The diversification of financial resources for sustainable and effective investment on water infrastructure

Abstract

The “red tap water” incident in Incheon in May 2019 caused a huge social stir over the importance of water infrastructure. This is not a problem confined to Incheon, but a common issue that corresponds to most large cities with high rates of deteriorated water pipes. While citizens' expectations for water services have increased due to the improvement of living standards, the water related finance policy, which has been aimed at expanding the supply of water infrastructure, has lacked the resources and plans for reinvestment on aging facilities. Local governments, which are unable to recover costs due to the difficulty of raising tariffs, are excessively dependent on state subsidies for reinvestment, which makes it difficult to finance. Therefore, this study examines ways to diversify water infrastructure reinvestment resources and propose financing plans according to each project's characteristics. The key agenda to consider under the current low growth, high fiscal spending policy situation seems to be financial accountability and sustainability. In terms of financial accountability using local bonds to finance water supply reinvestment is a desirable alternative to state subsidies received from higher governments. Local bonds have not yet been issued much, and the progress of projects becomes transparent in coordination process with the local parliament, attracting significant budget savings. For sewerage sector, it is appropriate to raise funds through private investment, including existing BTLs. However, in order for these measures to be activated, it was suggested that local water supply and sewage projects should be excluded from the gross cap of local bonds, and government empowerment on local level would be necessary to increase private investment. The establishment and use of public revolving fund are considered as a way to increase the sustainability of financing reinvestment on water infrastructure. The U.S. State Revolving Fund case study examines the operational structure, process, assistance criteria, financial structure and support measures, and discusses the feasibility of domestic application and success requirements in Korea.