The Global Financial and Economic Crisis and the
The Global Financial and Economic Crisis and the Water Sector A policy report for Sida December, 2009 Jim Winpenny, Andy Bullock, Jakob Granit, Rebecca Löfgren
Key messages 1. Financial crisis and food crisis set back growth and poverty gains § § Global financial crisis developed since 2007 Overlapped with the earlier food price crisis Together with fluctuating energy costs, have compounded the economic problems of many developing countries Fall in economic growth in Africa from 5. 7% in 2008 to 2. 8% in 2009, affecting most severely those with lesser economic diversification and greatest dependence on external finance.
Key messages 2. Persistent underinvestment in water A fundamental crisis in many countries that has been made even worse by recent events Basic problem is underinvestment in three key aspects of water: 1) Water services, both for basic needs and productive services necessary for economic growth 2) Water resource management and development and 3) Governance functions (such as reform, regulation, pollution control, data collection and monitoring)
Key messages 3. Deteriorating and deficient infrastructure have stalled MDG progress Cumulative results are § deterioration in infrastructure providing water services to households and farmers § lack of infrastructure to cope with the succession of droughts and flooding (worsened by climate change) Headline figures are so serious that they bear repetition: § More than a billion people suffer from under-nourishment § Nearly 1. 1 billion people lack access to safe drinking water. Mortality of almost 4, 500 children per day § Over 2 billion people currently without proper sanitation
Key messages 4. Financial vulnerability of water services Water services are particularly vulnerable in the current financial climate The three basic sources of revenue (the “ 3 Ts”) § tariffs § taxes § external transfers are all likely to suffer This is affecting access to repayable sources of funds to the sector such as commercial loans, bonds and private equity
Key messages 5. Seven impacts of the crisis Developing countries affected through § financial § trade § commodity prices § foreign direct investment § remittances § aid disbursements, and § exchange rate movements seven principal impacts: Remittances are a major financial inflow, far outweighing foreign direct investment and aid in South Asia. Remittances fall by 5– 8% in 2009 after 15– 20% growth p. a. from 2005 to 2007 Crisis reducing 2009 remittance flows to sub-Saharan Africa by $US 1 -2 bn Net impact varies. Some countries may gain. Most African countries will lose Situation still evolving Permanent impacts unlikely to be known for some time
Key messages 6. Long-term problems aggravated by economic crises § § Evidence from previous financial crises Long term repercussions on growth and poverty reduction East Asia (1997) reduced investment in infrastructure will be reduced. High social impact (Cambodia, Lao PR) Aggravation of water sector’s difficulties
Key messages 7. Deficient financial flows in Africa’s annual financing requirements for water updated to US$ 50 bn p. a. (drinking water and sanitation, wastewater, desalination, agricultural water management, hydropower, multipurpose storage) Current finance flows are deficient in many respects: § Overall amounts inadequate (to rates needed for growth and development) § Geographically imbalanced § Insufficient to fund capital expansion and recurrent costs § Low financial efficiency (eg cost recovery) Africa Water Vision targets Drinking Water access 75% by 2015 95% access by 2025 Sanitation access 70% by 2015 95% by 2025 Irrigation 100% increase in irrigated area by 2025 HEP potential 10% by 2015 25% by 2025
From analysis to response These findings highlight the need for a purposeful and proportionate response to the financial needs of global water … … which responds to problems caused by the current international financial and economic crisis … but which goes beyond this to address the chronic under-financing of the water sector § Increased lending from existing sources (IFIs and DFIs) and newly emerging partners Opportunity to trigger reforms (innovation, new financing) § Policy response opportunities available to Sida (menu of actions) §
Options for policy response § § § Based on the evidence presented from analysis Authors’ assessment of options for policy responses by Sida Meeting short and longer term water challenges Informed by Sida’s strategic directions, capacity and experience, its range of instruments and partnerships Taking advantage of Sida’s flexibility and willingness to support innovation, and influence within the international community Two internal objectives of the policy response are a) to sustain, and possibly increase, Sida’s disbursements for water: under shift to low-income countries and fragile states, take steps to achieve (possibly exceed) DAC average 8% share to water b) to implement new operational modalities at Sida: strengthen decentralised, multi-disciplinary country teams, effective policy advice and support, benefits from Sida’s regional and global programmes
Options for policy response Policy responses are set out in two general areas, namely: Countering the impacts of the economic crisis Through adjustments in the level and form of support Policy responses designed for implementation and disbursement as soon as possible (though some measures would take time to take effect) Actions would sustain Sida’s disbursements for water Levers of change Focusing on strategic areas where grant financing can make a difference in reversing the poor progress in the long-term financing of water in all its uses Actions lead to disbursements in the medium term (1 -3 years) Feasible target for Sida to give water a 10% share of total disbursements from 2012 onwards To be sustained until further review (considering its poverty targeted focus and contribution to overall sustainable economic growth)
Countering impacts of the economic and food crises a) National economic stimulus packages b) Food price crisis response c) Mobilising NGOs and civil society for local operations d) Risk sharing instruments e) Blending grant and loan finance f) Urgent housekeeping and efficiency measures to strengthen finances of water services
Countering impacts of the economic and food crises Development assistance channels Response Options Bilateral – Country Multilateral a) Reinforcing national economic stimulus packages § National economic stimulus packages in priority countries § World Bank § IFC Crisis Response b) Food price crisis response § National Programs for Food Security § Af. DB, World Bank Food Price Crisis Responses § IFAD c) Mobilising NGOs and civil society for local operations Bilateral Stockholm § NGO/ Civil Society Forum § Co-financing, challenge funds, output-based aid
Countering impacts of the economic and food crises Development assistance channels Response Options Bilateral Stockholm d) Risk sharing instruments Bilateral – Country Multilateral § Swedfund § MIGA e) Blending grant and loan finance § Review existing platforms § Leveraging with project/programme support § § EIB EUNIF EUAITF Guarant. Co f) Urgent housekeeping and efficiency measures § Utility twinning § PPP eg Performance Based Service Contracting § Water Operators Partnership
Levers of change g) Supporting African regional organizations and promoting regional integration h) Building the pipeline of ‘bankable’ projects i) Co-financing with multilateral agencies j) Leveraging commercial and private finance k) Pioneering Strategic Financial Planning l) Transition of emergency water support to sustainable water management in fragile States
Levers of Change Development assistance channels Response Options Bilateral Stockholm Bilateral – Country Multilateral g) Supporting African regional organizations and promoting regional integration § AMCOW dialogue § ‘Beyond the basin’ § Regional finance § Transboundary water initiatives § IFIs, DFIs, & bilaterals on pipeline investments/capacity § Infrastructure of regional importance in existing transboundary settings § New opportunities in e. g. L. Tanganyika, Nile, Pungwe basins § Engage with IFIs, DFIs, and bilateral agencies on pipeline of investments and capacity building efforts h) Building the pipeline of ‘bankable’ projects § NGO/Civ. Soc Forum § ICA membership § Afr. Water Facility § Af. DB, WB multi. Donor WPPs § CADDP § Active identification and support to investments “low hanging fruit” § Make trust funds available to IFIs and DFIs to build pipeline of investments
Levers of Change Development assistance channels Response Options Bilateral Stockholm i) Co-financing with multilateral agencies § Swedfund leverage j) Leverage commercial and private finance § Swedfund § PPIAF § ICA Bilateral – Country § Existing framework arrangements eg RWSSI, IFAD, WB or Af. DB Irrigation Business Plans § Stronger enabling environment §Swedfund k) Strategic Financial Planning l) Transition of emergency support to sustainable water management in Fragile States Multilateral § Engage more with PPIAF, Guarant. Co § Af. DB Country Strategic Overviews § National food security programs § Af. DB Fragile States Facility
Implementing policy change at Sida for water outcomes i) Identify crisis response options urgently through rapid assessments ii) Comprehensive update of Sida’s water policy and financial commitments iii) Strengthening and supporting Sida’s internal services and country teams iv) Forging global partnerships with IFIs, DFIs and bilateral ODA alliances for effective coordination and delivery v) Maximizing input from Sweden’s human resource base to support implementation in several sectors vi) Leading the global water agenda for real development outcomes through applied research and innovation
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