Will present some broad messages on financing and illustrate with a specific case study from Lesotho
MESSAGESRate of return on pvte investment in Africa is higher than any other region – Oxford Uni research and Harvard bus review 2009BUTThere is an absorption problem./ No capacity so additional investment collapses.
This is stating the obvious but that is necessary as for too long we have given the impression that money comes from nowhere and dependency culture.TRANSFERS – too dependent on these in many countries can be 50% or more of budget. This is unpredictable and not a sustainable basis for financing services.
Not much scope for tax as economies are informal.Excessive dependence on Aid.All sectors are seeking scarce funds and finance is more scarce than water and just as misused, wasted and over exploited (= debt).Water only gets between 0.5 and 1% of budget (and declining) – too low for meeting the governments political statements. ODA to Africa on water is 3% of total ODA and only about US$ 1 billion per year. Demands for WS&S are 10 to 20 bn/yr.Need to use ODA very strategically to leverage other funds
Promoting tariffs – paying for water services – has got lost in political rhetoric. Need to show reality of what has to be done to meet demand – TINA –WBstudy indicates urban piped water (delivered to the rich) costs 4 times what unregulated vendors charge (the poor) [0.13 v/s .51 $/m3]
Often sector is asking for money with very vague ideas of what is needed.
The project developed a planning tool and Technical Working Group from Water Sector Institutions were trained in itsuse.Financing needs analysed according to four scenarios: Business as usualHigh Growth with Urban and Industrial FocusHigh Growth with Rural Development FocusLow GrowthThe consequences of financing strategies based on the principles in the Water Policy were described and quantifiedThe 4 scenarios all aim for full cost recovery for urban water and sewerage services.The financing strategy therefore has a large degree of ‘user payment for services’ and identifies the need for a ‘social safety net’ to ensure that services also reach the poorer parts of the population
The scenarios worked on the Government policy to meet all unserved by 2020.
Provided the basis for agreement on realistic service targets.Agreement on bringing information and data from water and sanitation services together in one consistent format .Established a baseline for water and sanitation information.Water Sector SWAP was enhanced through dialogue among the relevant Government, Donors and other stakeholders.Examined different scenarios using a transparent methodology and country specific spreadsheets – avoiding the ‘black box’ problem.
Data sensitive eg government reluctant to give population figures
Off the shelf generic planning tools do not work as the water sector is different in different countries and planning tools need to fit into the existing data management systems.Some components of planning tools, such as unit cost models and specific sub-sector models, can have wider application in more than one country and help in developing local tools.
Finance institutions are frustrated at lack of demand and poor quality of projects Focus on accessing Trust Funds to develop infrastructure projects for the water sectorE.G. European Investment Bank manage an infrastructure trust fund for Africa that has never been used for water! AfDB manage the NEPAD trust fund for infrastructure, UN and others also have under used project preparation facilities. Have to cover life cycle costs. 20% design and build 44% O&M 36% financing cost.
Strategic Financial PlanningPlanification financière stratégique Alan Hall Chair of the EUWI Finance Working Group
1. Background Finance is a scarce resource• Good Governance is essential to reduce risk and attract finance.• Sound institutions and competent staff necessary to make effective use of finance.• Information critical for good decision-making and design.• Sound project preparation essential for investment: support is needed for both ‘soft’ and ‘hard’ interventions.
2. Background Realism: The 3 T’s• There are only three sources of finance: Taxes, Tariffs, Transfers• Government budgets are finite depending on taxes, tariffs and transfers.• Utilities only have income from tariffs or budget allocations (tax).• Aid transfers are from tax paid by workers in donor countries - limited and have to be used strategically.• Loans have to be paid back from taxes or tariffs.• Taxes and tariffs take many forms and are collected in many ways.
3. Background Governments face stark choices1. Lower ambitions (or renege on commitments).2. Access more grant aid (it has increased but is limited and unpredictable).3. Raise more tax (and/or divert it from other uses).4. Increase tariffs for water services.5. Attract private investment (and thus raise tariffs).
4. Background The myth of low tariffs “low tariffs help the poor who cannot afford to pay and are unwilling to pay”.• Low tariffs commit the poor to pay more for a worse service, whilst wealthier urban dwellers are subsidised.• It results in a lack of finance for maintaining assets and improving services and keeps the sector backward.• The least worst solution for extending services is to increase the pot of finance through higher tariffs.
5. Background Strategic Financial Planning (SFP)1. Analyses needs and gaps before trying to access funds and decide on the sources.2. Provides Facts – essential to convince the Ministry of Finance.3. Provides a reality check - demonstrate there is no magic bullet.4. Country SFP studies supported by OECD and bilateral donors in Armenia, Georgia, Moldova, Kyrgyz Republic.5. Lesotho study supported by EUWI-FWG. Cost Euro 250,000.
6. Lesotho Lesotho SFP study• Develop and maintain a strategic financial plan for water supply and sanitation services• Build capacity through a “learning-by-doing” process• Inform the ‘Sector Wide Approach’ for water through policy dialogue among government departments and with other stakeholders• Bring information and data from water and sanitation services (urban/ rural/ bulk water) together in one consistent format and establish a baseline 7
7. Lesotho Elements of the study• Intensive data collection and analysis• Take account of economic policies, plans and government aspirations• Financing needs analysed according to four scenarios: 1. Business as usual 2. High Growth with Urban and Industrial Focus 3. High Growth with Rural Development Focus 4. Low Growth• Structured method used to analyse information based on the OECD ‘Feasible’ methodology• Household affordability a key input to get realistic figures
9. LesothoResults: Total Funding Needs Average Annual Funding Needs to 2020 Includes 100 O&M 90 Costs 80 70 60 mEUR 50 40 30 20 10 0 U San Scenario 1 Scenario 2 Scenario 3 Scenario 4 R San Sew UWS RWS
10. Lesotho Population served3,500,000 Rural Pop un-served Urban Pop un-served3,000,000 Rural Pop served Urban Pop served2,500,0002,000,0001,500,0001,000,000 500,000 - 2020 2025 2030 2035 2009/10 2010/11 2011/12 2012/13 2015/16 2013/14 2014/15
11. Lesotho Water Sector Funding SourcesWater Sector Funding Sources to 2015 User Contribu Scenario 3 tions 29% Water Sector Funding Sources to 2030-35 Governm ent & Donors 28% Governm ent & Donors 71% User Contribu tions 72%
12. Outcomes SFP Outcomes• Formed the basis of engagement with Finance Ministry.• Objective discussion of tariff policy.• Analytical approach showed stark trade-off between reality and policy credibility – in a transparent way.• Results used to identify priorities and embedded into the budget and Medium Term Expenditure Framework.• Provided a platform for aid effectiveness and dialogue with donors.• Facilitated improvements in the Monitoring systems and cooperation between the Bureau of Statistics and water sector Institutions.
13. Lessons Constraints1. Data collection and analysis problematic.2. Institutional anchorage of the SFP process and planning tools – changes in staffing make this fragile.3. A ‘project approach’ is good for initial development of planning tools and capacity building but not for the long term.4. Follow-up support is necessary to ensure sustainability of the achievements.
14. Lessons Lessons1. Provides a structured and comprehensive approach – replaces the usual ad hoc approach2. SFP structured according to the sub-sector sub-divisions used in the budgeting process3. Flexible tool that allows for re-design/additions and updating according to the developments in the sector4. Must be ‘owned’ by the country. There is no ‘one size fits all’.5. Provides transparency therefore good for negotiations.
15. Observations Overcoming Financing Obstacles• SFP provides reality check – and helps set realistic aims.• Help Governments allocate scarce public budgets more strategically for public goods and facilitate private investment.• SFP part of wider support on financing for water. For example: – for project preparation (trust funds not presently used for water), – for blending of finance from multiple sources, – For helping countries understand finance and how to access finance from different sources.
16. Observations Strategy issues• Whole project costs must be factored in (less 40% are for infrastructure/construction).• Subsidies are needed but have to be designed and targeted.• Need to use a range of sources of finance and mechanisms and match different sources to different purposes.• Need different approach to serve the poor – if utilities are run as a ‘business’ then may need to have different agency to provide for the poorest communities.
17. Observations Distractions!• Worldwide Economic crisis – reduced access to finance.• Investment without revenues - excessive national debt.• Right to water (and sanitation) has consequences - legal costs, withdrawal of financing?• Loss of public support if focus only on urban areas with lack of solutions for the poor.
Thank you• EUWI FWG reports:• Strategic Financial Planning for water supply and sanitation in Africa (English and French)• A Primer for Practitioners and Students in Developing Countries• available from:www.euwi.net/wg/financewww.gwpforum.org