georgia Kaliningrad Rostov Eastern Ukraine Pskov Moldova
Kazakhstan
province provinceKazakhstan
province
Province
Potential affordability limit
water bill as % of average household income

MAIN FINDINGS FROM CASE-STUDIES IN FSU :
Affordability constraints


Affordability limit (as well as WTP) is site
specific while substantial fall of the collection
rate after tariff increase may indicate that the
limit is achieved
FEASIBLE model was used to assess at
which level of average per capita income
user charges could fully cover O&M cost
(assuming that the user charge for HHs is
set at the affordability limit of XX% of
average per capita income)
Potential O&M expenditure coverage in WSWW sector
by User charges and average per capita income
Country /
region, year
Average
annual per
capita
income one
year before,
USD
Novgorod,
2000
810
Pskov,
2000
640
Rostov,
2002
790
Armenia,
2003
385
Affordability
limit – user
charge as %
of average
per capita
income, %
Min. annual per capita
income that would
ensure full coverage
of O&M cost by user
charges set at the
affordability limit, EUR
2%
1680
3%
1150
2%
2000
3%
1350
2%
1150
3%
800
3%
1450
4%
1100
LESSONS LEARNED FROM CASE-STUDIES IN FSU:
Affordability constraints and role of Public funds


These estimates and income distribution
analysis show that in most poor countries and
provinces (e.g. Armenia, Pskov) user charges
which would allow to cover full O&M cost
would not be affordable for substantial
proportion of population (40-60%)
Public funds will therefore have to play
essential role in the short and medium term
providing income support to the poor
and/or operating subsidies to water utilities
bridging the cash flow gap
LESSONS LEARNED FROM CASE-STUDIES IN FSU:
role of Municipalities and local public budgets


In FSU Municipalities are often owners of the
infrastructure therefore formally responsible
for major repairs and capital investments
BUT most of local public budgets are not
sufficient to cover just operational expenses
and have very limited investment and
borrowing capacity
 additional burden for national and regional
budgets
LESSONS LEARNED FROM «FEASIBLE» COUNTRY STUDIES:
obstacles for Private sector participation
Private sector (operators, strategic investors)
could and will play more important role in
operating and financing water supply and
environmental infrastructure in FSU
But there are some obstacles:



Limited management capacity of Municipalities
Improper regulation, institutional set up and tariff
policy create too big risk and uncertainty
Affordability constraints
- elimination of these obstacles will take
years
Policy measures to accelerate progress
in WSWW sector in FSU



Regulation, Institutional set up and Contractual
relations, as well as tariff policy in Housing and
Communal Services sector should be improved
to create proper incentives and reduce risk and
uncertainty for operators and investors
Overall reform of public finance is needed to
balance responsibilities and revenues of local
(municipal) budgets and improve their borrowing
capacity
Sound economic and fiscal policy aimed at fast
growth - measured not only in terms of GDP, but
also in terms of HHs incomes and public
revenues