Step 2.05.04 , Long-Term Finance
To identify a long-term financial mechanism based on the value proposition of the Water Fund, which further broadens participant base and sources of finance.
Note: Long-term finance may also be referred to as “sustainable finance”.
Retain a financial expert to identified potential long-term financial mechanisms for the Water Fund
Identification of a long-term financial mechanism (i.e. a sustainable finance strategy) is distinct from conducting a business case analysis, which assesses whether investments in the Water Fund is financially beneficial for specific investors (current or future). As financial analysis requires specialized expertise, this step should not be conducted by a practitioner without relevant experience and/or expertise. It is highly recommended that a qualified expert be retained to complete long-term financial studies.
Establishing a trust fund may help mitigate cash flow risks
Experience suggests that it often makes sense for Water Funds to constitute a trust fund to mitigate cash flow risks, as well as to give certainty to water producers that the fund will be able to fulfill its multi-annual commitments and to strengthen its credibility by incorporating a transparent vehicle to administer resources.
Even if the Water Fund becomes the recipient of constant flows from tariffs, rights or other sources, a trust fund may facilitate investment from other users. Although the trust fund or similar vehicle has benefits, there may be cases where local regulations make it difficult to create such a figure. For instance, most Water Funds in Brazil are built on a promise by the municipalities or basin councils to finance conservation actions. The governance structure is based on the decisions of the basin committees and resources come from appropriations of these committees.
General guidelines for development of a long-term finance strategy
In all cases, it is recommended that any identified long-term financial mechanisms comply with the following conditions:
- Clearly define the sources and intended use of the funds.
- Establish accountability.
- Be transparent and welcome scrutiny by fund members;
- Be legally constituted as a authorized financial entity with all necessary permits to operate relevant instruments when regulation allows.
- When allowed, be tax deductible.
- Make the best possible effort to minimize the administrative cost.
- Have a clear mandate to use the funds only for the purpose of the Water Fund.
- Have a clear management guideline, approved by the members of the Water Fund.