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NOTES FROM BARNEY P. POPKIN

Summary of IRG's Financing Water Infrastructure Forum, March 17, 2005 at 1211 Connecticut Avenue, NW, Suite 700, Washington, DC 20026

by Barney P. Popkin, Water Resources & Environmental Management Consultant bppopkin@yahoo.com

These are my personal comments and do not represent the views of any agency or organization. Note that errors and omission and miss-interpretation are solely the fault of the lepracon. Oh, the next IRG Discussion Forum is slated for Thursday, April 21 on Infrastructure to Support Rural Agriculture Markets.

Over 100 water-infrastructure interested parties spent 90+ minutes of their St. Paddy's Day at the International Resources Group's Discussion Forum on Financing Water Infrastructure in Washington, DC. They were not disappointed.

Gracious introductory remarks by IRG President and CEO Asif M. Shaikh were followed by insightful presentations by IRG's Deputy Director for USAID Integrated Water and Coastal Resources Management IQC and Senior Manger Andrew Tczap, Water Infrastructure and Finance Expert Javed Burki, and World Bank's Senior Finance Specialist/Water and Energy Department Aldo Baietti.

Andy Tczap insightfully gave us the grim statistics on the overall global water sector, not financing, emphasizing the magnitude of the water scarcity problem and financing need. "The human right to water is indispensable for leading a life in human dignity. It is prerequisite for the realization of other human rights," - UN Commission on Economic, Social and Cultural Rights (2002). Andy notes that 31 countries presently face serious water scarcities, 1 of 3 people suffers hardships from water scarcities, water scarcity has greatest effect of developing countries and the poor, and a child dies of water-borne disease every 15 seconds. The 2050 estimates are best case - 2 billion people in 48 countries will be water scarce; worst case - 7 billion people in 60 countries will be water scarce.

Worldwide Water Usage, by percentage of total
	Worldwide	Developed Countries	Developing Countries
Domestic Use	8	11	8
Industrial Use	22	59	10
Agricultural Use	70	30	82

Andy notes there are 12 major international water conferences held from 1992-2003. The UN Summit of 2000 established the Millennium in Development Goal of halving the proportion of people without access to safe drinking water by 2015; the UN World Water Development Report (2003) notes "Many targets have been set over the past 30 years and will continue to be set. However, experience over this period shows a consistent pattern of failure to meet these targets."

Andy notes that the water sector has these impacts - health, food security (irrigation acreage is increasing and water quality is degrading), environment/ ecosystems/ biodiversity, and economic development. He notes that it is difficult to finance water infrastructure as revenue streams in developing countries don't cover investment costs, loan repayments, or operations and maintenance. Investments are required: annual investments in developing countries are estimated to be $180 billion, while current investment is only $75 billion. Investment needs and funding requirements for potable water and sanitation subsector is estimated in the range of $20 to $60 billion annually.

Javed Burki spoke eloquently on his experiences with the Indus Water Treaty, China Three Gorges Dam, China inter-basin water transfers, and Argentina and Paraguay dam projects. He dittoed Andy's water supply scarcity manta, noting that water is NOT an abundant resource. He said most people in developing countries see water as a public good and are not willing to pay for it. He's bullish on private sector development of water resources, which needs significantly new strategies to finance water infrastructure. Noting that estimates that 97 percent of the world's water resources are seawater, with only 3 percent as freshwater, only 0.036 percent is in lakes, rivers and reservoirs, and only 0.001 percent is in clouds - when it rains it doesn't really pour.

Javed notes that water demands increased enormously and surpassed world population growth which has tripled while water demand has increased six fold. The most rapidly growing economies in the world - China and India - are seeing tremendous industrial growth, likely 50 to 60 percent increase in water demand, likely municipal water demand twice agricultural demand growth and 1 ½ times industrial demand growth. It's estimated that 4 billion people by 2025 will be under severe water stress, very grim forecasts for China - need interbasin transfers parallel to construction effort to build the Great Wall of China. India, the other billion+ country, is approaching water scarcity.

Americans think every problem has a solution, usually related to money. The World Bank has been quoted, "Gloomy arithmetic of water is mired in the gloomy arithmetic of cost." The easy work has been done; there needs to be a reworking of relationships to share water. Cost of new bulk waters often are 2 to 3 times that of previous water. World investment needs to go from current $70 billion/year to $180 billion/year, a 2 ½ times increase, to deal with global water scarcity. The bulk of this investment will need to go to developing countries where investments have been so great at about 4 percent of Gross Domestic Product of developing countries to meet water investments. This level of expenditure is well beyond the capacity of the public sector, while the private sector is apprehensive.

Private sector investments of about $70 billion are for ALL infrastructure - about $3.5 billion in water and sanitation and $5.5 billion in hydropower annually. The estimate is that 2/3rds of investment for water infrastructure needs to come from the private sector. Much will depend on how the World Bank creates the framework of partnership for water infrastructure. Javed notes that public-private partnerships are necessary and need to conform to these two governing principles:

1. Dublin Principles, which encompass independent management of water is NOT appropriate, need linkage of municipal-agricultural-industrial water management: 1) in-basin water development program - difficult to do, but China is most advanced; India and Pakistan not institutionally capable yet; 2) water management is best done by all stakeholders who must cooperate - state, private sector, and civil society; and 3) water being a scarce resource, pricing must be effective, education must prove water is not a public good, not a free good, needs private-sector participation.
2. Need to put in place to attract private sector investment: 1) Public good component of water management for flood control, should be public sector; 2) must include upstream development as regulatory framework, legal issues, etc., before private sector is attracted; and 3) governments all over the world should seriously consider handing over distribution of urban water to the private sector. There's mixed success record but World Bank can find good lessons learned and to overcome barriers. Needs occupation of scarce water resources but a start needs to be made by modeling public-private partnerships in water management.

Aldo Baietti spoke practically on leveraging financing in changing markets, including Egypt's West Delta Region to bring surface water and getting the private sector to be realistic. Developing countries have many strict debt ceilings and financing is limited, unless there is absolute real economic growth. Privatization could bring more funds to the table, which was successful to 1997 then the East Asian financial crisis followed by Argentina, then Russia, then by 2002 private investment in infrastructure declined back to 1993 levels. The trend for private sector water investing has gone done. Unfortunately, I was unable to keep up with Aldo's presentation, but have few notes that might be useful.

He spoke on new PRT data reinvestments with downward trend (down 13 percent in 2003), big private water investors are risk adverse, foreign exchange risk, fundamentals of projects not solid in the water sector, utilization water utilities and have sub-sovereign loans in WSS, levels of sustainability as credit worthy in listed country conditions/ marginally credit worthy/ sustainable cost recovery/ cost recovery/ pay-as-you go/ recovery of cash outlays/ un-viable loss utilities. He addressed markets as potentially greater role for local operators and small urban town centers, and risk allocation schemes have interest in investing but having no interest to take on finances and demand risk. He spoke about how the World Bank and other IFIs can respond:

1. Refocus on risk instruments such as PRGs for local capitol market development, government payment commitments, OBAs and subsidies
2. Promote water incentive-based fiscal transfer systems to LGUs as main source of public finance for infrastructure
3. Develop capacity of local governments as more reliable financial stakeholders
4. Develop "ownership values"
5. Develop definitive policy guidelines for treatment of foreign exchange risk in US and infrastructure investments
6. Encourage more hybrid finance schemes as a way to bring back private operators with different risk allocation profiles
7. Encourage wholesale approaches for delivering IFI financing for smaller towns, utilizing local banking institutions

He described a clever changing risk allocation matrix where risks are taken up by private parties.

	Public Company	Performance Contract	Design, Build, Lease
Demand Risk		LIMITED	TOTAL
Planning & Design			TOTAL
Construction Risk	TOTAL	TOTAL	TOTAL
Operation & Commercial		LIMITED	TOTAL
Foreign Currency Risk
Regulatory Risk		LIMITED	TOTAL
Financial Risk
Credit Risk

He briefly presented several financial models: Design Build Lease (DBL), Output Based Aid to External Coverage (Jakarta example), Bulk Water Design-Operate-Transfer (BOT) in Amalgamation of Several Utilities, and Aftermage with Cost Recovery - which have several relationships between IFIs, Government, Concessions, Sponsors, Utilities, MCFs, Banks, LGUs, and Private sector.

He discussed aspects of the Egypt West Desert project as well.

After the presentations, there were several audience questions and responses. Statements were made that farmers are willing and able in developing countries to pay rates comparable or above municipal water rates for dependable, good quality irrigation water - which would be wonderful if true. The burden of history where irrigation water was free for centuries, the need for additional investment which mostly must be from the private sector, and the need for changing cultural attitudes in water supply are somewhat overwhelming, IMHO. Moreover, I am not sure that water scarcity is so much a supply challenge so much as it is a good governance and water allocation challenge, IMHO.