OECD Global Forum on Sustainable Development

Financing Water and Environmental

Infrastructure for All

Opening Speech

by

Jamal Saghir

Director, Energy and Water,

The World Bank

OECD Headquarters, Paris, 18 December 2003

TO KEEP IN MIND

Over 1 billion people without safe water, 2 b without sanitationPervasive under-pricing and mismanagement of WSS services10% of the world's food is grown with water from aquifers which are being depleted faster than the rate of recharge.What does this mean for ordinary people in the developing world?

A farmer in Kenya: "Water is life and because we have no water, life is miserable."

A young man in Russia: "How can we sow anything without water? What will my cow drink? Water is our life."

An old woman in Ethiopia: "We live hour to hour, wondering whether it will rain."

In many parts of the world, access to water distinguishes the poor from the non-poor.

In the next 15 minutes about 90 children in developing countries - six children per minute - will have died from disease caused by unsafe water and inadequate sanitation.

In 1990, 3 million deaths worldwide were attributed to diarrhea but there were over 4 billion episodes, or more than a thousand times as many. Children under five are the most vulnerable, accounting for 55% of all episodes but for 85% of the deaths from diarrhoeal diseases.

Mortality is high but morbidity is higher still.

AND

Overview of Presentation

The Water Financing Challenge Towards Realistic Solutions Innovative IFI Financial Instruments:

Follow-up of Camdessus/G8- June 2003 Evian meeting

What More Needs to be Done

The costs of not investing in water are very large

-10.0

-5.0

0.0

5.0

10.0

15.0

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

Years

Real

GD

P g

row

th (

%)

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

Vari

ab

ilit

y i

n R

ain

fall

(M

ete

r)

Real GDP grow th (%)

Variability in Rainfall (Meter)

Correlation between GDP and Rainfall in Zimbabwe

Correlation between GDP and Rainfall in Zimbabwe

Governments must raise the priority of water investments (including through the PRSP)

The MDGs – A Startling Reminder of the Financing Challenge Ahead

Halve by 2015 the proportion of people without sustainable access to safe drinking water

Halve by 2015 the proportion of people without access to basic sanitation

Translates into a doubling of investment needs from $15 billion to $30 billion per year for water supply & sanitation alone (as part of 180B a year for all water)

Investment needs per annum (B USD)

0

25

50

present MDG needs

wastewater treatmentsanitation

water supply

?

?

The finance challenge - an uphill battle for developing world and infant sectors

35%

50%

75%

100%

CurrentCoverage

Years to Full Coverage at Annual Growth Rates

5% 10% 15%

30 years

20 years

8 years 4 years 2 years

6 years9 years

13 years 8 years

Less Than One Year

Assumes 1.3 population growth rate.

The WSS market poses special challenges

Limited number of developers/operators Generally low margins Complexity and risks in the contractual

and regulatory framework

Sub-sovereign risk Limited pool of bankable

projects (size, condition, readiness)

most# of population centres

attractiveness

more medium less least

Siz

e of

pop

ulat

ion

cent

re

rural (<500)

cities (>1m)

villages (>500)

towns (>10k)

secondary cities

(>100k)

high potential for private financing

medium potential for private financing

low potential for private financing

Household &micro-financing

Need for public investment

Word Development Report 2004 Main Messages

Services are failing poor people They can work, the question is how? By empowering poor people to

Monitor and discipline service providersRaise their voice in policymaking

By strengthening incentives for service providers to serve the poor

How are services failing poor people?

Public spending benefits rich more than poor Money fails to reach frontline service providers

Uganda: only 13 percent of non-wage recurrent spending on primary education reached primary schools

Service quality is low for poor peopleBangladesh: absenteeism rates for doctors in primary

health care centers: 74 percentZimbabwe: 13 percent of respondents gave as a reason for

not delivering babies in public facilities that “nurses hit mothers during delivery”

Guinea: 70 percent of government drugs disappeared

Overview of presentation

The water financing challenge Towards Realistic Solutions Innovative IFI financial instruments:

follow-up of Camdessus/G8 What more needs to be done

Are we Realistic?

Investment needs are enormous Public funding stable or even decreasing International Aid is (and probably will remain) small

percentage of WSS financing Thus how to fill the gap? The private sector? Taxpayers? Tariff? A combination?

LET’S DISCUSS THOSE ISSUES

Domestic public finance remains the dominant source for water & sanitation

Financing flows into water in 2000

0

20

40

60

80

public private

international

domestic

Billion USD

Estimates from “GWP Framework for Action”

Domestic is dominant ~ 85%Public is dominant ~85%

Recent collapse of private flows to infrastructure

Annual Private Investment in Infrastructure in 1990-2002, in US$ billion

0

20

40

60

80

100

120

140

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Private investment in water supply and sanitation has been low

0

50

100

150

200

Energy Telecom Transport Water & Sewerage

East Asia and Pacific

Europe and Central Asia

Latin America and the Caribbean

Middle East and North Africa

South Asia

Sub-Saharan Africa

Total (interternational) private investment in infrastructure in 1990-2002

by sector and region, US$ billion

Degree of cost recovery

Reasons NOT to invest in the water business…

Telecom Gas Power Water0%

50%

100%

150%

200%

Financial autonomy

The financing paradox must be resolved

Consumers

Taxpayers

Who Pays How Financed

User Tariffs

Govt. Subsidies

Public or Private Debt

Overview of presentation

The water financing challenge Towards realistic solutions Innovative IFI financial Instruments:

Follow-up of Camdessus/G8 What more needs to be done

Risk mitigation instruments

Partial risk guarantees

Partial credit guarantees

Political risk insurance

Breach of contract coverage

• Currency risk – Dollar debt and local currency

earnings

• Regulatory risk– Regulatory framework not

implemented or untested

• Payment/performance risk– Government fails to pay amounts due

• Sub-sovereign risk– Water investments are often at the sub-

sovereign level

IFI risk mitigation instruments 2001 - 03

$4,972

$2,825

$39$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

Total value ofguarantees

Of which,infrastructure

guarantees

Of which, waterguarantees

To

tal

Val

ue

of

gu

aran

tees

($

mil

lio

ns)

123

51

3

0

20

40

60

80

100

120

140

Total value ofguarantees

Of which,infrastructure

guarantees

Of which, waterguarantees

To

tal

nu

mb

er o

f g

uar

ante

es

Number of Guarantees Issued Value of Guarantees Issued

Risk Mitigation Instruments Could Be Effective

Adequately Creditworthy – Do Not Require Risk Mitigation

Near Creditworthiness Marginally Creditworthy, but Reforming Non Creditworthy and Low Performing

Where risk mitigation can make a difference

Guarantees and subsovereign financing:Application in the WSS sector: How to increase effective demand?

Lithuania1 Project

Russia4 Projects

Romania3 Projects

Croatia1 Project

Mexico1 Project

Ecuador1 Project

Colombia1 Project

Poland3 Projects

Risk mitigation instruments

Direct subsovlending

Overview of presentation

The water financing challenge Towards realistic solutions Innovative IFI financial instruments:

follow-up of Camdessus/G8 What More Needs to be Done

1. Going Forward: Long-Term Sustainability: A Must

Improve Sector Performance – Closing the Revenue Gap is Key

With Decentralization, There is a Need to Bring in Local Governments as Key Stakeholders in the Financing of Water Investments – (ie. contributors of equity, guarantors, or direct borrowers)

Cost Recovery Critical: But At A Realistic Pace

The Use of Subsidies Should be Transparent and Primarily Aimed at Serving Poor Communities.

Make Use of All Sources of Financing – Public or Private and Create Framework Where Risks Are Properly Allocated and Bound By Enforceable Contracts.

Effect of Loan Maturities on Tariffs

0

10

20

30

40

50

60

70

80

90

0 5 10 15 20 25

Maturity in Years

Tarif

f Sugbon

Bohol

Malabuyoc

OBA Cambodia

2. Change to longer term financing

Only if sustainable cashflows, investments for expanding services can be attracted

Only few choices to finance investmentsTariffs (consumers)Taxes (tax payers)Bilateral and multilateral aid – limited extend

So Move to cost-recovery: but at a realistic pace

3. Closing the Revenue Gap

Predictable cash flow secure debt service investment loan better services

4. Effectively demand international funding

The needs are obvious, but how to translate “needs” into “effective demand”

Lobby to get water into your PRSP Develop bankable projects Develop creditworthy utilities Engage with public, private, communities and

stakeholders Nobody has “A or THE solution”. Look at various ways and learn by doing

5. Redirect funds to the poor

Stop subsidizing the rich, they can pay for themselves

Target subsidies better (subsidize connections rather than consumption)

Invest in differentiated service levels, giving consumers a choice

Decentralize funds (not only responsibilities) to local governments

5. Improve Creditworthiness

Agreed programme of tariff increases, taking into account social considerations

Clear / predictable allocation from central/local tax revenues

Improved operational management/collections

Increase data availability to make informed decisions

Management

Fin

an

ce

Public Private

Pu

blic

Pri

vate

6.6. Unbundle Finance And Management -Looking at Unbundle Finance And Management -Looking at Sustainable Hybrid SolutionsSustainable Hybrid Solutions

Leases/Affermage

Concessions

Divestitures

BOTs

Municipal Department Mgnt. Contracts

CorporatizedMuni. Service

Mixed Company

Operating Company plc

Public & Private sector roles in the WSS sector:Public & Private sector roles in the WSS sector:

An World Bank evolving model for Water Service Delivery

Targeted Subsidies OK

• For Connections

• For Usage Charges

Cost Recovery Critical

But At A Realistic Pace

World Bank Group Combine Instruments

IBRD/IDA Loans, Credits and Guarantees

IFC Loans and Investments

MIGA Guarantees

Engagement Anywhere Along the SpectrumPrivatePublic

7. Increase sustainability of Infrastructure (and thus Investments)

Before building new infrastructure, make sure that you have $$s for both construction and O&M

Lagos State Water Corporation in 1999: 96%

unaccounted-for-water

8. The Instruments: Needed, Available ? Used? Issue of Effective Demand?

Do not require risk mitigation, Adequately credit worthy

Risk mitigation instruments will be ineffective:Non-creditworthy and low performing or instruments too expensive

Risk mitigation instruments could be effective: Nearly/marginally creditworthy & reforming

most# of population centres

attractiveness

more medium less least

Siz

e of

pop

ulat

ion

cent

re

rural (<500)

cities (>1m)

villages (>500)

towns (>10k)

secondary cities

(>100k)Expand Application of

Risk Instruments

The instruments in greatest need may be least available

• Contractual/regulatory instruments• Foreign exchange risk instruments

The instruments available may be tailored for the wrong kind of current investment

• Limited current capital investments

• Increase in management , lease and service contracts

Recapping (1)

The Water Sector is Facing an Uphill Battle to Expand Coverage. The Debate is Not Between Public or Private, But Improving

Sector Performance and efficient quality service delivery to the poor at lowest cost

There is No Magic Solution! Cost Recovery is critical and Should Be the Foundation to A Sustainable Tariff Policy but At Realistic Pace

Targeted Subsidies OK

• For Connections

• For Usage Charges If Utilized Prudently targeted subsidies and Long-Term Financing

Can Contribute Significantly Towards Expanding Investments and service delivery

Public funding to shift from input based to output based financing

Recapping (2) Mobilizing balanced mix of public and private funding sources –

more innovative use of public funds and subsidies Powered by sustained cashflows instead of taxes Private funding to increasingly comprise local currency alternatives Make PPI contracts "pro-poor". A Fund Channeling and Governance Framework Based on the

Appropriate Allocation of Risks and Third Party Agreements is the Mechanism Needed to Align Incentives and Improve Governance

Partial Risk and Partial Credit Guarantees, IFC loan and Guarantees and MIGA instruments

Hybrid Models Mixing Public - Private Finance and Management Options Offers a Pragmatic Approach in An Environment of Increased Perceived Risks.

And.... grow the economyw

ate

racc

00

lynppp006.17379 10.0579

24

100 CyprusHungary

Thailand

TrinidadMexicoBrazil

Chile

Gambia

Gabon

India

Malawi

Bahamas

Turkey

Mongolia

Togo

Malta

Venezuel

IndonesiCote d'I

Saudi Ar

Uruguay

Papua Ne

ArgentinParaguay

Romania

Jamaica

Costa Ri

Guinea

Morocco

Guyana

Zimbabwe

Sierra L

Mozambiq

Jordan

CameroonZambia

Senegal

Vietnam

Colombia

Ghana

Tanzania

Ecuador

China

Bolivia

Panama

Nicaragu

South Af

Dominica

Egypt

KenyaGuinea-B

Sri Lank

Niger

Peru

Angola

Nigeria

Algeria

HondurasPakistan

Syria

Congo

Banglade

Philippi

Mali

Ethiopia

Uganda

Madagasc

Sudan

Guatemal

Suriname Iran

Lebanon

El Salva

Haiti

Namibia

Nepal

Belize

Macedoni

Vanuatu

Kazakhst

Croatia

Central

Eritrea

Rwanda

Benin

Uzbekist

Belarus

Yemen

Cape Ver

Antigua

Grenada

Lesotho

St. Luci

Chad

Turkmeni

Comoros

Samoa

Kazakhst

Cambodia

Moldova

St.Vince

Georgia

Slovakia Slovenia

Kyrgyzst

Equatori

Maldives

Bhutan

Lao

BarbadosSt.Kitts

Mauritan

Solomon

Fiji

MauritiuRussia

Source: UN Millennium Project

Access to water and GDP

Water high on the agenda: CSD 12 Selected thematic cluster: water, sanitation and human

settlements No more assessment and problem identifications and more

promises The political and substantive outcomes of CSD 12 need to be

transformed into specific Actions Provide Realistic Guidance and Actions on the Ground to

improve efficiency and coherence of policies Focus on implementation, including identifying constraints

and obstacles at the country level and possible approaches for implementation and scaling up

Review and forward looking session; not a negotiating session ~ government and other stakeholders

New York City, 19-30 April

Thank you