Economic and Financial

Instruments for IWRM

Application of financial instruments

Goal and objectives of the session

To examine in greater detail than in chapter 5 the main financing options for a water system.

To evaluate the relevance of these financing instruments for different purposes.

Outline presentation

Charges for use of water & water services. National government grants, soft loans &

guarantees. External grants (Official Development Aid). Philanthropic & not-for-profit agencies &

partnerships. Commercial loans, bonds & private equity. How do guarantees work?

Introduction

Partnerships, peer group collaboration

and private technical and managerial

support are relevant across the board in

conjunction with all financial options.

Institutional support of these types will

improve access to finance if it bolsters

the solvency and commercial viability of

water undertakings.

IWRM requires much more than applying isolated tools, keep in

mind the concepts seen in chapter 1 of this manual: it's about

management and capacity building. Are we ready to implement

the principles? Who else needs to be?

Charges for use of water & water services

Water abstraction charges Water supply tariffs Sewerage and effluent

charges Water pollution charges

and taxes License fees and charges

for specific servicesRunning away form the costs of pollution.

Financing flood risk management (1)

Charges on water usersExample: “French Agences de Bassin” fund their water resource management activities (including flood control) through surcharges on customers’ water bills, sometimes referred to as a “polluters’ tax”

Surcharge on property ownersExample: “Netherlands Water Boards”, responsible for surface water management including flood control, recover costs through charges on property owners

Financing flood risk management (2)

Negotiated contributions from beneficiaries Large landowners, property developers, sporting complexes, factories, power stations.

Charges and fees for use of facilities and attractionsAssets created by flood risk management have recreational and touristic benefits which can be the basis of entry charges and fees to the general public.

Financing flood risk management (3) Cost sharing from multipurpose schemes

Costs can be shared because FRM is often one of the purposes of hydropower projects, river flow management, preservation of wetlands, etc.

Cost sharing in transboundary projectsFRM frequently entails transboundary projects, where costs can be shared with neighbours

InsuranceMany governments encourage their citizens to take out private insurance policies to cover flood risk

The national budget for recurrent cost funding

Covering recurrent overhead water services costs

Providing the variable costs of operating water services

Underwriting any financial deficits incurred by local water undertakings, this removes any incentive on undertaking to improve its finance

Providing subsidies to cover stated and specific purposes (free water for deserving & sanitation)

Targeted or smart subsidies avoid disadvantages of general subsidies, if predictable and transparent

National government grants, soft loans & guarantees

Advantages of government funding of projects are:

Fund raising is related to national financial capacity, and can avoid local over-borrowing & debt problems

The national Treasury can get better terms in financial markets than local authorities

It can set national priorities and steer funds towards urgent/priority cases, ensuring equity between richer and poorer parts of the country

The foreign exchange risk of foreign loans is borne by central government

Financial intermediaries & development banks

Financial agencies occupying a position between central governments and local service providers, e.g. national development banks, infrastructure development corporations, water sector banks, municipal development corporations, environmental funds, etc.

External grants (Official Development Aid)

Grants or concessional loans are available from a wide variety of international agencies. It is sensible for developing countries to maximise their uptake of ODA grant money, before contemplating commercial finance for this sector.

Concessional loan is one that is available on better terms than those provided by private financial markets – lower interest, longer maturities, and/or grace periods before interest or repayments are due.

Philanthropic & not-for-profit agencies & partnerships

A high proportion of W&S programmes are undertaken in partnership with NGOs, foundations, Community Based organisations, church groups, charities and other philanthropic and not-for-profit bodies.

UN agencies (UNICEF), or branches of the International Red Cross are active in WASH.

Commercial loans, bonds & private equity (1)

Loans from International Financial Institutions (IFIs)

Medium/long term loans are available from for management and infrastructure.

IFIs’ shareholders are national governments, and they operate in many different countries.

Some of them are obliged by their statutes to lend only to national governments, others have the means to deal with private borrowers and can deal with sub-sovereign borrowers.

Their terms are normally more favourable than those on offer from commercial sources

Commercial loans, bonds & private equity (2)

Bank loans for infrastructure are of two main types, depending on how risks are borne:

corporate finance the loan is made to a company or public corporation, which undertakes the servicing of the debt.

project finance, where the loan is made to a “special purpose vehicle” undertaking the project, and the security for loan is the expected cash flow

How do guarantees work?

Mitigating specific risks, which are the critical sticking points of a project.

Enhancing creditworthiness of securities (e.g. bonds) to take them over a critical threshold.

Improving the terms on which borrowers and project sponsors can get access to loans and investment.

Giving lenders and investors exposure to previously unfamiliar markets and financial products.

Think about it

What is “affordable” How can ability to pay be assessed? How is this seen in you country? How do each stakeholder perceives “affordable”?

Should there be dedicated “water banks”? What experiences can you identify from your country?

What contributions do NGOs do?

End

Chapter 7 goes specifically into financing by means of bonds, BOTs and reforms. Chapter 8, the last chapter of the manual explores local financing mechanisms.