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A3.1 Investment policies
Characteristics
Through economic policies and public investment, governments may advertently or inadvertently have a significant effect on the water sector. IWRM encourages policy makers to be aware of all these potential effects and to include in the development of investment policies the role and potential impact of every level of investor: public (state, municipal), private sector, communities and individuals. Governments have a responsibility for investment policies that affect the water sector at three levels:
- Macroeconomic policies: Monetary, fiscal and trade policies all affect the pace and type of development of the economy in general and the water sector specifically. Thus, devaluation may lead to a boom in the export of irrigated crops; tax incentives might result in the growth of water-intensive industries, and trade liberalisation may cause changes in the balance of products leading to changes in water use;
- Public investment: investment in many sectors may affect the demand for water, including investment in housing, new town and industry development, transport, power and energy, agriculture and tourism;
- Public and private investment in the water sector itself: the water sector is capital-intensive with potentially very large financial needs for irrigation, water supply, wastewater treatment, and flood and environmental protection.
A national water investment strategy based on IWRM will be demand-led, and identify sources of funding for an affordable, realistic programme covering all aspects of water resource management, including conservation and wastewater treatment.
Lessons learned
Pre-conditions for good investment policies include:
- Medium-term (3-5 year) macroeconomic projections;
- A central unit that co-ordinates and reviews all policies (e.g. Prime Minister's Office or Central Planning Board. See A1);
- A public investment programme, broken down by economic sector;
- A project appraisal capability (see C2.8);
- Data and information on water needs and the intensity of water use in different sectors (see C1);
- Institutions have the capacity to implement the scope and volume of the programme effectively.
A workable investment strategy for the water sector includes:
- Estimates of investment requirements;
- Allocation of responsibilities for fundraising (e.g. among central or municipal government, communities, autonomous agencies, private companies);
- Identification of sources of grants and concessional loans (e.g. bilateral and multi-lateral donors such as the World Bank);
- Definition of the role of the private sector, and financial targets for concessions, joint ventures, etc;
- Assessment of the scope for alternative approaches, such as demand management (C3) or economic instruments (see C7) to reduce capital needs;
- Assessment of the scope for investment at the community/household level;
- Charging schemes for water and wastewater discharges (see economic instruments, C7);
- Clear assessment of the roles of public and private sectors and associated regulatory instruments.
Fund-raising can be delegated by central government to other stakeholders. This depends on factors such as whether the Treasury can raise finance on better terms than private investors, whether municipalities have the capacity to raise their own funds without central government guarantee, and the extent to which private firms will bring their own equity or loan funds to a project.
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