Challenges and Financing Needs in Water Investments
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The World Bank
The Widening Funding Gap
•
The region is only
funding 10% of their
annual requirements.
•
Water and Sanitation
will require $800 billion
over the period, or $53
billion annually.
•
300 million people still
do not enjoy safe
drinking water and 1.5
billion lack basic
sanitation services.
Most WSPs in LDCs Don’t Even Recover their
O&M Cost
*HIC–High income countries, UMIC–Upper middle-income countries, LMIC–Lower middle-income countries, LIC–Low income countries Source: World Economic Forum (2014).
The Financing Problem of Water Infrastructure
Many Utilities Struggle With:
•
Low coverage
•
High growth and investment
needs
•
Little Financing Capacity
Infant Utility Challenge
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Why Utilities
Get Into
Financial
Trouble
•
Utility is Inherently Unviable/Overextended – Need
for Operational and CAPEX Sustained Subsidies
•
Oversized System Carrying Too Much Debt – Are Cost
Recovery Tariffs Fair?
•
Cost Structure and Balance Sheet Position Have
Materially Changed – External Shocks
•
Utility is Fundamentally Mismanaged and Subject to
Corrupt Practices – Governance
•
Combinations of the Above With No Corrective
Intervention Taken Except Pressure to Reduce Costs
Whatever the reason utilities get into trouble, the end
financial result tends to be same given the how each of the
technical and financial variables interact with one another.
If left unchecked utilities go into a
“Vicious Performance Spiral”
The Vicious Performance Spiral
Financial
Accountability
of Public
Utilities
How they Differs from
Private Enterprises
•
Limited Involvement with Private Bankers -
Finance Relationship is
mostly with Local or Central Governments - Few sanctions for lenders
in case of default on debt.
•
Certain Remedies of Typical Workout Situations are Not Realistic for
Utilities - Bankruptcy, Liquidation, Sale of Main Assets - Either a
financial solution is found or the utility is relegated indefinitely to life
support conditions.
•
Financial and Strategic Incentives of Main Actors May Be Quite
Different - Profit motives are typically not the overriding concern or
objective. Lack of true ownership values.
•
Resources May be Denied to a Utility Not Because of Its Own
Limitations But Because of the Government’s Overall Fiscal Position -
The issue of fiscal space has important bearing on the amount of
public debt a government can assume to clean up balance sheets or
inject fresh capital or initiate expansion.
The World Bank highlights the widening funding gap in water and sanitation investments, with the region only funding 10% of its annual requirements. The sector faces a significant financing challenge, requiring $800 billion over a period, with millions still lacking access to safe drinking water and sanitation. Utilities in many countries struggle with low coverage, high growth needs, and limited financing capacity, leading to financial unsustainability. The issue is further exacerbated by mismanagement, high debt, and challenges in cost recovery.
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Presentation Transcript
Financing Challenges of Water Financing Challenges of Water Investments Investments The World Bank
The Widening Funding Gap The region is only funding 10% of their annual requirements. Water and Sanitation will require $800 billion over the period, or $53 billion annually. 300 million people still do not enjoy safe drinking water and 1.5 billion lack basic sanitation services.
Most WSPs in LDCs Dont Even Recover their O&M Cost *HIC High income countries, UMIC Upper middle-income countries, LMIC Lower middle-income countries, LIC Low income countries Source: World Economic Forum (2014).
The Financing Problem of Water Infrastructure Cost Average Cost LRMC Time
Many Utilities Struggle With: Low coverage High growth and investment needs Little Financing Capacity
Infant Utility Challenge DEVELOPING COUNTRIES DEVELOPING COUNTRIES DEVELOPED COUNTRIES DEVELOPED COUNTRIES Infant Utilities Low coverage High annual growth rates High investment needs Rely heavily on external financing Uncertainty of accessing external sources of funding Financially unsustainable Scarce owners equity financing Mature Utilities Full coverage or very close to full coverage Less expansion needs Lower expansion investment needs High investments to maintain the existing level of service Generate cash from internal operations
Utility is Inherently Unviable/Overextended Need for Operational and CAPEX Sustained Subsidies Oversized System Carrying Too Much Debt Are Cost Recovery Tariffs Fair? Why Utilities Get Into Financial Trouble Cost Structure and Balance Sheet Position Have Materially Changed External Shocks Utility is Fundamentally Mismanaged and Subject to Corrupt Practices Governance Combinations of the Above With No Corrective Intervention Taken Except Pressure to Reduce Costs
Whatever the reason utilities get into trouble, the end financial result tends to be same given the how each of the technical and financial variables interact with one another. If left unchecked utilities go into a Vicious Performance Spiral
The Vicious Performance Spiral Low tariffs, low collection Consumers use water inefficiently High usage and system losses drive up costs Investment, maintenance are postponed Services deteriorates Customers are ever less willing to pay Utility lives off state subsidies Managers lose autonomy and incentives Efficiency keep dropping Subsidies often fail to materialize Utility can t pay wages, recurrent costs or extend system Motivation and service deteriorates further System assets go down the drain Crisis, huge rehabilitation costs
Limited Involvement with Private Bankers - Finance Relationship is mostly with Local or Central Governments - Few sanctions for lenders in case of default on debt. Financial Accountability of Public Utilities Certain Remedies of Typical Workout Situations are Not Realistic for Utilities - Bankruptcy, Liquidation, Sale of Main Assets - Either a financial solution is found or the utility is relegated indefinitely to life support conditions. Financial and Strategic Incentives of Main Actors May Be Quite Different - Profit motives are typically not the overriding concern or objective. Lack of true ownership values. Resources May be Denied to a Utility Not Because of Its Own Limitations But Because of the Government s Overall Fiscal Position - The issue of fiscal space has important bearing on the amount of public debt a government can assume to clean up balance sheets or inject fresh capital or initiate expansion. How they Differs from Private Enterprises
