Good governance vital as well as finance

Alan Hall & James Winpenny, Global Water Partnership

Water has recently attained a higher international profile, and there is increased political will to tackle the challenges which face the world. Most of the Millennium Development Goals (MDGs) - whether on poverty, health, environment or hunger - require action on water.

The specific water targets, to halve the numbers without access to safe drinking water and sanitation, as well as the target for preparing integrated water resources management (IWRM) strategies, have acquired political impetus, but remain to be converted into concrete action in poorer countries.

A key issue in achieving all the MDG targets will be the provision of adequate finance for water and sanitation services. This will require a significant increase (according to many estimates, a doubling) of the annual capital investment in projects such as expanding distribution systems and creating new sources, and treatment and purification facilities.

Camdessus Panel
In 2002, the Global Water Partnership (GWP) and World Water Council (WWC) sponsored the creation of a World Panel on Financing Water Infrastructure, popularly known as the Camdessus Panel after its chairman, which reported on the scope for expanding the financial means available to the water sector to enable it to meet this challenge. (See GWP website)

As a result, financing is firmly on most agendas, and the basic international financial architecture for water and sanitation is largely in place. Nevertheless, there is much to be done to make it accessible, for example, by changing rules to allow more sub-sovereign lending by multilateral or bilateral agencies.

Similarly, the increased use of guarantees (rather than direct grants or loans) needs to be given more recognition alongside other means of donor support. The Panel's report helped to extend the debate on financing beyond government budgets or donor funds.

Whilst there has been positive progress at the international level, the necessary complementary national structures remain very unevenly developed. It is thus important now to move beyond broader generalities and try to make progress on financing within specific national systems, highlighting successful cases, disseminating good practice and building capacity for reform.

Identifying target groups
As part of this task, target groups for action under the MDGs should be identified as precisely as possible and national financing plans for these programmes should be drawn up. In most countries, the water sector should work together as a whole at national level, and its different parts should be mutually supportive.

Using different financing mechanisms is thus a critical part of achieving IWRM and poverty reduction strategies. This is consistent with seeking different financial solutions for the different market segments within a country.

Financing options
For target groups in larger towns and cities, and in middle-income countries, a full menu of financing options is available:

· Tariff revenue and internal cross-subsidy
· Grants and loans from central government
· Municipal subsidy and cross- subsidy from other revenue sources
· Bond issues, local and interna- tional, including use of pooled credit
· Sovereign guarantees for sub- sovereign borrowers
· Loans from international devel- opment banks and loans from specialised national municipal or water funds/banks
· Local currency guarantees for local borrowing
· Private equity, including invest- ment by local operators and so on.

It is important to make a clear distinction between, on the one hand, raising private finance (whatever the arrangements for asset ownership) and, on the other hand, involving private companies in the ownership and/or operation of water services. Both have a place but the former is not dependent on or necessarily linked to the latter.

Raising private finance can take a number of forms. For example, municipalities in India, Latin America and, more rarely, Africa have raised finance from commercial banks and bond issues which have increased the pot of money available to provide services.

Finance for poorer areas
For poorer populations, including much of Sub-Saharan Africa, the more realistic scenario is a combination of donor aid working through public sector institutions, and community-driven initiatives funded from various sources. Grant aid should be structured to leverage and catalyse local initiatives and funding.

Recent initiatives such as the African Water Facility, hosted by the African Develoment Bank, and the EU Water Facility (for the Africa, Caribbean, Pacific regions) provide mechanisms for funding local initiatives and are to be welcomed.

Donors have a growing obligation to increase their commitments to this sector, though the reasons why existing programmes are currently underspent should be addressed as a matter of urgency.

There is a mismatch between the well-documented demand at community level, where water is often cited as one of the top three priorities, and its low priority at higher government levels, where water is absent from many poverty-reduction strategies.

Low investment in this sector can be attributed to insufficient demand, poor cost recovery from low tariffs, institutional fragmentation and unrealistic service expectations, amongst other factors.

Improving governance
Fully half of the Panel's report was devoted to recommendations for im.ater sector. There is a clear link between levels of finance and investment and good governance.

Foreign direct investment increases as governance improves; conversely, weak governance increases risk and the possibility for malign political interference. The main governance problems to be addressed include vague or contradictory policies, an inadequate legal framework, a lack of transparency especially in the award of contracts, poor management and low quality staff, weak regulation, inadequate tariffs for cost recovery and a general lack of trust between government, service providers and consumers.

Global Water Partnership, the World Water Council, the multi-lateral banks and many other organisations involved in the original Panel are taking action to follow up its work and will report on this at the fourth World Water Forum in Mexico in 2006. Ministers at the UN Commission for Sustainable Development meeting in April 2005 are also urged to give full recognition to the importance of financing and governance in this sector.


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