Safe water, sanitation, and hygiene (WASH) are vital for human well-being. However, 1 in 3 people (approximately 2.2 billion) still lack safe drinking water, 4.2 billion do not have access to safely managed sanitation services, and 829,000 people die annually from unsafe water and related sanitation and hygiene around the world.

Financing Gap

While Sustainable Development Goal 6 (SDG 6) aims to “ensure availability and sustainable management of water and sanitation for all” by 2030, we won’t get there if nothing changes. The current level of WASH financing is too low to achieve universal access to safe drinking water and adequate sanitation and hygiene. To meet SDG 6, capital financing needs to triple to $114 billion annually, and operating and maintenance (O&M) costs also need to be considered. According to a joint World Health Organization and UN-Water report, the financing gap in 19 countries and one territory was greater than 60 percent, and less than 15 percent of the 115 countries and territories surveyed had the human or financial capital needed to implement WASH policies and plans. Critical hurdles to overcome include revenues that do not cover operating costs; insufficient creditworthiness of water and sanitation utilities; poor financial data on WASH; and uncertainty in future funding given annual variability in foreign aid. New estimates suggest that it would cost US$1.04 trillion (in 2015 dollars) annually from 2015 to 2030 to deliver sustainable water management for all countries and major water basins.

As the global WASH community races towards 2030 to meet SDG 6, new sources of finance and better use of existing ones for WASH projects are essential. A range of financing approaches can help address the diverse needs between and within countries, as well as incorporate measures that bolster resilience.

Public, Private, or Blended

Traditionally, WASH-related financing has been supported by the public sector. But in recent years, a more blended approach has come to the forefront. Public-private partnerships have gained prominence, as they provide the opportunity to assist governments in funding water projects, while also integrating innovative mechanisms that can improve the performance and financial sustainability of said projects. Azure, a partnership between Catholic Relief Services and Azure S.A., a Salvadoran-based social enterprise, mobilizes capital and technical support to upgrade and expand WASH services in underserved urban and rural areas. “Azure is taking the opportunity to breach the existing gap between small water service providers and local financial institutions,” said Carlos Aguilar, Azure’s Project Director. In mobilizing technical support, Azure helps small service providers become creditworthy and build projects that can be financed by different sources like commercial local institutions or blended financial structures.

Much like Azure, WaterEquity—the world’s first asset manager focused solely on solving the global water crisis—mobilizes funds for financial institutions and enterprises that are responsible for financing or providing WASH services in emerging markets. To date, WaterEquity has invested $60 million and plans to raise another $150 million over the next seven years via its recently launched Global Access Fund. “The fund will provide debt capital to high-performing financial institutions in emerging markets to enable them to scale their water and sanitation microfinance portfolios,” said John Moyer, WaterEquity’s Chief Investment Officer, thus offering an attractive risk-return profile to investors.

Alternative approaches to financing include USAID’s Water, Sanitation and Hygiene Finance (WASH-FIN) Project–implemented by Tetra Tech–which works with national governments, development partners, and local stakeholders to close the financing gap. For example, in Cambodia, where only 7 percent of rural households have access to piped water, WASH-FIN’s first step was to send out a team to analyze systems and private water operators’ expansion plans, including technical analysis, to help them put together a business plan. After developing a business plan, Sam Huston, Chief of Party for WASH-FIN, said, that they would help the operators submit financial proposals for a loan with multiple local commercial banks to stimulate competition for lending to improve the financial terms offered to the operators. By building the water operators’ capacity, WASH-FIN equips local stakeholders with the know-how needed to be self-reliant and develop enduring solutions to finance their WASH needs.

One Size Doesn’t Fit All

No country, region, or city is the same, especially when it comes to its water and sanitation needs. Thus, financing strategies need to be adaptive and appropriately designed for the local context. More than half of the world’s population lives in urban areas, and by 2050, these populations are expected to increase by 66 percent. Capitals and larger cities often enjoy higher coverage of basic water and sanitation services. However, 80 percent and 70 percent of people in rural areas lack basic water and sanitation services, respectively. Rural communities are last on large projects’ minds. “Even though larger municipal providers have significant financial and technical assistance needs,” said Aguilar, “unfortunately governments and fiscal resources tend to overlook rural and peri-urban service providers because of the smaller populations they serve that may not be as important as cities.”

WaterEquity, recognizing this urban-rural divide, ensures that WASH microloans issued by investees to clients are locally appropriate. “In one country a financial institution may lend under a group lending model, while in another it may make individual loans,” said Moyer. “And the types of water facilities that are appropriate vary from place to place, for example, piped connections in urban areas and on-site facilities in rural areas.” The costs of facilities also vary from place to place, so the loan terms, such as tenor, or the length of time before a financial contract expires, must be customized accordingly. By understanding the different challenges urban and rural settings face and tailoring solutions accordingly, we can begin to remedy the extreme WASH inequities experienced within countries.

The Case for Resilience

Risks that accumulate over time are seldom addressed when financing WASH projects, therefore closing the gap often does not account for climate resilience. However, water and sanitation infrastructure and services are to make a lasting, sustainable impact, they must also be equipped to withstand the challenges posed by climate change, such as droughts and floods. This resilience helps determine project success and return on investments. For this reason, many in the WASH sector are looking to climate bonds as yet another opportunity to finance infrastructure projects.

Climate bonds are on the rise, with rapid growth in this space in the United States and China, but lack of transparency over where invested money is being spent and how effective projects will be are deterrents to many investors. Globally, the Climate Bonds Standard and Certification Scheme encourages smart investments by providing scientifically-backed assurance that funds from bonds go to meeting climate protection standards established in the Paris Climate Agreement.

In 2018, the Water Consortium, a global group of sustainability-focused organizations, launched a Water Infrastructure Criteria for the Scheme, which helps inform bond holders of the impact of water infrastructure projects in relation to climate mitigation, adaptation, and resilience. These new criteria are expected to help mobilize capital around credible projects that can promote sustainable market growth in the water sector. Importantly, the criteria also recognize nature (i.e., watersheds, rivers, etc.) as types of infrastructure and therefore promote investments in sustainable, nature-based, and hybrid infrastructure projects as well.

Resilience goes beyond climate change, extending to organizational sustainability, so that when the main project leaders or donors depart the playing field, clean water still flows. Azure has built resilience into its projects by making it possible for capacity and expertise to remain in the country, to continue growing, and to serve not only the rural service providers but other organizations that require enduring participatory support and commercial management support in the country, said Aguilar. Azure also creates competition among local financial providers. “The local banks and financial cooperative institutions discover that beyond the loan transactions,” he said, “there are other opportunities in establishing a business relationship with these rural service providers as an effective way to grow their businesses.”

Similarly, in Cambodia, WASH-FIN has worked with seven private water operators to prepare technical assessments, investment project proposals, and other financial documents. Five of them completed loan transactions, three more operators were selected for business plan development support, and about 20 banks and micro-finance institutions have been engaged. “Each one of those loans results in more households being connected and improvements in the service quality,” said Huston, “whether in better water treatment capability or increased service levels, moving from 12 hours a day to 24 hours.”

Achieving SDG 6

What is needed to close this financing gap to achieve SDG 6? “We need to continue strengthening the operational, commercial, and financial management capacities of water service providers to feed the pipeline of bankable projects. Local commercial lenders and blended finance structures are part of the solution,” said Aguilar.

Creating an enabling environment that attracts investments is essential to filling the SDG 6 financing gap and government agencies and funding partners need to better utilize what they already have. Expanded market finance must be accessed to close the financing gap, according to this WASH-FIN report. “Governments need to not only allocate significant public funds to water and sanitation, but also structure those projects to attract private capital,” said Moyer. A report by Stanford University and the U.S. Water Partnership also recommends governments in low and middle income countries signal their commitment to WASH, set affordable and cost-recovery water tariffs, apply corporate governance standards across the board to public and private water and sanitation utilities, develop pro-poor subsidies, prepare long-term investment plans, and invest in utility data collection and dissemination—all important actions governments can undertake to create an enabling environment.

As long as the status quo persists, it will not be possible to meet SDG 6. Innovative, resilient financial models are required to solve the WASH challenges of today and tomorrow. The Roundtable on Financing Water, convened since 2017 by the Organisation for Economic Co-operation and Development, Dutch Government, World Water Council and World Bank, provides a platform to examine and pioneer new solutions to these ends. Sanitation and Water for All’s biennial Finance Ministers Meeting, taking place in Washington, D.C. this April, is another important forum that helps governments improve existing mechanisms and consider novel sources of financing, such as climate funds.

To successfully fill the WASH financing gap by 2030, models, like those developed by Azure, WASH-FIN, WaterEquity, and Water.org, should be adapted and adopted. Although the financing gap is immense, we have the approaches and platforms in place to accelerate progress toward SDG 6. After all, only 1 percent of the global GDP is needed to ensure water and sanitation for all. Yet it could make a world of difference in the lives of the people who still need access to clean and safe water and sanitation services.