Harnessing Private Investment to Finance Clean Water and Sanitation
The World Health Organization (WHO) estimates that approximately 768 million people worldwide lack access to improved drinking water, and over 2,500 million people lack access to sanitation facilities. WHO also estimates the global economic losses associated with inadequate water supply and sanitation to be USD 260 billion annually. Population increases, urbanization, climate change, and surging demand for water by the industrial and agricultural sectors are poised to exacerbate the lack of access to safe drinking water and sanitation services in the future.
This week, roughly 2,500 experts, practitioners, decision makers, and business innovators gathered at World Water Week (WWW) in Stockholm, Sweden, to address these concerns. World Water Week is one of the largest gatherings in the water sector, and provides a forum for participants to exchange ideas and develop innovative solutions to water supply issues. The UN has already declared 2013 the “International Year of Water Cooperation.” Appropriately, then, WWW’s theme this year is “Water cooperation – Building Partnerships.”
World Water Week conversations have begun to explore how governments and private investors can cooperate in financing sustainable water sector programs. Estimates of the exact amount of financing needed to meet the UN’s Millennium Development Goals in water and sanitation vary, but several major studies have concluded that additional investment is critical to fund new projects and sustain existing projects that can meet global water and sanitation needs in the coming years.
Engaging private investment in the drinking water and sanitation sector
While governments in developing countries typically provide water and sanitation services as public utilities, they often lack enough capital to construct and sustain systems that will meet the full water and sanitation needs of their citizens. Private investment can play a significant role in filling this financing gap.
Recently, I was part of a Dalberg team helping a consortium of 10 international donors identify how and where to deploy private investment to improve access to high-quality water and sanitation services. Over the course of our research, including over 200 interviews with about 60 organizations operating in 14 countries, we made five observations about the potential for private investment in water and sanitation:
1. There is a lack of long-term finance on feasible terms to support the development of water and sanitation services.
The development of long-life quality water assets, such as reverse osmosis water treatment plants that purify rain water, requires long-term financing (lasting from 7-10 years) so that project leaders can pay their loans back within a time frame that allows them to establish stable operations, clients, and prices. However, long-term financing is difficult to come by in many of the markets we studied, and is particularly scarce for water and sanitation project. Banks and other commercial investors are generally unfamiliar with the sector, and therefore reluctant to take on the risks of financing it.
2. There is a sizable pipeline of investments in the water and sanitation sector: the team identified a pipeline of over USD 100 million across the 14 countries reviewed.
3. Effective finance solutions for water and sanitation must be flexible enough to factor in local circumstances.
While debt is the preferred financing instrument by the sector across geographies, the required terms vary based on underlying business and country contexts. Factors such as type of water solution and whether the country’s water sector is nascent or mature affect the kinds of loans and levels of affordable interest rates that are appropriate.
4. The potential for investments is scattered geographically.
The potential for investments is not linked to a particular geography or continent, but must be defined on a country by country basis, based on the public utility, institutional and regulatory environment, nature of donor funding, history and nature of past support, level of income and wealth, and structure of the financial system.
5. Tapping potential investments will require investors to subsidize technical assistance and in some cases, provide concessional funding.
A majority of sector experts have identified technical assistance as necessary to develop existing opportunities. In addition, while a majority of the investment opportunities could come close to commercial terms, some will not be able to repay loans at commercial rates. These will depend on concessional financing terms—in other words, money lent at below-market rates, generally by foreign governments or multilateral organizations, to developing countries.
World Water Week: Continue the conversation
Ultimately, my team identified opportunities for investment in 14 countries, demonstrating that there is an opportunity for private investment to play a significant role in filling the financing gap in the drinking water and sanitation sector. Nonetheless, private investment approaches are still in their initial stages. Investors will need to keep in mind that these opportunities require significant technical assistance and the returns may be lower than market rates. But that is where the potential for partnerships comes into play. Collaboration between governments, development agencies, investors and various other stakeholders can lead to answers about how to invest, where to invest, and what to expect, driving progress toward universal clean water and sanitation access forward, one conversation at a time.
Photos courtesy of subject.
Madhu Yalamarthi is a consultant in Dalberg’s Mumbai office. To keep the Water and Sanitation conversation going with Dalberg, please contact Adrien Couton, who leads Dalberg’s global Water and Sanitation practice area.