- Goal 1: Ensure the integration of water into the national economy, recognising it as a social and economic good, vital for the satisfaction of basic human needs, food security, poverty alleviation, and the protection of ecosystem functioning, and applying economic instruments in its management
- Goal 2: Ensure efficiency, transparency and accountability in water resources management as a precondition for sustainable financial management
- Goal 3: Ensure the establishment of public/private partnerships
- Goal 4: Ensure financial sustainability
- Goal 5: Ensure adequate financing of the water sector
- Goal 6: Ensure financing of water resources data knowledge base as a basis for analysis and research for better understanding and decision making
- Goal 7: Ensure that provision is made for economic costs analysis of extreme events or chronically prone areas to flooding and drought
Economic and Financial Issues
Report of working group 3
75. This annex provides a brief review of economic and financial issues that were discussed on the basis of recommendations of chapter 18 of Agenda 21 and recommendations by the Commission on Sustainable Development. The discussion aimed to elucidate a range of policy options aimed at enhancing the financing of water resources and the economic performance of water resources development and utilisation.
76. It was recalled that as stated in the Programme For The Further Implementation of Agenda 21, the inter-governmental process under the aegis of CSD on Freshwater will be fully fruitful only if there is a proved commitment by the international community to the provision of new and additional financial resources for the goals of this initiative.
77. Water is a finite and vulnerable environmental resource and a social and economic good. The allocation of scarce water resources among competing uses has fundamental effects on ecosystems and the national economic development in terms of employment and the generation and distribution of income and poverty alleviation. Such policies can also have significant impacts on land use planning and the movement of population from rural to urban areas. The access of suitable amounts of water for basic human needs should be incorporated in the formulation and implementation of economic policies for resource development and allocation.
78. The use of pricing policies and other economic instruments are essential for the effective and equitable allocation of the resource taking into account social and economic criteria as well as basic human needs. Economic evaluations need to consider positive and negative impacts on health, human and ecosystems. Inadequate economic policies have often contributed to the poor performance of water utilities thus decreasing their ability to attract financial resources from the public and private sector as well as from the international community. To the extent that subsidies are required for social reasons, they should be well targeted to the intended beneficiaries and managed in a fully transparent way. Subsidies should be seen in the context of poverty alleviation as measures which, in time, could be phased out. Additional funding, targeted mainly to peri-urban and rural areas, is required.
79. While the public sector has traditionally played a major role in financing water resources development, there is an increasing recognition of the need for the involvement of other stakeholders (local private sector and community based organisations) and financial sustainability.
80. Financial support for the collection, processing and dissemination of timely, reliable and demand-oriented information is essential to the effective management of water resources.
81. In addition, the number of water related natural disasters (flood, drought) have been rising rapidly over the past decades. Therefore, the economic evaluation for the losses due to these phenomena and financial provision for their prevention and mitigation should be of priority.
82. Several reasons justify the interest in analysing issues related to economic and financing considerations in the water sector. Among those are:
- The importance of water as a natural resource with a social as well as an economic good ;
- Given that the sector requires new and additional financial resources, the need to understand how and by whom the water resources sector is financed, particularly in the case of the service component of resource management;
- The importance of defining the role of the government and the private sector and their financial obligations;
- The need to take into account differences between rural and urban areas and the different users (agricultural, industrial, energy, etc.) in view of the wide range of water users in the economic spectrum;
- The need to ensure the security and provision of water through incentives provided by government for the purpose of satisfying basic human needs, taking into account that the provision of water supply to some areas of the sector is economically justified at the macro level despite the non profitability in terms of internal cost recovery, particularly in under privileged areas;
- The need to understand and use economic tools and apply them into the water sector to achieve greater efficiency;
- Decision makers need to know the cost of provision of water, establish long term economic perspective of water in the overall economy, and take into account the social implication of water resources, and determine appropriate development scenarios;
- The necessity to link performance and financing to cost recovery and to show users the benefits of using sustainable management solutions and the impact of such actions on the economy;
- Social and environmental cost/benefit analysis needed in water related projects;
- Deficient practices exist in budgeting development, operation and maintenance;
- Integration of water into national, sub-national, and river basin planning as the resource is needed in all sector activity;
- The fact that lack of water in an area will result in migration to areas where the resource is available, shows the need for integration of water resources development and management with land use planning which will result in stabilising rural populations through added employment opportunities and poverty alleviation.
- Reforms of the water sector will result in economic benefit, specially at local level;
- The need to finance capacity building to improve management;
- Funding basic water data collection and management must be sufficient to understand the nature and variations of the resource;
- Needed efforts to prevent and mitigate disaster losses;
- The fact that foreign and national private investments are increasing notably in urban areas does not minimise the need for significant increases in national and international financing in view of the very large investment requirements.
83. In order to achieve this goal, the following strategic issues were identified:
- Recognise water as a social good, for the satisfaction of basic human needs, to be provided to all, with due attention given to gender dimensions;
- Recognise water as a finite and vulnerable resource with a value in alternative uses, environment and ecosystem maintenance, and consider this value in the intersectoral allocation of water for different uses taking into account water quality;
- Estimate and consider "intangibles", such as social and environmental values of water in dealing with intersectoral allocations;
- Consider that special conditions apply in rural non/monetary sectors of the economy in which economic instruments may be difficult to apply.
84. The following specific actions were identified to address these issues.
- Apply demand management approaches based. on assessment of demands and users' willingness and ability to pay;
- Ensure that a proper regulatory environment exists for cross-sectoral consideration of user charges for different sub-sectors;
- Collect and disseminate internationally experiences, good practices and instruments for evaluation of water for different uses, including environmental and ecosystem maintenance. Establish mechanisms for applying these practices and instruments at the appropriate management levels;
- Develop and grant legal concessions for water abstractions and infrastructure management at the local level;
- Consider conditions in poor rural communities by focusing on low cost solutions, and factoring in contributions in kind by local users through labour and other inputs;
- Include environmental parameters in the evaluation of water related projects in all sub-sectors.
85. The following strategic issues were identified as being pertinent to achieving this goal:
- An efficient and transparent financial management is a precondition for effective cost recovery;
- The provision of high-quality services to users is a precondition for effective cost recovery;
- The allocation and use of revenues from water within the water sector itself, and within local communities, must be transparent;
- The application and acceptance of the principle of water as an economic good requires full transparency and accountability in charges, subsidies, cross-subsidies and taxes applied to different user groups;
- Investments in the water sector should be made with the objective of maximising the output and productivity of water resources.
86. The following specific actions were identified to address these issues.
- Ensure transparency in charges, subsidies, cross-subsidies and taxes;
- Ensure transparency in the management of water service providers (water utilities), and avoid monopolies whenever possible;
- Develop and apply criteria and standards for performance of utilities, and link these to user charges;
- Ensure regular public, independent audits of service providers;
- Monitor the performance of equipment, and ensure that procurement takes place in a transparent manner, and through international tender. Avoid to the extent possible procurement through tied aid;
- Develop and apply instruments for charges in the irrigation sector through studies and collection and dissemination of international experience;
- Develop and apply instruments for pollution charges through studies and collection and dissemination of international experience;
- Pay particular attention to avoiding cost and time overruns.
87. The following issues were identified as being pertinent to achieving this goal:
- The existence of a clear definition of and distinction between the role of government, the private sector and other stakeholders, where appropriate to local situations;
- The establishment of an environment conducive to private sector investment;
88. The following specific actions were identified to address these issues.
- Require environment reviews for export guarantee (credits) to attract private funds and services;
- Institute clarification and awareness building measures with respect to defining and understanding the role of private sector;
- Define the roles and responsibilities of the partners in public / private partnerships (PPP), including NGO's, local authorities and community based organisations. Promote organisational changes in Government accordingly;
- Define and take into consideration elements of risks in water resources management and specify risk responsibilities of the various partners;
- The resources to be provided by both the service provider and the Government have to be clearly defined, controlled and clearly spelled out
89. The following issues were identified as being pertinent to achieving this goal:
- The need for determining means and methods to be put in place to facilitate gradual transition towards full cost recovery, whereby all costs are recovered from users or otherwise funded on a sustainable basis;
- The need for considering different criteria to determine financial burden of the different users;
- The need to ensure that the sector should be financially self sustainable.
90. The following specific actions were identified to address these issues.
- Identify criteria for levels of cost recovery for different categories of users, through economic analyses and consultations with users groups;
- Develop financial and regulatory instruments to facilitate private investments;
- Implement adapted financial policies for poorest and rural areas;
- Develop adapted financial solutions for sanitation;
- Redirect public savings to "sustainable development" actions;
- Allocate resources from water charges for Research and Development purposes;
- Link financial self sustainability of local services with decentralisation through the participation of users and mobilisation of local entrepreneurs;
- Diversify sources of funding.
91. The following issues were identified as being pertinent to achieving this goal:
- The adequacy of absorptive capacity and availability of financial resources within the sector;
- The lack of political awareness and will to implement strategies aimed at recovering costs;
- The requirements of external finances limit the flows of resources to the sector.
92. The following specific actions were identified to address these issues:
- Improve donor-recipient dialogue on financing;
- Ensure to include in the estimation of costs, all operational, maintenance and other costs;
- Put in place a national fund for financial resources mobilisation and allocation;
- Urge the international community and Governments (in both recipient and donor countries) to maintain and consider increasing their financial support to freshwater resources development. The impact of such a support would be far more significant if it were well targeted and predictable;
- Improve communication and co-operation among sources of financing of the sector;
- Mobilise largely untapped community financing resources and provide credit mechanisms which foster self help efforts by individuals;
- Identify and mobilise innovative source of funding;
- Increase water sector finances where absorptive capacity exists. Where it does not, improve or upgrade the adsorptive capacity;
- Particular attention must be made to include operational, maintenance and depreciation costs in all water related projects.
93. The following specific actions were identified to address these issues:
- Foster links between environmental impact assessment with data base development;
- Create national water funds for the development of the water resource knowledge base, including contributions from users;
- Support integrated water resource information systems and their management, particularly early warning systems;
- Support for awareness program for understanding the need for data collection, decision making, policy impact assessment and public information as well as education.
94. The following specific actions were identified to address these issues:
- Create mechanisms of regional consultation including meetings, creation of regional solidarity funds with the assistance of the international community;
- Put in place drought and flood preparedness programs and early warning systems;
- Put in place mitigation plans at local and national levels;
- Put in place regional emergency funds and insurance programs for extreme events;
- Prepare drought as well as flood preparedness mitigation programs.
95. Areas in need of financing were grouped into institutional and capacity building, integrated water resources planing and management, support to underprivileged area and investment initiatives:
- Institutional capacity building/support to policy including support to policy and legislation;
- Integrated Water Resources Management;
- Data collection, monitoring and integrated information management systems;
- Knowledge of hydro-ecosystems functioning;
- Demand and supply assessment;
- Feasibility and thematic studies; (g) National, sub national and river basin action plans;
- Local support for sustainable solutions to communities, associations, local authorities and emerging local private sector;
- Investment for those without access to basic needs.
96. Several strategies and actions could be recommended in addressing economic and financial issues related to integrated water resources management. Among the measures of particular interest are cost reduction means including:
- Restructuring of existing institutions to reduce cost;
- Improving existing management such as demand management/leak reduction;
- Promoting competition in service provision;
- Improving existing data collection network;
- Provision of financial incentives, including tax exemption for equipment and for private sector;
- Investing in under privileged areas;
- Reliance on low cost systems and appropriate technologies including indigenous technologies;
- Increasing accountability in system management.
97. Water must be integrated into the national economy, recognising it as a social and economic good, vital for ecosystem functioning and applying economic instruments in its management. As such, economic policies must consider "intangibles" such as social and environmental values of water as well as the special conditions in non monetary sector economies.
98. Actions should be oriented towards applying demand based management approach taking into account the notion of users' willingness and ability to pay. Resources must help in the collection, dissemination and transfer of international experiences in economic evaluation and financial management of water resource. Where possible, support should be provided to strengthen private sector, community based participation as well as the development of appropriate and low cost technologies. Also, assistance should continue in favour of public institution in improving their role.
99. Efficiency, transparency and accountability are keys to sustainable financial management of water resources. For these, several actions are required. Information should be made public for performance indicators, procurement procedures, pricing policies and components, cost estimates and revenues. Determination and allocation of subsidies, cross-subsidies, charges should be transparent in order to maintain confidence and improve investment revenues in the sector. Instruments such as auditing could help achieve this goal.
100. Integrated water resource management required closed partnership between public and private sectors. As such, a clear definition and distinction should be made of the role of government, the private sector and other stakeholders, where appropriate to local situations. In doing so, it is important that the institutional and legal environments be conducive for private sector investment and the emergence of local water service providers. Particular attention has to be given to financial and economic risk assessment.
101. Regardless of policies, financial sustainability is a prerequisite for sustainable integrated water resource management. Therefore, it is a necessity to facilitate a gradual transition towards full cost recovery, criteria for financial burden sharing and the development of financial and regulatory instruments. Also, measures needed include adapted financial policies for the poorest and rural areas and the allocation of resources from water charges to research and development purposes. Emphasis should be placed on participation of users, training of local entrepreneurs and the diversification of sources of funding. Furthermore, a strong link should be made with the decentralisation process.
102. At the same time, it is important to ensure adequate financing of the water sector. Related issues in this case concern the adequacy of absorptive capacity and availability of financial resources within the sector, the lack of political awareness and will to implement strategies aimed at recovering costs as well as the requirements of external funding sources which limit the flows of resources to the sector. Thus, actions should be aimed at improving donor-recipient dialogue on financing, the creation of national fund for financial resources mobilisation and allocation in the water resources sector. The international community and Governments (donors and recipients alike) should be urged to maintain and encourage to increase their assistance to the water resources sector in a predictable manner and targeted to solve specific problems. Value can be added by improving communication and co-operation among sources of financing as well as the mobilisation of largely untapped community financing resources and through the provision of credit mechanisms which foster self help efforts by individuals. This includes, the mobilisation of innovative source of funding.
103. Financing of water resources data knowledge base is a basis for analysis and research for better understanding and decision making. Decision making rely, to a large extent, on the existence and the availability of data and their analysis. Thus is essential that adequate financial resource be provided for better understanding of water resource knowledge base. This implies, among others, the fostering of links between physical, socio economic and environmental impact assessment with data base development, the creation of national water funds. Support should similarly be mobilised for integrated water resource information systems and their management, particularly early warning systems Also, awareness for understanding the need for data collection, decision making, policy impact assessment and public information as well as education deserve an attention.
104. The frequency of extreme events have increased in recent decades. Therefore, provision should be made for economic costs analysis of these events and for the management measures for chronically prone areas to flooding and drought. Several main actions may concurred to achieving this goal. The creation of mechanisms of regional consultation, regional solidarity funds, drought and flood preparedness programs and early warning systems, mitigation plans at local and national levels, regional emergency funds and insurance programs for extreme events could be considered.
105. In a broader perspective, several priority activities should be financed including institutional and capacity building, integrated water resources planning and management. Particularly, local support should be provided for sustainable solutions to communities, associations, local authorities and emerging local private sector.
106. Finally, financial resources can be best attracted to the sector when efforts are made to increase financial accountability and to reduce cost in particular. For this, specific actions could include restructuring of existing institutions, improving existing management through demand management/leak reduction, promoting competition in service provision, data collection and creating financial incentives, participation as well as the use of low cost technologies.