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The Need for Water Sector Investments

Securing funding revenues, financing strategies, and investment structures to meet water needs is a key enabling factor to achieving good water governance. Investments are needed in the conservation, management and development of the natural resources that underpin water supply services (watersheds, catchments, river courses, wetlands, aquifers). Likewise, it is also needed in the creation of hard (pipelines, dams, treatment works, pumps, distribution systems, hydropower stations), and soft infrastructure (administrative overheads, research and monitoring, consumer services, IT systems). Indeed, IWRM cannot be achieved without investing in the enabling environment (Tools A), institutional arrangements (Tools B), and management instruments (Tools C), as they all serve as basis for sustainable water resources management. Investments in the water sector should include but not be limited to (GWP & OECD, 2015):   

  • Development of institutions (e.g., catchment agencies, water rights, markets, pricing policies, and quality regulations). 
  • Sharing of information (e.g., extreme weather forecasts and warnings, and agricultural advisories, water quality monitoring platforms). 
  • Building of infrastructure (e.g., natural or human-made water storage, water supply and sanitation systems, and irrigation). 
Defining Investment, Funding, and Financing

In the Tools of the Sub-Section, the term “investment” is used in its economic sense of the creation of a productive asset yielding benefits over a future period. Then it also covers investment from the perspective of funding and financing. Funding corresponds to income or cashflows that water projects generate which mainly comes from tariffs, taxes, and transferences (better known as the “3Ts”). On the other hand, financing refers to accessing resources for capital investments and covering operational and maintenance costs which are paid back with funding sources (GWP & WWC, 2018) (Fig. 1).   

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Figure 1. Sources of funding and financing. Source: SWA (2020).

The cost of this investment needs to be funded in various ways – charging water users, investments from government budgets, and external aid. Most of the water infrastructure investment traditionally comes from the public domain. However, in recent times, there is a growing involvement of water users’ associations and private commercial entities in sharing these costs (e.g., using water tariffs to protect watersheds through investment vehicles such as water funds). On the other hand, capital investment entails not only the one-off initial outlay, but also the sizeable recurring expenses of operation, maintenance, repairs, and replacements. These operation costs may, in some cases, very well exceed tariff revenues which may make compelling the use of general taxes (e.g., subsidies for poor underserved populations, based on distributional decisions, whose incomes cannot afford to pay for full-cost recovery tariffs).   

Water is widely considered to be a problematic area for attracting financing – much more so than for transport, telecommunications, or power generation. This is due to several factors: the poor creditworthiness of borrowing institutions, the low levels of tariffs and cost recovery, political interference with operations, lack of suitable collateral, and the capital-intensive, long-term nature of major infrastructures. Also, the water sector tends to be regulated in a way that might generate so-called regulatory risks for investors (e.g., the risk of being at the mercy of arbitrary decisions made by officials and regulators). In addition, water is prone to foreign exchange risk since its revenues arise principally in local currency, whereas its liabilities to foreign lenders and equity investors need servicing in foreign exchange. Finally, the greatest returns related to water investment are normally long-term and non-monetary ones (e.g. improvements in health), thus making them not so attractive from a private investor’s point of view (Tool D1.02). 

New Opportunities for Water Sector Funding and Financing

The last decade has witnessed a growing interest in reforming the water sector to attract more capital investments from public and private sources to achieve better water service provision, secure water for multiple economic uses, and conserve natural ecosystems, all these goals in the context of climate change. Recommendations on how to enhance opportunities for water sector funding and financing include (WWC & OECD, 2015WWC, 2018; Cooley et al., 2020; GWP & WWC, 2018): 

  • Alignment of water sector’s goals with the national sustainable development strategy is a prerequisite to access international funds and private capital (Tool D1.01; Tool D2.02). 
  • Good governance, stable and modern regulation frameworks, and efficient and transparent management of water utilities are key aspects to achieve stable flows of financing resources. 
  • Adoption of risk management strategies and instruments paves the path for attracting potential investors (Tool D2.04). 
  • Multipurpose water infrastructure offers a new business plan and investment category for financiers.  
  • The use of competition, research, and development can lead to new ways of value recovery and disruptive technologies in terms of lowering costs and increasing benefits, paving the way for new investments.  
  • Public finance is and will continue to be the main source of funding for the water sector and should leverage private investments in the form of blended finance (Tool D2.05). 
  • Adaptation to climate change is the new frontier of water financing, a perfect opportunity to try new financial structures and instruments (Tool D2.06). 
  • Purpose financing offers new investment opportunities for the water sectors, including for instance, climate finance (e.g. green bonds); corporate investment (e.g. sustainability bonds); and regional initiatives (e.g. China’s One Belt, One Road). 
  • More funding can be unlocked by revisiting the composition and sharing arrangement between the tariff, tax, and subsidy structures (e.g., cross user subsidies used to pursue social or industrial development) (Tool D2.03). 
  • Repackaging and scaling up of microfinance and microinsurance can lead to increase financing especially in rural areas traditionally out of the sight of commercial financiers.   
Sub-Section Overview

The Tools in this Sub-Section aim to provide insights on how to enhance funding and financing for water. Tool D2.01 discusses the opportunity which Integrated National Financing Frameworks can bring to enhance coordination for SDG 6 investments. Strategic Financial Planning, Tool D2.02, gives practical recommendations on how to develop a comprehensive framework for evaluating the investments needs of the entire water sector over a medium to long term basis. The basic of water sector financing is presented in Tool D2.03, which introduces the “3Ts” model to generate steady revenues for water. The different sources of repayable finance for water, including a detailed description of loan and bond instruments, is described in Tool D2.04. The particularity and opportunity offered by blended finance and climate finance mechanisms are then discussed in Tool D2.05 and D2.06. Finally, indications on sources of investment and best practices for financing transboundary water cooperation are laid out in D2.07.  

D2 Financing Strategies and Principles
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