13/11/18Global Issues 

Contribution to OECD work on Blended Finance

"We must not forget about water sector governance"

November 13, 2018; by Neil Dhot, AquaFed

The recent OECD/GIZ conference and the latest OECD roundtable on financing water have proved that blended finance is already happening, and there is a lot more understanding in the sector about how to make it more impactful and effective.

Find out more about the OECD work on "Blended Finance"

Considering the gap between current investment levels and what we need to even get close to achieving the SDGs, we should feel at least a little more optimistic that we could be starting to head in the right direction.

 

Private water operators can contribute in many ways to the SDGs, and it does not mean full privatisation, from source to tap, as we can provide simple building blocks. But there is a harsh reality, which is that to attract private finance, both public and private utilities or a particular project, have to provide a return on the investment. The recipient of the finance has to be able to reassure the investor about the frequency and amount of future cash flows and reduce risks. In the developing world, but also elsewhere, the water sector is still too often unable to overcome this problem and private capital has been invested into other sectors.

 

Other attendees at the recent conferences have already describe the components of a well-functioning utility, which we entirely support. AquaFed’s focus is also on policy and the enabling environment needed to attract commercial resources. We have been making the case for a number of years for policy decisions that could support the development of well-performing utilities and the sector overall. These are ideas that are also shared by a wide range of stakeholders. But clearly, we still have work to do because these policies are still not being implemented!

 

So let’s remind ourselves about governance – possibly one of the most talked about subjects in the sector, yet where so little action is actually taken to make improvements.  For private investors, good governance is essential.

 

Good governance starts by having an over-arching long term strategy and plan, for a 25-year horizon for example. Some countries have these, but they can be vague and non-committal. The reality of election cycles and increasing unpredictability of climate change impacts, population growth, and economic performance makes long horizons difficult. But if governments and opposition parties can agree and lock down, perhaps by statute, water and sanitation priorities for the next 10 years (therefore overriding political change at election), this would give investors at least some feeling of medium-term stability. Minimising political risk is very important to investors and utilities – political risk and instability has so often contributed to lack of investment and also service failures.

 

Water users and citizens must be given clear information on a national water and sanitation investment programme, with how much is to be raised through taxes, tariffs and transfers and how much is to be spent and on what. A policy of having full financial transparency is essential. As many have commented, how can we get users to care about water and make changes to the way they use water if they do not know its value?

 

Following from this, water and sanitation need an appropriate home within the government machine. The particular name and position of department varies, but what is important is that water and sanitation are seen as integral to long-term planning, whether urban and rural infrastructure planning, or now increasingly so, planning for climate change adaptation and mitigation. It is essential that water and sanitation is approached by governments with a thematic mindset. This requires many things, one is to have a good jockey just as Dr Eberhard suggested, but not just at the utility manager level, but also leading water and sanitation policy and decisions within government.

 

Regulation and efficient regulatory bodies are another critical factor. It is not true o say that investors don’t like regulation. On the contrary, clear and long-term focused regulation gives further stability to the water and sanitation sector. Price regulation is complex and can be approached in very many ways. But there are many examples where private and public utilities’ prices are regulated very effectively by independent price regulators. If done properly, this is another lever to help stabilise the sector, which is good for tariff payers as well as investors because they can better understand what will happen in the next few years.

 

Performance on environmental and water quality outcomes are also essential areas for regulation. Again, investors want to have as much certainty as possible, so clear environmental standards and clarity on how they will be enforced is very important.

 

Finally, transparency of performance. This is a factor that even today the water and sanitation sector falls way short. Transparency can only be a force for good and be beneficial for users and investors. There is a severe lack of standardisation of published performance measures sometimes within one country, let alone a region or continent. Investors have to be able to see how their assets are performing otherwise they will take their money elsewhere.

 

Publicly managed utilities must be prepared to be under the same scrutiny as private operators, whether its issues regarding finances, performance, price, access and acceptability. Ultimately, many of these indicators also reveal whether people’s rights to water and sanitation are being fulfilled – which is something we must never lose sight of.