Water financing

We are following the examples of leading international water organisations in an attempt to close the financial gap for water, in line with Sustainable Development Goal ambitions.

A scarce resource

Demand for water exceeds the supply available. Despite of the fact that 71% of our planet consists of water, only 1% of water is suitable to drink. Geography further complicates the problem. The total amount of easily accessible freshwater on Earth in a form of a surface water or groundwater is 14,000 cubic kilometers; however, only 5,000 cubic kilometers is used by humanity due to uneven geographical distribution and unequal water consumption. Water is a scarce resource for some parts of the world and parts of population.

Globally there a many water challenges, including water security, pollution, population growth, economic volatility and climate change. Because of these challenges, demand for water is expected to increase by nearly one-third by 2050. According to FAO Aquastats, water withdrawals across the world can be broadly broken down into agriculture (70%), municipals (11%) and industrial water consumption (19%).

Water is surpassing oil as the world’s scarcest critical resource, and just as wars over oil played a major role in 20th-century history, many leaders and acclaimed experts in the water sector are increasingly convinced that major 21st-century conflicts may be fought over water. While a society’s transition from oil may be drawn out and difficult, water is irreplaceable. Yet, water costs are far less than oil. Water’s cost doesn’t reflect its true economic value.

The cost of water

For many reasons, the water supply and service fees in many regions around the world do not cover the full economic cost of provision, maintenance and replacement of water infrastructure. As a result, water infrastructure projects often rely on public or private subsidies, and this can be a constraint on the achievable rate of return – and project bankability. Political, regulatory, macroeconomic complexities, and business and technical risks, also impact project viability and have historically been a core determinant of bankability.

It’s difficult estimate to the amount of investment needed in water infrastructure across the world in order to keep pace with projected growth. The most cited data comes from grey literature, such as the McKinsey Global Institute (MGI), who estimated in 2017 that an annual investment of US$ 500 billion in water infrastructure is required from 2017 through to 2035, representing an aggregate spending of US$ 9.1 trillion, based on a ‘business as usual scenario’, which means simply keeping pace with economic growth. Most of the investment is needed in the emerging markets, where the financing challenge is particularly acute.

Achieving SDG targets

The World Bank study, “The Costs of Meeting the 2030 Sustainable Development Goal Targets on Drinking Water, Sanitation, and Hygiene”, reveals that current levels of investment are likely to be sufficient to provide basic water and sanitation services for all by 2030. Current global expenditure is estimated at around $28.4 billion per year, for every household in the world to have access to drinking water, an adequate toilet and a suitable place to wash their hands by 2030. But the SDG water and sanitation targets 6.1 and 6.2 go beyond basic access and services. They set the goal for a world where all people always have access to drinking water nearby and their fecal wastes are safely managed. The total cost of providing WASH services at these levels is estimated at around $114 billion per year, three times the current investment levels to meet the basics.

Considering the amount of estimated investment needed, efforts to meet the SDG targets on drinking-water and sanitation will require not only additional public funding, but also greater service efficiency, increased engagement from civil society and the private sector and improved bankability of investable entities, initiatives and projects.

The discussions on how global water community will collectively raise enough funds to close the financing gap is prominent among policy makers and stakeholders and continues to evolve.

Linking impact investing with water

Investment markets have already experienced how impact investing can work for profit and global good.

Impact investing pursues dual objectives – the intent to achieve social and environmental objectives in parallel with financial return. The impact investing movement started in 2007 by enthusiasts at the Bellagio Centre, convened by Rockefeller Foundation, and has seen tremendous growth since, turning into a billion dollar industry over the past decade.

In support of the movement, we bring together policymakers, development practitioners, representatives from financial institutions and philanthropies, and private sector actors to examine the commercial perspective of investing in water and the policy dimensions of blended finance and impact investing for water.

The video below details the inspirational story of Sir Ronald Cohen, the father of social investment.

Investing in water

In general, there are different ways to invest in water, starting with simply buying the shares of those companies that make everything from pipes, pumps, meters, filters and other equipment and infrastructure, to investments in the water utilities, water purification and treatment companies, innovative water technologies, environmental services and capacity building entities, all delivering positive social and environmental impact. Other investments in water include purchasing water rights, investing in water-rich farmland and agriculture, water index, exchange-traded funds (ETF), water commodity stocks and holdings. Some are more ethical than others and the choice depends on individual pursuits and intentions.

Investors, intending to achieve social and environmental impacts in addition to financial return, can be divided in two broad investor categories, private impact investors (PII) – encompassing  a range of investor types, including fund managers, family offices, foundations, banks, pension funds, corporations and others that channel private capital into impact and Development Finance Institutions (DFIs) – government-backed financial institutions that provide finance to the private sector for investments promoting development. DFIs are important actors in the impact investing landscape, providing large amounts of capital both through direct impact investments and through indirect investments, such as impact investment funds.

All of the above factors and developments taken into consideration, International WaterCentre (IWC) is evolving its business by adding “Financing for Water” strategic thematic area to join  international water leading organisations such as OECD, GIZ, World Bank and global water community in an attempt to close the financial gap for water in line with Sustainable Development Goals ambitions.

We know that the full spectrum of financial solutions, from microfinance to supplier finance to commercial loans to bonds and even equity, are all required. We’ve seen an explosion of new funds and enhancement instruments targeting water and sanitation and, perhaps most significantly, we are starting to see a push to move more public resources into the sector. These increased public funds are essential if we are able to attract the much-needed commercial resources to deliver water and sanitation services. The combination of public and private financing is key in order to move forward with blending options. More needs to be done and a critical aspect is to improve the enabling environment, or the foundational issues, of the service providers. This means improving their technical and financial viability while also improving their policy, institutional, governance and regulatory environment. Without addressing these two essential aspects of the financing process, we won’t develop the pipeline to secure the financing that is available, we won’t capitalize on blending opportunities, and we certainly won’t close the financing gap. The most immediate question going forward is how the sector will collectively mobilize and target the much-needed public and donor resources to address these two vital issues that are key to financing universal access.

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