OECD Horizontal Project

“Sustainable Financing to Ensure Affordable Access to Water and Sanitation”

Expert Meeting

14-15 November 2007

2

Overview

Monica Scatasta (ENV):

• The Horizontal Project: Policy Questions, Rationale, Description

• Progress with Pillar 1: Water pricing and financing

Peter Borkey (ENV)

• Progress with Pillar 2: Development of realistic financing

strategies for water and sanitation infrastructure in non-OECD countries

Céline Kauffmann (DAF)

• Progress with Pillar 3: Application to the water sector of the 2007 OECD Principles for Private Sector Participation in Infrastructure

3

The Horizontal Project:

Key Policy Questions

The OECD horizontal water project responds to the increasing calls within the international community for :

• Strengthened efforts to ensure adequate provision of water services, both for ensuring basic human rights and as a prerequisite for economic development

• Improving management of water resources & associated watersheds to maintain an adequate supply of freshwater of suitable quality for human use and ecosystems

The project addresses the economic basis for sustainable water service provision & sound water management. It helps respond to two sets of related policy questions :

• How to overcome the financial obstacles to the provision of adequate water & sanitation services for all, while reconciling revenue efficiency with other policy objectives, such as the need to ensure service affordability for all

• How to improve the use of incentives to encourage management of water resources that is both economically efficient & environmentally effective

The Horizontal Project:

Project Rationale

The rationale for choosing these policy questions is that:

• Ensuring sustainable financing to operate, maintain, expand, & upgrade infrastructure is essential to achieving access to water and sanitation for all

• Tariffs for water & sanitation services can play a crucial role, but policy-makers must reconcile revenue efficiency with other policy objectives

• Therefore, additional sources of financing must also be identified, including new and innovative solutions.

• Part of the solution may come from the involvement of private investors & financiers, but the effectiveness of their engagement needs to be improved

• Developing countries face great difficulties in closing the financing gap, so that a special effort is needed for them to develop realistic water strategies

• Improved management of water resources can also benefit from the use of pricing reflecting the full economic costs of use, but their implementation and interaction with other economic instruments need to be further explored

• Particular challenges face the implementation of water pricing in the agriculture sector

5

The Horizontal Project :

Focus / Who does the work?

The project contributes to the debate by focusing on issues where value added specific to the OECD was identified:

1. Identify good practices and share experiences with water pricing and financing of water supply and sanitation infrastructure – ENV, TAD and DCD

2. Support developing country governments to prepare realistic finance strategies for water infrastructure - ENV

3. Develop practical guidance for engaging private investors in the development and management of water infrastructure - DAF

6

Pillar 1

1. Identify good practices and share experiences with water pricing and financing of water supply and sanitation infrastructure

• Pricing : Survey & case studies on (i) water supply and sanitation pricing practices (household & industrial users), (ii) the use of economic instruments for water resources management

• Financing: infrastructure needs; alternative/ innovative financing and business models; ODA to water sector

• Agriculture: irrigation water pricing & infrastructure financing; sustainable water use for agriculture

7

Progress with Pillar 1 :

Activities• Assessment of water infrastructure needs for OECD & BRIC countries Initial

results OECD (2006) Infrastructure to 2030; revised version finalised, official release Nov. 2007

• Survey of water pricing practices (i) Ongoing data collection; preliminary results to be verified with countries; (ii) case studies in selected OECD countries: developing TORs in coordination with Pillar 2, 3; (iii) ongoing literature review

• Water management in agricultureProposed work discussed in JWPAE of July 2007, draft annotated outline of the report for submission to the Dec. 2007 JWPAE meeting

• Innovative business models & financing Developed work plan; ongoing interviews with key stakeholders

• ODA to water sector Data being collected by DCD

Events:

• World water week (Stockholm, Aug. 2007) OECD work was presented; input was received for innovative business models report

• Meeting of Coordinators of 5th World Water Forum (Istanbul, 4-5 Nov. 2007) OECD became part of consortium coordinating the Finance Theme of the Forum

• OECD Meeting of Water Experts (14-15 Nov. 2007) Discuss results of water pricing survey; innovative models; agricultural water pricing

8

Pillar 1 : DeliverablesReports:

• Survey of water pricing practices Report on water pricing for water and sanitation services in OECD countries and developing countries, including survey of current best practices (Q3 2008)

• Water management in agriculture in OECD countries Reports on (i) water pricing for agriculture and financing agricultural water supply infrastructure (Q3 2008); (ii) policies and approaches for sustainable water management in agriculture (Q4 2008)

• ODA to water sector Analysis and data on ODA to the water sector (2008)

• Innovative business models & financing Report on innovative sources of financing and innovative business models for the water sector (Q3 2008)

• Synthesis report Final draft available Q4 2008

Events:

• 2nd Meeting of Coordinators of 5th World Water Forum (Jan./Feb.2008) Coordination of the Finance Theme of the Forum

• World Bank Water Week (DC, Feb/Mar. 2008) Disseminate preliminary results

• World Water Week (Stockholm, Aug. 2008) Present draft reports of 3 components

• OECD High Level (GFSD) Meeting on Water Financing (Paris, Autumn 2008)

• 5th World Water Forum (Istanbul, Mar. 2009) Present final component & synthesis reports

9

Peter Borkey (ENV)

10

Pillar 2

2. Support developing country governments to prepare realistic finance strategies for water infrastructure

• Develop the FEASIBLE financing tool for application in developing countries

• Apply in 2 African countries and draw lessons learned

• Close co-operation with World Bank through WSP (SWIFT tool) and with the EU Water Initiative

• Continue application in EECCA countries

11

Progress with Pillar 2:

Establishment of a Task Team

• Established to support follow-up to OECD environment and development Ministerial, April 2006

• Brings together OECD delegations (ENV and DEV), plus some beneficiaries, World Bank, UNSGAB, the EU Water Initiative and other experts

• Task Team is chaired by Maurice Bernard, Head of the Water and Sanitation Division, Agence Française de Développement

• OECD provides secretariat and supports project implementation

• First meeting took place on 22nd March 2007 in Paris, second meeting took place on 23rd October 2007 in Paris, third meeting is planned for April 2008

12

Topical Focus of Task Team

• Support developing country efforts to develop financing strategies for the water supply and sanitation sector

• Strong agreement in Task Team that in addition to increasing the supply of finance, there is a need to improve the demand for finance -as recommended by the Gurría TF

• This agenda will be supportive of the objectives set-out in the Paris Declaration on Aid Effectiveness, i.e. alignment and harmonisation

• Methodologies developed by the OECD (FEASIBLE) and the World Bank (SWIFT) can support analytical work and policy dialogue within developing countries, as well as between developing countries and donors

13

Agreed Work programme of

Task Team• Collection of relevant experience in member and non-member

countries

• Work to adapt FEASIBLE to the African context– Joint workshop with EUWI FWG and WSP held at end of April 2007 to

review FEASIBLE and SWIFT methodologies

• Implementation of at least 2 pilot projects in Africa– Egypt with support of Greece and OECD in framework of Med-EUWI

– Burkina Faso with support of EUWI Finance Working Group and OECD

– Additional SSA country under discussion, EUWI FWG to lead work

• Report including policy conclusions focusing on good practices for developing and implementing finance strategies for WSS, and how donors can support such activities

14

Progress with Pillar 2 :

Activities

Project launched in Egypt, with Greece as lead country and strong support from the EC

Identification of a Burkina Faso for pilot study in co-operation with EUWI, AFD as possible key partner

Projects in Moldova, Georgia and Armenia are ongoing, project in Kyrgyzstan to be launched; EUWI strong partner in all of them

Collection of good practice examples from member-countries and multilaterals Developing ToRs in coordination with Pillar 1 & 3

Events:

International water week (Stockholm, August 2007) presentation of Moldova Finance Strategy

Next meeting of Task Team planned for April 2008

15

Pillar 2 : DeliverablesReports:

• Technical adjustments to FEASIBLE model, to extend it to developing countries (Q2 2008)

• Country case studies Egypt and Burkina Faso – capacity development and policy dialogues (Q4 2008)

• Financing strategies for several EECCA countries using FEASIBLE Final draft available Q4 2008

• Financing Strategy report Final draft available Q1 2009

Events:

• Two meetings of the Task Team in 2008

• World Bank Water Week (Feb/March 2008) Disseminate preliminary results

• World Water Week (Stockholm, August 2008) Present draft reports

• OECD High Level (GFSD) Meeting on Water Financing (Paris, Autumn 2008)

• 5th World Water Forum (Istanbul, March 2009) Present final component & synthesis reports

16

Céline Kauffmann (DAF)

17

Pillar 3

3. Engaging private sector in the development and management of water and sanitation infrastructure

• Develop guidance for private sector participation in water and sanitation infrastructure building on the 2007 OECD Principles

• Conduct a review of experiences of some 30 developing and emerging countries

• Engage with existing initiatives and discuss the guidance and country practices at regional level

Progress with Pillar 3

Adapting the principles: matrix linking 24 Principles, specificities of water and sanitation infrastructure, concrete issues faced by key actors and good practices draft finalised, to be discussed at first regional roundtable

Country review: a common framework for some 30 countries in Africa, Asia and Latin America and 7 dimensions of information preliminary database finalised

Collection of good practice examples from member countries and multilaterals (in coordination with Pillars 1 & 2)

18

Progress with Pillar 3

Multi-stakeholder dialogue: engaging with existing initiatives (World Bank, BPD, Water dialogues, Regional Development Banks) and discussing outputs at regional level

27-28 Nov. 2007: Regional roundtable for Africa in Zambia Discussion of guidance and good practices in an African context

Early 2008: Regional roundtable in a MENA country

Additional regional roundtable in Asia and Latin America (funding?)

19

Scope of the work

• Focus on increasing access to drinking water and sanitation

– Excludes other uses of water such as irrigation, hydroelectricity

– Focus on developing and emerging countries where the needs are tremendous

• Participation understood broadly, including non-financial forms of participation that involve managing infrastructure services

• Private sector understood broadly: international investors, small-scale operators, private sector whose core activity is not water, financiers

20

Context and trends

• Water and sanitation is a key sector where much effort is still needed

• New management issues: resource allocation, quality control,

improved maintenance and preservation => promotion of decentralization, local governance, participation and equity, financial viability and environmental sustainability

• Partnership with the international private sector since the

1990’s has been highly debated

• Rapid changes in the terms of involvement of private sector: less risky contracts, emergence of new actors, growing recognition of the small-scale private providers

21

Key characteristicsfor the cooperation between public & private

• Monopolistic sector where competition is difficult to introduce: high fixed costs, long-term irreversible investments,

inelastic demand and important asymmetry of information

• Basic need, important externalities on health, gender equality and environment high political interest

• Local management, but requires integrated water resource management (externalities, full water cycle)

• Numerous stakeholders and segmentation

• Risky sector: contractual risk, foreign-exchange risk, sub-sovereign

risk and political interferences

• Pricing has multiple objectives: cost recovery, economic

efficiency, environmental sustainability, equity and affordability22

Issues faced by governmentshighlighted through the Principles

• Global vision and local management

• Bridging a segmented sector: consistency across policies,

objectives and public agencies (SWAP)

• Designing the incentives: price setting, targeting of subsidies

(Chile). Towards shorter, less risky contract and stronger State involvement.

• Diversity of private actors: building on comparative advantages

& engaging the small-scale operators (Mauritania)

• Strengthening ownership: involving the workforce & developing

consumer trust (NWASCO)

• Uptake of innovative financing tools: OBA, pooled financing

(India), municipal bonds (Jo’burg)23

24

www.oecd.org/water/

TENTATIVE LIST OF COUNTRIES

Africa: Burkina, Ghana, Kenya, Mauritania, Mozambique, Senegal,

South Africa, Uganda, Tanzania, Zambia

Latin America: Argentina, Bolivia, Brazil, Chile, Colombia,

Honduras, Mexico, Peru

Asia: Bangladesh, Cambodia, China, India, Indonesia, Malaysia, Nepal,

Philippines, Singapore, Thailand + Russia

MENA: Algeria, Egypt, Jordan, Morocco and Tunisia

25

INFORMATION FRAMEWORK

1- Environment: demography and business

2- Basic Water & sanitation data: resources, uses and access

3- Performance indicators

4- Investment needs: Public expenditure, investment gap, available financing tools

5- Pricing policy: tariffs structure, metering practice, affordability, sustainability

6- Institutional and policy Framework

7- Private Sector Participation

26