Water

Gurria Panel Searching for Demand-Supply Equilibrium in Water Financing
(April 2006)

In 2003, the Camdessus report told the 3rd World Water Forum in Japan to find the money. Investments in the water sector needed to double in order for countries to meet the Millennium Development Goals.

In 2006, the Gurria report told the 4th World Water Forum in Mexico to find the demand. Investments over the past four years had not doubled because the demand for it had not increased.

What's going on?

The Gurria Task Force, chaired by Mexico's Finance Minister Angel Gurria, was given the mandate to build on the Camdessus report by assessing the financing trends for local governments, which are increasingly taking on responsibilities for providing water services as a result of decentralization.

Despite Camdessus' recommendation for financing to double from its 2003 level of $15 billion annually, Gurria found that investments have marginally increased, at best, or decreased in some cases. For example, the report states, the UK Government committed to double its direct water financing, but only after a drop from 2.6% to 1.9% of total aid between 1998 and 2003.

Looking at a longer snapshot of investments, from 2000 to 2004, financing decreased. From overseas development assistance groups, investments fell from 5.4% to 4.2%. From the private sector, water sector investments dropped to a new low in 2003, accounting for only 5 percent of total private investments in infrastructure between 1990 and 2002. At national levels, governments also reflected a trend in not spending what was allocated for the water sector.

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Basic economics point to a solution: Create the demand.

In his speech at the presentation of the Gurria Task Force Report in Mexico, ADB Deputy Director General Arjun Thapan identified three reasons behind the low demand in the Asia and Pacific region.

• Firstly, governments do not understand the importance of water sector investments as a necessary first step for economic development and poverty reduction.
• Secondly, governments have not embarked nor implemented reforms to degrees that create confidence by development groups and the private sector.
• Thirdly, governments are not interested in the financing options being offered them, especially local governments who lack the credit ratings for traditional financing.

For each of these areas, "financing institutions like ADB and the private sector must understand the governments' position and offer it comprehensive solutions," Thapan said.

For example, if governments are not prioritizing the water sector as they should be, groups must raise awareness levels about the water-poverty link through policy dialogues and programs. Groups should be building capacity of governments through grant-based projects and programs. And if governments, particularly local governments, cannot access financing because of low credit worthiness, innovative options need to be designed specifically for them and their situation.

A changeup in financing options is where overseas finance groups have made the greatest progress since the Camdessus report. The new Water Financing Program launched by ADB at the 4th World Water Forum will utilize new modalities ADB approved in 2005 as means for raising demand among local governments. These include subsovereign and nonsovereign public sector lending, multitranche financing, local currency financing for the public sector, refinancing, syndication, risk-sharing arrangements and flexibility in commitment charges. The program aims to double ADB's water investments over the next 5 years.

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The Gurria Task Force report does not assume that increased demand plus increased financing will equal poverty reduction. For that, the report says, strategies are needed.

All too often, though, the report found that resources are not invested where needed most. The report points to those countries where 90% of the world's 1.1 billion people without access to water services receive less than 40% of overseas development assistance money. Where's it going? Middle income countries. They receive, on average, $446 per capita compared to $16 per capita for low-income countries.

To reverse this, the report recommends a number of innovative approaches, such as output-based aid and small-scale water providers. Output-based aid rewards the private sector for every poor household it connects to a piped system, while small — scale water providers — that are regulated for fair pricing and quality-are an interim solution until a formal utility can connect the poor.

At the 4th World Water Forum, ADB advocated for governments to set action plans at national and subnational levels that include specific targets for water services and resource management. ADB is already supporting targeting activities, such as performance benchmarking and peer review services for utilities, river basin organizations, and government water sector apex bodies.

"Knowledge, like what the Gurria Task Force Report offers, is obviously important," Thapan said, "but action must accompany."

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• Read about ADB's participation in the 4th World Water Forum.
• Download the Camdessus Panel report.
• Download the Gurria Task Force Report.