The Economics and Finance of Water Week 7: Water Economics and Financing Day 5: Water Financing August 1, 2008 Expo Zaragoza
The Problem Economics of Water Contents Assigning raw water Pricing drinking water Cross subsidies and efficiency Challenges in agriculture Finance of water Efficiency as a source of finance Sources and arrangements for finance Financial Structuring Risk Mitigation The Way Forward
The Problem Need for significant increases in water infrastructure investments, severe underinvestment Very risky sector, politically charged, conflicts of interest, externalities Inefficient use, inefficient price signals, inefficient markets Deficiencies in the investment environment Enhancements in the economic and financial efficiency and expansion of access to resources are needed
Assigning raw water Trading can improve efficiency, but government intervention may be necessary Externalities, inter-temporal temporal benefits, regulated markets Water rights Costs, conflict resolution, duration, gross/net Payments and fees Variable and fixed costs, externalities Market institutions Institutions, characteristics of tradeable rights
Pricing drinking water Pricing: central issue of regulation Monopoly, externalities, essential good, sunk costs Pricing criteria Financial sustainability of the service Costs to society (full costs and externalities) Affordability Simplicity, transparency and predictability Price caps vs. cost-plus and mixed schemes
Cross subsidies and efficiencies Cross subsidies and price discrimination. Why use Criteria: Incremental cost, stand-alone, alone, average cost Cross subsidies and sustainability a price scheme is sustainable if, and only if, it is cross-subsidy subsidy-free according to both stand-alone alone and the incremental criteria. the incremental cost condition requires that prices should be above marginal costs. Therefore, price over marginal cost should hold for both welfare and sustainability reasons. price schedules meeting the conditions for voluntary sustainability ity may have implicit cross-subsidies subsidies according to the average cost criterion. the sustainability of a price scheme closely depends upon the alternatives for service provision of each consumer or group of consumers. checking sustainability requires that information about alternative technologies be available to every group of consumers.
Challenges in agriculture One of the most critical issues: water in agriculture Pricing can lead to water efficiency Enhancing agricultural markets Incentives for avoiding water waste and making water flowing towards the highest economic priorities Incentives for the efficient use of water Increasing value of agricultural products and avoid abandoning land and water for other uses Introduce technical improvement Uundertake infrastructure investment for water availability
Efficiency as a source of finance Technical inefficiencies Non-revenue water, energy efficiency Managerial inefficiencies Corruption, billing and collection, pricing signals, project preparation Sectoral inefficiencies Sector governance, management Regulation and investment climate
Sources and arrangements for finance Financial planning Needs, financing gaps, alternative investments/policies Financing sources: Value for money Public resources: ratepayers and taxpayers Private finance: ratepayers and taxpayers Capture efficiency of the private sector, lack of fiscal space to invest, technology transfer, lack of institutional capacity Aid resources: Selective uses Keep all financial options open
Financial Structuring Right structures can increase the number of bankable projects, attract investments, reduce backlash from failures and enhance the long term viability of projects Poor choice of modalities of service provision are major causes of failure Structures must be adapted to local prevailing conditions (legal an regulatory, fiscal space, macro In developing countries, structures are complex Structures must be adapted to dynamic conditions
Risk Mitigation Existence of risk mitigation tools can enhance availability and return of investments Financial and political risk and mitigation Refinancing risk Foreign exchange exposure Partial risk and partial credit guarantees Policy risks Rates, contractual obligations, coverage, termination payment, currency convertibility, taxes,. But water is politically charged
The way forward Need to pay attention to economic and financial realities and reduce political influence Good policies and management are as scarce and valuable as financing Allocation of water rights, proper pricing and use of cross-subsidies subsidies Increase economic, technical, managerial and sectoral efficiency Enhance the business environment Explore all options in terms of modalities of service provision and financial sources and structures
The Economics and Finance of Water Water Economics and Financing Water Tribune August 1, 2008 Expo Zaragoza