Sanitation and Water for All: How Can the Financing Gap be Filled

This discussion paper provides a framework to facilitate the country dialogues and preparatory processes leading up to the Sanitation and Water for All (SWA) High-Level Meetings in April 2017, setting out key considerations for countries as they undertake financial planning to meet the Sustainable Development Goals (SDGs). The 2030 Agenda for Sustainable Development introduced a new level of ambition for water, sanitation and hygiene (WASH) services, encouraging countries to aspire to even higher levels of service and thus greater health, economic, social, and environmental benefits. Despite the impressive achievements of the Millennium Development Goal (MDG) period, some areas were left incomplete. The definitions and indicators associated with the SDGs have changed significantly compared to the MDGs, with implications for both WASH sector needs and financing. The financing needed to meet the global SDG WASH targets greatly outweighs available funding from traditional sources. Inaction carries its own costs because access to water, sanitation and hygiene brings proven and significant development benefits. Globally, the current levels of funding flowing to WASH services are in line only with the capital costs of meeting basic WASH services. The costs of achieving safely managed WASH, on the other hand, are a multiple of the costs of achieving basic WASH. The World Bank estimates that $114 billion per year in overall global investment is needed to meet SDG targets 6.1 and 6.2. This represents 0.39 percent of the combined annual national income of the 140 low- and middle-income countries included in the study. The feasibility of achieving the SDG WASH targets depends on the ability to mobilize and redirect significant additional resources if services are to reach poorer, harder to reach populations. Using Existing Financing More Efficiently To extract better results from existing financing, governments need to start by identifying objectives for the water, sanitation, and/or hygiene sector, such as social priorities and desired service levels and standards, and start putting the associated policies in place. Governments then need to identify the sector reforms (including the legal, regulatory, organizational, and institutional structures and instruments) needed to achieve the sector objectives. Once sector objectives are agreed, governments need to engage in three critical, and related, debates: defining who pays for what in the sector; analyzing each subsector individually (urban water, rural water, urban sanitation, and rural sanitation) to determine how to maximize the use of existing financial sources; and aligning aid transfers with domestic priorities to facilitate and support sector reform. In response to the financial challenges facing the WASH sector, this discussion paper outlines a range of proposals for using existing financial flows more effectively, including improving the efficiency of existing funding sources (tariffs, taxes, transfers), and mobilizing domestic private finance—a largely untapped financial resource to the sector. To increase the efficiency of existing funding sources, water service providers should be incentivized to reduce costs. Tariffs need to be set to achieve better cost-recovery, while targeted subsidies should be introduced as needed to alleviate the impact on low-income customers. Revenues from taxes and transfers need to be allocated to areas of greatest need or potential impact. Household investments should be mobilized, particularly for sanitation, and combined with facilitated access to finance. Mobilizing Repayable Finance Because existing domestic resources fall far short of the resources needed to achieve SDG 6.1. and 6.2., it is essential to look beyond them to see how repayable financing can be mobilized, especially from private sources. Repayable financing allows investments to be brought forward without having to accumulate sufficient funds upfront to cover the entire investment or wait for grant or low-cost capital to become available. It also helps smooth cash flows for water service providers, which is particularly important given the large upfront costs associated with water investments. Increasing the level of private financing for the sector would allow service providers to borrow and invest in expanding services and improving quality without having to wait for scarce public resources to be made available or rely on limited concessional financing. Private finance can take various forms—such as vendor or supplier finance, microfinance, commercial bank loans, bonds, or equity—and come from a variety of providers, including equipment suppliers, microfinance institutions, commercial banks, private investors, or investment funds via capital markets. Domestic private finance can reduce the foreign exchange risk. Such funds need to be mobilized gradually, given that the current starting point is limited or no commercial financing. This means improving the financial performance of existing service providers through a mix of initiatives aimed at improving technical/commercial efficiency and through governance and regulatory reforms. These improvements will generate the financial surplus that will enable utilities to borrow funds through commercial channels. Blended finance—the strategic use of public taxes, development grants and concessional loansto mobilize private capital flows to emerging and frontier markets—can leverage additional funds for the sector and reduce borrowing costs compared to a fully commercial arrangement. Blending can help overcome affordability and/or political constraints to borrowing to improve services. The concessional element is used to catalyze more commercial investment than would occur without blending. Blended finance can create new relationships and opportunities between the water and financial sectors, which can promote the long-term goal of increasing commercial financing. A mix of instruments can be used, such as capital subsidies, partial credit guarantees, tenor extensions, political risk insurance, and dedicated lines of credit. These multiple pathways toward greater financial sustainability are mutually reinforcing and need to be implemented in a coordinated manner. The optimal sequencing and balance will vary from country to country and by subsector. The financial attractiveness of the sector will develop incrementally, as the creditworthiness of water sector institutions improves and as capital markets in a country evolve. This will require building political will. Recognition is needed that water and sanitation can be transformed from a "spending sector" into one that can effectively contribute to efforts to promote economic growth and reduce poverty. As governments set their sector objectives, crafting sector financial strategies will be key to getting available funding sources (tariffs, taxes and transfers) to leverage repayable financing, especially domestic private finance.