The Financing of Hydropower, Irrigation and Water Supply Infrastructure in Developing Countries

A companion paper in the previous issue of this journal (Briscoe, 1999) describes the changing face of infrastructure financing in developing countries. This paper deals with the financing of major infrastructure in the water-related sectors-hydropower, water supply and sanitation, irrigation, and overall water resources management (including the environment). The overall level of investment in water-related infrastructure in developing countries is estimated to be of the order of 65 billion annually, with the respective shares about 15 billion for hydro, 25 billion for water and sanitation and 25 billion for irrigation and drainage. About 90% of this investment comes from domestic sources, primarily from the public sector. Water-related infrastructure accounts for a large chunk-about 15%-of all government spending. This heavy dependence on the public sector means that the global 'winds of change' in the respective roles of government and the private sector have major implications for the financing and structure of the water economy. The paper describes how each of the 'sub-sectors' is adapting to these winds of change. First, in recent years competition and private sector provision have emerged as the characteristicsof the new electricity industry. This change poses a fundamental challenge to hydro which, to a much greater degree than thermal, has risks (hydrological, geological, social and environmental) which are better assumed by the public than the private sector. The future of private hydro, and thus of hydro itself, depends heavily on the ability of the public sector to both share risks with the private sector, and to provide predictable social and environmental rules of the game. Second, the urban water supply sector is in the early stages of equally profound change. In recent years there has been a dramatic shift towards the private sector, in developed and developing countries alike. An outline of the future shape of a competitive urban water sector is emerging: it is one in which a growing number of private companies will compete with revitalized (and often corporatized) public utilities. Capital will, increasingly, come from the private capital markets, with the critical government role being that of light, transparent benchmarking and regulation. Third, the adaptation to the winds of change is least advanced in the public irrigation sector, which has long been characterized by public financing and 'rent seeking' by bureaucracies, politicians and private beneficiaries. It is only in recent years, and only in a few countries, that the irrigation sector has modernized. In these cases irrigation has become like any other utility, in which accountable, autonomous agencies provide users with the services the users want. In many instances, farmers have become responsible for the costs of operating and maintaining their systems; in some instances they are responsible for meeting the full costs of replacement, rehabilitation and new investments. Where these changes have taken place, there have not only been sharp swings in the relative proportion of private and public spending, but there have been dramatic improvements in the efficiency of investment and operation and, in most cases, major positive environmental impacts.