INTERVIEW | Xavier Leflaive, Organisation for Economic Cooperation and Development (OECD)
In our APE Interview Series 2019, we meet high-level water experts to discuss the future of water and share perspectives on the upcoming challenges and solutions for truly sustainable water services. This interview is part of a six-part series, all of the interviews are available in Aqua Publica Europea's publication 'The Public Water Services of the Future'
Xavier Leflaive, Principal Administrator (water), at the OECD's Environment Directorate, explains the economic and financial implications for water management looking forward.
1. What are the main needs the water sector will have to address in the next decade in Europe?
The water sector in Europe will face several needs in the coming decades. I would like to highlight 4:
- One is securing access for all. While most city dwellers usually have access to good quality services across Europe, there are still some concerns for selected groups, including migrants, homeless people and communities in remote places. Even if they do not represent large numbers, they need to be addressed. Affordability will need to be factored in, when considering technological and financing models. OECD forthcoming report on how to address the social consequences of water pricing alludes to this issue.
- Another need is to address the backlog of investments in several countries. That backlog derives from insufficient efforts in the operation and maintenance of existing assets. It leads to premature decay of the infrastructure and possibly decreased service quality in the coming years/decades. In several countries, the need to address the significant backlog is likely to require a change in the financing model: postponed investments will come at a higher cost and general taxation or revenues from tariffs may not be able to cover these costs.
- Another one is to adapt existing services, infrastructures and levels of security to shifting circumstances, including uncertainties about future water availability, quality and demand. On-going discussions at the Roundtable on Financing Water explore how conservative biases in financing mechanisms and institutions can be overcome, so that the benefits of flexible approaches can materialise.
- Finally, service providers need to engage more with water resources management. Utilities can probably do a better work at contributing to wider water policy objectives, such as conservation, or the ecological status of water bodies. It is a call for strengthened stakeholder engagement and reaching solutions in partnership with other sectors, such as agriculture, industry, energy and urban planning. See OECD publication (2015), Water and Cities. Ensuring Sustainable Futures, for a more detailed discussion and concrete illustrations of good international practices.
Note that I do not consider compliance with EU regulation as an additional challenge: more stringent regulation (which is likely) is meant to help countries address their existing or forthcoming challenges. From that perspective, I see regulation as support, not an additional constraint.
2. What are the specific challenges to ensure to ensure sustainable financing of the sector?
On-going collaboration between the OECD and the Directorate General for Environment of the European Commission analyses how financing capacities in EU member states match future investment needs, to comply with the Drinking Water and Urban Wastewater Treatment Directives. The final report is due at the end of the year. One preliminary message is that most EU countries will have to increase the annual level of expenditures for water supply and sanitation by more than 25 %, if they want to comply with both Directives and minimise leakage. Countries face distinctive challenges to cover these needs.
Looking ahead, moving to tariffs that reflect the costs of service provision seems to be the most robust financing option. Such a transition is best accepted if i) utilities can demonstrate the value for money; operational efficiency and engagement with stakeholders are key; and ii) affordability issues are properly addressed. The main message needs to be reiterated: cheap water hurts the poor as it deprives utilities from revenues that are much needed to maintain existing services and extend service coverage. It is more effective to address affordability issues through targeted social measures than through water tariffs. A few countries deserve distinct attention (including Bulgaria and Romania), where more than 10 % of households would face affordability issues if tariffs were to better reflect the cost of service provision.
This does not mean that tariffs should not be reformed in those countries, but reform would require well-thought accompanying measures. Revenue from tariffs should be ring-fenced to cover the costs of service provision (which is not the case in some countries).
Another challenge will be to mobilise additional capital and strengthen the financing systems on which investments rely. One way forward is to deploy public finance (and cohesion funds where they are available) to mobilise additional capital (essentially domestic commercial finance). Our report OECD (2019), Making Blended Finance Work for Water and Sanitation, although it was initiated in a developing country context, proposes a series of practical options.
3. What are the main recommendations – towards both water operators and public institutions – regarding investment and financing approachesto address these challenges?
The recommendations derive from on-going discussions at the Roundtable on Financing Water mentioned above, where water and finance professionals meet:
- One recommendation is to make the best use of existing assets (maintenance, reducing non-revenue water, etc.) Further postponing expenditures to maintain and renew existing assets will only increase future costs. While addressing the existing backlog, authorities (national and local) should value and encourage flexibility, defined as the capacity of a service or technology to adjust to shifting circumstances. This perspective can lead to reassessing the benefit of water resources management (protection of catchments; water use efficiency; land use and forestry that can increase resilience to water-related risks.)
- Another one is to make the best use of existing financing resources. As mentioned above, existing funding can be leveraged to mobilise additional capital and strengthen the financing systems on which investments rely (instead of just funding investments, thus crowding out other sources of finance).
- The capacity of authorities and service providers to demonstrate value for money will be essential to increase the willingness to pay of water users. With this end in view, many countries would benefit from beefing up the way long-term planning is being made and drives investment decisions; the UK and the Netherlands have a lot to share. Investments that deliver tangible benefits to water users now and in the future should be prioritised.
- In that context, the European Commission can help countries transition towards sustainable water management and water supply and sanitation services. Support will be multifaceted, from sharing information and good practices, to urging thorough planning that factors in future uncertainties, setting priorities that benefit communities on the ground. Financial support is essential, but it is not the silver bullet, in particular in countries which struggle to make valuable use of available finance.
4. What are from your perspective the main scenarios regarding the future models of financing of the water sector?
Future financing models are likely to pay much more attention to value for money. Value for money is a requisite to ask water users, tax payers or other financiers to foot the water bill.
- Value for money requires thorough planning, prioritization and coordination across policy areas. I was interested to see that, while Lithuania invested significantly over the last decades to provide access to safe water and improved sanitation, only half of the existing capacity is used (essentially because users are reluctant to pay the connection costs), raising questions about the consistency of policy, institutional and financing frameworks.
- Value for money also requires smart allocation of risks and revenues across a range of financiers, to attract diverse sources of funds (including domestic commercial finance). Europe can pioneer and innovative financing mechanisms, where public finance and external assistance (such as the structural funds) can be used to derisk investment and attract commercial finance. Note that commercial finance does not mean private operation of the service.
- Finally, understanding the value of water management and water services creates opportunities to harness new sources of finance. For instance, while property developers benefit from high value services (including protection against flood risks), they hardly contribute to financing the service. In Casablanca, Morocco, property developers contribute to the cost of storing water upstream to secure access, through land development taxes. The aforementioned publication Water and Cities. Ensuring Sustainable features detailed examples on this regard.
5. Investments and asset management in the water sector are characterized by a long time span, which increases uncertainty of the decision-making process. What can be done to reduce such uncertainty, thus improving the long-term effectiveness of investment decisions?
Obviously, better data can only help, on future water demand and availability, on the performance of networks and existing assets. We can expect further progress in modelling and in benchmarking. But the point is that uncertainties will remain and public authorities and service providers need to make decisions when they do not know. Uncertainty will need to be managed (rather than just reduced). For decisions where there is high confidence in the information available, robust approaches can be used to design systems to function well under a range of future conditions; where there is low confidence, flexible, iterative approaches are more appropriate. This is where the capacity to value flexibility, to adjust to future needs and conditions is critical. I do not think we have the tool and metrics to do this now. This is an avenue for research, for both academics and practitioners. I trust Aqua Publica can play a role here as well.
Find out more
- Read the full publication The Public Water Services of the Future: https://www.aquapublica.eu/article/news/publication-public-water-servic…
- OECD Environment: http://www.oecd.org/environment/