1. Economic and Financial
Instruments for IWRM
Introduction to water finance based on chapter
5 of a manual on Finance for IWRM published
by the above organizaitons and written by
James Winpenny, slides produced by
Meine Pieter van Dijk UNESCO-IHE, 28-8-7

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. Learning objectives: to
 Analyse and understand the variety and
complexity of a national water sector and
the specific financial needs of its
component parts
 Differentiate financial and economic
instruments
 Apply a critical approach to different
sources of finance

4. Structure of the 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

5. Financial and economic instruments
 Some instruments can perform both economic and
financial purposes:
1. economic instruments influence the behavior 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. Fundability of water functions
Some functions are easier to fund than
others:
1. Easier to fund
2. More difficult to fund
3. More likely to be neglected & underfunded

8. 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

9. 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%

10. 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

11. 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

12. 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

13. 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

14. Instruments for financing the water sector 2
ii) National government grants, soft loans &
guarantees, from
National, state or municipal budgets
Financial intermediaries & development banks
iii) External grants & concessional loans (oda)
iv) Philanthropic agencies & partnerships
Partnerships involving NGOs and civil society groups
v) Commercial loans, equity & PSP, f or example, IFI
loans, Commercial bank loans & microfinance,
Bonds, Private equity, External guarantees & risk
sharing, PSP contracts of various kinds (BOTs,
concessions, etc)

15. 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

16. 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

17. Think about it: three exercises
 Break down your country’s water sector into its
main constituent parts and draw up an inventory
of the sources of finance 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

18. End
 Is there any scope for involving private
equity and commercial finance in the water
sector your country?
 The next chapter will give some examples
of financial instruments used in the water
sector in developing countries.