Ensuring sustainable sources of funding and financing that match the growing needs for investment in water is one of the major building blocks of a strong water governance system. About 80% of countries struggle in reaching financing means to meet WASH targets (GLAAS, 2019) and it is estimated that the capital investments alone in WASH would have to triple to achieve the WASH components of the 2030 Agenda (Hutton and Varughese, 2016). We therefore must make the best use of existing financial resources and assets, while maximising the benefits of future investment needs and communicating them effectively to harness additional sources of finance.
On the IWRM Toolbox, we describe 12 tools that present various mechanisms and structures that can be used to boost investments in water. Below is a quick overview of what to expect from those tools.
Assessing water investments
It's important to start with the fact that there are large differences between values between different users when evaluating competing uses for water allocation. Evaluation of investment opportunities in the water sector requires different approaches depending on the goals of investors, NGOs, governments, development banks, and other interested stakeholders. Tool D1.01 - Evaluating Water Investments describes various valuation methods that can help prove the positive return on investment of water projects and policies for decision-makers. Here is a case study that describes the use of this tool in Jamaica.
However, to reflect social, economic, and environmental costs and benefits of a project it is necessary to somehow assign monetary value to non-marketed or "abstract" goods and services. Those looking to attract investments by showcasing benefits and value for money will benefit from Tool D1.02 - Economic Value of Water, as this tool describes several methods for calculating the "real" economic value of a particular water project or policy - thus converting non-monetary benefits and costs of investments in water, both tangible and intangible, into economic and monetary value. In 2022, a school in Malaysia applied the principles of this tool in their installation of a rainwater harvesting system.
Additionally, Tool D1.03 - Business Model Canvas provides a framework that can help entrepreneurs and project managers to develop, improve, and/or adapt their business or project idea. A case study by the Malaysia Water Resources Forum shows how this tool can be applied in practice. They used the tool to identify how to maintain their main value propositions and partnerships while readjusting their customer segments, revenue streams and cost structures to adapt to the online environment. For multinational corporations and SMEs, the identification of water-related risks and the estimation of their associated financial costs can provide a strong economic rationale to invest in water management, especially if that cost to manage the risks is lower than the potential financial loss due to a water problem, be it physical, regulatory or reputational. Tool D1.04 - Water Financial Disclosures therefore, gives the basics of water-related financial disclosures to incentivise companies to invest in water resources management. Like companies, investors also need to assess potential investments with a view to reduce risks and ensure profitability. In recent years, impact investment has become more mainstream, going beyond just reducing risk to investing purposely in companies, organisations, and funds with the intention to generate social and/or environmental impact alongside a financial return. The Tool D1.05 - Impact Investment Market Maps introduces the principles for responsible investment, discusses impact investing market maps, and explains how the investment market map methodology is applied to the water sector to incentivise companies to invest in water resources management.
Planning of spending
Like water, money should flow. To make sure that sustainable financial water flows are maintained, strategic planning of influx and outflux are crucial. Countries will benefit greatly from integrating their financial water flows with their National Development Plans and Sustainable Development Strategies - although these cannot be replaced. Tool D2.01 - Integrated National Financing Frameworks is such a planning and monitoring instrument that helps water management authorities to have sound finances that support the achievement of SDGs, looking at both financing sources and non-financial means of implementation available with the aim of raising resources and managing risks. Tool D2.02 - Strategic Financial Planning describes an approach to bring planning and financing on convergent tracks so that spending is compatible with available resources. It is a guiding framework to determine who should pay for what and what should be the future service level. A recent example for these Financial Planning tools can be found in a case study by the Morrocco Sebou Water Fund.
Securing additional funding and finance
It is important to note the difference between 'funding' and 'finance'; not uncommonly used interchangeably, these two mean in fact very different things. In the simplest terms, funding refers to income that water projects generate, mainly in the form of tariffs, taxes, and transfers (3Ts).
Public funding ideally needs to cover not only initial capital investment, but also operation and maintenance costs of water-related “infrastructure” (both grey and green). Achieving the full cost recovery of an investment is not easy as it requires sufficient revenues to cover current and (partially) future costs, being mindful of asset depreciation and future capital investment needs. Tool D2.03 - Generating Basic Revenues addresses the basics related to cost recovery and introduces the 3Ts (taxes, tariffs, and transfers) as funding mechanisms that provide steady revenues for investments in water.
To alleviate the burden on public funds, private capital can supplement government funding to deliver projects within budget, faster, and at less risk to taxpayers. Finance thus refers to accessing additional repayable resources such as loans and investments from private entities.. Both funding and financing flows depend on the political environment, regulations, institutional arrangements, and markets, as well as political and economic stability. In the Toolbox, there are four tools that describe different means of attracting finance for water.
The first two describe specific financial structures and mechanisms. Tool D2.04 - Repayable Resources of Finance for Water describes how financing works from the perspective of different types of service providers and their business models, and explains the difference between loans, bonds, and equity. It is important to note here that the capacity to attract commercial repayable finance depends on good prospects in future flows of the 3Ts basic revenues, and the political and economic stability of the country to be able to repay loans and bonds. As early as 2013, GWP together with the Water Resources Commission prepared an IWRM investment plan for the White Volta basin in Ghana. This investment plan engaged the public sector as well as civil society actors and contributed to the prioritisation of actions and projects to improve socio-economic aspirations while the financing strategy identified approaches to raise funds to implement projects. Tool D2.05 - Blended Finance is particularly useful for those investments where the cost of capital and the risks are high, while investment track records are poor. It is a structuring approach that uses concessional or philanthropic funds as a de-risk mechanism to catalyse the mobilisation of additional capital. Blended finance targets projects that are bankable - with a clearly defined revenue stream - or semi-bankable - with slightly lower returns but high development impact.
The second two describe how links with other themes can provide additional resources. For example, linking water to climate change can generate additional finance for water investments, as water resources are key for climate change adaptation and mitigation. Tool D2.06 - Water and Climate Finance is a useful start as it presents key characteristics to make water-related investments more attractive to climate finance and lists a few main sources of water and climate funding. A case study on the GWP Toolbox related to this tool is based on the EURECCA project implemented in Uganda, where an assessment of climate and water issues in major catchments brought to the fore major challenges associated with impacts on flood risks and livelihoods. The programme they developed not only managed floods and landslides, but also contributed to the diversification of livelihood strategies and strengthened institutions from local to national scales. For this project they partnered with the Sahara and Sahel Observatory, an accredited climate finance broker.
Finally, water does not abide by political and administrative boundaries. Transboundary cooperation is key for sustainable water resources management, but its long-term and sometimes resource-intensive process do not make it a particularly appealing investment, especially as it requires continuous political commitment and allocation of financial resources across countries. The tool D2.07 - Transboundary Financing gives an overview of available resources, and practical insights on potential ways to secure financing. An interesting case study for this tool is the cooperation for investment planning for green growth and poverty reduction in the Mekrou sub-basin located in Benin, Burkina Faso and Niger.
These tools can serve as inspiration to secure finance for the water sector across policies and governance structures, and demonstrate examples of innovative financing instruments to accelerate the achievement of global water security, and more case studies are available to illustrate the importance and effects of these different tools. Check them out on the IWRM Action Hub, and feel free to share with us your own thoughts and experiences.