It’s World Water Week (WWW) 2018 and over 3500 development practitioners and business innovators have gathered in Stockholm to foster new thinking and positive action on the world’s most pressing water-related challenges. This year’s conference, organized by the Stockholm International Water Institute (SIWI), will address the theme, “Water, ecosystems and human development”.
Innovative financing for water is a clear priority this week, with multiple events focusing on how new forms of financing can enable markets in water-related investments, including an introductory session on blended finance led by the Organization for Economic Co-operation and Development (OECD).
A financing gap for clean water and sanitation
Clean water and sanitation are two of the most basic requirements for human welfare. Under the Sustainable Development Goals (SDGs), the global community committed to achieving universal and equitable access to safe and affordable drinking water as well as to adequate sanitation by 2030. While progress has been made, it is estimated that 660 million people still do not have access to improved drinking water.
One of the main barriers to achieving universal access to safe and affordable drinking water is a significant financing gap. To meet SDG 6 (Water and sanitation), capital financing would need to triple to $114 billion per annum, not including operating and maintenance costs.
To fill this gap, additional sources of capital are needed, including those from the private sector. Currently, aid agencies and donors are primary funders of water and sanitation systems, while private sector involvement has been limited. To date, the private sector typically accounts for a mere 7% of total spending on water and sanitation in developing countries, in Sub-Saharan Africa this figure is less than 0.5%.
Opportunities for blended finance
Given the potential for blended finance in the Water, Sanitation, and Hygiene (WASH) sector, it is no surprise that the topic is taking centre stage at WWW. Blended finance can mobilize more private sector investment into water and sanitation projects through mitigating risks and enhancing project viability. In our State of Blended Finance report, an online survey of over 100 key blended finance stakeholders indicated that more than half of the respondents saw blended finance playing a particularly important role in SDG 6.
The Tamil Nadu Water and Sanitation Pooled Fund (WSPF) is a successful example of how blended finance can be leveraged to attract additional private capital for the water sector. The WSPF is a special purpose vehicle designed to pool municipal-level bond issuances for the purpose of financing water and sanitation projects across 13 municipalities. The blended vehicle bolstered market confidence by offering multiple layers of credit enhancement, including a USAID Development Credit Authority (DCA) guarantee for 50% of the principal amount.
Source: OECD
Considerations for water practitioners
The water sector has been identified by development experts as having strong potential to mobilize private sector investment, but it is important to recognize the barriers that continue to face commercial investments in the water sector, including large upfront capital costs and operational efficiency barriers.
Blended finance can address these challenges through crowding in necessary upfront capital to cover such costs and providing much-needed technical assistance to boost the efficiency and credit worthiness of projects to commercial investors.
However, there is still far to go before the WASH sector begins to execute blended and innovative finance transactions effectively. As WWW progresses this week, we hope to see more connections formed between the public, philanthropic, and private sectors, as they work towards achieving SDG 6. Clean water for all is too important of an objective to undertake in silos.
