OECD Studies on Water O E C Meeting the Challenge of Financing Water D OECD Studies on Water S and Sanitation t u d Meeting the Challenge ie TOOLS AND APPROACHES s o n of Financing Water Water is essential for economic growth, human health, and the environment. Yet W governments around the world face significant challenges in managing their water a t e and Sanitation resources effectively. The problems are multiple and complex: billions of people are r still without access to safe water and adequate sanitation; competition for water is increasing among the different uses and users; and major investment is required TOOLS AND APPROACHES to maintain and improve water infrastructure in OECD and non-OECD countries. This OECD series on water provides policy analysis and guidance on the economic, financial and governance aspects of water resources management. These aspects generally lie at the heart of the water problem and hold the key to unlocking the policy puzzle. Contents M Part I. Key issues with respect to financing water and sanitation e e Chapter 1. What are the benefits of investing in water and sanitation services? t in Chapter 2. Current status of water and sanitation services and investment needs g Chapter 3. Where is the money going to come from? th e Part II. A toolbox to support effective water and sanitation policies C h a Chapter 4. Introduction to the toolbox lle Chapter 5. S trategic financial planning for water and sanitation services at national or n g regional level: The FEASIBLE tool e Chapter 6. Financial planning tool for water utilities o f Chapter 7. Multi-year investment planning tool for municipalities F in Chapter 8. Guidelines for performance-based contracts a n Chapter 9. Water utility performance indicators (IBNET) c Chapter 10. Private sector participation in water infrastructure: Checklist for public action in g W a t e r Please cite this publication as: a n OECD (2011), Meeting the Challenge of Financing Water and Sanitation: Tools and Approaches, d OECD Studies on Water, OECD Publishing. S a http://dx.doi.org/10.1787/9789264120525-en n it This work is published on the OECD iLibrary, which gathers all OECD books, periodicals and a t statistical databases. Visit www.oecd-ilibrary.org, and do not hesitate to contact us for more io n information. Co-distributed by IWA Publishing Alliance House, 12 Caxton Street, London SW1H OQS, UK Telephone: +44 (0) 20 7654 5500 ISBN 978-92-64-12051-8 -:HSTCQE=VWUZV]: Fax: +44 (0) 20 7654 5555 97 2011 14 1 P E-mail: [email protected] www.iwapublishing.com OECD Studies on Water Meeting the Challenge of Financing Water and Sanitation TOOLS AND APPROACHES This work is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Organisation or of the governments of its member countries. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Please cite this publication as: OECD (2011), Meeting the Challenge of Financing Water and Sanitation: Tools and Approaches, OECD Studies on Water, OECD Publishing. http://dx.doi.org/10.1787/9789264120525-en ISBN 978-92-64-12051-8 (print) ISBN 978-92-64-12052-5 (PDF) Series: OECD Studies on Water ISSN 2224-5073 (print) ISSN 2224-5081 (online) Photo credits: Cover © From left to right © Taro Yamada/Corbis, © iStockphoto/Roger Whiteway, © iStockphoto/ Carmen Martínez Banús, © iStockphoto/Mark Tenniswood Corrigenda to OECD publications may be found on line at: www.oecd.org/publishing/corrigenda. © OECD 2011 You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases and multimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitable acknowledgment of OECD as source and copyright owner is given. All requests for public or commercial use and translation rights should be submitted to [email protected] Requests for permission to photocopy portions of this material for public or commercial use shall be addressed directly to the Copyright Clearance Center (CCC) at [email protected] or the Centre français d’exploitation du droit de copie (CFC) at [email protected]. 3 FOREWORD – Foreword Almost 900 million people cannot get clean drinking water and 2.5billion lack access to basic sanitation. Polluted water and poor sanitation cause 1.5 million preventable child deaths per year which makes them among the biggest causes of infant mortality along with malaria and malnutrition. This book “Meeting the Challenge of Financing Water and Sanitation” presents strategies on how finance for essential water and sanitation services can be mobilised. And it offers a set of concrete policy tools that governments can use to support these efforts. Improving water and sanitation infrastructure will require a significant scale-up in funding in both developed and developing countries. For example, it is estimated that the US will have to invest USD 23 billion annually for the next 20 years to maintain water infrastructure at current service levels, while meeting health and environmental standards. Meanwhile, in developing countries, current spending will need to double – to about USD 18 billion per year, to expand water services and achieve the water and sanitation Millennium Development Goals. In addition, investment will be needed to maintain the existing water infrastructure in these countries, which will add another USD 54 billion spending per year. The benefits of improved water and sanitation are massive. One dollar of investment in water and sanitation saves 4 to 12 dollars in avoided health care costs alone. African governments and G8 leaders have both recognised the challenges and committed themselves to supporting a more strategic approach as well as to the mobilisation of more financial resources. Closing the significant gap between the funding that is currently available and the investment that is needed will require significant efforts by governments and the private sector around the world. In this context “Meeting the Challenge of Financing Water and Sanitation” provides support for these policy efforts based on ongoing OECD work and cross-country evidence from the experiences of both developing and developed countries. One of the most under-utilised opportunities for reducing the funding gap comes from improving the efficiency of the water and sanitation sector. MEETING THE CHALLENGE OF FINANCING WATER AND SANITATION – TOOLS AND APPROACHES – © OECD 2011 4 – FOREWORD This report shows how governments can implement the necessary reforms, and establish more sustainable financing for the sector relying on three basic sources of revenue - the 3Ts (i.e. taxes, tariffs and transfers). It also highlights how countries can mobilise repayable finance, including through innovative mechanisms such as grouped financing vehicles and microfinance. Finally, there is an urgent need for governments to think more strategically about the water sector. Strategic financial planning assists governments to set realistic infrastructure targets that can be achieved with available resources and that are agreed in a multi-stakeholder policy dialogue. Heeding this message will go a long way towards ensuring adequate financing for the water sector and will improve the lives of millions of people around the world. The OECD stands ready to help! Angel Gurría OECD Secretary-General MEETING THE CHALLENGE OF FINANCING WATER AND SANITATION – TOOLS AND APPROACHES – © OECD 2011 5 ACKNOWLEDGEMENTS – Acknowledgments This report was prepared by Sophie Trémolet (Trémolet Consulting, UK) with inputs from Peter Börkey, Céline Kauffmann and Alexandre Martoussevitch from the OECD secretariat in Paris. It draws on a number of recent OECD publications, including Managing Water for All: An OECD Perspective on Pricing and Financing (2009), Strategic Financial Planning for Water Supply and Sanitation (2009), Private Sector Participation in Water Infrastructure. OECD Checklist for Public Action (2009), Pricing water resources and water and sanitation services (2010a), Innovative Finance Mechanisms for the Water Sector (2010b) and Benefits of Investing in Water and Sanitation: an OECD Perspective (2011). Several experts from the OECD secretariat contributed inputs into Part II of the report, including Valérie Gaveau (Development Cooperation Directorate), Céline Kauffmann (Directorate for Financial and Enterprise Affairs), Tatiana Efimova, Nelly Petkova and Alexander Martoussevitch (all Environment Directorate). Jim Winpenny (Wynchwood Consulting) contributed inputs into the design of the work, while Diane Binder (Trémolet Consulting) carried out initial research as well as editing for PartII. Finally, the authors are grateful to Peregrine Swann (WHO) for his comments and review. The report was discussed and declassified by the OECD Working Party on Biodiversity, Water and Ecosystems at its meeting in March 2011. MEETING THE CHALLENGE OF FINANCING WATER AND SANITATION – TOOLS AND APPROACHES – © OECD 2011 7 TABLEOFCONTENTS – Table of contents Abbreviations and acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Structure of the report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Part I. Key issues with respect to financing water and sanitation Chapter 1.What are the benefits of investing in WSS? . . . . . . . . . . . . . . . . . . . 27 1.1. Identifying necessary investments in WSS. . . . . . . . . . . . . . . . . . . . . . . . . . 28 1.2. Estimating the benefits of investing in WSS. . . . . . . . . . . . . . . . . . . . . . . . . .31 Chapter 2.Current status of WSS and investment needs . . . . . . . . . . . . . . . . . .41 2.1. Current status and investment needs in OECD countries and transition economies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 2.2. Overview of investment needs in developing countries: Reaching the MDGs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Chapter 3.Where is the money going to come from?. . . . . . . . . . . . . . . . . . . . . 51 3.1. Reducing costs and improving efficiency. . . . . . . . . . . . . . . . . . . . . . . . . . . 53 3.2. Closing the gap: A combination of the 3Ts. . . . . . . . . . . . . . . . . . . . . . . . . . 56 3.3. Bridging the gap: Tapping repayable sources of funding . . . . . . . . . . . . . . . 64 3.4. Mobilising the private sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 3.5. Using strategic financial planning. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 MEETING THE CHALLENGE OF FINANCING WATER AND SANITATION – TOOLS AND APPROACHES – © OECD 2011 8 – TABLEOFCONTENTS Part II. A toolbox to support effective water and sanitation policies Chapter 4.Introduction to the toolbox. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Chapter 5.Strategic Financial Planning for WSS at national orregionallevel – theFEASIBLEtool . . . . . . . . . . . . . . . . . . . . . . . 93 5.1. Background and rationale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 5.2. Description of the Strategic Financial Plan process and the FEASIBLE tool . . 95 5.3. Where has it been applied? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 5.4. Lessons learned and the way forward. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 5.5. How to get started? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101 Chapter 6.Financial planning tool for water utilities . . . . . . . . . . . . . . . . . . . .103 6.1. Background and rationale for developing the tool. . . . . . . . . . . . . . . . . . . . 104 6.2. Description of the tool. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105 6.3. Where has it been applied? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 6.4. Lessons learned and the way forward. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 6.5. How to get started. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 Chapter 7.Multi-year investment planning tool for municipalities . . . . . . . . 109 7.1. Background and rationale for developing the tool. . . . . . . . . . . . . . . . . . . . .110 7.2. Description of the tool. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .110 7.3. Where has it been applied? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112 7.4. Lessons learned and the way forward. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112 7.5. How to get started . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112 Chapter 8.Guidelines for performance-based contracts. . . . . . . . . . . . . . . . . .115 8.1. Background and rationale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .116 8.2. Description of the tool. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .116 8.3. Where has it been applied? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .118 8.4. Lessons learned and the way forward. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 8.5. How to get started. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 Chapter 9.Water Utility Performance Indicators (IBNET) . . . . . . . . . . . . . . 123 9.1. Background and rationale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 9.2. Description of the tool. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 9.3. Where has it been applied? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 9.4. Lessons learned and the way forward. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 9.5. How to get started . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 MEETING THE CHALLENGE OF FINANCING WATER AND SANITATION – TOOLS AND APPROACHES – © OECD 2011