Financing Strategies and FEASIBLE

1. Financing Strategies and FEASIBLE Jesper Karup Pedersen (jkp@cowi.dk) Bucharest 15 May 2008 Bucharest

2. Content • Environmental financing strategies - what and why? • Three phases • In fact, a policy dialogue • Toolbox, including FEASIBLE • Major challenges • Advantages Bucharest

3. Environmental Financing Strategies - What and Why? • Possible definition • A time-bound plan for sustainable financing of capital investments and O&M costs in an environment sector adopted by a national, regional or local government and embraced by major stakeholders involved in environmental management and operation in the country, region or municipality in question with a view to achieving a set of targets that are SMART. • "Sustainable financing" implies that expenditures (investment expenditure and operation and maintenance expenditure) are balanced with revenues (from public budgets, user charges and loans/grants from domestic and international sources). • Rationale is simple: Lack of financial realism is to be replaced by "sustainable financing" (this is particularly true in SEE and EECCA) Bucharest

4. Consensus that environmental financing strategies may be used to: • Assess total investment needs of alternative policy targets • Bring about practical implementation programmes taking into considerations what the economy and households can afford • Identify investment projects and build short to medium-term project pipelines • Identify the policies and measures which are necessary to ensure effective financing of the project pipelines • Support claims of environment to other ministries • Measure and report on the progress in the implementation of programmes and policies • Improve financial planning and budgeting • Improve legal and regulatory framework Bucharest

5. Three Phases • Preparation • Need acknowledged • ToR • Development • Set-up of Steering Committee • Baseline scenario • Development scenarios • Final financing strategy • Implementation • Implementation plan • Approval • Implementation and monitoring Bucharest

6. Bucharest

7. In fact, a policy dialogue • Development of an environmental financing strategy is, in fact, nothing but a policy dialogue • The work on the development scenarios is an iterative process during which the financing gap is closed due to changes in policy variables • Policy variables include: • Service levels • Technology options • Coverage of population • Spread of investment over time • Affordability of households • User charges • Public budget spending • Level of support from donors and IFIs Bucharest

8. Key issues discussed in Armenia - an example: Country-specific interpretation of MDGs through introduction of Minimal Water Supply Standards (MWSS): Water quantity (minimal 50 lcd for ALL rural population) Regularity (min 8 hours/day) Distance (< 100 meter from home) Safe (chlorination, safety checks) Targets - on plot supply to be increased to 70% of rural households Increase user charges (and collection rates) Affordability - max % shares of rural household income and public budget available for WSS (threshold for affordability set at 3%) Bucharest

9. How to improve institutional framework? • responsibilities and ownership • scale of operations • ability for cross subsidisation • private or public operators • Steps towards implementation • implementing agency • adopt MWSS and adjust targets on WSS in Poverty Reduction Strategy Paper (PRSP) • integrate the financing strategy into Medium-Term Expenditure Framework (MTEF) and annual budgets • mobilise additional international loans and grants Bucharest

10. In baseline scenario accumulated financing gap totals AMD 16.5 bln (till 2015) Bucharest

11. Toolbox, including FEASIBLE • Many tools… • … which complement each other • FEASIBLE, which originally was developed by COWI under supervision of the OECD and with financial support from the Danish EPA, is only one tool in the toolbox • FEASIBLE facilitates the iterative process of balancing the required finance with the available finance • It is in the public domain (e.g. www.cowi.dk/feasible) Bucharest

12. FEASIBLE Model - Overview Bucharest

13. Ukraine, Example (profiles of expenditure needs and supply of finance to safely operate the infrastructure) Bucharest

14. Turkey, Example (realistic financing:Affordability by agglomeration size) 150,000 1,000,000 50,000 150,000 2,000 50,000 >1,000,000 <2,000 Policy recommendations Establish territory-wide water and sewerage corporations Implement needs-based transfers from central government Bucharest

15. EECCA, Example (affordability of water bills for households) Bucharest

16. Scope of FEASIBLE Costing of water supply, wastewater and municipal waste Assessing supply of finance from user charges, public budgets and external sources Assessing affordability of households Structure and functionality General module to define and delineate the modelled area Water supply, wastewater and municipal waste modules Supply of finance module Results module to assess financing gap Autonomy Stand-alone tool Requires limited out-of-model calculations Underlying concepts Assesses expenditures using generic cost functions (not unit costs) which easily may be adjusted to local context Bucharest

17. Entry data requirements • Large amount of input data, though much less than for a feasibility study, but… • … FEASIBLE uses a lot of default values, which can substitute for missing data • No need to derive country-specific cost functions Bucharest

18. Collection Simple dry pit latrine Improved latrine Pour flush latrine with holding tank Small communal sewerage with septic tank, reed bed, biological sand filter and stabilisation ponds Sewered interceptors Simplified sewerage Conventional waterborne sewerage Treatment Conventional mechanical and biological/chemical treatment Reed bed treatment Biological sand filters Stabilisation ponds FEASIBLE Technology Options, Rural Module, Sanitation Bucharest

19. Major strengths Costing analysis in stand-alone model Limited data requirements Allows to model large number of regions and municipalities Allows to model a large number of policy variables Helps anticipating affordability problems for income groups and calculating the budget needed for social protection measures Major constraints Supply of finance module is relatively simplistic (e.g. aggregates all public finance in one line) Affordability module with income distribution not yet inside the FEASIBLE Can not substitute for feasibility studies (in this case other tools are relevant - e.g. Financing Planning Tool for Water Utilities) Bucharest

20. Major Challenges • True policy dialogue is anything but simple to ensure - leadership, transparency and iterations matter • Development targets have to be SMART - if not, the credibility of the whole process and all parties involved will be undermined • Tools should be solid - it is not only about process • Attention should be paid to implementation - a well-developed environmental financing strategy takes you only half way Bucharest

21. Advantages • Environmental financing strategies offer a wide range of advantages to governments, donors and IFIs, including: • They support the introduction of good governance, which is just as important as finance to improve the situation in the environmental sectors • They facilitate a change in the minds of decision-makers - e.g. from focus on wish-lists to Santa Claus to focus on realistic targets • They assist in establishing a regulatory framework for financial sustainability and promote cost-effective use of resources. • They offer a way out of the vicious circle of financial un-sustainability and declining service provision that many countries are caught in • They contribute to the development of road maps for achieving the MDGs - and may be used by all parties to check realism Bucharest