Strategic Financial Planning (SFP) for water is an approach that aims to place the financing of water infrastructure and services onto a more predictable and sustainable basis. SFP brings planning and financing – which are typically done separately – onto convergent tracks, so that spending ambitions are more compatible with available financial resources. Conversely, financing strategies can be tailored to what is actually needed, which improves the prospects of getting funding. SFPs should be an integral part of planning systems at all levels of water management.
SFP would normally have the following elements:
- Scenarios – (10-20 years or even longer) of investment and service plans for the sub-sector (e.g. water supply and sanitation, irrigation, wastewater), including estimated costs for capital investment and recurrent operation and maintenance (O&M).
- Projections – of feasible sources of finance for both the initial capital investment and the recurrent costs of operating services. These would typically include cost recovery from tariffs and other user charges, subsidies from government budgets (including those originating from external donors), contributions from non-governmental organisations, loans on commercial terms from banks and export credit agencies, private equity, loans on concessional terms from international financing institutions (IFIs) and other sources, etc.
- Comparaisons – The financial requirements implied by the above scenarios would be compared with projections of finance likely to be available. In the event of a financing gap appearing, a process of iteration would take place involving revisions to both the spending and financing scenarios. Spending plans would be adjusted to make them realistic (e.g. less ambitious targets, more cost-effective options, demand management programmes, more attenuated implementation periods), while more rigorous assumptions would be made about financing sources (higher tariffs, greater engagement with donors and IFIs, use of financial engineering and innovative financing sources, etc.).
- Iteration – would continue through several rounds until the spending scenarios were compatible with feasible sources of finance.
A number of countries have practised the elements of SFP in their own way (e.g. Senegal, Mozambique), but some (e.g. Kyrgyzstan, Armenia, Moldova, Lesotho, Egypt) have undertaken SFP more systematically, involving stakeholder dialogues and modelling exercises to underpin the processes described above.
The OECD has sponsored the production of modelling system FEASIBLE. The FEASIBLE is a computerised tool for developing spending and financing scenarios, enabling iteration of the two to produce a compatible outcome (for detailed discussion, see EUWI, 2007 and EUWI/GWP, 2007).
Experience so far shows that the following positive outcomes can be expected from SFP:
- A more widely shared understanding of the issues amongst stakeholders, leading to greater consensus on realistic spending targets;
- A more objective and realistic debate on tariff policies;
- Greater dialogue between the water community and the Ministry of Finance;
- Outcomes from SFP can be incorporated into mainstream governmental budgetary and planning frameworks, such as the annual Budget, the Medium Term Expenditure Framework and Poverty Reduction Strategies;
The following lessons for policymakers have also emerged, if the full benefits of SFP are to be realised:
- SFP must be championed at an influential level, and fully owned by the government, in order to give it the necessary credibility and impetus.
- Time and care should be taken to engage stakeholders in dialogues about water investment and spending ambitions, and about the trade-offs involved in interactions between spending and financing scenarios.
- If the process is supported by the use of formal modelling, this should be credible and endorsed by stakeholders, including the Ministry of Finance.