1. 5th World Water Forum Istanbul, March 16 – 22, 2009
Technical Experts Panel on the Impact of the Financial Crisis on the Water Sector
Jamal Saghir
Director
Energy, Transport and Water
The World Bank
Istanbul
March 17, 2009
Mr General Secretary, Ministers and distinguished panelists, dear participants. My name is Jamal Saghir and I am Director of the Energy, Transport and Water department in the Sustainable Development Vice Presidency of the World Bank. I would like to welcome you all, in the name of the organizers of this 5th World Water Forum, in this technical experts’ panel on the impact of the financial crisis on the water sector.
For many months, the various institutions working as part of the theme 5 consortium – led by the World Bank, OECD, EIB and WSP - have been working hard to set up a comprehensive program on finance. The water sector is notoriously under-funded, finance is an important topic, and a total of 12 sessions which will be offered in the next 4 days, covering many aspects of the problem. This special session was added to this program only a few weeks ago, at the request of the Forum Secretariat and the World Water Council. While many of the financial issues facing the water sector have been there for a long time, the current global financial crisis obviously present new and very serious challenges. We felt it was essential to address these in this Forum.
Let me be very clear: the crisis is now on everybody’s mind, and I don’t want to create false expectations. Me and my colleagues in this session are not going to bring you definite answers. We do not have them. What we will try to do is analyze the current situation from our various perspectives, and pinpoint key issues. My presentation will focus on the impact of the financial crisis on developing countries, based on the World Bank’s experience. It will be followed by a second presentation by my colleague Jose Frade, Deputy Director at the European Investment Bank, who will discuss the impact of the crisis on the water sector in EU countries.
This will be followed by a panel discussion, and a number of distinguished panelists will be with us this morning. I would like to recognize first Mr. Angel Gurria, Secretary General of the OECD. I am very grateful that he is honoring us with his presence this morning. The OECD has been very much involved in analyzing the development of the financial crisis in the world economy, and has therefore much to share. In addition, Mr Gurria will appear again this afternoon in the high level panel on finance and water, and his presence with us this morning shall ensure that what we discuss is duly passed over to the other panelists this afternoon. In addition to him and Jose Frade, our other distinguished panelists are:
Jose Luis Luege Tamargo, Director General of CONAGUA, the national water agency of Mexico
Jeremias Paul, Under-secretary of Finance of the government of The Philippines
Patrick Cairo, CEO of United Water, Suez Environment branch in the USA
Mevlut Vural, Director General of ISKI, the water utility of Istanbul, and
Gündüz Findikçioglu, Head of Research at the Turkish Development Bank
One last thing I want to add: the financial crisis is a sensitive and difficult topic. Our distinguished panelists have been invited in their quality of technical experts. They come from various countries and institutions, but it is important to highlight that what they will say does not necessarily represent the position or views of their respectives institutions or governments.

2. We are facing a global crisis of an unprecedented nature
A credit crunch with far reaching ripple effects in a globalized economy
A crisis of major proportion: Industrial production down 15%, largest world trade decline in 80 years
This is largely unchartered territory…
Let me start with a very broad overview of the situation we are facing. It is no secret that we are in the middle of a major financial and economic crisis. The world economy has entered into a major downturn caused by is, without doubt, the most dangerous shock in financial markets since the 1930s. What started initially as a credit crunch is now having multiple repercussions all over the world.
This crisis started just a few months ago, and we are all now realizing that it will be of major proportion. This year, the global economy is likely to shrink for the first time since World War Two. World Bank forecasts suggest that global industrial production by the middle of 2009 could be as much as 15 percent lower than levels in World trade might record in 2009 its largest decline in 80 years. This is truly unprecedented.
True: this is not the first time that the world faces a recession, but this one is taking place in a new, highly globalized world. The world has changed a lot during the last decade, and globalization has profoundly modified the world economic landscape. The multiple interactions that sustain the global economies are extremely complex, and not always fully understood. While there are lessons to be drawn from the past, we have no real blue print on how to deal with this specific crisis. As the very foundations of the global economy are being shaken through banks and financial markets, governments all over the world are looking for solutions, but the truth is that we are all in unchartered territories.

3. Developing countries will be seriously affected
Although the crisis was originated in rich countries, the effect in developing countries will be profound
Large public debt issuances by rich countries for stimulus packages are crowding out developing countries borrowers – both public and private
A distinctive feature of the current global downturn is that this is a crisis emanating from advanced economies, rather than from bad policies in developing countries. During the last decade, many developing countries have made remarkable efforts to implement sound fiscal and economic policies. The reward for them was several years of unprecedented growth and stability. This was not just in the most advanced Middle Income countries, but also in many poor countries of Sub-Saharan Africa.
Unfortunately, while developing countries are not responsible for this crisis, they will be seriously affected. This same economic globalization which had benefited them in the past is now going to hurt them.
Why? Because rich countries are now issuing large amounts of public debt to finance stimulus packages and the rescue of their financial systems. This is crowding out many developing country borrowers, both private and public, at a time when the risk aversion of lenders has dramatically increased. As you shall see in my next slide, the spread on emerging markets have widened dramatically over just a few months. As a consequence, institutions that have provided financial intermediation for developing country clients are virtually disappearing. It is like if all the work of the last decade to develop sound emerging markets was being anihilated by the wave generated by this crisis…

4. Financial crisis in emerging markets: spreads increasing sharply
As I just said, the financial crisis has severely impacted emerging markets’ access to foreign capital. Risk spreads are widening and credit standards are tightening. Developing countries that can still access financial markets face higher borrowing costs, and lower capital flows, leading to weaker investment and slower growth in the future.
The graph presented here show you the evolution of the spread between the emerging market bond index and US treasury bills over the last 2 years. This spread represents the “risk premium” which financial markets are requesting to lend in emerging markets – a proxy of their “risk perception” and appetite for lending. As you can see, it stood at around 200 basis points – or just 2 percents – in 2006 and henceforth. But starting in last October, its jumped brutally to 900 basis points, and is now hoovering around 700 basis points. This means emerging markets borrowers are now paying on average 5 percent more on their debt than a few months ago.
And this is for those borrowers which are still solvent that is, those who can still find somebody willing to lend them money. Developing countries that can still access financial markets face higher borrowing costs, and lower capital flows, leading to weaker investment and slower growth in the future. Overall, risk spreads are widening and credit standards are tightening. Many developing countries are not even in this situation: the financial markets are basically shut for them.
Source : World Bank, P= projected

5. The financial crisis is now becoming an economic crisis
Economic Growth of Developing Countries %
What are the consequences of this credit crunch? Everything is linked, and the financial crisis is now becoming an economic crisis. Global trade is projected to contract this year for the first time since Trade finance, which underpins around 90 percent of world trade has been disrupted and there is likely to be a dramatic reduction in developing country export growth as a result of the recession in the advanced economies. A fall in remittances to developing countries has already begun and primary commodity prices have plunged at the prospect of falling world demand.
This means lower economic growth and higher unemployment. The approaching advanced world recession will likely generate a sharp slowdown in growth in developing countries. We already know that 94 out of 116 developing countries have experienced a slowdown in economic growth. Of these countries, 43 have high levels of poverty. World Bank projections are for developing country growth to tumble to 4.5 percent in 2009, down from 7.9 percent in 2007.
Obviously, this affects all countries in the world, developed and developing countries. But developing countries are facing huge poverty challenges, and need economic growth to support their burgeoning populations. Tens of millions of people are being pushed into poverty, unless something is done.
Source: ILO, Trends Econometric Models, December 2008
Source: World Bank

6. An increased dependence on ODA
The World Bank has been witnessing an increase in funding requests from the most advanced MICs: not a good news!
For many developing countries, IFIs are becoming the main source of funding
Will rich country maintain ODA flows in a time of budget crisis?
The latest figures on the impact of the credit crunch, suggest that developing countries will face a financing shortfall of $ billion this year, as private sector creditors shun emerging markets. This money is needed to keep essential investments (such as in infrastructure) going, and to finance social programs to mitigate the impact of the recession. Unfortunately, only a quarter of developing countries are estimated to be able to fund their needs with their current resources. International Financial Institutions (IFIs) and donors are needed more than ever.
The World Bank has witnessed a sharp rise in recent months in the requests for financing from the most advanced middle income countries. These are countries which had gradually “graduated” from the Bank, meaning that they had made sufficient progresses to be able to go directly to the international financial markets. They did not need us any more. That they are coming back to us may give us some business, but frankly this is not good news!
At the same time, many of the world’s poorest countries are becoming ever more dependent on development assistance as their exports and fiscal revenues decline. Unfortunately, even before the crisis, donors were already behind by around $39 billion on their commitments to increase aid made at the Gleneagles Summit in There is now a serious concern that aid flows may become more volatile, as some countries may cut their aid budgets, at a time when they need to fund their own enormous financial rescue packages. At least for this year, what will happen to aid flows is still unclear, and several countries have actually reaffirmed their aid commitments. This is a good thing.
Let’s be frank: the consequence of cuts in aid flows would not be just negative, they would be catastrophic! We don’t just need to maintain ODA flows: we need to increase them. International financial institutions cannot by themselves currently cover the shortfall -- that includes public and private debt and trade deficits. The solution will require putting together governments, multilateral institutions, and the private sector.

7. Food, Water, Energy, Finance, and Climate: The Perfect Storm?
FOOD CRISIS
CLIMATE CHANGE
MORE POVERTY
LOWER GROWTH
Water Crisis
Colleagues
As Indicated earlier, The various challenges and crises we are facing are interconnected.
High fuel costs add to rising farming costs and falling food supplies. Climate change causes changes in weather patterns leading to droughts that are part of the food crisis.
The world is interconnected. For instance, slumping demand in rich countries have threatened the jobs of workers in developing countries..
The combination of the food crisis, the energy challenge, the financial crisis, and climate change is the perfect storm for developing countries. We look forward to an era of lower growth and increased poverty. The international community should unite to address these issues, but can probably relieve only part of the pain.
Unless we take action, water will be the next global crisis, emerging from the shadow of climate change and today’s financial and economic crises.
We are on a dangerous path. Water itself is at risk because we tend still to overuse it. Water efficiency practices are still limited in agriculture and industry, which represent 90 percent of total fresh water use. Climate change is making water supplies more unpredictable, with serious consequences for agriculture. People and fresh water are often not in the same place—the Amazon has 15 percent of the earth’s fresh water, yet only 1 percent of its population.
ENERGY CRISIS
FINANCIAL CRISIS

8. What will be the specific impact(s) on the water sector?
What we have just presented is a very broad overview of the crisis. Obviously much more could be said, it is unfortunately a bleak picture…
What interest us here is the specific impact on the water sector. As I mentioned in my first slide, it is probably to early to say. Yet, the water sector is obviously a major player. It is an asset-intensive sector, requiring massive amounts of investment. It has a direct link with poverty. And in many countries, the water sector before the crisis was already “weak”, with low level of access and service quality, and being far from financial sustainability.
I do not want to drag you into all details, and so will limit myself in providing a framework for our panel discussion. I would like to outline two major elements in the potential financial impact on the water sector. The first one is related to the flow of investments in the water sector – which is already insufficient. The second one is related to the impact on the financial viability of water services providers – which also left much to be desired.

9. The water sector is underfunded… and this could become worse
Public funding for infrastructure is expected to be constrained in many countries
The water sector has not a good track record of advocating its case with finance ministers
This financial crisis could not come at a worse time, because the water sector is already hugely underfunded, all around the world. In developing countries, massive investments are needed in order to provide access to basic water and sanitation services to fast growing population. All over the world, massive investments are also needed to protect water resources in the face of increasing environmental contamination. In many countries, water infrastructure is deteriorated, and massive amounts are, again, needed for rehabilitation. In irrigation infrastructure, large investments are also needed to cope with the food crisis, and foster a better livelihood for small farmers. And finally, climate change will require massive investments in water infrastructure, in order to adapt to changing rainfall and temperature patterns.
The problem is that, in a time of financial crisis, money is scarce, and so public funding for infrastructure projects worldwide is expected to be constrained. Currently, more than three quarters of infrastructure spending in developing countries, and closer to 90 percent in many IDA countries, is financed by the public sector. As the global crisis unfolds, budgets are shrinking as fiscal receipts diminish and spending on social safety nets increase. At the same time, many governments are finding it difficult, if not impossible to continue accessing finance in the private financial markets, as they had been able to do in recent years. This is shown in this graph, with already a sharp reduction in governments borrowing (both to banks and through bonds issuances) between 2007 and 2008.
Unfortunately, the water sector does not have a good track record of convincing finance ministers that they are worthy recipients of public money. Even though the social, economic and environmental benefits of investing in water are huge, we – and by we I mean all stakeholders, of which we have a good representation in this room today – are just not good at advocating for our sector. How are we going to fare, at a time of budget squeeze, with less money around and big pressures to spend on safety net programs and other sectors?
2007
2008

10. The water sector is not sufficiently present in stimulus packages
Infrastructure
Green Infrastructure
Other Measures
Maybe what will happen is that the overall investment in the water sector will drop. That would be catastrophic. But we should not be fatalistic. Crises are time of challenges, but also of opportunities. This World Water Forum could not come at a better time, because it provides us with a unique opportunity to raise the profile of our sector, and do a better job at advocacy.
As you all know, many countries around the world are busy preparing massive economic stimulus packages. The share of infrastructure spending – and of the water sector - in announced fiscal stimulus packages varies substantially across countries. So far announced infrastructure spending for 2009 represents on average 64 percent of the total stimulus in emerging market economies and 22 percent of the total stimulus in high income economies. We do not have the specific proportion for water investments, but what we know is that water is not featured prominently in most cases. If we take the figures for “green” infrastructure which includes water and sanitation but also others such as renewable energies, only in the EU, China and South Korea are the proportions significant.
We need to advocate for a better share of water investments in the stimulus packages being developed around the world. Water investments means a lot of job creation, and has a direct impact on poverty reduction. In many places, they are badly needed for environmental protection. What each country is doing, or planning to do, is very varied.
100%
75%
50%
25% 0%
11.6
18.7
2.6
France
51.4
12.0 Germany
100.4
1.0
Italy
1.3
11.2
1.4
Spain
1.1
26.5
2.1 UK
210
8.0
35.5 EU
464
2.2
9.5
Japan
11.8
26.3
South
Korea
685.1
0.9
14.0
USA
143.7
239.9
197.6
China
4.8
2.0
India

11. What about the private sector?
The situation with private investment flows is even worse.
Risk of new projects being cancelled, and current projects coming under stress
Water was never a significant portion of private infrastructure investment, but amount raised via BOTs (for bulk facilities in MICs) were still significant
An increasing role for improving efficiency?
I have just discussed about public investment levels, but what about the private sector? Liquidity for private infrastructure investments is drying up, even though in recent months new private activity has continued to take place in developing countries with projects being tendered and brought to financial closure. The rate of project closure for infrastructure as a whole from August to December 2008 was just 15% lower than in the same period in 2007, but many projects that reached financial closure in the last six months were at an advanced stage of raising finance. This is unlikely to continue.The market fundamentals for emerging markets are undergoing a major change with higher risk aversion, decreased availability of funding, rise in cost of borrowing, shorter maturities, and depreciation of currencies. The problem is not just that we expect a drop in the number of new projects being awarded. Existing private infrastructure projects in many developing countries are already facing liquidity constraints, and many could come under stress.
Now, you all know that water and sewerage was always the “poor orphan” of private infrastructure, representing just a few percents of the total private infrastructure investment flows. Yet, the amount of private investment collected through BOTs projects for bulk treatment facilities in middle income countries is not unsignificant, representing more than one billion US dollars a year. Based on the data collected by the World Bank through the PPI database, the same number of private water projects reached closure in late 2008 as in 2007 (28 projects), but associated investment declined from US$1.4 billion to US$850 million.
Even at their current low level, a reduction of private investment flows to water and wastewater BOT projects would not be good news. Are the private investors now withdrawing even more from the water sector? We also needs to look more at how the private sector can contribute, not through direct private investment but by helping water utilities to improve their efficiency, and make better use of the money tey have. I will adress that again in a later slide.

12. The financial viability of water utilities could be seriously affected
What will be the impact of the recession on the capacity/willingness of populations to pay their water bills?
The financial viability of water utilities would be directly impacted by
Increase in rate of non-payment
Delays in tariff adjustments (inflation)
The second major impact we expect is on water utilities. By this, I mean mostly water and sanitation services providers – urban utilities and rural schemes – but my point is equally applicable to irrigation agencies providing water to farmers.
A global recession will obviously hit many households. Understandably, many governments will do their best to limit the negative impact on the purchasing power of families. While the water bill usually represent only a small portion of households spending, we all know that in many countries, many people do not “value” water. There is either a culture of non payment of water bills, and/or a widespread perception that water should be inexpensive – even though the cost of providing water and sanitation services is significant and has to be paid for…
The degradation of the economic situation could affect the financial situation of water utilities in two ways. First, there might be an increase in the rate of bills collection, because of the raise in poverty level. This could be the case especially for Middle Income Countries with high rate of access to piped water services, where many poor families are connected to the network. Second, the bad economic situation might tempt governments to delay necessary tariffs adjustments for inflation, reducing the amounts of revenues of the utility.

13. Degradation of financial situation would be major set back for reforms
Increased poverty will reduce capacity to pay of households: collection rates and revenues will come under pressure
Return of “vicious circle” of poor service, low willingness to pay, low investment…
Upward pressure on operating costs (energy,…)
Could set us back a decade of reforming services providers to foster long term financial sustainability
This would have far reaching consequences for the financial viability of the water sector in many countries. Data from the IBNet database, maintained by the World Bank and which collect technical and financial indicators from about 1,500 water utilities around the world, already suggest that the trend before the crisis was not good. The first graph on the left shows that operating costs were going up significantly on average in recent years, at least partly in responde to raising energy costs. And most worryingly, the second graph on the right shows that the average rate of cost recovery through tariffs was stable in recent years at around 0.9, but went down for the first time in 2007.
The big risk here is for many water utilities to go back to the well known “vicious” circle of low revenues, poor assets maintenance, low quality of services, low willingness to pay of customers, and so forth… Once habits of non payment are established, we know by experience that it is very difficult to change the behavior of the populations concerned. And once tariffs levels have been allowed to go down, we also know that it is very hard to reverse the trend, as sharp tariffs increases are not easily accepted by the population. This is a big warning: if we allow the financial situation of water utilities to deteriorate any further, the water sector in many countries could be set back to where it was a decade ago. All the benefits of the many efforts made in many countries in recent years would be lost.

14. The crisis call for a renewed emphasis on efficiency
Better efficiency in both investment and operation: we need to do more with the same (or less…)
This is the best way to make our case with finance ministers
Private sector has a role to play, not as direct financiers, but to help improve operational efficiency (leases and MCs)
But again, like when I was discussing the issue of investment flow, highlighting the fact that this was a time of opportunity for advocating for major water spending, this is also a time of opportunity for pushing further reforms at water utilities. With less money around, this is a time to push for even more emphasis on efficiency. Efficiency in the use of scarce funds for investments, and efficiency in the use of also scarce funds for operation and maintenance.
We all know that many water utilities, especially in the developing world, are not efficiently operated. This means enormous wastage of water, and money. A recent study by the World Bank indicates that about 16 billions of m3 are lost every years in developing countries through network leakages. And another 20 billions of m3 are delivered every year but not built. Before asking for more money, we all need to realize that we need to make a better job with what we have. We can not expect finance ministers, or private financiers, to take us seriously when we ask for more funds, if we are not already managing what we have in an efficient manner.
This is where the private sector has a major role to play. I already mentioned that private financial flows in water infrastructure are marginal. Back in the 1990s, Public-Private Partnerships for water utilities were being developed with a focus on raising direct private investment, but this proved a wrong focus, and led to several major disappointments. A recent study by the World Bank is showing that the major contributions of private operators is not through private money, but through the improvements they bring to operational efficiency and service quality, which in turn help improve the financial situation and creditworthiness of water utilities. At a time when money is scarce, efficient private operators involved through leases/affermages or management contracts could be very important partners to help water utilities around the world survive the crisis.

15. Thank you
Thank you for your attention. I guess it is clear that dealing with this crisis will require an increased collaboration between all stakeholders, and especially between donors and IFIs. I will now pass the floor to my colleague Jose Frade from EIB, to present their experience from European countries.