OECD Internet Projects

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• Financing Strategies for Water and Environmental
  Infrastructure
• Lessons learned from case-studies
• in FSU
• OECD Global Forum on Sustainable Development
• Financing Water and Environmental Infrastructure
  for All
• 18-19 December 2003, OECD Headquarters, Paris

Alexander Martusevich OECD
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Financing Strategies applying FEASIBLE approach
case-studies in FSU
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MAIN OBSERVATIONS FROM CASE-STUDIES IN FSU

• Water and wastewater infrastructure in former
  Soviet Union is rather extensive, more than in
  other countries with similar level of income, but
  inefficient and deteriorating
• Connection rates in FSU are high (70-100 in
  urban areas), but service level is rather low due
  to lack of proper maintenance and investments
• Low incentives for rational water use by
  consumers

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MAIN OBSERVATIONS FROM CASE-STUDIES IN FSU

• Efficiency is low (water losses amounts to
  30-75, excessive energy consumption per 1m3 by
  water utilities)
• In case of Yerevan Huge excessive energy
  consumption at 14,000 MWth per annum to pump
  water from Ararat valley can be avoided as
  gravity flow from mountains is almost sufficient
  to meet the demand

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MAIN OBSERVATIONS FROM CASE-STUDIES IN FSU

• Little incentives to optimise infrastructure and
  public capital expenditure and increase
  efficiency of public investments (e.g. FEASIBLE
  simulations proved that in oil rich
  Khanty-Mansijsk province WSWW infrastructure
  development targets could be achieved with lower
  public expenditure than it was initially
  projected / or actually spent )
• Very little proportion of public capital
  expenditure targeted to rural area
• In FSU there is not enough finance to cover even
  baseline (OM) expenditure needs with few
  exceptions (e.g. KhMAO)

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BASELINE SCENARIO OM EXPENDITURE NEEDS COMPARED
WITH TOTAL FINANCING AVAILABLE
51
42
34
EUR per connected inhabitant per year
25
17
8
0
Pskov
Ukraine
Georgia
Novgorod
Kazakhstan
Moldova
Rostov
Kaliningrad
Eastern
Kazakhstan
OM expenditure needs
Supply of finance
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FOCUS ON TWO ISSUES

• (1) BALANCING OM EXPENDITURE NEEDS WITH
  AFFORDABLE USER CHARGES
• (2) PRESENT AND FUTURE ROLE OF MAIN SOURCES OF
  FINANCING
• User charges
• Public funds
• Debt financing and private strategic and equity
  investments

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BALANCING OM EXPENDITURE NEEDS WITH AFFORDABLE
USER CHARGES

• Reduce excessive or illegal water consumption -
  demand side incentives for rational water use
• Increase operational efficiency (reduce water
  losses, excessive staff, energy savings) supply
  side incentives
• Create incentives for infrastructure and capital
  expenditure optimisation, utilise economy of
  scale
• Improve collection (often poor in FSU) and/or
  increase user charges (not much room in most poor
  countries)

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LESSONS LEARNED FROM CASE-STUDIES IN FSU

• (1) Demand and Supply side incentives are
  equally important
• Billing based on Metering does create strong
  incentives for rational water use but needs to be
  supported by appropriate Tariff policy not to
  make Water utility a bankrupt
• Huge water and energy saving potential could be
  utilised in the short term (and may counter
  balance upward trend in electricity prices)
• (2) User charge revenues
• - at present are not sufficient to cover OM
  expenditure

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PRESENT USER CHARGES AS OF EXPENDITURE NEEDED
TO IMPLEMENT BASELINE SCENARIO
100
80
60
40
20
0
Moldova
Kazakhstan
Novgorod
Rostov
Ukraine
Georgia
Kaliningrad
Pskov
Eastern
oblast
Kazakhstan
User charges as of OM expenditure requirements
User charges as of OM and re-investment
expenditure requirements
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MAIN FINDINGS FROM CASE-STUDIES IN FSU

• are present User charges affordable ?
• In most of cases present user charges are
  affordable for majority of households (HHs)
  applying 3-4 threshold
• Even in poor countries there is some room for
  user charges increase to affordability limit
• However, there is little sense to further
  increase user charges until collection is
  substantially improved (Armenia)
• are HHs able and willing to pay more ?

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MAIN FINDINGS FROM CASE-STUDIES IN FSU

• Some proportion of HHs is able to pay for water
  more (and even willing to pay more for improved
  services) ?

4.5
4.0
3.5
Potential affordability limit
3.0
2.5
2.0
water bill as of average household income
1.5
1.0
0.5
Eastern Kazakhstan
Kaliningrad province
Novgorod province
Georgia
Rostov province
Ukraine
Pskov Province
Moldova
Kazakhstan
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MAIN FINDINGS FROM CASE-STUDIES IN FSU
Affordability constraints

• Affordability limit (as well as WTP) is site
  specific while substantial fall of the collection
  rate after tariff increase may indicate that the
  limit is achieved
• FEASIBLE model was used to assess at which level
  of average per capita income user charges could
  fully cover OM cost (assuming that the user
  charge for HHs is set at the affordability limit
  of XX of average per capita income)

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Potential OM expenditure coverage in WSWW sector
by User charges and average per capita income
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LESSONS LEARNED FROM CASE-STUDIES IN FSU
Affordability constraints and role of Public
funds

• These estimates and income distribution analysis
  show that in most poor countries and provinces
  (e.g. Armenia, Pskov) user charges which would
  allow to cover full OM cost would not be
  affordable for substantial proportion of
  population (40-60)
• Public funds will therefore have to play
  essential role in the short and medium term
  providing income support to the poor and/or
  operating subsidies to water utilities bridging
  the cash flow gap

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LESSONS LEARNED FROM CASE-STUDIES IN FSUrole of
Municipalities and local public budgets

• In FSU Municipalities are often owners of the
  infrastructure therefore formally responsible for
  major repairs and capital investments
• BUT most of local public budgets are not
  sufficient to cover just operational expenses and
  have very limited investment and borrowing
  capacity
• ? additional burden for national and regional
  budgets

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LESSONS LEARNED FROM FEASIBLE COUNTRY
STUDIESobstacles for Private sector
participation

• Private sector (operators, strategic investors)
  could and will play more important role in
  operating and financing water supply and
  environmental infrastructure in FSU
• But there are some obstacles
• Limited management capacity of Municipalities
• Improper regulation, institutional set up and
  tariff policy create too big risk and uncertainty
  
• Affordability constraints
• - elimination of these obstacles will take years

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Policy measures to accelerate progress in WSWW
sector in FSU

• Regulation, Institutional set up and Contractual
  relations, as well as tariff policy in Housing
  and Communal Services sector should be improved
  to create proper incentives and reduce risk and
  uncertainty for operators and investors
• Overall reform of public finance is needed to
  balance responsibilities and revenues of local
  (municipal) budgets and improve their borrowing
  capacity
• Sound economic and fiscal policy aimed at fast
  growth - measured not only in terms of GDP, but
  also in terms of HHs incomes and public revenues