Financing watershed

A CONCEPTUAL FRAMEWORK FOR A NATIONAL POLICY ON FINANCING WATERSHED MANAGEMENT

IN SRI LANKA

Hemesiri Kotagama

Nimal Gunawardena

Hemesiri Kotagama

THEORY TO PRACTICE

Desire for a commodity - demand – – could be achieved in a market -effective demand – – only if the individual is able to pay for it.

Policies, programs, plans, projects, and strategies to achieve sustainable development would be:

– ineffective expressions of desires, – if not backed by mechanisms to finance.

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Integrated Water Resource Management (IWRM)

Biswas, et.al. (2005) noted that the World Summit on Sustainable Development held in 2002 had called for IWRM plans and that:

– “Regrettably, few any of the completed IWRM plans considered how the overarching water governance and management system is to be financed; indeed some did not mention financing at all. … The plans were typically silent on who should raise the funds, for what particular purpose and who should bear the pay back cost”.

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“WATERSHEDS’’ IN FINANCING WATERSHEDS

The reports by Camdessus (2003), Gurria (2006) and Rees et.al (2008) are ‘watersheds’ on factually establishing:

– the nexus between sustainable management of water and its financing;

– that financing of the water sector has been neglected; and

– on conceptualization mechanism to finance the conservation of the water sector.

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AVAILABLE GUIDANCE

Camdessus (2003) – has addressed the supply of finances, to finance

domestic water supply and sanitation; Gurria (2006)

– has examined the demand for finances for water supplies, by local governments’ and

Rees et.al. (2008) – has examined, overarching issues of financing

water management and governance.

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CONCEPTUAL FRAMEWORK ON FINANCING IWRM

An ideal conceptual framework to comprehensively examine the financing of the water sector would be, – to consider the demand and supply aspects of

financing, – at each functional node (where it interacts with

people and provides a service) of the water cycle.

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WATER AND FINANCE CYCLES

Financing Climate Change

Financing Mangrove Management

Financing Watershed

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OBJECTIVE OF THE CHAPTER

Propose a logical framework to conceptualize a policy on financing watershed management.

Theoretical ideals of economics, experiences and opinions are presented and critically reviewed, as guidance to formulating a pragmatic policy.

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EMPIRICAL AND NORMATIVE ASPECTS: The Need

Annual funds required by the water sector would have to be doubled, to achieve the millennium development goals by 2015.

However, global water sector is experiencing ‘decreased, static, or marginal’ changes in finances.

Financing has been biased towards capital investments

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EMPIRICAL AND NORMATIVE ASPECTS: National sovereignty

Respecting national sovereignty is a prime requirement of a national policy.

Water is national resource with national benefits, it is best that watershed conservation is nationally financed.

However, in the short-term, developing countries with budgetary difficulties, may be required to depend on foreign finances to overcome cash flow problems.

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EMPIRICAL AND NORMATIVE ASPECTS: Endogenous financing

It is ideal if: – finance for environmental conservation is– generated within the environmental sector, – through revenues from resource users.

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EMPIRICAL AND NORMATIVE ASPECTS: Market economics

IWRM Principle– ‘water has an economic value in all its competing

uses and should be recognized as an economic good’

If the market economic system is used to allocate water, where it could best be used, and where market failures are rectified, it would enable to conserve water.

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EMPIRICAL AND NORMATIVE ASPECTS: Stakeholder participation

Economic: – The market economic system, enables stake

holder participation – participation may be inequitable.

Political: – Trend towards decentralization of governance. – local governments are heavily dependent on

central government finances and often starved for finances

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EMPIRICAL AND NORMATIVE ASPECTS: Organizational reform

Neither extremes of combining nor fragmenting of sub-sectors and organizations in the water sector is optimal.– combining organizations may allow cross-

financing. – fragmenting organizations may lead to

constraining financing options.

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EMPIRICAL AND NORMATIVE ASPECTS: Sources and mechanisms

3 sources: – water users, – tax payers and – aid donors

Mechanisms of financing– user charges, regulatory fees and levies, payments for

ecosystems services, creation of pollution markets, pollution taxes and abstraction charges etc.

Payments for Watershed Services (PWS) Public funding would remain dominant in water

sector.

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THEORY: MARKET FAILURE AND PUBLIC FINANCING: Case of Watershed

The theoretical model:

– Explains the market failure to finance watershed conservation.

– Rationalizes public financing of watershed conservation.

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ECONOMIC SIGNIFICANCE OF WATERSHED CONSERVATION IN SRI LANKA

Somarathne (2001)

– Onsite cost due to soil erosion as 953 Rs M/Yr

– Offsite cost due to silting of reservoirs and loss of hydro-power generation 15 Rs. M/Yr

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FINANCING WATERSHED CONSERVATION IN SRI LANKA

Mostly foreign financed projects

Financing is discontinuous

Need commitment of national financial allocations

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FINANCING WATERSHED MANAGEMENT IN SRI LANKA: Level of financing

Only 1% of the GDP has been spent on environmental related projects,

– a country should spend 2 to 3 % of the GDP on environmental investments to ensure sustainable development.

Theoretically, for development to be sustainable, one view is that investment should be equal to the sum of, rents from natural resource depletion and the environmental damage (Hartwick and Olewiler, 1986)

– The level of investment is below the expected levels of investment for sustainable management of Upper Mahaweli watershed.

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FINANCING WATERSHED MANAGEMENT IN SRI LANKA:Sources of Financing

Declining availability of foreign finance Possibilities for environmental sector to be

neglected in public finances– Public financial crisis– Political process

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FINANCING WATERSHED MANAGEMENT IN SRI LANKA:Financing Mechanisms

National Level: – Rationalising and earmarking allocations

Provincial Level:– Allowing to generate own financing– Strengthening capacity for above

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FINANCING WATERSHED MANAGEMENT IN SRI LANKA:Financing Options

Reducing need Improving efficiency Acquiring finance

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FINANCING WATERSHED MANAGEMENT IN SRI LANKA: Acquiring finances

– Who should pay? Foreign vs National (both).

– National: General vs. specific taxes

– How much to charge? – How to charge?

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FINANCING WATERSHED MANAGEMENT IN SRI LANKA:Allocation of Finances

Who should allocate? How much should be allocated.

– Provincial environmental accounting.

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CONCLUSION

The present level of financing watershed management, in Sri Lanka, is sub-optimal.

Foreign finances, for watershed management investments, is declining. Finances to manage watersheds should be secured nationally.

Watershed management will have to continue to depend on public financing.

Earmarking the allocation of public finance, for watershed management, from the central government to provincial governments and implementing agencies would be required.

Provincial governments must be encouraged and conditions created, to generate finances for watershed management.

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