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Water infrastructurefinancing2011sept22


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The Third Expert Group Meeting (3EGM) on Monitoring of Investment and Results (MIR) in the Water Sector in Asia and the Pacific, organized by the United Nations Economic and Social Commission for Asia and the Pacific (UN-ESCAP), in collaboration with the Global Water Partnership Southeast Asia (GWP-SEA), in Bangkok, Thailand on 22 and 23 September 2011.

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Water infrastructurefinancing2011sept22

  1. 1. Financing Infrastructure in the Water Sector Expert Group Meeting on Monitoring of Investment and Results in the Asia and the Pacific Bangkok, 22-23 September 2011 Margit Molnar Regional Adviser UNESCAP Macroeconomic Policy and Development Division
  2. 2. Infrastructure capital is particularly important <ul><li>Compared to other type of capital </li></ul><ul><li>Different economies of scale </li></ul><ul><li>Network externalities </li></ul><ul><li>Enhances market access </li></ul>
  3. 3. And is financed from various sources <ul><li>Government budget </li></ul><ul><ul><ul><li>Desirable where social returns are high </li></ul></ul></ul><ul><ul><ul><li>Affordability issues in many countries </li></ul></ul></ul><ul><li>Financial markets </li></ul><ul><ul><li>Credit spreads are very large </li></ul></ul><ul><ul><li>Yield premia are lower but bond markets underdeveloped </li></ul></ul><ul><ul><li>Securatisation of infrastructure assets and listing of co-s limited </li></ul></ul><ul><ul><ul><li>Globally listed AP infrastructure securities only make up 3-4% of global market capitalisation </li></ul></ul></ul><ul><li>PPPs </li></ul><ul><ul><li>Value for money of service delivery and affordability </li></ul></ul>
  4. 4. Nevertheless a huge financing gap persists… <ul><li>Without making additional funds available for financing crucial projects worth US$800 billion a year would not materialise in the next 10 years (ADB-ADBI estimate) </li></ul>
  5. 5. Is the water sector any different? <ul><li>Under-financed </li></ul><ul><ul><li>MDG targets for water & sanitation require </li></ul></ul><ul><ul><ul><li>Investment of additional US$72billion annually </li></ul></ul></ul><ul><ul><ul><ul><li>Maintenance costs of US$54billion annually </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Increasing coverage US$18billion annually </li></ul></ul></ul></ul><ul><li>Per-capita consumption has been increasing exponentially </li></ul><ul><ul><li>579 km3 in 1900 vs. 3973 km3 in 2000 </li></ul></ul><ul><ul><li>… and demand is projected to reach 5235 km3 in 2025 (Clarke and King, 2004). </li></ul></ul>
  6. 6. Financing of water infrastructure <ul><li>2 types of costs: </li></ul><ul><ul><li>Capital investment </li></ul></ul><ul><ul><ul><li>Mainly financed by governments, combined with ODA & IFI borrowing, limited commercial participation </li></ul></ul></ul><ul><ul><li>Recurrent costs </li></ul></ul><ul><ul><ul><li>Tariff revenues and subsidies </li></ul></ul></ul>
  7. 7. Financing ( cont .) <ul><li>Tariffs </li></ul><ul><ul><li>Most important, but sometimes too low </li></ul></ul><ul><ul><ul><li>Full cost recovery – ideal but not even the developed countries implement </li></ul></ul></ul><ul><ul><ul><li>Sustainable cost recovery – towards consensus of making at least O&M costs sustainable </li></ul></ul></ul><ul><ul><li>If too low (e.g. capped at low level), utilities may not make any extension to the network and even neglect maintenance  disruptions of service, deterioration of quality etc. </li></ul></ul>
  8. 8. Financing ( cont .) <ul><li>Subsidies </li></ul><ul><ul><li>Justified if internalise externalities (public health, environment) </li></ul></ul><ul><ul><li>Inefficient if attempts to increase affordability of services unless targeted </li></ul></ul><ul><ul><li>Target: providers or consumers </li></ul></ul><ul><ul><ul><li>Planned subsidising of providers may be part of sustainable cost recovery </li></ul></ul></ul><ul><ul><ul><li>Subsidising of consumers only efficient if targeted </li></ul></ul></ul>
  9. 9. Commercial financing difficult <ul><li>Not all benefits are reflected in price </li></ul><ul><li>Sunk costs </li></ul><ul><li>More capital-intensive than other network services (electricity, gas or telecommunications) </li></ul><ul><li>Perceived as risky </li></ul>
  10. 10. Bond premia vs. credit spreads for 5-year term issues/loans from AAA to B- <ul><li>Bond premia over Treasury bills (blue bars) </li></ul><ul><li>Credit spread over Treasury bills (red bars) </li></ul><ul><li>April vs. September 2011 </li></ul>Heightened risk aversion reflected in widening spreads at lower ratings
  11. 11. A special type of PPP – revenue bonds Source: Yoshino (2011)
  12. 12. Lack of financing leads to underinvestment <ul><li>Bottleneck to growth </li></ul><ul><li>Greater impact on the poor </li></ul><ul><li>Health impacts </li></ul><ul><li>… but excessive subsidising leads to inefficiencies and high profit margins </li></ul><ul><ul><ul><li>Mark-up estimates for a group of developed countries show a much higher level of mark-ups than in other utilities </li></ul></ul></ul><ul><ul><ul><li>… and lowers incentives to enhance cost efficiency </li></ul></ul></ul>
  13. 14. How to overcome the affordability issue? <ul><li>As pointed out by ESCAP, inter alia in the Economic and Social Survey 2011  regional mechanism channeling regional savings for regional investment needed </li></ul><ul><ul><li>Given huge infrastructure investment needs </li></ul></ul><ul><ul><li>Large reserves </li></ul></ul><ul><ul><li>Returns high </li></ul></ul><ul><ul><li>Both financial and economic in terms of increased market access, economies of scale etc. </li></ul></ul>
  14. 15. <ul><li>Thank you! </li></ul>