This document discusses various economic and financial instruments for integrated water resource management. It examines in detail the main financing options for water systems, including the pros and cons of each option and how they can be applied in different circumstances. The options covered include water and sewerage charges, government grants and loans, external grants such as development aid, philanthropic partnerships, commercial loans and bonds, and private equity. It also discusses how risk guarantees can be used to facilitate financing. The document provides examples of how these instruments have been applied to finance activities like flood risk management. It concludes by suggesting a role play exercise where participants negotiate a funding scheme between a central government and local authority to improve local access to water and sanitation.

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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?