9. capnetchch6.1


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9. capnetchch6.1

  1. 1. Economic and Financial Instruments for IWRM Application of financial instruments based on chapter 6 of a manual on Finance for IWRM published by the above organizations and written by James Winpenny, slides produced by Meine Pieter van Dijk UNESCO-IHE, 28-8-7
  2. 2. Goal and objectives of the session  To examine in greater detail than in chapter 5 the main financing options for a water system  To evaluate the relevance of these financing instruments for different purposes
  3. 3. Learning objectives  Understand the pros and cons of each financing option and the circumstances in which each is applicable  Assess the interdependence of the financing mechanisms and how synergy can be produced  Be able to combine different options to provide a coherent financial structure
  4. 4. Outline presentation  Charges for use of water & water services  National government grants, soft loans & guarantees  External grants (Official Development Aid)  Philanthropic & not-for-profit agencies & partnerships  Commercial loans, bonds & private equity  How do guarantees work?
  5. 5. Charges for use of water & water services  Water abstraction charges  Water supply tariffs  Sewerage and effluent charges  Water pollution charges and taxes  Licence fees and charges for specific services
  6. 6. Financing flood risk management 1  Charges on water users For example the French Agences de Bassin fund their water resource management activities (including flood control) through surcharges on customers’ water bills, sometimes referred to as a “polluters’ tax”  Surcharge on property owners For example the Netherlands Water Boards, responsible for surface water management including flood control, recover costs through charges on property owners
  7. 7. Financing flood risk management 2  Negotiated contributions from beneficiaries For examle large landowners, property developers, sporting complexes, factories, power stations  Charges and fees for use of facilities and attractions For example some assets created by flood risk management have recreational and touristic benefits which can be the basis of entry charges and fees to the general public: rambling, water sports on reservoirs, fishing & hunting rights, etc.
  8. 8. Financing flood risk management 3  Cost sharing from multipurpose schemes Costs can be shared because FRM is often one of the purposes of hydropower projects, river flow management, preservation of wetlands, etc.  Cost sharing in transboundary projects FRM frequently entails transboundary projects, where costs can be shared with neighbours  Insurance Many governments encourage their citizens to take out private insurance policies to cover flood risk
  9. 9. The national budget for recurrent cost funding  Covering recurrent overhead water services costs  Providing the variable costs of operating water services (power, chemicals) should be user charges  Underwriting any financial deficits incurred by local water undertakings, this removes any incentive on undertaking to improve its finance  Providing subsidies to cover stated and specific purposes (free water for deserving & sanitation)  Targeted or smart subsidies avoid disadvantages of general subsidies, if predictable and transparent
  10. 10. National government grants, soft loans & guarantees Advantages of government funding of projects are:  Fund raising is related to national financial capacity, and can avoid local over-borrowing & debt problems  The national Treasury can get better terms in financial markets than local authorities  It can set national priorities and steer funds towards urgent/priority cases, ensuring equity between richer and poorer parts of the country  The foreign exchange risk of foreign loans is borne by central government
  11. 11. Financial intermediaries & development banks  Financial agencies occupying a position between central governments and local service providers, e.g. national development banks, infrastructure development corporations, water sector banks, municipal development corporations, environmental funds, etc.  They funnel wholesale money down to the regional and local borrowers
  12. 12. External grants (Official Development Aid)  Grants or concessional loans are available from a wide variety of international agencies. It is sensible for developing countries to maximise their uptake of ODA grant money, before contemplating commercial finance for this sector  Concessional loan is one that is available on better terms than those provided by private financial markets – lower interest, longer maturities, and/or grace periods before interest or repayments are due
  13. 13. Output-Based Aid (OBA) see example Kenya in ch.8 OBA has been defined as: “..a strategy for using explicit performance-based subsidies to support the delivery of basic services where policy concerns would justify public funding to complement or replace user-fees. The core of the OBA approach is the contracting out of service delivery to a third party, usually a private firm, where payment of public funds is tied to the actual delivery of these services”
  14. 14. Philanthropic & not-for-profit agencies & partnerships  A high proportion of W&S programmes are undertaken in partnership with NGOs, Community Based organisations, church groups, charities and other philanthropic and not-for-profit bodies  A number of wealthy foundations have recently started programmes in water and sanitation  UN agencies (UNICEF), or branches of the International Red Cross are active watsan NGOs  Some NGOs specialise in W&S and have experience & programmes, e.g.Eau Vive and WaterAid
  15. 15. Commercial loans, bonds & private equity 1 Loans from International Financial Institutions (IFIs)  Medium/long term loans are available from IFIs for water resources management and infrastructure.  IFIs’ shareholders are national governments, and they operate in many different countries  Some of them are obliged by their statutes to lend only to national governments, others have the means to deal with private borrowers and can deal with sub-sovereign borrowers  Their terms are normally more favourable than those on offer from commercial sources
  16. 16. Commercial loans, bonds & private equity 2 Bank loans for infrastructure are of two main types, depending on how risks are born:.  corporate finance where the loan is made to a company or public corporation, which undertakes the servicing of the debt. (The loan may be used for spending on specific projects, but it is the overall balance sheet of the borrower that is the concern of the lender)  project finance, where the loan is made to a “special purpose vehicle” undertaking the project, and the security for loan is the expected cash flow
  17. 17. How do guarantees work?  Mitigating specific risks, which are the critical sticking points on a project  Enhancing creditworthiness of securities (e.g. bonds) to take them over a critical threshold  Improving the terms on which borrowers and project sponsors can get access to loans and investment  Giving lenders and investors exposure to previously unfamiliar markets and financial products
  18. 18. Think about it: types of risk  Political risk (war, civil disturbance, terrorism, kidnappings, nationalization, expropriation without adequate compensation, restrictions on the conversion and transfer of foreign exchange needed for the project); Insurance cover is available from MIGA, bilateral official agencies and private insurers  Regulatory & contractual (breach of contract by public off taker adverse decisions by regulators or other public agencies due to political pressure); cover is available from MIGA Breach of Contract policies and the World Bank’s Partial Risk Guarantee  Credit (late payment or default on loans made, or goods and services provided, for commercial reasons); Partial Credit Guarantees are offered by IFC & other IFIs, some bilateral donors have Partial Loan Guarantees , and insurance policies are also sold by private mono-line companies (providing financial guarantees)  Devaluation risk, insurance against this is currently not a practical proposition, though pilot testing of possible schemes are under way
  19. 19. End Role play: form 2 groups; one representing the Central Government while the second group is a local authority. The local government wants to improve access to water and sanitation for its population. Both groups will attend a round table to negotiate an appropriate funding scheme. Groups have 25 minutes to prepare their arguments before the round table begins. One of the course facilitators or one of the participants will act as moderator. Suggestions for Central government Do you want to keep control of financing flows, or are they decentralized? How would you monitor the use of funds? How would you control for local indebtedness? Are you confident of having access to new money (e.g. from aid, budget, bonds etc) or do you prefer to leave it to the local authorities? Are you willing to offer a sovereign guarantee for local fundraising? Local Where do you stand on the question of dependence on central government? Do you have the capacity to negotiate with funders? How would you ensure repayment capacity for loans or equity? Does central government funding flow down to your level or blockages?