1. Strategic Financial Planning Planification financière stratégique Alan Hall Chair of the EUWI Finance Working Group Presented by Madigu Godfrey Strathmore University

2. Finance is a scarce resource Good Governance is essential to reduce risk and attract finance. Sound institutions and competent staff necessary to make effective use of finance. Information critical for good decision-making and design. Sound project preparation essential for investment: support is needed for both soft and hard interventions. 1. Background

3. Realism: The 3 Ts There are only three sources of finance: Taxes, Tariffs, Transfers Government budgets are finite depending on taxes, tariffs and transfers. Utilities only have income from tariffs or budget allocations (tax). ODA transfers are from tax paid by workers in donor countries - very limited and have to be used strategically. Loans have to be paid back from taxes or tariffs. Taxes and tariffs take many forms and are collected in many ways. 2. Background

4. Governments face stark choices 1.Renege on commitments. 2.Access more ODA (aid has increased, but it is limited and unpredictable). 3.Raise more tax (and/or divert it from other uses). 4.Increase tariffs for water services. 5.Attract private investment (and thus raise tariffs). 3. Background

5. The myth of low tariffs low tariffs help the poor who cannot afford to pay and are unwilling to pay. Low tariffs commit the poor to pay more for a worse service, whilst wealthier urban dwellers are subsidised. It results in a lack of finance for maintaining assets and improving services and keeps the sector backward. The least worst solution for extending services is to increase the pot of finance through higher tariffs. 4. Background

6. Strategic Financial Planning 1.Analyses needs and gaps before trying to access funds and decide on the sources. 2.Provides Facts – essential to convince the Ministry of Finance. 3.Provides a reality check - demonstrate there is no magic bullet. 4.Country SFP studies supported by OECD and bilateral donors in Armenia, Georgia, Moldova, Kyrgyz Republic. 5.Lesotho case study supported by EUWI-FWG. 5. Background

7. Case study on SFP Develop and maintain a strategic financial plan for water supply and sanitation services Build capacity through a learning-by-doing process Inform the Sector Wide Approach for water through policy dialogue among government departments and with other stakeholders Bring information and data from water and sanitation services (urban/ rural/ bulk water) together in one consistent format and establish a baseline 7 6. Lesotho

8. Elements of the study Intensive data collection and analysis Take account of economic policies, plans and government aspirations Financing needs analysed according to four scenarios: 1.Business as usual 2.High Growth with Urban and Industrial Focus 3.High Growth with Rural Development Focus 4.Low Growth Structured methodology used to analyse information based on the OECD Feasible methodology Household affordability a key input to get realistic figures 7. Lesotho

9. Supply Planning Methodology 9 Macro-economic forecast Existing Facilities and Situation Targets Level year Rules governing: Public transfers User charges Private sector finance Sources of Finance: User Charges Public budgets Private fin. Inst. Donors and IFIs Expenditure forecast Investment expenditure O&M expenditure Project available finance for Investment expenditure Recurring expenditure Capacity Building etc Financing Gap Change Targets Rules Finance Sources Demand Change Prices Production/ Income Public Revenues 8. Lesotho

10. Results: Total Funding Needs Includes O&M Costs 9. Lesotho

11. 10. Lesotho

12. Water Sector Funding Sources Scenario 3 11. Lesotho

13. SFP Outcomes Formed the basis of engagement with Finance Ministry. Objective discussion of tariff policy. Analytical approach showed stark trade-off between reality and policy credibility – in a transparent way. Results used to identify priorities and embedded into the budget and Medium Term Expenditure Framework. Provided a platform for aid effectiveness and dialogue with donors. Facilitated improvements in the M&E systems and cooperation between the Bureau of Statistics and water sector Institutions. 12. Outcomes

14. Constraints 1.Data collection and analysis problematic. 2.Institutional anchorage of the SFP process and planning tools – changes in staffing make this fragile. 3.A project approach is good for initial development of planning tools and capacity building but not for the long term. 4.Follow-up support is necessary to ensure sustainability of the achievements. 13. Lessons

15. Lessons 1.Provides a structured and comprehensive approach – replaces the usual ad hoc approach 2.SFP structured according to the sub-sector sub-divisions used in the budgeting process 3.Flexible tool that allows for re-design/additions and updating according to the developments in the sector 4.Must be owned by the country. There is no one size fits all. 5.Provides transparency therefore good for negotiations. 14. Lessons

16. Overcoming Financing Obstacles SFP provides reality check – and helps set realistic aims. Help Governments allocate scarce public budgets more strategically for public goods and facilitate private investment. SFP part of wider support on financing for water. E.g. – for project preparation (trust funds not presently used for water), – for blending of finance from multiple sources, – For helping countries understand finance and how to access finance from different sources. 15. Observations

17. Strategy issues Whole project costs must be factored in (less 40% are for infrastructure/construction). Subsidies are needed but have to be designed and targeted. Need suite of sources and mechanisms that match purpose. Utilities operating as a business up to a point – but different approach needed to serve the poor – may need to have different agency for the latter. 16. Observations

18. Distractions! Worldwide Economic crisis - access to finance. Investment without revenues - excessive national debt. Right to water (and sanitation) consequences - legal costs, withdrawal of financing? Loss of public support with lack of solutions for the poor. 16. Observations

19. Further thoughts... Sources of finance -social entrepreneurs? Is the problem finance or management? Can water be recycled? What are the issues? Purification, fertiliser systems In general, government may not solve the water issues- government solutions may not be sustainable! – Why did the Marshal Plan work for Europe? 17. Thoughts

20. Thank you EUWI FWG reports: Strategic Financial Planning for water supply and sanitation in Africa (English and French) A Primer for Practitioners and Students in Developing Countries available from: www.euwi.net/wg/finance www.gwpforum.org