1. Strategic Financial Planning
Planification financière stratégique
Alan Hall
Chair of the EUWI
Finance Working Group

2. 1. Background
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.

3. 2. 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).
• Aid transfers are from tax paid by workers in donor countries -
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.

4. 3. Background
Governments face stark choices
1. Lower ambitions (or renege on commitments).
2. Access more grant aid (it has increased but 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).

5. 4. 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.

6. 5. Background
Strategic Financial Planning (SFP)
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 study supported by EUWI-FWG. Cost Euro 250,000.

7. 6. Lesotho
Lesotho SFP study
• 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

8. 7. 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 method used to analyse information based on the OECD
‘Feasible’ methodology
• Household affordability a key input to get realistic figures

9. 8. Lesotho
Planning Methodology
Macro-economic forecast
•Prices •Production/ Income
•Public Revenues
Demand Change
Supply
Existing Targets Rules governing: Sources of
Facilities •Level •Public transfers Finance:
and •year •User charges •User Charges
Situation •Private sector •Public budgets
finance •Private fin. Inst.
•Donors and IFIs
Project available finance for
Expenditure forecast Change
•Investment expenditure
•Investment expenditure •Targets
•“Rules” •Recurring expenditure
•O&M expenditure
•Finance •Capacity Building etc
Sources
Financing Gap 9

10. 9. Lesotho
Results: Total Funding Needs
Average Annual Funding
Needs to 2020
Includes
100 O&M
90 Costs
80
70
60
mEUR
50
40
30
20
10
0
U San
Scenario 1
Scenario 2
Scenario 3
Scenario 4
R San
Sew
UWS
RWS

11. 10. Lesotho
Population served
3,500,000
Rural Pop un-served
Urban Pop un-served
3,000,000
Rural Pop served
Urban Pop served
2,500,000
2,000,000
1,500,000
1,000,000
500,000
-
2020
2025
2030
2035
2009/10
2010/11
2011/12
2012/13
2015/16
2013/14
2014/15

12. 11. Lesotho
Water Sector Funding Sources
Water Sector Funding Sources to 2015 User
Contribu Scenario 3
tions
29%
Water Sector Funding Sources to 2030-35
Governm
ent &
Donors
28%
Governm
ent &
Donors
71%
User
Contribu
tions
72%

13. 12. Outcomes
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 Monitoring systems and cooperation
between the Bureau of Statistics and water sector Institutions.

14. 13. Lessons
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.

15. 14. 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.

16. 15. Observations
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. For example:
– 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.

17. 16. 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 to use a range of sources of finance and mechanisms
and match different sources to different purposes.
• Need different approach to serve the poor – if utilities are run
as a ‘business’ then may need to have different agency to
provide for the poorest communities.

18. 17. Observations
Distractions!
• Worldwide Economic crisis – reduced access
to finance.
• Investment without revenues - excessive
national debt.
• Right to water (and sanitation) has
consequences - legal costs, withdrawal of
financing?
• Loss of public support if focus only on urban
areas with lack of solutions for the poor.

19. 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