Annex III: Economic and Financial Issues

Introduction

Economic and Financial Concerns in the Development and Utilisation of Water Resources

Reasons for Analyzing Economic and Financial Issues in the Water Sector

Strategic Principles and Related Proposed Actions and their Implementation

1. 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

2. Goal 2: Ensure efficiency, transparency and accountability in water resources management as a precondition for sustainable financial management

3. Goal 3: Ensure the establishment of public/private partnerships

4. Goal 4: Ensure financial sustainability

5. Goal 5: Ensure adequate financing of the water sector

6. Goal 6: Ensure financing of water resources data knowledge base as a basis for analysis and research for better understanding and decision making

7. Goal 7: Ensure that provision is made for economic costs analysis of extreme events or chronically prone areas to flooding and drought

Priority Areas in Need of Financing

Strategies/Actions for Cost Reduction

Summary of Key Issues and Recommended Actions

Annex III:

Economic and Financial Issues
Report of working group 3

I. Introduction

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.

II. Economic and Financial Concerns in the Development and Utilisation of Water Resources

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.

III. Reasons for Analyzing Economic and Financial Issues in the Water Sector

82. Several reasons justify the interest in analysing issues related to economic and financing considerations in the water sector. Among those are:

1. The importance of water as a natural resource with a social as well as an economic good ;

2. 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;

3. The importance of defining the role of the government and the private sector and their financial obligations;

4. 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;

5. 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;

6. The need to understand and use economic tools and apply them into the water sector to achieve greater efficiency;

7. 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;

8. 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;

9. Social and environmental cost/benefit analysis needed in water related projects;

10. Deficient practices exist in budgeting development, operation and maintenance;

11. Integration of water into national, sub-national, and river basin planning as the resource is needed in all sector activity;

12. 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.

13. Reforms of the water sector will result in economic benefit, specially at local level;

14. The need to finance capacity building to improve management;

15. Funding basic water data collection and management must be sufficient to understand the nature and variations of the resource;

16. Needed efforts to prevent and mitigate disaster losses;

17. 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.

IV. Strategic Principles and Related Proposed Actions and their Implementation

A. 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

B. Goal 2: Ensure efficiency, transparency and accountability in water resources management as a precondition for sustainable financial management

C. Goal 3: Ensure the establishment of public/private partnerships

D. Goal 4: Ensure financial sustainability

E. Goal 5: Ensure adequate financing of the water sector

F. Goal 6: Ensure financing of water resources data knowledge base as a basis for analysis and research for better understanding and decision making

G. Goal 7: Ensure that provision is made for economic costs analysis of extreme events or chronically prone areas to flooding and drought

V. Priority Areas in Need of Financing

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:

1. Institutional capacity building/support to policy including support to policy and legislation;

2. Integrated Water Resources Management;

3. Data collection, monitoring and integrated information management systems;

4. Knowledge of hydro-ecosystems functioning;

5. Demand and supply assessment;

6. Feasibility and thematic studies; (g) National, sub national and river basin action plans;

7. Local support for sustainable solutions to communities, associations, local authorities and emerging local private sector;

8. Investment for those without access to basic needs.

VI. Strategies/Actions for Cost Reduction

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:

1. Restructuring of existing institutions to reduce cost;

2. Improving existing management such as demand management/leak reduction;

3. Promoting competition in service provision;

4. Improving existing data collection network;

5. Provision of financial incentives, including tax exemption for equipment and for private sector;

6. Investing in under privileged areas;

7. Reliance on low cost systems and appropriate technologies including indigenous technologies;

8. Increasing accountability in system management.

VII. Summary of Key Issues and Recommended Actions

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.

Annex II: Freshwater Ecosystems and Water Quality: Report of Working Group 2

Annex IV. Participation and Institutions for Integrated Water Resources Management Report of Working Group 4