The Global Financial and Economic Crisis and the Water Sector

1. The Global Financial and Economic Crisis and the Water Sector A policy report for Sida December, 2009 Jim Winpenny, Andy Bullock, Jakob Granit, Rebecca Löfgren

2. Key messages • Financial crisis and food crisis set back growth and poverty gains • Global financial crisis developed since 2007 • Overlapped with the earlier food price crisis • Together with fluctuating energy costs, have compounded the economic problems of many developing countries • Fall in economic growth in Africa from 5.7% in 2008 to 2.8% in 2009, affecting most severely those with lesser economic diversification and greatest dependence on external finance.

3. Key messages 2. Persistent underinvestment in water A fundamental crisis in many countries that has been made even worse by recent events Basic problem is underinvestment in three key aspects of water: 1) Water services, both for basic needs and productive services necessary for economic growth 2) Water resource management and development and 3) Governance functions (such as reform, regulation, pollution control, data collection and monitoring)

4. Key messages • Headline figures are so serious that they bear repetition: • More than a billion people suffer from under-nourishment • Nearly 1.1 billion people lack access to safe drinking water. Mortality of almost 4,500 children per day • Over 2 billion people currently without proper sanitation 3. Deteriorating and deficient infrastructure have stalled MDG progress Cumulative results are • deterioration in infrastructure providing water services to households and farmers • lack of infrastructure to cope with the succession of droughts and flooding (worsened by climate change)

5. Key messages 4. Financial vulnerability of water services Water services are particularly vulnerable in the current financial climate The three basic sources of revenue (the “3Ts”) • tariffs • taxes • external transfers are all likely to suffer This is affecting access to repayable sources of funds to the sector such as commercial loans, bonds and private equity

6. Key messages 5. Seven impacts of the crisis Developing countries affected through seven principal impacts: • financial • trade • commodity prices • foreign direct investment • remittances • aid disbursements, and • exchange rate movements Net impact varies. Some countries may gain. Most African countries will lose Situation still evolving Permanent impacts unlikely to be known for some time Remittances are a major financial inflow, far outweighing foreign direct investment and aid in South Asia. Remittances fall by 5–8% in 2009 after 15–20% growth p.a. from 2005 to 2007 Crisis reducing 2009 remittance flows to sub-Saharan Africa by $US 1-2 bn

7. Key messages 6. Long-term problems aggravated by economic crises • Evidence from previous financial crises • Long term repercussions on growth and poverty reduction • East Asia (1997) reduced investment in infrastructure will be reduced. High social impact (Cambodia, Lao PR) • Aggravation of water sector’s difficulties

8. Key messages Africa Water Vision targets 7. Deficient financial flows in Africa Africa’s annual financing requirements for water updated to US$ 50bn p.a. (drinking water and sanitation, wastewater, desalination, agricultural water management, hydropower, multipurpose storage) Current finance flows are deficient in many respects: • Overall amounts inadequate (to rates needed for growth and development) • Geographically imbalanced • Insufficient to fund capital expansion and recurrent costs • Low financial efficiency (eg cost recovery) Drinking Wateraccess 75% by 2015 95% access by 2025 Sanitation access 70% by 2015 95% by 2025 Irrigation 100% increase in irrigated area by 2025 HEP potential 10% by 2015 25% by 2025

9. From analysis to response These findings highlight the need for a purposeful and proportionate response to the financial needs of global water … … which responds to problems caused by the current international financial and economic crisis … but which goes beyond this to address the chronic under-financing of the water sector • Increased lending from existing sources (IFIs and DFIs) and newly emerging partners • Opportunity to trigger reforms (innovation, new financing) • Policy response opportunities available to Sida(menu of actions)

10. Options for policy response • Based on the evidence presented from analysis • Authors’ assessment of options for policy responses by Sida • Meeting short and longer term water challenges • Informed by Sida’s strategic directions, capacity and experience, its range of instruments and partnerships • Taking advantage of Sida’s flexibility and willingness to support innovation, and influence within the international community Two internal objectives of the policy response are a) to sustain, and possibly increase, Sida’s disbursements for water: under shift to low-income countries and fragile states, take steps to achieve (possibly exceed) DAC average 8% share to water b)to implement new operational modalities at Sida: strengthen decentralised, multi-disciplinary country teams, effective policy advice and support, benefits from Sida’s regional and global programmes

11. Options for policy response Policy responses are set out in two general areas, namely: Countering the impacts of the economic crisis  Through adjustments in the level and form of support  Policy responses designed for implementation and disbursement as soon as possible (though some measures would take time to take effect)  Actions would sustain Sida’s disbursements for water Levers of change Focusing on strategic areas where grant financing can make a difference in reversing the poor progress in the long-term financing of water in all its uses  Actions lead to disbursements in the medium term (1-3 years)  Feasible target for Sida to give water a 10% share of total disbursements from 2012 onwards  To be sustained until further review (considering its poverty targeted focus and contribution to overall sustainable economic growth)

12. Countering impacts of the economic and food crises a) National economic stimulus packages b) Food price crisis response c) Mobilising NGOs and civil society for local operations d) Risk sharing instruments e) Blending grant and loan finance f) Urgent housekeeping and efficiency measures to strengthen finances of water services

13. Countering impacts of the economic and food crises

14. Countering impacts of the economic and food crises

15. Levers of change g) Supporting African regional organizations and promoting regional integration h) Building the pipeline of ‘bankable’ projects i) Co-financing with multilateral agencies j) Leveraging commercial and private finance k) Pioneering Strategic Financial Planning l) Transition of emergency water support to sustainable water management in fragile States

16. Levers of Change

17. Levers of Change

18. Implementing policy change atSida for water outcomes i) Identify crisis response options urgently through rapid assessments ii) Comprehensive update of Sida’s water policy and financial commitments iii) Strengthening and supporting Sida’s internal services and country teams iv) Forging global partnerships with IFIs, DFIs and bilateral ODA alliances for effective coordination and delivery v) Maximizing input from Sweden’s human resource base to support implementation in several sectors vi) Leading the global water agenda for real development outcomes through applied research and innovation