The Role of the World Bank in a Changing Water World Water Supply & Sanitation Hydropower Jamal Saghir Director, Energy and Water World Bank Water Week 2003 4 March 2003
Outline of the presentation A changing water world The financing challenge The changing role of the World Bank This Water Week: Discussing the changing role of the World Bank
The external environment we deal with WSSD Johannesburg Summit Climate Change: UNFCC, Kyoto Protocol Water & the Poor World Commission on Dams Water The Millennium Development Goals The Argentina Crisis Post September 11 UN Conference on Financing for Development in Monterrey Collapse of private investment in developing world
A changing water world: Water high on the development agenda Millennium Development Goals WSSD in Johannesburg: Sanitation target Hydropower recognized as renewable 80% of decision makers saw water as key issue The way ahead Kyoto, March 2003: implementation Forum/ expected to be largest water gathering ever Evian, June 2003: G8 meeting with water on the agenda
The challenge of the MDGs for water supply & sanitation the numbers MDG & WSSD targets: Reducing by 1/2 the proportion of population without sustainable access to safe drinking water & sanitation % of countries on track to reach MDGs 100% 50% 0% # of new people with access to WSS per day -50% 400,000 300,000 200,000 100,000 0 water supply sanitation 91-00 01-15* *needed for MDG Primary school completion Child mortality HIV/AIDS prevalence Access to water Access to Sanitation Very Unlikely Unlikely Possible Very Likely No Data Reality check: ~ Less than 1 in 5 countries on track for WSS ~ Less than 1 in 10 low income countries on track ~ Proxy indicators proximity to hardware
A changing water world: The world WSS market Size of population centre # of population centres attractiveness most more medium less least high potential for private financing medium potential for private financing low potential for private financing Household µ-financing Need for public investment
A changing water world: Development of economically-feasible hydropower potential 100 % of potential developed 80 60 40 20 0 Europe North America Africa South America China 0 0.5 1 1.5 2 2.5 Potential in million GWH/year Asia (excl China)
Outline of the presentation A changing water world The financing challenge The changing role of the World Bank This Water Week: Discussing the changing role of the World Bank
Reminder: water sector relies on public financing Public is dominant ~85% 80 60 40 international domestic Domestic is dominant ~ 85% 20 0 public private Financing flows into water in 2000 (US$ Billions) Source: GWP Framework for Action
Investment Alone without reform will be ineffectual Ensure the most cost-effective use of resources Ensure allocation of resources to highest priority investment needs And.. Increase resource mobilization from all sources Investment needs per annum (B USD) 50 25?? Getting the enabling conditions right is first priority 0 present MDG needs wastewater treatment sanitation water supply
Global capital flows to emerging markets have dropped significantly since 1997 $300 $200 $100 Total net private flows FDI Capital markets $0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Net long-term flows to developing countries, 1991-2001 (US$ Billions) Source: The World Bank
Reasons NOT to invest in the water business 200% 150% 100% Financial autonomy 50% 0% Telecom Gas Power Water Degree of cost recovery
Moving beyond public-private debate It is about giving access to water & sanitation The public-private dichotomy is a bit false public service providers at a minimum use private suppliers and often outsource many functions private service providers rely on public support (tax holidays, subsidies) and are always subject to some form of public regulation The focus therefore, should be on efficient public-private partnerships, not on ideological debates
Individual country, regulatory and project risk matters more than ever 240 180 120 60 0 Developing countries Asia and the Pacific China Africa LDC s 1995 1996 1997 1998 1999 2000 2001 Inflows Into Developing Countries ((US$ Billions) Source: UNCTAD Predictably, good projects in developing countries with large markets, strong growth potential and increasingly transparent legal and regulatory environments are preferred over others. With the downturn in investor appetite, other markets and opportunities are often not even being considered
Risks faced by investors in the water sector Currency risk Dollar debt and local currency earnings Regulatory risk Regulatory framework not implemented Payment/performance risk Government fails to pay amounts due Sub-sovereign risk Water investments are often at the sub-sovereign level Affordability risk Private operators and consumers will not do it all role of public investments and subsidies
After September 11, risk aversion in the market has further increased September 11, corporate bankruptcies have increased risk aversion Argentina fiasco Banks capital eroded Reduced number of strategic investors Reconsideration of portfolios in emerging markets Rating downgrades Reduced availability of private PRI
Despite (or perhaps because of) difficult conditions, we are seeing... New approaches to risk allocation and new risk instruments called upon and emerging greater sponsor (government) participation increased efforts to secure local currency (or expatriated) financing increased demand for risk insurance instruments reduced developer equity participation Increased activity of mid-market and South to South investors funds being formed, seeking operator expertise investors buying at steep discounts to original investments with less risk sophistication but often with greater local market savvy
Outline of the presentation A changing water world The financing challenge The changing role of the World Bank This Water Week: Discussing the changing role of the World Bank
The changing role of international partners The MDGs have raised expectations Countries define local goals & strategies ODA must adapt & respond to country goals Increased financing Focus resources to countries both ready and committed Attend to poverty pockets in midst of progress Adapt and respond to long term engagement Re-engage in high risk/high reward projects
ODA: Need for involvement in all stages of reform Long term engagement patience required! TA & policy dialogue lending High need nascent reform status Policies in right direction, local capacities uneven Policies in place/institution al readiness
Where we are: country level effort The Bank is currently supporting 106 countries in WSS: # of countries with Bank WSS support per region # of countries with Bank support dialogue vs lending MNA 22 SAR 7 AFR 10 34 Policy dialogue only Policy dialogue & lending LAC ECA 23 10 EAP Lending only 0 20 40 60
The changing role of the World Bank process up till now Water supply & sanitation high on the Bank s agenda: Corporate focus area Featured in Implementation Forum Together with health & education (service delivery MDGs) on agenda Spring Meetings WSS Business Strategy nearly ready Increased involvement in external dialogue
The changing role of the World Bank preliminary outcomes Need to scale up current efforts through: Increasing effectiveness of ongoing Bank support (ESW + dialogue + lending) Increasing the volume of effort (ESW + dialogue + lending) Changing focus to countries where potential for impact is highest Working across sectors Working with and through external partners
Where we are hydropower IBRD/IDA & Grant Comm Amt 1200 1000 800 600 400 200 0 90-92 93-95 96-98 99-01 02-04 IBRD/IDA Commitment to large hydropower (Million USD) and number of projects 1990-2002 8 7 6 5 4 3 2 1 0 Number of Projects
New instruments to leverage funding Combine public and private financing Smarter subsidies Output Based Aid Lending/guarantees at the sub-sovereign level Better contracts and bidding procedures Risk mitigation instruments Partial risk guarantees / Partial credit guarantees Political risk insurance Breach of contract coverage
Better contracts often more important than financial instruments Clear guidance to the regulator in contract Specify tariff formulas as much as feasible Clarify appeal process Fast track arbitration timeline Specified exit payments if no agreement can be reached Premium in bid evaluation if proposed financial structure minimize currency risk
Sub-sovereign level instruments Key risks in water are at the sub-sovereign level, not governmental Financing needs of municipalities near creditworthiness Recognize need for Government support in less than creditworthy but reforming municipalities
Where can risk mitigation instruments make a difference? Size of population centre # of population centres attractiveness most more medium less least Do not require risk mitigation ~ Adequately creditworthy Risk mitigation instruments could be effective: Near/marginally creditworthy & reforming Risk mitigation instrument will be ineffective: Non creditworthy and low performing
New instruments to leverage funding - So what to do? IFC, PRG and MIGA continue working with investors Bank working with governments to improve investment climate and governance Coordination among IFIs Output Based Aid to increase private involvement Reforms should facilitate local investors
Outline of the presentation A changing water world The changing role of international partners The changing role of the World Bank This Water Week: Discussing the changing role of the World Bank
Themes throughout the coming 3 days Sanitation and hygiene education WSS: Not one size fits all Working across sectors New approaches to hydropower New instruments to leverage funding
Sanitation & Hygiene education Session 2: Scaling up: How to reach the MDGs on sanitation? Session 9: Sanitation and hygiene Session 15: Wastewater reuse
Water supply & sanitation: Not one size fits all Session 3: beyond the public private debate Session 8: modes of public engagement Session 10: new approaches to PSP Session 5: scaling up sustainable RWS services Session 22: franchising
Working across sectors Session 17: The role of strategic communications in water reform Session 19: RWSS toolkit for multi-sector projects
New approaches for hydropower Session 4: High risk/high reward water projects Session 12: Involving stakeholder groups in assessing options for water & energy developments
Innovative financing instruments Session 7: Innovative approaches to subsovereign financing Session 25: Water and rural development financing WSS through budgetary support instruments Session 28: Financing of rural water supply and sanitation
Thank you!