Results of ADB Water Week 2004
Water for the Poor: Setting the Rules and Finding the Money
ADB Headquarters, Manila, Philippines
26-30 January 2004
Debate on Water Financing
One powerful theme of Water Week was '"Finding the Money." This reflected the findings of the Camdessus report that emphasised that if MDGs in water were to be achieved, annual funds going into the sector would roughly have to double.
It is not simply a matter of finding more money. It is equally important to get more value for money, to direct the money to those areas in most need and to those who have proven that they have the capacity to make the right decisions and be accountable for its effective use.
FINANCE ISSUES
Decentralizing the funds and making it available to local governments, NGOs and community groups, which are best placed to make use of them
INCREASING THE SUPPLY OF FUNDS
It has been shown that substantial capacity for financing water and sanitation lies within communities, but that some additional upfront financing is needed to kick start their programs.
Communities are prepared to pay for services including loan servicing. The private sector is a source of funds provided that the business risks are acceptable, and that government and international lenders can favorably influence them. Providers, through greater collection efficiency and cost based tariffs, can generate funding for expansion supplemented by borrowing from the local market. Bilateral and multilateral development banks (MDBs) must comply with their commitments to the UN.
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SHIFTING THE LENDING FOCUS TO RURAL
This point has already been made in a separate presentation by the ADB. It does require though rethinking on the financing packaging so as to provide the smaller amounts at acceptable risks and affordable rates to rural towns, rural communities and irrigation authorities.
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DECENTRALIZING THE FUNDS
Currently MDBs and others lend on concessional terms to national governments for water and sanitation projects. These funds may in turn be on-lent to provincial or local governments, typically at commercial interest rates or higher. If they find their way to communities or NGOs, the interest rates are higher still and repayment periods often very short. This process is a barrier to communities and local government taking the initiative. Yet it seems change is difficult since governments do not have the political will to adopt more appropriate methods. They plead the foreign exchange risk they are assuming in taking on the international loan, a risk that they then pass on to local levels. They also claim a lack of accountability and transparency on the part of local governments, NGOs and communities, but do nothing about the situation and are hardly exemplars themselves. For their part, local governments, NGOs and communities often lack broad based management expertise, adequate financial systems and well-trained staff.
Yet VP Jin in his closing remarks to Water Week made the point "Decentralizing water financing through autonomous and accountable service providers is a key part of ADB's water policy and we are keenly advocating this to our clients and partners." It is fully consistent with the recommendations of the Water Panel on financing water infrastructure chaired by Michel Camdessus.
To make decentralization a reality, both governments and multilateral development banks (MDBs) will need to revise their processes, working in conjunction with local governments, NGOs and other stakeholders at sub-national levels.
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REDUCING THE RISKS OF BORROWING
High interest rates to end-users are often justified by government as being necessary to cover the foreign exchange rates of loans from international lenders. All the risk is then placed with the end-user, with the government protected. The financier also enjoys a risk free situation, with both sovereign guarantee and no exchange risk.
This seems a paradox since it is the international financial community that is best equipped to manage financial risk and that is familiar with managing multiple currencies.
Mechanisms need to be found to change this barrier to cost effective water investment. Solutions may include building up the domestic financial markets so there is less reliance on foreign denominated borrowings, MDBs changing some of their lending practices, governments rethinking their on-lending practices, and greater thought being given to sustaining revolving domestic credit facilities.
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SIMPLIFYING THE PROCEDURES
Project and program lending typically involves complex paperwork, many conditionalities and a lengthy process. It is one reason why transaction costs are high. As a consequence, larger loan amounts are preferred by lenders to achieve an acceptable ratio between loan and transaction costs.
But if lending is required in rural areas, if lending is needed at local government level and the borrowers are small organizations and ill equipped for complex loan processes, then something has to be done to simplify procedures.
ADB, which has recently set about revising its business practices, should extend this review into loan instruments and harmonize its efforts with other international lending agencies.
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REPLICATING GOOD EXPERIENCES
It has been said on a number of occasions that there are already many good models of successful cooperation on financing and decision-making that have resulted in beneficial water and sanitation outcomes for communities.
A difficulty is that few seem to know about them. Consequently, a very effective strategy would be for an organization like the ADB to harness its resources to identify and disseminate models of good practice across the region. This challenge is being picked up by the ADB through its knowledge management strategy referred to by VP van der Linden in his keynote address on "Leadership."
However, the onus should also be on those who have initiated successful projects to ensure they inform others - among them their local media, water ministries, the media and water associations.
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BUILDING COMMUNITY AND NGO CAPACITY
Though organizations like ADB already have or can tap into a considerable skill base, this is not the case for communities and NGOs.
Given that partnerships are being advocated, it is important that one of the partners - communities, local government or NGOs - are as well informed on what matters as are lenders such as the ADB. Consequently, some assistance is required to build their knowledge and skill base.
VP Jin mentioned, "Capacity building in local government and water user organizations has to be linked to further decentralized financing in a demand-led manner." This intention has to be converted into action through agreed country assistance strategies and project and program proposals.
In summary, achieving the water MDGs will require all stakeholders to reform their financing practices.
Topics 
Increasing the supply of funds
Shifting the focus of lending to the rural sector
Reducing the risks and transaction costs of borrowing
Simplifying the procedures
Replicating good experiences
Using some funds to build the capacity of communities and NGOs