Greater and more innovative levels of finance and sound systems of governance are needed to achieve UN Millennium Development Goal Target 10 to halve by 2015 the proportion of people without sustainable access to safe drinking water and sanitation. Estimates of the shortfall range from US$6.5 billion to US$75 billion a year.[1]

Most finance mechanisms are more suitable for middle-income countries. A 2005 report by the UN Millennium Project Task Force on Water and Sanitation called for targeted grants for the poorest countries to bridge the gap.

Questions left by Camdessus Report

The Camdessus Report (2003) codified what was known about finance for the water sector and made recommendations on new sources of finance. Better sector governance, cost recovery and national public funding were seen as pre-requisites. The Camdessus Report did not go into detail on the types of financial instruments, nor did it address the fundamental question of how a poor country can access sufficient capital for water and sanitation investment.

In 2004, the EU Water Initiative’s Finance Working Group (FWG) released a final report addressing the following questions:

- Why do the current financing flows not reach the water sector?

- What constraints affect these finance flows?

- How could these constraints be overcome?

The "Gurria Task Force" on Financing Water for All

A Task Force led by Angel Gurria is preparing proposals on water financing for the 4th World Water Forum in Mexico in March 2006, focusing on:

- Financing water for agriculture: a subject of primary concern, since more than 70% of freshwater use is for agriculture;

- New models for financing municipalities and local action: to highlight successful and innovative examples that could be scaled up or replicated.

Innovative finance mechanisms

The IRC Thematic Group on Financing and Cost Recovery has collected data on many examples of successful financing to increase coverage for the poorest at sub-national level through a combination of taxation, charges, efficient collection and cross subsidies.

The concept of ‘innovative finance’ expands the range of stakeholders to include national NGOs, local banks or financial intermediaries, decentralised government agencies, and users, as well as donors and International Finance Institutions (IFIs). Innovative finance can improve a utility’s operational efficiency, improve business development skills for service providers, subsidise connection fees for the poor and support longer-term sustainability. New mechanisms include micro finance, guarantees, pooled finance and other equity and debt instruments at district or municipal level. Innovation also consists of moving beyond the community level to consider larger scale coverage.

Micro finance

Micro finance institutions (MFIs) offer financial services for small scale enterprises (social or otherwise) that are unable to use traditional banks. Micro finance is increasingly provided by institutions (mostly banks) seeking new clients among low-income enterprises. This is stimulating competition, making breakthroughs in outreach, especially in Asia. Innovations include strategic alliances with NGOs and companies that offer complementary services such as business development skills, project preparation, education etc.

NGOs provide innovative loans to support network connections for the poor or act as partners in aid schemes or for banks to expand micro finance in the water sector. The question of how MFIs in Sub-Saharan Africa can become as successful as their Asian counterparts is unresolved.

Guarantees

An increasing number of donors guarantee loans made to local utilities, small private sector enterprises or MFIs. Guarantees mitigate political, regulatory, policy, and sovereign risks. They improve the credit worthiness of a borrower, public or private, lower the cost of capital loans, and increase the attractiveness of water and sanitation investments for commercial banks.

Revolving funds

A revolving fund is a form of pooled finance, which charges repayments to a portfolio of networked urban or small town infrastructure projects, rather than to one project. This results in a stronger credit profile for municipalities, easier access to loans or guarantees, lower interest rates, and lower transaction costs.

No panacea

Innovative finance mechanisms are no more a panacea for development assistance, than were the traditional finance mechanisms that contributed to debt without substantial poverty reduction. Loans need to be repaid, usually with interest, through the tax system or user fees. Without an effective collection system, their effectiveness is doomed. Moreover, innovative finance will not transform a poorly planned project into a good one; or a poorly run utility into a well-managed one. In this respect, non-finance measures are many times more critical. The illegal status of peri-urban households is a key barrier to obtaining credit to improve services, while lump-sum connection costs remain a barrier to increasing coverage to the urban poor.

Detailed articles on some of these cases can be found in Waterlines issue Vol 24, No.2 of October 2005, co-ordinated by Catarina Fonseca (see IRC news section).

A recent European Union Water Initiative inquiry found that in several countries, including Mozambique, Kenya, Uganda, Ghana and Senegal, only a select few outside the international development community were acquainted with innovative finance options and programmes. There is an information gap to be bridged.

[1] WELL Briefing note 9, 2004,: Will it cost the earth? An overview of cost estimates for achieving the water and sanitation targets of the Millennium Development Goals.

Tags: financing