Financing water: last year we were discussing blended finance, what are we discussing now?
At the All Systems Connect International Symposium, experts and decision-makers from around the world will be discussing why and how to prioritise investment in water, sanitation and hygiene as a human right - and in water security - as a requirement for economic growth. In this blog, Catarina Fonseca, IRC associate, economist and water and sanitation advocate, gives a preview of some of the themes.
In the last couple of years, global finance discussions in the water, sanitation and hygiene (WASH) sector have been focusing on blended finance (public finance used to de-risk and attract private finance), and financing from potential sources, particularly climate funds. The latest discussions are adding a third needed pathway, which is food security and ultimately, sustainable growth. This takes a macro-level angle, and is more complex than previous pathways – because of the different stakeholders and cooperation needed far beyond the WASH sector.
The costs of inaction
The Global Commission on the Economics of Water presented some scary data and trends about the impacts of and on water, at the recent UN Water Conference 2023. It is expected that in seven years, given the demand, there will be a 40% freshwater shortage. It might be difficult to imagine how this will affect more than the known water stressed countries (China, Brazil, India, etc), but the evidence shows that unpredictable floods and droughts are already aggravating displacement, migration and food insecurity. They also inflict costly damages to infrastructure; and devastate livelihoods, quality of life, and biodiversity – ultimately undermining economic growth and human security.
We are already feeling the impact of the war in Ukraine on food prices and energy - imagine a 10- or 20-fold impact as a result of water insecurity.
For instance, Sub-Saharan Africa loses 5% of its GDP annually (estimated at US$170 billion per year) because of a lack of water, contaminated water, or poor sanitation. And, every year, 40 billion hours of otherwise productive time is spent collecting water – a burden disproportionately shouldered by women and girls. Arguably, this is not only about water availability but also poor service delivery. These statistics find their root causes in two interrelated challenges:
The delivery of water supply, sanitation and hygiene services is capital-intensive, and many countries are struggling to finance this, and particularly in a way that is resilient to shocks;
Unlike a public good, a common good is rivalrous - the use of water resources reduces the availability for others. There is a value of water to the economy that needs to be internalised by those sectors who use it.
These challenges are interrelated, as the costs of service delivery (and hence its finance) are increasing as a result of poor water resources management and under valuing the use and misuse of water.
Sharing the costs of financing water, sanitation and hygiene service delivery
We now must recognise that to meet these challenges head-on, we need to think beyond the drinking water sector. We also need to think beyond the 3Ts: taxes, tariffs and transfers. These sources provide only piece-meal finance solutions. They are not - and will not be - enough to cope with the growing finance gap.
Major productive sectors with high water use, such as agriculture, energy, garments, beverages, manufacturing, mining and others will need to internalise the costs of water use (including pollution) which are currently passed on as externalities to others. For example, costs are passed to utilities who need to spend more on water treatment and re-use, or need to drill and pump water from deeper aquifers given the over abstraction.
Businesses are already ahead of the game.
Businesses are already ahead of the game. Data on water externalities (the impact on the environment, on water companies, on livelihoods for instance) from CERES (apparel, packaged meat industries) and CDP shows that some of the largest companies in these sectors are improving their water stewardship and reducing their water footprints, because water availability is so critical for the survival of their businesses. But these initiatives need to be widespread and call for appropriate regulations and incentives to ensure compliance at country level. The impact on the drinking water sector goes further than the direct operations of the industries and also impacts the financial sector. CDP research shows that US$15.5 billion of financial assets are stranded or at risk.
Many questions unanswered
In an already highly fragmented and siloed sector – what does this mean for government ministries responsible for water and sanitation? These ministries are typically not in charge of natural resource protection, stormwater or wastewater, and their finance strategies and investment plans.
What does it mean for other ministries (agriculture, energy, health, education, environment, etc.) that do not include the true costs of using water in their programmes?
What does it mean for the myriad of intermediary organisations that are trying to bring supply and demand for finance, but are struggling with regulatory frameworks that go beyond the sector?
What does it mean for private investors who are not able to legally invest in equity or transfer financial resources to shareholders?
The answers are not easy, because the issues are complex. The International High-Level Panel on Water Investments for Africa has released its flagship report (also available in French here) at the UN Water 2023 conference which sheds some light on the most important areas and steps.
First, the report calls for a 4th "T” for ‘transformative’ financial flows through dedicated budget allocations for water within the economic sectors (i.e. agriculture, industry, mining, energy, and others). These would need to be tracked and reported similarly to the other 3Ts. At the moment, only some industries are reporting voluntarily to CDP globally, not at country level.
The critical steps identified by the High-Level Panel include:
Establish cross-sectoral political leadership at the highest level, with commitment to substantially increase public budgets and investments for water security and sustainable sanitation;
Track progress and enhance mutual accountability for results in the mobilisation of water investments - including recommitting to the allocation of at least 5% of national budgets for the the drinking water and sanitation sector and 0.5% of GDP per annum for sanitation and hygiene programmes;
Mobilise new sources of funding and innovative finance, such as institutional investors by actively supporting matchmaking platforms to bring together the supply and demand for finance;
Strengthen institutional regulation for water investments, create incentives and penalties for increased water efficiency across multiple industries to lead water stewardship efforts, biodiversity, and ecosystem protection; and
Use aid to de-risk water investments and leverage larger funding streams. This includes support to improve the implementation capacity and quality of bankable projects.
The finance theme of the All Systems Connect International Symposium
This is the start of interesting and ambitious discussions on finance in the water sector much beyond drinking water. In the finance stream of All Systems Connect we hope to bring some of these concepts to light, with concrete in-country leadership and calls for action. And when I refer to leadership, this is not only government, but all of us, from wherever we are placed in the systems. What can be our contributions to bring a systems approach to finance? How can we push some of the boundaries and create constructive partnerships to reduce the finance gap? I look forward to discussing these with you.
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