The future of water finance in two lines or 127 pages

The High Level Panel on Infrastructure Financing for a Water-Secure World published its latest report this month. It is supposed to send a “wake-up call” for governments to commit to action.

I have a horrible feeling that they will continue to slumber on, not least because this kind of panel is always too wary of frightening the horses to say anything that might disturb a politician’s beauty sleep.

The report makes a number of familiar points: that water is an essential requisite for national economic growth, that global warming is making the financing challenge more urgent, that we need the right enabling environment, and that cost-recovery tariffs are highly desirable. Its main proposals can be summed up as follows:

• We need to think of water infrastructure as “multipurpose infrastructure” (MPI) encompassing water, wastewater and drainage, and think about it as a “growing investment category, worthy of special focus”. This is a worthy statement, but paradoxically the report then goes on to suggest that “banks and international financial institutions should consider linking their water and energy departments, and possibly other sectoral groups with close links to water”. To my mind, merging water with energy and other easy to finance sectors would be the end of it, but “MPI” seems likely to be the new buzzword for our sector.
• There is a broad choice of business models and financing arrangements for MPI. And incidentally bears practice open defecation.
• Water projects could be financed through a “public goods charge” like the levies the Metropolitan Water District of Southern California uses to finance public purpose projects in conservation, recycling, groundwater remediation, and local resource management programmes. This is a nice idea, but one suspects that it would be difficult to operate outside California because both customers and politicians would simply assume that the public goods charge was just another price hike.
• Create a good enabling environment by accepting the OECD’s twelve principles of good water governance and the Lisbon Charter on water regulation. Motherhood and apple pie would also be beneficial.
• The trend in public-private partnerships is away from finance, and towards operational engagements, with the European companies giving way to expertise from Brazil, China, Singapore, India and the Philippines. This is true, but it is more a symptom of the infrastructure financing problem than a solution to it.
• Public sector clients should consider making more use of DBOT (design-build-operate-transfer) procurement models to access private expertise in the earliest stages of designing projects. Well said!
• Water is ripe for the arrival of “disruptive” technologies. Yawn.
• A number of good entrepreneurial solutions to water supply are growing up beyond the reach of utility networks. They also compete with less good informal vendors. It is suggested that authorities should provide an enabling environment for “properly-regulated operators”. This is half right. Yes, entrepreneurialism should be encouraged beyond the networks, but as soon as you start talking about it being “properly-regulated”, you might kill it.
• Small and medium-sized cities should pool their water systems to obtain economies of scale. Try telling that to the mayors of America’s 35,000 cities with their own water system.
• Improving collection rates is the first step to raising finance to improving services which can then form the basis of future tariff rises. This is a good point, but the truth is that low collection rates are usually the result of poorly motivated and possibly corrupt staff. You may need to fix that problem first.
• If you are concerned about affordability, subsidise consumers rather than water tariffs; also subsidising the connections for poor people is more effective than subsidising tariffs. Too true.
• Include funding for operations and maintenance in loan packages. A good idea if your loan is actually a free gift. It doesn’t work if you want your money back, because it just adds to the burden of debt repayment without addressing the issue of why the borrower was unable to finance maintenance.
• Procurement should be based on lifecycle costs. Absolutely – and roll on BOTs.
• Optimal maintenance procedures (i.e. only fixing things when you know they need fixing) are good. Are they sure about that? There was I thinking that it made sense to dig up roads, regardless of the condition of the pipe.
• Results-based finance (i.e. disbursing funds for a project only when it is properly operational) needs to be used more widely. I suspect that there would not be many construction companies who have the balance sheet to finance the assets they build and then wait for payment, although that model has been growing in popularity in China.
• Performance-based contracts should be used more widely to get the most out of private sub-contractors. I think that they will be.
• Offer financiers a better balance of risk and reward, through good contractual structures, and the use of donor and international financial institution-funded guarantees. One suspects that they are doing this as much as they can already.
• Increase the pipeline of new water projects by encouraging public sector clients to make greater use of pre-project support offered by IFIs and donors, who in turn should make greater efforts to improve the quality of water projects both directly and through better training. Of course.
• IFIs should work together and with other lenders to co-fund projects, and multiply the impact of their lending. This makes sense, but it does exacerbate the problem whereby the best utilities attract all the money, while the ones who really need it go without.
• Blending concessionary and non-concessionary finance makes sense. So it does.
• Bill householders for the increase in the value of their property when new water infrastructure goes in. If you can get away with it.
• Set up specialist water funding agencies and facilities. This could help, but the main thing is to ensure that there are good projects to invest in in the first place.
• Attract institutional investors and sovereign wealth funds into the sector. Easy: all you have to do is make it worth their while.
• Tap into climate funding and green bonds. And any other faddish form of finance around.
• Take note of the Report of the Intergovernmental Committee of Experts on Sustainable Development Financing. This is the last proposal on the list, I guess because someone on the panel was involved in the report and promised to give it a mention.

Overall it is a good report, summarising the state of the art of thinking on water infrastructure finance. My report would be two lines long rather than 127 pages. It would read:

Don’t bother to finance water utilities unless they are allowed to run as profitable businesses.

• Basket case utilities get that way because something other than performance has been incentivised.