Strategic Financial Planning

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Oct 28, 2013 (3 years and 9 months ago)

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Strategic Financial Planning

Planification financière stratégique

Alan Hall

Chair of the EUWI

Finance Working Group

Presented by Madigu Godfrey

Strathmore University

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


Realism: The 3 T’s


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


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


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


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


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

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

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

Results: Total Funding Needs

Includes
O&M
Costs

9. Lesotho


10. Lesotho


Water Sector Funding Sources

Scenario 3

11. Lesotho


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


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


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


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


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


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


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


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