Communication from the Commission to the Council and the European Parliament - Establishment of an EU Water Fund
Date: 2003-04-23
Institutions: European Commission
Subjects: developing countries, fund (EU), sustainable development, water, water management

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 23.4.2003
COM(2003) 211 final

COMMUNICATION FROM THE COMMISSION
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT

Establishment of an EU Water Fund

TABLE OF CONTENTS

1.

2.

3.

4.

5.

6.

BACKGROUND ......................................................................................................... 3

WHY A FUND ............................................................................................................ 4

THE ROLE OF THE FUND........................................................................................ 5

MANAGEMENT OF THE FUND .............................................................................. 7

REGULATORY FRAMEWORK................................................................................ 7

CONCLUSIONS.......................................................................................................... 8

ANNEX.................................................................................................................................... 10

2

COMMUNICATION FROM THE COMMISSION
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT

Establishment of an EU Water Fund

1.

BACKGROUND

Water  plays  a  vital  role  for  sustaining  life  and  human  development  on  this  planet.
More people die every year world-wide from unsafe water than from war. In Africa
close to 40% of the population are without access to safe water supply and even more
lack adequate sanitation.

Water  is critical  for human health,  sustainable rural development and  food  security
(agricultural  production  accounts  for  70%  of  water  use),  environmental  protection
(water  pollution  and  bad  management  of  the  resources  undermines  economic
development opportunities), gender issues and land resources management. It is thus
a central issue for poverty  reduction,  sustainable development and  the  achievement
of the Millennium Development Goals (MDG’s).

With the recent reform of EU water policy and the new Water Framework Directive
the  EU  has  one  of  the  most  advanced  water  policies  in  the  world  and  can  provide
significant experience and expertise.

In May 2002 a Council resolution was adopted endorsing the "Communication on
water management in developing countries", which stressed the need to integrate
sustainable water management in national and regional development strategies and to
support partner countries in developing sustainable solutions.

The EU Water Initiative which was launched at the World Summit for Sustainable
Development (WSSD), is a catalyst and a foundation on which future action can be
built  to  meet  the  water  and  sanitation  MDG's.  This  can  be  achieved  through  the
promotion  of  good  governance,  sustainable  water  resources  management  (which
includes  a  sound  management  of  water  for  agricultural  production),  research  and
knowledge  transfer,  enhanced  co-ordination  and  stronger  partnerships.  A  new  EU-
African  strategic  partnership  on  water  affairs  and  sanitation  was  signed  by
President  Prodi,  Prime  Minister  Rasmussen  and  African  Heads  of  State  in
Johannesburg.

To  meet  MDGs  and  WSSD  targets  requires  the  mobilisation  of  substantial  funds
from public and private, local and international sources and the establishment of new
innovative financing mechanisms. This is a conclusion of the financial analysis of the
EU Water initiative and was also outlined in the World Panel on Financing Water
Infrastructure  (Camdessus  Report).  The  Report  stresses  in  particular  the
importance of this issue and the urgency to take measures to deal with it, and states:
“…the  flow  of  funds  has  to  roughly  double,  with  the  increase  to  come  from  all
sources”.

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The Kyoto 3rd World Water Forum (16-23 March 2003) has further demonstrated
the  need  to  address  this  critical  challenge.  However,  it  resulted  in  disappointing
conclusions because of the lack of trust between the different actors (public, private
and NGOs), and the lack of clarity on their respective roles. Furthermore, the Forum
did not take any major decision regarding the  availability of financial resources  for
investments in the water sector.

2.

WHY A FUND

As  indicated  in  the  Camdessus  report,  mobilisation  of  a  significant  level  of
resources is the key factor to the realisation of the MDG’s in the area of water and
sanitation.  The  present  level  of  funding  has  proven  inadequate  for  meeting  the
investment  needs  to  comply  with  these  goals  and  new  innovative  funding
mechanisms are urgently required to attract more private investments.

Establishing a specific Water Fund could constitute a substantial contribution to the
solution  of  the  problems  as  it  would  facilitate  the  leveraging  of  resources  from  a
large range of sources. As  a  first priority, the  Fund would be oriented  to achieving
the targets on water supply and sanitation, within the framework of integrated water
resources  management.  and  would  include  co-financing  with  other  EU  sources  of
finance.

This mobilisation of adequate levels of resources should also include

– 

– 

optimal  co-financing  with  various  sources  of  funding  (local/international,
private/public) taking into account their respective strengths and weaknesses.

use  of  financial  engineering  techniques,  including  introduction  of  new
instruments guaranteeing and leveraging the mobilisation of funds from a wide
range  of  sources,  taking  into  account  the  principles  of  transparency,
accountability, and appropriateness for the specific socio-economic contexts.

To mobilise the necessary  resources the possibility of using the  conditional reserve
of  €1  billion  foreseen  within  the  Cotonou  Agreement  could  be  explored,  while
respecting the legal bases which apply to the EDF. Due consideration would have to
be  given to  the  necessary procedural steps  and to  the  legal  provisions  which  might
have to be modified in order to allow the reserve to be mobilised for this purpose.

Co-financing  would  be  offered  to  authorities  in  ACP  countries,  acting  jointly  with
EIB,  other  EU  public  financial  institutions  involving  as  appropriate  private/public
operators from these countries or from the EU. In this context, in particular for grass
roots projects, EU  civil society organisations  can play  an important role.  Access  to
the  co-financing  of  the  Fund  could  be  extended  to  other  International  Financial
Institutions  (IFIs),  in  particular  the  African  Development  Bank  (AfDB)  and  the
World Bank Group (including International Financial Co-operation and Multilateral
Investment Guarantee Agency).

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3.

THE ROLE OF THE FUND

There  are  various  existing  initiatives  to  finance  country-specific  and  multi-country
advice and related activities for the development of Public Private Partnerships. The
proposed  EU  Water  Fund  should  not  compete  with  these  existing  initiatives,  and
should not be directed to finance those private sector developments which provide a
reasonable  return  on  investment.  The  Fund  would  primarily  provide  concessional
funding,  which,  by  nature,  has  a  higher  leverage  than  lending  and  would  be
additional to other EU and international financial instruments.

The  main  role  of  the  fund  is  to  be  a  catalyst  (promoting  initiatives,  providing
information,  being  a clearing-house,  building  research and management  capacity  in
ACP  countries)  on  the  one  hand  and  an  instrument  which  can  provide  the  missing
link  in  financing  sustainable  projects  and  activities  on  the  other  hand.  There  exists
many plans and proposals in the area of clean water and sanitation, but, as indicated
in the Camdessus-report, the majority cannot be realised because of the inflexibility
of existing instruments. The proposed EU-Fund should be able to give a very flexible
answer to a variety of situations.

The Fund should be directed towards achievement of the WSSD and MDG targets
and should concentrate its activities in countries, which have a sound national water
policy  or  which  are  strongly  committed  to  develop  it,  based  on  good  governance
principles,  and where  there  is  prioritisation  of  spending  towards  social  sectors,  and
definition of the relevant indicators as part of the Poverty Reduction Strategy process
(PRSP).  Countries  which do not satisfy these criteria should be  assisted  to  develop
national policy and associated indicators as part of capacity building projects.

On  this  context,  the  activities  of  the  fund  shall  capitalise  on  knowledge  generated
within  European  and  International  Water  research  and  scientific  co-operation.
Research plays a key  role in providing knowledge-based approaches for  innovative
policy  formulation  and  implementation  instruments  covering  various  aspects  from
institutional  reform,  socio-economic  analysis,  integrated  water  planning  and
management, and appropriate technology transfer.

The Fund could cover a wide variety of actions but focus mainly on:

(cid:1)  Co-financing of investments with local authorities and financing institutions

Many large water  projects have long  pay  back  periods  and  high  risk,  making  them
unattractive  for  commercial  or  even  IFI  financing.  The  Fund  would  provide  grants
complementary to local funding and funding by international sources to finance the
initial investment. The two basic domestic sources of finance are namely:

-  Consumers:  user  charges  (fixed  in  relation  to  the  population’s  ability  to  pay  and
sensitive to the needs of the poor) should at least cover operating costs and essential
maintenance.  Establishing  a  system  of  tariff  cross-subsidisation  may  be  part  of  the
solution,

-  Taxpayers:  should  contribute  in  accordance  with  the  public  finance  and  debt
situation of the beneficiary authorities (sovereign and sub-sovereign).

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Efficient  management  of  the  Fund  will  require  appropriate  “financial  engineering”,
ensuring both maximal leverage of the grant funding and optimal satisfaction of the
needs of (poor) consumers.

The  Fund  would  primarily  co-finance  investments  in  the  area  of  water  supply  and
sanitation.  Such  projects  should  be  realised  in  the  context  of  an  integrated
management of water resources at the level of the river basin. The Fund could also
finance projects in transboundary river basin development.

(cid:1)  Enhancing the 9th EDF "Investment Facility" managed by the EIB

The  “Investment  Facility”  (I.F)  is  the  appropriate  vehicle  for  assisting  projects
involving  private  commercial  (public/private)  operators  or  other  forms  of  private
intervention. Financial instruments facilitating the intervention of EU operators, such
as guarantees, risk insurance, soft loans etc., should be provided. Being accessible to
EIB  as  well  as  to  other  public  finance  institutions  of  the  EU,  the  I.F.  should
encourage  co-financing  and  complementarity  between  these  various  sources  of
finance and with the Fund.

(cid:1)  Co-Financing and capacity building for Community based projects

In  addition  to  sectoral  and  larger  scale  projects,  resources  should  be  set  aside  for
community  based  actions,  implemented  by  local  authorities  and/or  grass  roots
organisations,  e.g.  in  co-operation  with  EU  NGOs.  In  poor  communities  the
partnership  approach  requires  strong  support  from  civil  society,  thus  the  need  for
capacity building at this level too.

(cid:1)  All  forms  of  technical  assistance  and  mechanisms  for  longer-term  capacity  building,  in
support  of 
institutional,
environmental,  social  and  financial  sustainability  of  the  sector  and  improving  the
information systems, such as:

the  development  of  activities  which  contribute 

the 

to 

(1)  Water policy development leading to sector reform

TA  could  be  provided  in  support  of  Governments  efforts  to  adopt  integrated  water
resources  management  policies  and  implement  water  strategies,  which,  while
protecting  and conserving the ecological  integrity  of  their  water  resources,  are  also
coherent with their poverty reduction strategies.

(2) 

Strengthening and reform of Water utility management

TA  could  be  provided  for  improving  the  management  capacity  of  water-related
institutions  at  government  and  municipal  level.  This  includes  management  training
and institution building of the regulatory authorities.

(3)  Management of transboundary water courses

Technical assistance should be provided to develop river basin management plans in
large  transboundary  water  courses  and  the  necessary  international  agreements,  in
addition  to  building  local/regional  capacity  of  ACP  institutions  through  investment
into water related research and management capacity.

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4.

MANAGEMENT OF THE FUND

The operation of such a Fund to be put in place should reflect the principle – that the
decisions  on  financing  should  be  taken  on  the  merits  of  the  project  proposals
received, not on the basis of pre-determined national envelopes. In view of the origin
of the money (EDF) it has to be clear from the start that the money can only be spent
in ACP-countries.

Preparation  of  the  project  design  and  technical  implementation  of  the  investment
projects should be the responsibility of  the  international, national or local authority
and  the  co-financing  (EU)  institutions.  The  “management  structure”  of  the  fund
should reflect this principle and therefore be lean and flexible. At the same time, it
should  respond  to  sound  principles  of  transparency  and  accountability.  It  should
focus on strategic choices of projects to be financed as well as general supervision of
the use of the funds. The management of the fund should be able to operate closely
with the financial institutions but with a firm view on how the grant element can be
used to create a maximum leverage of the amount of other types of finance that can
be mobilised.

In  order  to  maintain  a  focus  on  the  problems  of  Africa  and  ensure  a  privileged
relationship with African institutions, a close link should be established between the
management  of  the  EU  Water  Fund  and  i.a.  AfDB,  AU,  NEPAD,  the  African
Ministerial  Council  on  Water,  the  African  Water  Facility  and  African  experts  in
general.  Similar  links  will  be  established  with  institutions  in  the  Caribbean  and
Pacific regions.

Once the decision of principle is taken and the source of financing within the EDF is
clarified  and  secured,  an  appropriate  method  of  implementation  should  be  found
within the applicable financial rules in order to achieve the above objectives. Several
options are available, as laid down notably in Articles 14 and 15 of the EDF financial
regulation and in the relevant provisions of the EDF legal bases.

The creation of an Executive Agency, as mentioned in the above Articles of the EDF
financial regulation, might be an appropriate way to manage the new Fund. However,
its  use in the  EDF  would  have  to  be  very  carefully  considered,  in  accordance  with
Article 15 of the EDF financial regulation, and Council Regulation n° 58/2003 of 19
December 2002 laying down the conditions to be met for using executive agencies.

5.

REGULATORY FRAMEWORK

For the financing of the EU Water Fund, it is envisaged to use the “conditional” € 1
billion  foreseen  in  Article  2.2  of  the  Internal  Agreement  on  the  Financing  and
Administration  of  Community  Aid  under  the  Financial  Protocol  to  the  Cotonou
Agreement of December 2000.

To take this proposal forward, commitment and support at the highest political level
from  both  the  EU  and  ACP  sides  will  be  required,  in  particular  to  address  the
following points:

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At  present the use of the  reserve is  conditional  on a  mid-term review  of  the  global
performance and implementation. It is foreseen that the release of the conditional €1
billion will be decided by the Council after an assessment of the degree of realization
of  commitments  and  disbursements  in  2004  according  to  the  Financial  Protocol  of
the Cotonou Agreement.

The Internal Agreement for the 9th EDF (Article 2.2) specifies that this will be done
on the basis of a proposal by the Commission. The Commission intends to make this
proposal in due time so that the release of the funds can take place early in 2004.

In respect of the principles of ownership and partnership of the Cotonou Agreement,
the possible use of the conditional €1 billion should be the subject of an exchange of
views with the ACP Group. The Joint Council Meeting of May 2003 constitutes an
excellent opportunity for such an exchange since the follow up to Johannesburg and
Monterrey  will  be  a  point  of  discussion  in  the  agenda.  Following  this  exchange  of
views  a  joint  ACP-EC  decision  by  the  Council  of  Ministers  on  the  use  of  the
conditional billion will be necessary.

the 

three  envelopes  (the 

In accordance with the Financial Protocol, if the conditional billion is released, it will
long-term
be  distributed  proportionally  amongst 
development  envelope,  the  regional  cooperation  envelope  and  the  Investment
Facility). The situation is simple under the regional cooperation envelope where the
Community is entitled  to  notify  to  the ACP-party  funds for intra-ACP cooperation.
As  regards  the  Investment  Facility,  there  are  no  major  constraints  as  long  as  the
proposals  comply  with  the  conditions  for  loans  from  this  facility.  However  the
resources  from  the  long-term  envelope  are  supposed  to  be  used  for  topping  up
National Indicative Programmes.

In  order  to  use  funds  on  the  basis  of  the  merits  of  the  activities  proposed  and  the
ownership  and commitment by  involved  stakeholders,  and  not  on  a  pre-determined
distribution, it should be agreed with ACP partners that a more flexible approach is
needed and should be endorsed by the Joint EU/ACP Council.

6.

CONCLUSIONS

Mobilization of a significant level of resources is a key factor for the realization of
the MDG and WSSD targets, and flexibility in the response is required to meet the
challenge in an effective manner. This flexibility must be achieved in order to ensure
that  the  proposed  Fund  constitutes  an  effective  mechanism  to  use  the  conditional
billion for a priority objective in an innovative manner.

The  establishment  of  an  EU  Water  Fund  will  contribute  to  the  achievement  of  the
Millennium Development Goals of halving by 2015 the number of persons  without
access to safe water and sanitation.

The Commission therefore proposes to:

(cid:1)  Endorse the recommendations presented in this Communication.

(cid:1)  Consider  the  release  of  the  conditional  €1  billion  ,  so  as  to  enable  a  decision  in

early 2004.

8

(cid:1)  Prepare in collaboration between EU and ACP partners, the decision by the Joint
ACP  Council  on  the  use  of  the  conditional  €1  billion  from  the  EDF  for  the
financing  of  an  EU  Water  Fund  ,on  the  basis  of  the  approach  outlined  in  this
Communication.

(cid:1)  Examine the most appropriate implementation method for a possible Water Fund
financed by the EDF, for example that of a possible Executive Agency, based on a
cost benefit analysis of the different options.

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ANNEX
LEGISLATIVE FINANCIAL STATEMENT

Policy area(s): Development and relations with ACP States

Activit(y/ies): Development co-operation policy and sectoral strategies

TITLE OF ACTION:

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN

PARLIAMENT ON THE ESTABLISHMENT OF AN EU WATER FUND

1.

BUDGET LINE(S) + HEADING(S)

Not applicable as it is proposed to be financed by the European Development Fund.

This  Communication  has  no  net  consequences  on  human  and  administrative
ressources at this stage.

2.

OVERALL FIGURES

Not applicable. See above.

4.

LEGAL BASIS

Articles 14 and 15 of the EDF 9 Financial Regulation.

5.

DESCRIPTION AND GROUNDS

5.1.1. Objectives pursued

Set up an EU Water Fund for ACP countries, using the conditional one billion Euro
foreseen  in  the  Cotonou  Agreement,  and  serving  to  co-finance  as  a  priority  with
other sources of EU funding.

This Fund will contribute to the achievement of  the millennium development goals
for water sanitation.

5.3.

Methods of implementation

Implementation  options,  including  the  setting-up  of  an  Executive  Agency,  will  be
studied.

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