Session FT 1.26

Access to finance for local governments

 

 

Conveners

• World Water Council
• Global water Partnership
• Water and Energy Users' federation (WAFED), Nepal

Access to finance is an essential part of the local capacity to develop and manage water services in a sustainable way. It is on this local level that action has to take place to meet the global challenges for a secure water for all. To achieve MDGs Target 10 for water supply and sanitation, financial flows to the local level need to increase but local capacity needs also to be enhanced if funds are to be efficiently managed.

Agriculture is the greatest user of water and much investment is needed to make the sector more water productive. The sector needs drastic reform: capable water institutions, sound projects and creditworthy borrowers are required to attract the necessary finance.

The first purpose of the session is to present the findings of the Task Force on “Financing Water for All” established by the WWC, the GWP and the Secretariat of the 4th World Water Forum as a follow up of the Camdessus Panel in order to maintain financing issues in the water and sanitation sector at the top of political agenda.
The conveners intend to present the first report of the Task Force: “Enhancing access to finance for local governments – Financing water for agriculture” and discuss some innovations on financing mechanisms in different parts of the world, share experiences and learn lessons to bring access to finance a step closer for local governments.

Lessons learned

 

1. Generating more funds for the water and sanitation sector would not succeed without a complementary effort to create the right conditions on the “demand side”, i.e. with the central and local governments that need the funds.
2. Dedicated partnerships in which all parties cooperate is essential for matching better demand with supply of services and their financing.
3. The bulk of the funds required for sustaining existing systems and for new investments in water services comes from user fees and the public budget. Fair tariffs and public solidarity are required to connect the unserved, but free water services ultimately may be very expensive for the poor.

Key messages

 

1. Water is a local affair, especially given the current trends in decentralisation processes.  Finance needs to be brought to the local level and shifted from supply to demand-oriented financing mechanisms.
2. Local actors should be empowered and their capacity should be strengthened. Developing local capital markets is needed to make local currency finance possible. Furthermore, access to finance needs to be increased for communities and the local private sector by creating gender sensitive credit schemes like micro-finance.
3. All financial flows need to increase to meet the MDGs, but customers and taxpayers will remain the main source of finance. The income and the cost for service provision need to be balanced to ensure repayment capacity (and creditworthiness) of local governments. That can only be done if all stakeholders (central and local governments, public or private service providers, consumers and financers) work in partnership and decide on the level of services, technology selected, and cost recovery mechanisms including tariff structures and subsidy mechanisms.
4. ODA represents only a small part of funding but it can play a significant role in leveraging other money.
5. Water scarcity in the future will lead to more competition between water uses. Agricultural water will need to become more productive. This requires a wide reform of water institutions in agriculture.

Orientations for action

 

 Access to finance for local governments :

1. National governments should give water more priority: investing in water is investing in development and is key to poverty reduction.
2. National and local governments should develop action plans to facilitate and increase the levels of investments in water at the municipal and district level. Blockages in the flow of funds to local entities responsible for extending water services should be removed. 
3. Bilateral and multilateral financing agencies should stimulate the development of local capital markets to make local currency loans possible and more attractive. The provision of legal security through international guarantees is a necessary condition for lowering financial costs of water projects in some poor countries.

 Financing water for agriculture

1. Water institutions will need to make a strong effort for capacity development, including participation, empowerment, technical assistance and organizational development.
   
2. The trend to give Water User Associations (WUA) more delegated responsibilities should be accompanied by sufficient delegation of powers.
   
3. International aid should focus on project facilitation, money leveraging and capacity building. Water charges to users are the only sustainable source of finance for recurrent operations. But services need to be improved before setting appropriate tariffs if the potential of this source is to be realized.
   
4. The specific risk of the sector to investors and lenders needs to be identified in order to involve a wider range of financial sources.  Co-financing would allow to share the risk between funders. The potential of micro-finance in the sector should be promoted to finance water for agriculture.

Local actions presented

 

Local Governments Perspectives

Jean-Pierre Elong MBassi, UCLG-Africa / Municipal Development Partnership

 

Water is a local affair since water scarcity, water tariffs and water-related dangers are locally experienced. MDGs for W&S can only be reached by involving and empowering local authorities.

To ensure that financial flows reach the local level:
- local authorities need financial support from central governments to implement national policy at the local level
- new financial mechanisms, as mutualisation, should be developed to allow poor and small municipalities to reach the financial markets.
- Local capacity needs to be enhanced, especially the capacity to define local strategies in accordance with the national policy and the capacity to plan investments.
- Local authorities should be able to delegate the management of services, even to private partners with proper public control, monitoring, evaluation of services and renegotiation of contract when necessary. The real debate is not public versus private but access or not to water and sanitation services. 
 
 

Financing local Authorities – new water financing programme

Arjun Thapan, Asian Development Bank

 

AsDB has 3 messsages:
- achieving the MDGs requires more finance
- finance needs to be made available for local governments
- poor are not reached so far

The importance of investing in water is not well understood.

The AsDB launched a new Water Financing Programme for the 5 coming years on the occasion of the 4th Forum. This programme intends to support subsovereigns and non-public entities. It will direct new investments at rural communities, cities and the heart of the water sector, river basins. Under the Water Financing Programme, AsDB proposes to increase its water investments to well over $2 billion annually.
The programme will support the decentralization process in Indonesia, it will also provide long-term capacity building support to Vietnam, assistance to India, China…

 

 

Delivering financial engineering and concessionality to local partners – New approaches from AFD

Alexi Bonnel, Agence Française de Développement

 

Central governments could not be the only beneficiaries of finance any more. Donors should consider many stakeholders: public and private bodies, civil society, central and local authorities. This requires multiple financial sources.

Main source of funds remains the consumer. ODA covers only a small part of financing needs of the water and sanitation sector but helps to lever other funds: from public budget, NGOs, consumers, local finance…

Sanitation is poorly taken into account in aid projects. Sanitation requires more aid in the form of grants.

Donors need to take more RISK and propose sub-sovereign lending, risk mitigation instruments as guarantees, Output-Based Aid mechanisms, soft loans to private sector. Guarantees should be recognized as ODA.
But we should not forget that free water is not sustainable. People have to realize the importance of payment: only bankable and creditworthy bodies can lever finance.

 

Mixed services - enhanced creditworthiness - Casablanca Morocco

El Madhi Arrifi (on behalf of M. Kadri), Admistration of rural engineering of Morocco

 

In Morocco, water and sanitation services are combined with electricity and delegated to the private sector in Casablanca, Rabat, Tangiers and Tetouan.

The service provider has a strong policy of cost recovery in which new beneficiaries contribute to finance the development of the network (64% of costs).

Combining different services allow cross-subsidies between the sectors. In the case of Morocco, electricity generates 61% of cash-flows (water 6% and sanitation 33%) while 37% of investments are allocated to the water sector, and 47% to sanitation.

The delegation of services to the private sector has lead to more investments, better services coverage, improved quality of services and confidence of financial institutions.

The water and sanitation sector can assume the cost of investments only if it benefits from important subsidies and high tariffs.

 

Removing financing obstacles by improving project structuring

Antonio Vives, Inter-American Development Bank
 

The limited capacity for projects preparation and development is a major obstacle to financial flows to the water and sanitation sector. Donors and multilateral financial institutions should support projects in the early phase.
IDB is going to approve a Project Preparation Fund, which will provide grants for capacity building and project preparation. Donors should consider as well debt-for-project-preparation swaps to lever other funds.

All potential resources (own labor, tariffs, donors, multilaterals, public and private) need to be mobilized depending on local conditions.

Improved project preparation and structuring can help bring funds and enhance the long-term sustainability of water projects. All actors, all sources, all structures must be explored.

 

Financing irrigation project, Aigues del Segarra Guarrigues, Spain

Jean-Jacques Saint-Lezin, SOFOL - Dexia Mexico

 

The project concerns the construction of an irrigation channel in Catalunya, Spain, involving 20.000 farmers in over 100 municipalities. It consists in a master construction plan and 150 individual projects, for a total amount of 1.072 million € and a duration of 10 years.

In 1999, the State and the regional government signed a Collaboration Protocol, for the construction, exploitation and financing of the channel.

The regional government of Catalunya created a Special Project Vehicle, called REGSEGA, as public concession grantor. A private company, ASG, won a 30-year concession contract with REGSEGA for operation and maintenance and pays REGSEGA a concession fee. In return, ASG receives from farmers a operation fee (184€ / Ha + 0.006€ / m3) the cover the O&M costs.

After completion, construction costs of individual projects will be reimbursed by REGSEGA (80%) and by the farmers (20%).

The project financial structure is based on the sale of receivables model.

 

Municipal grants

Patrick Flusk, DPLG, South Africa

In South Africa, the constitutional structure of the government is as follows:
- national (28 departments)
- provincial (9 Î 10 departments each)
- local
     Metros (6)
     District municipalities (47)
     Local municipalities (230)

Primary source of financing for local governments remains local taxes and other revenues levied and collected by municipalities themselves, including property taxes, levies and user charges.

Grants from nationally raised revenues, known as the equitable share, are transferred to local governments to supplement their revenue.
- Municipal Infrastructure Grants (MIG), for basic services for the poor
- Equitable Share, to address the O&M costs of basic services to the indigents
- Capacity Building Grants.

MIG target the poorest municipalities, who have a limited local tax base and the highest number of poor households. Donor support represents 2 – 3% of the budget.
Rapid increase in capital expenditure is needed in order to meet South Africa’s targets to eradicate backlogs by 2008 for water and 2010 for sanitation.
National Government has introduced the Project Consolidate Programme to support municipalities in need of:
- capacity building (technical, engineering and project management)
- MIG and FBS delivery
- An effective monitoring, evaluation and reporting system, which is an essential tool for sustainable development.
There is an urgent need to encourage and support municipalities to engage with the private sector and civil society to establish partnerships in the infrastructure planning and roll out.

 

Learning from ADB on water (mis) management: Experiences of Nepal

Priaban Man Singh, WAFED, Nepal

 

In Nepal, 72 % of the population has access to basic water supply and 25% of the population has sanitation facility.

Why does Nepal failed to harness its water resources?
Asian Development Bank’s Total loan disbursement till date is US$ 1,390 million;
And total loan disbursement in 2005 is US$ 43.66 million (Energy 25.28% followed by Water Supply and Sanitation 22.51% are the largest sectors). 

What did Nepal learn from its experience:
- Long term perspective plan is required
- Emphasis on small, environment friendly projects
- Domestic resources must be utilized
- Ensure transperancy in all activities
- Ensure local people participation in all phases of the project.