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Chapter+5 introduction+to+finance+instruments

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  • 1. Economic and Financial Instruments for IWRM Introduction to water finance
  • 2. 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.
  • 3. Outline 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
  • 4. Introduction
    • A nation’s water sector comprises a range of functions and services. The starting point in constructing a financing strategy is to consider, for each part of the sector, its sources and modalities of finance, the financial status of the entities involved, and their estimated future financial requirements.
  • 5. Financial and economic instruments
    • Some instruments can perform both economic and financial purposes: 1. economic instruments influence the behaviour 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.
  • 6. 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
  • 7. 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
  • 8. 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%
  • 9. 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
  • 10. 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
  • 11. 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
  • 12. 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
  • 13. Instruments for financing the water sector (2)
    • ii) National government grants, soft loans & guarantees, from National, state or municipal budgets and/or financial intermediaries & development banks.
    • iii) External grants & concessional loans (oda)
    • iv) Philanthropic agencies & partnerships
    • v) Commercial loans, equity & PSP, for example, IFI loans, Commercial bank loans & microfinance, Bonds, Private equity, External guarantees & risk sharing, PSP contracts of various kinds (BOTs, concessions, etc).
  • 14. 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
  • 15. 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
  • 16. Think about it
    • Is there any scope for involving private equity and commercial finance in the water sector your country?
    • Which are the main constituent parts of your country's water sector? Which are finance sources 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.
    There are always things not seen!
  • 17. End
    • The next chapter will give some examples of financial instruments used in the water sector in developing countries.