This document summarizes best practices for financing water management presented at a ministerial forum in Guadeloupe. It discusses water as both an economic and social good, and the challenges of financing its infrastructure and recurrent costs. Sources of financing include tariffs, taxes, loans, and bonds. While cost recovery is ideal, political and social factors often prevent full tariff-based financing. Effective financial management, revenue collection, and regulatory frameworks are keys to sustainable water infrastructure development. Governance models of utilities may also impact their ability to succeed financially.

1. 7th Annual High Level Session – Ministerial Forum:
Water Management Financing
in the Caribbean
Hosted by:
Global Water Partnership (Caribbean)
October 06 – 07, 2011
Guadeloupe
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2. Best Practices for Water Financing
and Pricing
by
Glenn A. Khan*
Note: * - Deputy Executive Director of the Regulated Industries Commission (RIC). Views expressed are not necessarily those of the RIC.
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3. How important is Water?
- Water is indispensable for leading a life in
human dignity.
- Therefore, the suggestion “water for all”
recognizes the importance of water as a
basic human right.
In this sense, it appears to raise questions
about whether water is a private or public
good.
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4. Public vs Private Good
The International Conference on Water and
the Environment, in Dublin, 1992, issued
four guiding principles, one of which was
that:
“Water has an economic value in all its
competing uses and should be recognised as
an economic good”.
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5. If we accept that water is an
economic good, should there be a
problem with respect to financing
water?
Why are private entrepreneurs not
queuing up to provide such
services? 5

6. Why is there a Problem to finance Water?
It is part of Public Infrastructure which
poses the greatest financing challenge for
developing countries
Ambiguity about whether it is Economic or
Social Infrastructure
Economic infrastructure attracts high user
charges(Telecommunications, Power, etc.)
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7. Cont’d
Social infrastructure - heavy reliance on Public finance.
Usually, there is ambivalence among politicians and water
consumers about whether water services should be
provided free or with a subsidy, or commercially.
This generally results in compromise where water is
priced below economic levels, leaving the sector
chronically under financed.
Exacerbates the downward spiral of poor financial
performance, service levels and service quality.
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8. Some Financing
Issues
There is no Blueprint for an ideal system of
water financing.
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9. Uniformity
Where there is a command economy- central
government might fund services, with or without the
consumer making payments
In Market economies- users pay the full economic
price for water
In some countries (France) - the principle , “Water
pays for water”, is used (consumers should provide
the bulk of financing)
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10. What should Public Finance be used
for:
Financing activities with strong external
benefits?
Providing for social benefits such as
public health, and the avoidance of
diseases? Is this a case for subsidizing
water?
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11. Need for Financial Self- sufficiency
- Assurance of revenue sources to ensure
sustainability
- Freedom from political interference in
business decisions
- Cost recovery tariffs
- Transparent, predictable and reliable
subsidies
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12. Financing Local Water (T&T)
- Currently the public budget is the main source of
investment in the water sector.
- The local capital market has been used also – the
issue of long-term bonds.
- Only about 40% of operating expenditure is
funded through tariffs (or income generated from
operations).
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13. Cont’d
When we speak about the challenges of
financing water, the discussions tend to focus on
investment in pipes, treatment plants, reservoirs
etc..
But it is equally important to provide resources
for recurrent expenditure.
- People normally assume that all recurrent
costs are covered by revenues.
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14. Cont’d
- Over the life of WASA there has probably
been no period during which it was able to
cover such costs from internally generated
revenues.
- Thus resulting in inadequate maintenance
and repairs and in the end, the need for
greater Investment.
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15. •Financing Needs?
We have identified two types of financing
needs:
- Finance for Investment (mains,
plants etc.)
- Finance for Recurrent Expenditure
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16. Sources on Finance
The capital-intensive nature of water and waste water utilities
places capital financing at the heart of the development of a
sustainable sector. But utilities also require financing for recurrent
costs. There are several sources from which financing for water is
derived:
- Tariffs paid by consumers
- Taxes / Government budgets
- Loans from Development Agencies
- Funds from donor agencies
- Loans from commercial banks.
- Bonds
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17. What are the Best Practices
Capital Costs - large items of investments, including major
repairs and replacement, modernisation and
rehabilitation, generally require specific funding
programmes. Instruments available:
Current revenues – for small and regularly recurring
expenses( in private companies and mostly in developed
countries, some of these needs are met from user charges)
Long-term Debt – for major system improvements
(treatment plants, mains). Loans from government
agencies, Government- guaranteed loans, Bonds, External
developments assistance
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18. Recurrent Costs – these include wages and salaries, fuel
costs, electricity, chemicals, spare parts. Some of these costs are fixed
(rent) while others are variable (chemicals and electricity used)
depending on the volume of service.
The most sustainable source of finance for variable costs items is user
charges. (long-term solution)
Full cost recovery should be the goal of every utility.
In the short to medium term, cross-subsidies and government
subsidies should be used, but not sustainable solution.
Short –term financing, in the form of loans to cover working capital
requirements and to cushion irregularities in cash flow, available from
commercial banks.
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19. Local Financing of Water
Some issues:
- In most developing countries, water is
financed through budgetary allocations.
- Given that there are competing needs
on the treasury, in difficult times the allocation of
water or ability of SOE to meet service
requirements is affected due to lack of funding,
subventions and subsidies.
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20. - Public funding for water is thus a hostage of
the government’s fiscal situation.
Sometimes, because of government
bureaucracy the flow of funds is impeded thus
leading to under utilisation and unavailability
of allocated funds from government budget.
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21. International Financing for Water
Development Assistance –
Given the critical importance of water for life,
development agencies have always been
supportive of the initiatives of Developing
countries, especially in respect of infrastructure
(either grants or concessionary loans).
- That type of funding, though useful, is
not a sustainable way of financing water.
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22. Trends in International Aid to sector – declining.
- Between 1996 – 1998, $3.5 billion but fell to
$3.1 billion 1999 – 2001.
- WB lending for water and sanitation averaged
$1.25 billion (1990 – 98) but dropped to $1.1
billion between 1999 – 2001.
- IDB lending, between 1991 – 1995
($640 million per year), between 1996
– 2001 ($400 million per year).
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23. The largest funding sources are local -
governments, local banks and user charges.
There are challenges associated with each
form of financing.
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24. Financing Challenges
Funding the water sector from its own cash
flow has proven to be unachievable.
A World Bank study by Guillermo Yepes, 2002
– “financial sustainability of the service
providers and resource mobilisation for sector
development … Remain elusive goals”.
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25. Financing Challenges cont’d
Tariffs have three main purposes:
1. Cost recovery - revenue for efficient operations and
maintenance
2. Reflecting cost of service and giving signals to users
about the scarcity of water( volumetric tariffs provide an
incentive to use water carefully)
3. Environmental protection - encouraging conservation,
and penalising wastage.
Thus, where these objectives are not met, utilities are
unable to be self-sustaining. 25

26. Financing Challenges cont’d
Short-term Loans
- Commercial bank lending to water utilities has
never been large;
- Financing limited because of the perceived
low credit worthiness of water utilities.
- Usually provided only when guaranteed by
governments.
- The assets of water companies cannot be easily
sold if utilities default and therefore are not a
good form of collateral security.
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27. Some Possible Reasons for Problems
World Panel on financing water infrastructure:
- serious defects in the governance of the
global water sector hamper its ability to
generate and attract finance.
- even if these problems were overcome
inherent features in the sector will pose
risks to potential lenders and investors.
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28. Cont’d
Some of the issues identified by the Panel include:
- the low priority that central governments
give to water sector issues.
- political interference in Utility (operation and
management).
- resistance to cost – recovering
tariffs.
- confusion of social, environmental
and commercial aims.
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29. Other Related Challenges
- Social and public health benefits – incompatible
with full cost recovery and financial sufficiency?
- Prices that utility will have to charge would seem
high to most governments.
- Governments would be inclined to suppress
price increases for fear of losing popularity
and office.
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30. Cont’d
- Transition from engineering
company to business-oriented one.
- Strong customer service focus /
orientation.
- Bankable, financially viable
projects in the water sector.
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31. Cont’d
- Capital intensive nature of infrastructure
investments (in the US ratio of Capital
investment to revenue is twice as high in water as
in natural gas, and 70% higher than in electricity
and telecommunications).
- The assets are unusable for other purposes, and
cannot be removed, thus private sector not
attracted because investor is at mercy of host
country (international investors).
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32. CAN CHALLENGES BE OVERCOME?
- Make distinction between the various policy aims
that water satisfies and as far as possible arrange
funding for each based on its possible returns.
- This is being practised in Trinidad and Tobago with
“industrial water” – the desal plant is a commercial
venture. It is probably doing well financially.
- Likelihood of foreign investment low in the absence
of strong government guarantee.
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33. Cont’d
- In the electricity sector there are PPAs with
generators but private international investment
in the infrastructure has been very selective,
oriented towards energy (BP, Atlantic LNG) and
telecoms (Cable & Wireless, Digicel) rather than
water.
- More use must be made of local capital market
through bonds (since revenues are in local
currency, foreign investors won’t be attracted
because of exchange rate risks, however, it shields the
utility from these risks.
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34. Role of Regulator
The Regulator’s role is to ensure sustainable cost
recovery (SCR):
- Sufficient revenues to recover recurrent costs,
SCR includes operating and financing costs as
well as the costs of renewing infrastructure.
- Revenue from charges should be covered by users
as a group – using appropriate tariff structures
(based on consultations).
- Ensuring utility meets service requirements to
customers.
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35. - Budget allocation should be secured to ensure
that it is not subject to change.
- Subsidies should be targeted and transparent.
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36. Conclusion
Effective financial management is key for
sustainable infrastructural development and
management. Important considerations include;
the conduct of fundamental business processes,
and the institutional and regulatory framework
within which tariffs are considered and enforced.
Improving revenue collection efficiency is also
important.
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37. I know that we are discussing financing
water, and while that is very important and
critical to our sustainability efforts, we should
also consider another important factor- the
governance model used by utilities in the region.
Is it a factor that is impeding utility success?
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38. An important question for Ministers to
answer is – how to cover the costs of
service delivery, in the absence of full cost
recovery? Of course, that is a political
question.
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39. The End
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