Innovation in financing is needed to bridge the water sector investment gap. Kathleen Dominique, of the OECD, looks at the potential of blended finance.
Water flows are a prerequisite for every one of the Sustainable Development Goals (SDGs), including those on food security, healthy lives, clean energy, and marine and terrestrial ecosystems. SDG 6, ensuring the availability and sustainable management of water and sanitation for all, reflects the critical importance of water in its own right. There is growing awareness that water-related investments are essential to climate resilience and to delivering the goals set out in the Paris Agreement. Beyond environmental concerns, the sustainable and collaborative management of shared water resources also strengthens international peace and security.
Yet the human right to water and sanitation is, so far, not a reality for billions of people. Globally, 4.5 billion lack access to sanitation compatible with the water and sanitation targets set by the SDGs1, and an estimated 2.1 billion people lack access to safely managed drinking water services1. The economic benefits of investing in water security – managing the impact of “too much”, “too little” and “too polluted” water, maintaining healthy ecosystems, and improving access to supply and sanitation services – could exceed hundreds of billions of dollars annually2. The value of additional investments needed until 2030 to ensure universal access to safe and affordable drinking water is estimated at $1.7 trillion3 – about three times current levels of investment. For the broader range of infrastructure needed to improve water security, projections of global financing needs range from $6.7 trillion by 2030 to $22.6 trillion by 20504.
The need to accelerate action on financing
The OECD is working with governments and partners to accelerate action to scale financing that contributes to water security and sustainable growth. This includes building and expanding on proven approaches, as well as finding innovative solutions.
To support this work, in 2017 we launched the Roundtable on Financing Water – a joint initiative of the OECD, the Netherlands, the World Water Council and the World Bank. The Roundtable is a unique forum to convene water experts and financiers. It engages a diversity of actors – including governments, private financiers, international organisations, academia, and civil society organisations – focused on finding novel ideas and solutions to bridge the water financing gap.
At the same time, the OECD is developing analytical work and policy advice to contribute to a more robust evidence base that can inform strategic financial planning for water-related investments. The work focuses on three pillars.
First, through its work on mapping financing flows, the OECD is working with the European Commission to project financing needs for water supply, sanitation and flood protection for the 28 EU member states by 2050. Mapping the flow of finance to investments that contribute to water security can identify the ultimate sources of capital, level of investment required, and the different players at different stages, as well as the channels and vehicles to access investment in water security. Similar work is under way focusing on countries in Asia, working in partnership with the Asian Development Bank.
Second, OECD’s work on blended finance identifies ways in which the strategic deployment of development financing can support the crowding in and scaling up of commercial finance to bridge the gap in water-related investments. The OECD defines blended finance as the strategic use of development finance to mobilise additional finance towards sustainable development in developing countries5. The new OECD publication Making Blended Finance Work for Water and Sanitation examines what has worked so far in terms of experience with blended finance for water-related investments, and the potential to scale up blended finance approaches to apply to a broader range of investment types and contexts.
Third, while financiers typically focus on the availability of a pipeline of bankable projects, government authorities and project developers should also situate these pipelines within broader strategic investment pathways, to ensure they are resilient and contribute to water security and sustainable growth over the long term. The OECD is working to develop policy-relevant guidance on how governments can take a long-term strategic approach at distinct geographical scales (catchment, basin or landscape) and ensure that assets deliver anticipated benefits over their operational lifetime and avoid premature obsolescence or costly retrofitting in the future. Such an approach would also help to secure a stable flow of returns for investors. A first case study, focused on the Zambezi Basin in partnership with WWF, is under way.
The blended finance opportunity
Progress across these themes is highlighting opportunities for blended finance to contribute to scaling up financing for water investments. Public sources of finance alone will not be sufficient to achieve water security in the future. In the past, water-related investments have been financed by the public sector, with concessional finance playing an important role in developing countries. Future financing needs to exceed the capacity of public finance by far, in developed and developing countries. Investment needs are driven by economic development, urbanisation and population growth. They are also driven by populations’ expectations in terms of security, the stringency of environmental and other policies, and by a changing climate, which generates uncertainties about future water demand and availability. Ongoing OECD work suggests that all European countries will need to increase the level of investment in water security by 25% or more. It is unlikely that governments alone (national and local) will redirect scarce public finance to meet these needs.
Blended finance can play a critical role in mobilising commercial finance and strengthening the financing systems on which water and sanitation investments rely. By deploying development finance in a way that addresses the investment barriers that prevent commercial actors from providing capital, blended finance operates as a market building instrument, able to be a bridge from reliance on grant and other donor financing to crowding in commercial finance over the long term.
The amount of commercial finance mobilised by blended finance for water and sanitation is limited compared to other sectors (Figure 1). According to OECD data, only 1.36% ($2.14 billion) of total private finance mobilised from 2012-17 ($157.2 billion) has been mobilised in the water and sanitation sector. In terms of blended finance instruments, guarantees mobilise 59%, or $1.24 billion, in the water and sanitation sector, followed by syndicated loans at 28%, or approximately $0.6 billion.
The report Making Blended Finance Work for Water and Sanitation, which was launched in August at Stockholm World Water Week, offers insights into what has worked so far in terms of blended finance for water-related investments. It also looks into the potential to scale up blended finance approaches to apply to a broader range of investment types and contexts. The research, supported by the Swedish International Development Cooperation Agency (SIDA), distils lessons learned and emerging guidance to scale and exploit the full potential of blended finance to deliver on water security. It focuses on three water and sanitation sub-sectors (Figure 2): water and sanitation utilities; off-grid sanitation; and multi-purpose water infrastructure (MPWI) and landscape-based approaches (LBA). These were selected to give distinct perspectives based on experience with blended finance to date, requirements for blended finance to successfully emerge, and potential for the use of different blended finance instruments and mechanisms.
Blended finance models to mobilise additional commercial finance in the water and sanitation sector are emerging, but have not reached scale. This assessment varies by sub-sector, given the heterogeneity of the operating models and the risk-return profile of investment opportunities in each of the sectors. Within this spectrum of blended financing, the three sub-sectors are characterised by transactions that are reflecting different stages of financial market building (see Figure 3). Blended models to finance utilities are emerging as an appropriate tool for creditworthy, or near creditworthy, utilities to move away from purely concessional donor finance towards market financing. For the off-grid sanitation subsector and technologies, however, grants and concessional financing are predominant, whereas blended finance models that mobilise commercial financing are largely absent. In contrast, blended finance models are established as instruments mobilising commercial finance at scale in the MPWI sub-sector. For landscape-based approaches, blended finance can potentially operate as a fit-for-purpose financing instrument as it brings together different stakeholders responding to their individual investment preferences, but developments remain at a very early stage.
Evidence supports the potential for blended finance to unlock commercial finance for water and sanitation in developing countries. In Jamaica, a USD 3 million grant unlocked a USD 12 million loan for the National Water Commission to finance a pipeline of utility projects to reduce pollution from untreated wastewater, and increase access to piped water supply and sewer connections nationally. In India, Water.org’s WaterCredit initiative supports microfinance institutions in the disbursement of loans for off-grid water or sanitation projects, with a view to making the population of India free from open defaecation. In Uganda, the Kalangala Infrastructure Investment Services is a multi-donor public-private partnership responsible for the investment and maintenance of basic infrastructure to improve access to water and transport safety, and enable more reliable renewable electricity. In Latin America, Water Funds promote the pooling of public and private financing in support of sustainable watershed management through nature-based solutions, while creating incentives to engage in conservation and climate adaptation practices.
Commercial financiers can play a greater role in financing water and sanitation. When implemented in conjunction with efforts to improve the enabling environment, blended finance is designed to enable stand-alone commercial investment in the long run, by providing confidence, capacities and a track record in markets where commercial investors are not yet investing. So, blended finance can add value first and foremost by shifting funds not currently directed to sustainable development to countries and sectors that have significant investment needs, to deliver on the SDGs. In doing so, blended finance enables commercial investors to develop a track record of operating in the sector by altering the risk-return balance in a way in which the commercial sector is willing to invest. Because of their transitory nature, blended finance models can mobilise relatively more commercial finance over time. In parallel, a larger role for commercial actors can enable stronger financial systems by encouraging accountability and transparency, as well as new ways of addressing existing social and environmental challenges.
1 WHO-UNICEF (2017), Progress on drinking water, sanitation and hygiene: 2017 update and SDG baselines
2 Sadoff, C. et al (2015), Securing Water, Sustaining Growth, report on the GWP-OECD Task Force on water security and sustainable growth
3 Hutton G. and M. Varughese (2016), The Costs of Meeting the 2030 Sustainable Development Goal Targets on Drinking Water, Sanitation, and Hygiene, WSP – The World Bank Group.
4 Winpenny, J. (2015), Water: Fit to Finance? Catalysing National Growth Through Investment in Water Security, report of the High Level Panel on Financing Infrastructure for a Water-Secure World, World Water Council, OECD
5 OECD (2018), Making Blended Finance Work for Sustainable Development Goals
Read the blended finance publication and policy highlights: oe.cd/bf-water
Also, see: oe.cd/water-roundtable; oe.cd/blended; oe.cd/social-impact
Contact: Kathleen.Dominique@oecd.org and Wiebke.Bartz-Zuccala@oecd.org