I would like to thank the Scripps Institute of Oceanography, its Center for Environment and National Security and its Director, Ambassador Reno Harnish, for inviting me to participate in this important symposium on “water, climate and finance”.

I plan to cover two overarching areas:

• the threats we face that relate to water security and climate change, and
• approaches the US Government is taking to utilize financing mechanisms to address water needs and the impact of climate change.

Message

Regarding water security and the related water, climate, and finance linkages, I would like to convey this underlying message:

1. At the intersection of climate change and water security, hundreds of millions of people in the developing world face a grim and urgent situation.
2. To be successful in meeting needs at that intersection, the public and private sectors need to better understand the most effective financial mechanisms deployed under different climate and water impact scenarios. Examples of financial mechanisms which support the efforts of partnerships to meet both water security and climate change challenges include: payment for environment services mechanisms; loan guarantees; a regional financing mechanism in Africa; Global Development Alliance; and micro credit.
3. We can be far more effective if we take a systems approach to link: (a) climate change impact and water insecurity, (b) financial tools which support solutions to the impact of climate change and water insecurity; (c) partnerships that deploy these tools; and (d) the impact of the use of specific tools on climate and water challenges.
4. Looking ahead, a key challenge and opportunity is to refine our knowledge--and apply that knowledge-- of a system comprised of climate and water related threats and impact; financial tools to address those impacts/threats; partnerships to deploy these tools and the impacts of such deployment. In so doing, we will become far more effective in meeting pressing short and long term water and climate needs.

Threats to Water Security

In addressing climate change and water security, collectively the United States, developing countries, other donors, NGOs, philanthropic organizations, academia and financial institutions such as those represented here today face these realities:

• By 2025, as much as two-thirds of the world’s population could be living under water stressed conditions where water has become an impediment to socio-economic development. Many sources of freshwater will be under additional strain from climate change and population growth. And 2.4 billion people will face absolute water scarcity – the point at which a lack of water threatens social and economic development.
• Over 800 million people around the world lack access to an improved water source, and 2.5 billion people lack access to improved sanitation. Lack of access to water, sanitation, and hygiene causes an estimated 2.1 million deaths every year.
• Women and girls are disproportionately affected by water and sanitation challenges. They usually bear the primary responsibility for meeting the water needs of the family, foregoing other economic and educational opportunities.
• As demands for water increase, tensions over scarce water resources are likely to rise – both within and among countries. More than 260 river basins, home to over 40 per cent of the world’s population, are shared by two or more countries.
• Compounding these problems will be the challenge of climate change. While the conditions will vary depending on the region, some regions will likely get an overabundance of water and some regions will get drier. Floods and droughts will become more frequent and severe. Floods and droughts now touch more people than all other natural disasters combined. As we are seeing today, the worst drought in over half a century in Djibouti, Ethiopia, Kenya, and Somalia has left over 12.7 million people in need of emergency assistance.
• In Africa, at least twice as much food must be produced by 2050 to avoid widespread starvation amongst an expected population of 1.8 billion. But, food production per capita has been declining, and cereal yields have remained stagnant since the 1960s.
• By the middle of the 21st century, annual average river runoff and water availability are projected to increase as a result of climate change at high latitudes and in some wet tropical areas, and decrease over some dry regions at mid-latitudes and in the dry tropics. Many semi-arid and arid areas such as southern Africa are particularly exposed to the impacts of climate change and are projected to suffer a decrease of water resources. Higher water temperatures and changes in extremes, including floods and droughts, are projected to affect water quality and exacerbate many forms of water pollution.
• The global search for energy and food supplies, as noted in the World Bank's 2011 World Development Report, is amplifying pressure on arable land in developing countries. This search for energy and food supplies impacts the availability and use of water.

The intersection between water security and climate change impacts human and natural systems in a number of ways:

• climate change can weaken or destroy watersheds which are both sources of water and a "sink" to absorb carbon which in turn contributes to a stable environment.
• changes in climate can not only reduce or eliminate supplies of water, it can also contribute to sudden, destructive, massive flows of water -- such as the floods in Pakistan which not only caused great suffering and loss of life but also imperiled Pakistan's eco- systems.
• the reduction of the availability of water, which under stable conditions evaporates and transpires into the atmosphere, can disrupt the hydrologic cycle and rainfall patterns.
• changes in climate can contribute to drought which in turn can disrupt agricultural production and water supplies, and this can lead to populations competing for limited water and contributing to conflict.

In addition to climate change, population growth, industrialization, agricultural production, and conflict all present threats to water security.

Water Security Goal and Approach

Regarding our approach to meeting these challenges, the goal of U.S. efforts is to increase water security. This means ensuring that we have the water we need, where we need it, when we need it – in a reliable and sustainable manner – to meet human, livelihood, ecosystem and food production needs while reducing the risks from extreme hydrological events.

Water does not stand by itself as an Administration initiative but as a key issue to be integrated across our diplomatic and development efforts to achieve Administration priorities on health, economic growth, food security, climate change, and peace and security.

To achieve this goal, the United States is working to:

• Improve hygiene and increase access to safe drinking water and sanitation;
• Improve water resources management;
• Increase the productivity of water; and
• Mitigate tensions associated with shared waters.

By:

• Capacity building, institutional strengthening and policy/regulatory reform;
• Diplomatic engagement;
• Direct investments to meet immediate needs, build infrastructure, and mobilize local capital; and
• Investments in science and technology.

In so doing, we implement the Paul Simon Water for the Poor Act, which addresses meeting water and sanitation needs throughout the developing world. In that regard, during the period from FY 2003 through 2010, USAID provided either first-time access or improved access to drinking water supply to more than 50 million people, and USAID provided either first-time or improved sanitation to over 39 million people. Thus, over the past 8 years, USAID has, on average, provided almost ten million people per year with access to either drinking water or sanitation.

In achieving our goal, through President Obama’s three major development initiatives-- Feed the Future, the Global Health Initiative, and Global Climate Change Initiative-- we seek to meet long term development needs while also working to mitigate future humanitarian shocks.

In Africa, one of the world’s most pressing development challenges:

• Feed the Future aims to address hunger and unlock the enormous potential of African agriculture as a driver of prosperity;
• The Global Health Initiative is saving millions of lives while building sustainable health systems;
• The Global Climate Change Initiative is helping to address the potentially dire consequences of climate change on African ecosystems, food production, and economic development through assistance programs in climate change adaptation, clean energy, and sustainable land management. The United States recognizes that climate change is an urgent environmental, economic, and security issue, and we are committed to working with African countries to help adapt to a changing climate:
  • Working with the Adaptation Partnership, a global effort including over 20 developed and developing countries, we are collaborating with our African partners to bring together practitioners and policy-makers to address adaptation challenges ranging from access to climate services, to climate-smart agriculture and sustainable protection of marine areas.
  • This year, the Apps4Africa program will host three African regional competitions to develop innovative ways to address local climate change challenges through the use of mobile technology.

Financing Approaches to Water Security and Climate Change

A quarter of the world’s population lacks access to safe drinking water and nearly half have no access to sanitation. By and large the sector is widely underfinanced, even in the developed world. While estimates vary, somewhere between $15 and $30 billion annually will be required to meet the internationally agreed goals on drinking water and sanitation. Finance is a necessary - but certainly not the only - condition for providing water and sanitation services. In seeking ways to generate greater resources, it is important to recognize that all resources for water and sanitation ultimately arise from either taxes, tariffs or transfers. Many systems keep tariffs too low to even cover operating and maintenance costs, leading to poor service which only the wealthy can mitigate for themselves; therefore low tariffs usually penalize the poor.

Generating the resources needed to meet the Millennium Development Goals (MDGs) will require effective planning, sound management, and creative approaches for mobilizing and efficiently using all forms of capital (grants, concessional and commercial debt, private equity, and inter-governmental transfers) for both large-scale and micro-finance activities. Innovative approaches are needed for securing and blending financial support for water and sanitation from the national down to the community level. Financial strategies, capital intermediaries and project development facilities can each contribute to this process.

USAID embraces a wide range of financial approaches; here are some examples of targeted commitments we have made over the last year:

• Utilizing grant financing, USAID has begun a five-year, $34 million water, sanitation, and hygiene project to reach more than 2 million of Indonesia’s urban poor.
• In Kenya, USAID is in discussions with local water utilities, a local cell phone company, and a local microfinance institution to create new ways for poor people to pay for water. They receive a microloan to cover the initial cost of connecting their homes with water systems, and then repay those loans using micro-banking services on their cell phones.
• In the Philippines, Japan and the United States have worked together, leveraging in part an USAID loan guarantee to establish a water revolving fund to support private investment to improve water and sanitation for more than 100,000 people in 36 villages.
• USAID is working with the private sector to open a ceramic water filter factory in Cambodia. With ceramic filters, people no longer need to boil water to make it safe to drink, so they don’t need to burn as much wood or charcoal, which in turn reduces greenhouse gases. And the factory has even applied to receive carbon credits for future sales.

For partnerships to be effective, they have to operate in an environment with strong governance and enabling environment. Herein, USAID, in addition to providing financing, adds particular value in its focus on strengthening governance, building capacity to improve cost recovery, promoting transparency and predictability, and strengthening the credit worthiness of both large and small scale service providers.

There are indeed a wide range of financial approaches to addressing water security and climate change. In the time remaining, I'd like to concentrate on five approaches in particular:

1. payment for ecosystem services mechanisms;
2. loan guarantees;
3. a regional financing mechanism in Africa;
4. Global Development Alliance; and
5. Micro credit.

1. Payment for Ecosystem Services (PES):

The underlying concept of PES is that (a) natural systems, such as watersheds, provide a service to the public, such as the sustainable provision of water and the protection of biodiversity and (b) society should pay individuals and entities for sustaining these systems so that their service can continue to be provided. A well-known example of a PES program in the United States is the approach New York City took, in which the city pays owners of watersheds to protect and maintain them in a sustainable fashion. In return New York City receives a quality water supply which enables it to reduce water treatment costs.

An excellent example of USAID’s implementation of Payments for Ecosystem is in Ecuador where USAID improved the management of more than 160,000 hectares of parks and protected areas that provide 70 per cent of Quito’s drinking water. A key partner in this effort is Quito’s Water Protection Fund (FONAG), which was established with USAID support in 1999 (through Parks in Peril), to conserve the city’s watershed using revenues from 2 per cent of municipal water bills. FONAG’s activities include restoration and reforestation of native trees to stabilize watersheds, hiring local guards to patrol parks, engaging communities in watershed conservation, and educating 5,000 children from rural schools on the importance of water conservation. FONAG is a recognized national and international leader in watershed management. USAID’s newest water management program, working directly with FONAG, replicated the model in five other municipalities and watersheds around the country. The model serves as a platform for municipalities to involve water users and promote civil participation and awareness in the decision making process for natural resources. The program helps establish financial mechanisms for long-term sustainability of protected areas. Additionally the program promotes sustainable natural resource use in rural areas by providing resources that improve the livelihoods of communities in upstream watersheds, enhance production activities and generate alternative employment.

2. Loan Guarantees: Development Credit Authority (DCA)

Banks in developing countries have extremely conservative lending practices. They often prefer to invest in high-yielding government treasuries, or in large corporations that they view as low-risk. Consequently, smaller businesses face difficulties accessing the credit they need to invest in growing and expanding their enterprises. Frequently these potential borrowers are unable to qualify for a loan. If they are able to qualify, they are often unable to meet collateral requirements that can be as high as 100-200 percent of the value of the loan.

To encourage financial institutions to lend to creditworthy but underserved borrowers, USAID uses the Development Credit Authority (DCA). DCA is a tool that USAID missions use to stimulate lending through the use of partial credit guarantees. These risk-sharing guarantees, which generally cover up to 50 per cent of loss on loans made by financial institutions and investors, use private sector wealth to stimulate broad-based development that is truly sustainable. These guarantees have been used in a variety of ways, such as to support municipal lending to increase access to clean water and clean energy. Since DCA was established in late 1999, more than 267 partial credit guarantees have facilitated over $2.3 billion of private capital debt financing in more than 64 countries. Through the DCA guarantee mechanism, USAID is able to leverage an average of $28 in private sector funds for every dollar spent by the U.S. Government. Claims on the DCA portfolio are approximately 1 per cent, demonstrating that the targeted borrowers are both a creditworthy and profitable source of business.

USAID’s Development Credit Authority guarantees that support water specifically have leveraged $176.7 million dollars in private capital at a cost to USAID of $5.7 million. The credit guarantees support a range of water activities: from bond guarantees that help finance water infrastructure projects by reducing the risks to institutional investors, to loan portfolio guarantees that give incentives to private financial institutions to make loans to small and medium enterprises operating in water services and delivery value chains.

Examples of DCA structured credit guarantees to improve the availability of affordable water services include:

India
$29 million mobilized 
In India, two separate DCA guarantees have mobilized a total of $29 million for improved water services. USAID guaranteed the issuance of two municipal bonds in India (Tamil Nadu in 2002 and Karnataka in 2003) to raise capital to invest in sanitation and water supply for low-income neighborhoods.

Bulgaria $15 million mobilized In Bulgaria in 2005, a DCA guarantee was developed to encourage municipal lending, following on recent legislation giving municipalities the ability to obtain financing.

Serbia
$10 million mobilized 
USAID/Serbia used the DCA in 2005 to mobilize loans to municipalities for infrastructure development. One such loan was a $10 million financing to the Municipality of Smederevo, which used the proceeds to make several infrastructure improvements including installing underground pipes to link areas in the municipality to the water supply system.

Peru 
$10 million mobilized 
In 2007, USAID/Peru structured a partial credit guarantee designed to increase access to credit for urban rehabilitation. This guarantee enabled low-income households to access micro-finance loans to improve water supply and waste management in urban neighborhoods.

Philippines
$ 62 million mobilized 
The Philippine Water Revolving Fund (PWRF) is a joint effort under the Clean Water for People Initiative between the United States and Japan to attract private investment in water and sanitation infrastructure. A DCA loan portfolio guarantee for $37.5 million was designed to re-guarantee loans covered by a local guarantor, the Local Government Unit Guarantee Corporation (LGUGC) aimed at water investments. This is a follow-on to a $24 million re-guarantee with LGUGC designed in late 1999.

Kenya
$5 million mobilized 
In 2008, USAID/Kenya developed a partial credit guarantee designed to increase lending to community-managed small water enterprises. This initiative will increase access to water by reducing the collateral requirements of potential borrowers. By working with partners such as the Government of Kenya, and the World Bank’s Water and Sanitation Program and Global Partnership on Output-Based Aid, this guarantee aims to increase the availability of water to those who are underserved by the market.

Albania
$13.5 million mobilized 
In 2008, a multi-bank DCA guarantee mobilized $13.5 million to help Albanian municipalities access commercial credit for infrastructure projects. These projects allow for infrastructure investments including improving sewer and wastewater treatment and better water supply.

3. Financing water and sanitation service delivery on a regional basis: Sustainable Water and Sanitation in Africa (SUWASA)

Launched in September 2009 and operating with a $40 million ceiling, SUWASA is a six-year USAID regional initiative with a mission of fostering the evolution of urban and peri-urban water and sanitation service delivery in Africa to achieve long-term financial sustainability through the application of market-based principles.

SUWASA’s premise is that financially viable and efficient utilities help anchor the ability of governments to provide basic services to current and future populations. By delivering services on a reliable and sustainable basis, governments engender confidence among their constituents and enhance their own stability. However, many African utilities are caught in a destructive cycle – they need to expand in order to increase their revenue base. Yet they can’t expand because they lack the available funds. To bridge the financing gap, SUWASA is helping to identify ways to make water service providers more attractive to the market and make market financiers more open to the water and sanitation industry.

In Ethiopia and Nigeria, SUWASA and USAID are working in close collaboration with The World Bank with the goal of making the utilities eligible for investment financing under existing World Bank programs. Such investment will, in turn, make the service providers more capable of ultimately accessing market finance. In Uganda, SUWASA is supporting the innovative system of performance agreements and management contracts which is in place in the sector. This system delegates responsibility for service provision from the Ministry to local water authorities which, in turn, delegate the responsibility for operating and maintaining water systems to local management contractors. The selected management contractors are compensated by retaining a percentage of the user fees that they collect.

4. Global Development Alliance GDA:

The Global Development Alliance (GDA) invites prospective partner organizations to form public-private alliances to carry out activities in support of USAID's international development objectives.

Potential alliance partners are expected to bring significant new resources, ideas, technologies, and/or partners to development activities. Partners include a wide range of organizations such as: foundations, U.S. and non-U.S. non-governmental organizations (NGOs), U.S. and non-U.S. private businesses, business and trade associations, international organizations, U.S. and non-U.S. colleges and universities, U.S. cities and states, other U.S. Government agencies, civic groups, other donor governments, host country governments, regional organizations, host country parastatals, philanthropic leaders including venture capitalists, public figures, advocacy groups, pension funds and employee-welfare plans. Successful proposals will provide 1:1 resource leveraging.

An example of a GDA partnership is:

• The Coca-Cola Company (TCCC) and USAID have created a unique partnership to address community water needs in developing countries around the world. Through the “Water and Development Alliance” (WADA), local USAID Missions and Coca-Cola system partners collaborate to contribute to protecting and improving the sustainability of watersheds, increasing access to water supply and sanitation services, and enhancing productive uses of water for hundreds of thousands of the world’s poor.

5.Micro Credit and Linkages to Large-Scale Utility Financing in Indonesia?

One constraint to increased access to clean water for low income households in Indonesia is the upfront connection fee charged by municipal water companies. Many families are unable to pay this cost in one installment, thereby forcing them to rely on other sources for their daily needs, often sources of lower quality and higher cost. To achieve the Millennium Development Goals on access to clean water, the Government of Indonesia has committed to support the addition of 10 million new water supply connections in the coming five years.

USAID through a new five-year, $34 million Indonesian Urban Water, Sanitation and Hygiene (IUWASH) program started in the second quarter of this year will aim to support the GOI commitment by mobilizing demand, improving capacity of service providers, and strengthening local governance and financing opportunities.

In the past in Indonesia, USAID provided technical assistance to support linkages between water utilities and local banks in enabling micro-credit for water connections to the low-income households. As a result of this effort, there were 22 master agreements signed between water utilities and local banks, benefiting 12,111 households with access to clean water.

The IUWASH program has the broader goal of increased access to safe water supply for 2 million Indonesians and 200,000 Indonesians for improved sanitation facilities. An important component of the project is to help government entities and Indonesian water utilities secure long-term financing.The Government of Indonesia is now only able to invest one tenth of required investment to achieve MDG goals in water, and far less for sanitation. This USAID IUWASH project will integrate technical assistance to (a) local governments for improved governance processes to plan and budget the required resources for water and sanitation and (b) water utilities for improved financial performance and increased credit worthiness (to include debt restructuring plans). A good credit rating result will present opportunities to assist the qualified governments and water utilities in preparing a financially sound and credit worthy investment plan, to be presented either to commercial banks or bond investors.

Conclusion:

Looking ahead, a key challenge and opportunity is to refine our knowledge--and apply that knowledge-- of a system comprised of climate and water related threats and impact; financial tools to address those impacts/threats; partnerships to deploy these tools and the impacts of such deployment. In so doing, we will become far more effective in meeting pressing short and long term water and climate needs.

Thank you