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Chapter+5 introduction+to+finance+instruments

  1. 1. Economic and Financial Instruments for IWRM Introduction to water finance
  2. 2. Goal and objectives of the session <ul><li>To explain how the main constituent parts of the water sector obtain their finance. </li></ul><ul><li>To consider how a financing structure can be put together that is coherent, adequate and sustainable. </li></ul>
  3. 3. Outline presentation <ul><li>Financial and economic instruments </li></ul><ul><li>Finance for the water sector </li></ul><ul><li>Cost categories and funding sources </li></ul><ul><li>Building a financing strategy for IWRM </li></ul><ul><li>The range of financial instruments </li></ul><ul><li>Case study: two examples of coherent financing, the Netherlands and France </li></ul>
  4. 4. Introduction <ul><li>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. </li></ul>
  5. 5. Financial and economic instruments <ul><li>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. </li></ul><ul><li>However, the two effects may overlap, and the same instrument may perform one or both purposes in different circumstances. </li></ul><ul><li>For example a tariff can serve both purposes. </li></ul>
  6. 6. Catalogue of the national water sector <ul><li>Water sector policy setting & coordination </li></ul><ul><li>Environmental & economic regulation & performance monitoring </li></ul><ul><li>Water resource development & management </li></ul><ul><li>Distribution of water &bulk supply </li></ul><ul><li>Sanitation and wastewater collection, transport & treatment </li></ul>
  7. 7. Cost categories and funding sources <ul><li>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. </li></ul><ul><li>Capital costs are for large items of investment: </li></ul><ul><li>-infrastructure (dams, distribution networks, etc.) </li></ul><ul><li>-resource development (e.g. protection of catchments, drilling groundwater wells, etc) </li></ul><ul><li>- major repairs & modernisation (e.g. upgrading a water treatment plant) </li></ul><ul><li>-rehabilitation of old or broken installations, etc </li></ul>
  8. 8. Sources of capital funding in the nineties <ul><li>Domestic public sector 65-70%; </li></ul><ul><li>Domestic private sector 5%; </li></ul><ul><li>International donor agencies and International Finance Institutions 10-15%; </li></ul><ul><li>International private companies 10-15% </li></ul>
  9. 9. Building a financing strategy for IWRM (1) <ul><li>Using public finance for public goods </li></ul><ul><li>Recover costs from users for directly productive services </li></ul><ul><li>Appropriate delegation of financial power to sub-sovereign & local bodies </li></ul><ul><li>Increased self-financing of service providers </li></ul><ul><li>Take up of external grants </li></ul>
  10. 10. Building a financing strategy for IWRM (2) <ul><li>Co-financing should be sought for transnational projects and those with international benefits </li></ul><ul><li>The cost of multipurpose schemes can be shared with other sectors </li></ul><ul><li>Some externalities of water can be captured in monetary form and the proceeds applied to IWRM </li></ul><ul><li>Partnerships are a good way to tap new sources of finance </li></ul><ul><li>Tapping finance from commercial sources </li></ul>
  11. 11. The range of financial instruments <ul><li>Charges for use or benefits </li></ul><ul><li>National or local government grants or other support </li></ul><ul><li>External grants (oda) </li></ul><ul><li>Philanthropy </li></ul><ul><li>Commercial loans and equity </li></ul>
  12. 12. Instruments for financing the water sector (1) <ul><li>i) Charges for the use of water and water services: </li></ul><ul><li>-Water abstraction charge </li></ul><ul><li>-Water tariffs for households, industries, farmers & other major users </li></ul><ul><li>-Sewerage & effluent charge </li></ul><ul><li>-Water pollution charges and taxes </li></ul><ul><li>-Licence fees & charges for use of specific services </li></ul><ul><li>-Flood protection levies </li></ul>
  13. 13. Instruments for financing the water sector (2) <ul><li>ii) National government grants, soft loans & guarantees, from National, state or municipal budgets and/or financial intermediaries & development banks. </li></ul><ul><li>iii) External grants & concessional loans (oda) </li></ul><ul><li>iv) Philanthropic agencies & partnerships </li></ul><ul><li>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). </li></ul>
  14. 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. 15. Distinctive features of the Dutch model <ul><li>Public sector ownership model for Water Boards & Drinking Water companies (plcs); </li></ul><ul><li>Democratic structure of Water Boards, with strong stakeholder representation; </li></ul><ul><li>Strong revenue streams for WBs & water supply plcs; </li></ul><ul><li>Water Bank a dedicated source of long term loans; </li></ul><ul><li>Water supply & wastewater collection & treatment now self-financed (through cash flow & loans) </li></ul><ul><li>Strong sub-sovereign agencies attracting long term finance on fine terms </li></ul><ul><li>High degree of self-regulation & benchmarking by WBs & plcs </li></ul>
  16. 16. Think about it <ul><li>Is there any scope for involving private equity and commercial finance in the water sector your country? </li></ul><ul><li>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) </li></ul><ul><li>Is the current financing structure rational and sensible? Suggest ways in which it could be improved. </li></ul><ul><li>Make suggestions for attracting more financial resources into the water sector of your country. </li></ul>There are always things not seen!
  17. 17. End <ul><li>The next chapter will give some examples of financial instruments used in the water sector in developing countries. </li></ul>