Grzegorz Peszko Environmental Finance Program Manager NMC Division, OECD Environment Directorate

1. FINANCING STRATEGIES FOR WATER AND ENVIRONMENTAL INFRASTRUCTURE Global Forum on Sustainable Development Paris 18 December 2003 GrzegorzPeszko Environmental Finance Program Manager NMC Division, OECD Environment Directorate

2. Do we know how much we need? • … to achieve the water and environment-related international development goals in the Millennium Declaration? • Worldwide estimates for water-related MDGs: additional $16Bln p/a (GWP), $9Bln to $30Bln p/a (WB), $25Bln p/a (Wateraid). • Uncertainties about interpretation of the MDG goals, assumptions, costing methodologies remain • But no panic necessary - costs are not magic figures cast in stone, depend on how we want to achieve MDGs, what exactly this imply in the field, and when. • Catastrophic cost estimates breed inaction

3. Bridging financing gaps to meet MDGs • Rescheduling or modifying targets • Finding cheaper ways of achieving given targets • Knowing better how much we spend already to achieve the MDGs targets • Increasing and diversifying finance Focus of this presentation

4. How much we spend? OECD: Pollution Abatement and Control expenditures • Total PAC expenditures in the range of 0.8 to 2.8% (Poland) of GDP • PAC investments in the range of 0.9% - 3.8% (Czech Republic) of GFCF • Growing share of current expenditure • Uneven but progressive application of PPP and UPP Developing countries: Estimates of present expenditures in water sector: $10Bln-$80Bln/a

5. We do not know well how much we spend • Different classifications and definitions used • Problems with double counting: expenditure data “by abater” and “by financier” principle • Treatment of specialised producers (e.g. utilities) • Problems with comparing “apples with oranges”: e.g. expenditures with costs, investments with total • Problems with discretionary judgments – e.g. integrated technologies • Problems with data coverage: cross-country comparison and time trends difficult

6. Environmentally Extended Expenditure in Selected Economies in Transition (as share of GDP in 2000) Moldova Kazakhstan Ukraine Russian Fed. Georgia Uzbekistan Armenia Turkmenistan Kyrgyz Republic Azerbaijan Estonia Romania Bulgaria Latvia Lithuania Slovenia Czech Republic Poland Slovak Republic Hungary Germany Portugal 0 1 2 3 4 5 6 Source: OECD %

7. Environmentally Extended Investment Expenditure in Selected countries(as share of GFCF in 2000) Russian Fed. Georgia Ukraine Armenia Uzbekistan Turkmenistan Kyrgyz Republic Azerbaijan Moldova Romania Bulgaria Lithuania Poland Czech Republic Hungary Portugal Germany Source: OECD 0 2 4 6 8 10 12 14 %

8. Who finances and who ultimately pays? But what are weights of different sources? • National and sub-national governments • Local governments • Local communities • Service providers (specialised producers) • Private intermediaries - institutions of financial and capital markets • International financial institutions • Foreign governments (ODA,export credits) • Users • Domestic taxpayers • Foreign taxpayers • Future users • The poor (for low level of infrastructure services) • Data by financing sources not collected systematically even in OECD countries • Transfers are difficult to trace (especially subsidies)

9. Financing capital investments is not enough • Operation and maintenance – to ensure sustainability • Return on investments and debt service – to attract commercial finance

10. Reforms and innovations in financial architecture needed • … but no paradigm shift around the corner • Every financial institution has a role to play with large menus of financial products • Smart blending needed, leveraging, not crowding out • Constituency for efficiency, especially in public sector • Realism and innovations, rather than “one size fits all” solutions • No magic bullet, such as public budget, ODA or private sector participation, will alone hit the MDGs • Strategic, realistic and systematic approaches to exploit synergies between financial sources needed – financing strategies

11. ONE POSSIBLE MODEL FOR DEVELOPING FINANCING STRATEGIES: „FEASIBLE” Affordability assessment

12. LESSONS LEARNED FROM «FEASIBLE» FINANCING STRATEGIES • In most FSU and in China baseline finance is not sufficient to cover even regular O&M and modest infrastructure development targets • Policy and institutional failures are usually responsible for low investments and funding

13. Shares of different sources in financing water and wastewater utilities 100% 80% 60% 40% 20% 0% Kaliningrad oblast Eastern Novgorod Pskov Georgia Rostov Moldova Kazakhstan Ukraine Sichuan Province Kazakhstan User charges Other Public budgets Source: OECD, data from the base year of analysis

14. Lessons learned from FEASIBLE financing strategies: Users must pay • User fees – the key to any sustainable financing system of water and environmental infrastructure • No sustainable alternative to cover operational and maintenance costs (typical full cost coverage in OECD countries) • Increasing coverage of investment costs (e.g. return on equity) and debt service precondition to attract external private finance • Governments need to ensure that tariffs are established at realistic and affordable levels, often in the face of political opposition

15. Can users pay?… Want to pay? • Users often are able to pay (ATP) more - affordability benchmarks vary • Willingness to pay (WTP) can be higher or lower than ATP; WTP can be influenced by policy. • Another bottleneck: willingness to charge by government (WTC). • Models of social safety nets • income support to households or regions • cost/price subsidies • mixed

16. Governments (taxpayers) will always have to pay • Provision of pure public goods and subsidising quasi private goods (e.g. drinking water, district heat) • Correction for externalities (wastewater, solid waste – financing incremental costs) • Market creation (regulation, institutions building) • Market access (risk sharing, credit enhancement, subsidies) • Social safety nets

17. Local financial and capital markets • Financing water/environmental infrastructure in developing countries still at infant stage, but growing • Benefits: more sustainable than public budgets and ODA, reduce currency mismatches • Maturity mismatch a problem: access to long term savings • Credit market architecture a problem: low institutional capacity, no credit record, disclosure of financial information, rating • Local finance a problem – unclear responsibilities not matched with access to revenues, unclear property regimes, ineffective supervision of local borrowing • Risk profile difficult to estimate. Interim risk sharing with public sector needed. Clear risk allocation and enforceable contracts are part of enabling framework.

18. International financial institutions (IFI) • Important role in capital investments • Demonstration and catalytic function – quality of projects • Engineering, financial and management discipline • Paving the way for greater reliance on debt financing – risk mitigation • Development of long term local credit systems

19. Private operators and strategic investors • Service providers (it costs, but gains are efficiency, financial viability, know-how transfer) • Usually management rather than financing solution. • Credit enhancement of public utilities • Equity and strategic management • Need for effective regulation of private monopoly

20. Development assistance • Generally decreasing, but some regions are politically trendy • Emerging trend to use donor assistance to finance sustainable local financial mechanisms rather than individual projects • Untied procurement became common • More strategic perspective needed (commitments for multiyear programs rather than individual projects) • Better integration between investment support, TA and support for policy reforms

21. LESSONS LEARNED FROM «FEASIBLE» FINANCING STRATEGIES • Good data and information essential • Unrealistic targets can undermine progress and breed cynicism • water supply and wastewater infrastructure need to be integrated • Financing strategies are no self-fulfilling prophecies - need to be implemented (policies, institutions, instruments) • Good governance, right policies and regulations are as important as finance

22. LESSONS LEARNED FROM «FEASIBLE» FINANCING STRATEGIES • Without specific incentives, infrastructure will be excessively costly and inefficient • Strategic framework needs to be filled with rolling mid-term investment program and solid project pipelines • FEASIBLE analyses already made impacts in many countries: • More transparent, rational dialogues • More realistic targets • More diversified financing

23. ACCESS TO ’FEASIBLE ’ TOOLKIT • “FEASIBLE-1Beta” Excel model has been available as public domain and widely used for 2 years. • “FEASIBLE-2” in testing. Fully operational in public domain since January 2001. • For publication “Financing Strategies for Water and Environmental Infrastructure” visit www.SourceOECD.org • For information how to receive the FEASIBLE model and users manual visit: • To get more information on country studies in FSU and download documentation, visit visual projects database at: http://oecd.hybrid.pl www.oecd.org/env/finance www.cowi.dk/publications/div01pub/index.htm www.mst.dk/homepage