Creating an Enabling Environment for Sustainable Water Infrastructure Financing

Water presents a significant global development challenge as crises over resources and access to clean water are becoming more extreme due to climate change. To reach the most disadvantaged communities in rural areas, adequate infrastructure is going to be integral. It is estimated that water infrastructure will require an additional $22.5 trillion by 2050, and to achieve Sustainable Development Goal (SDG) 6, financing would need to triple to $114 billion per year. As with other forms of infrastructure, water requires more than simply building reservoirs, pipes, and holding tanks. For true sustainable infrastructure, donors and local governments should also invest in support to maintain infrastructure and create a regulatory environment that enables continued improvement.

To successfully finance water infrastructure, there must be an understanding of what the current financing landscape looks like and how the United States, its Group of Seven (G7) allies, and multilateral partners should prioritize financing, especially on a local level.

Financing Water: An Important Void the G7 Can Fill

Financing for water, sanitation and hygiene (WASH) services comes from myriad sources, namely the three T’s: taxes, tariffs, and transfers. That is, domestic taxes from individuals and businesses passed from governments to the WASH sector; tariffs and fees paid by WASH users (e.g., households, businesses, and governments); and transfers, such as official development assistance (ODA), remittances, and grants from international donors or nongovernmental organizations.

The United States launched a Global Water Strategy in 2017 to work with partner countries and key stakeholders to achieve WASH-related objectives through the U.S. Agency for International Development (USAID), Millennium Challenge Corporation (MCC), and other agencies. From fiscal year (FY) 2008 to FY 2020, USAID’s programs helped 59.5 million people gain access to an improved drinking water service and 44.6 million gain access to improved sanitation services. In 2020 alone, USAID provided $450 million to support WASH programming. This year, USAID designated 21 high priority countries (HPCs) that present WASH challenges and opportunities to make significant progress in meeting these challenges through USAID’s programs. The MCC has funded $1.1 billion in WASH interventions as of December 2021, which fell into the following categories: water infrastructure, sanitation or wastewater infrastructure, hygiene and other training, and drainage infrastructure. An example of one of these projects was between the MCC and El Salvador, which signed a five-year $461 million compact to reduce poverty by investing in the northern zone of the country. Since the start of the project, an estimated 7,600 households are now connected to potable water. 

The Build Back Better World (B3W) initiative is one avenue through which water infrastructure challenges around the world could be accomplished. Announced at the June 2021 G7 conference, B3W is an effort to meet the infrastructure needs of low- and middle-income countries (LMICs). It is structured around four priority pillars: climate, health and health security, digital technology, and gender equity and equality. Although water is not explicitly referenced, it falls under the climate, health, and gender pillars. B3W intends to pull together financing from G7 aid agencies and development finance institutions (DFIs) to catalyze private investment for infrastructure projects, of which water is critical. Details remain to be determined, including how much the initiative will focus on hard versus soft infrastructure, how seven different DFIs and aid agencies will align their financing policies, and how the U.S. government will manage its own inter-agency process, including coordination between USAID, the MCC, and the Development Finance Corporation (DFC). Water should be a focus area for B3W.

Urban versus Rural Challenges: Why Water Challenges Should Be Addressed on a Local Level

Urban and rural areas face different challenges related to water access and WASH. This contributes to the need to address water-related financing on a local level. While urban WASH coverage is generally higher than for rural communities, deep intra-urban inequalities persist. These challenges are only exacerbated by increased urbanization. The population of slums have grown at an average of six million people a year, with 80 percent of this growth occurring in just three regions: sub-Saharan Africa, eastern and southeastern Asia, and central and southern Asia.  Moreover, the impacts of the Covid-19 pandemic have been more severe in urban areas because of high population density and inadequate access to basic WASH services. Despite increased urbanization, urban access to drinking water has stagnated or improved only marginally since 1990. Only 53 percent of water sources are free from contamination for the poorest urban populations, while this number is 80 percent for rich urban populations. Urban populations that cannot rely on municipal piped water often find themselves paying excessive amounts for basic water services from alternative providers. Affordability of water and WASH services is another major challenge urban households face, which also impacts rural communities.

In rural communities, there are several issues that make providing access to clean water and sanitation especially difficult. First, there is a lack of infrastructure that connects clean sources of water to these communities. This includes insufficient wastewater treatment and indoor plumbing—issues that are exacerbated by water pollution from surrounding agricultural sites. Second, local governance on water issues, often due to a lack of institutional knowledge, is generally weak. This is further aggravated by a lack of coordination between federal, regional, and local governments. Third, insufficient and unsustainable funding to build and maintain infrastructure is a critical issue for sustainability. Fourth, many rural communities, such as those in the Sahel and the Northern Triangle, are in geographically vulnerable areas prone to extensive desertification. Finally, all these challenges are exacerbated by the specific needs that each local community has, which makes it difficult or even impossible to create a standard solution to addressing water issues. As a result, G7 development actors should come up with solutions on a local level and support local governments.

Recommendations

The United States and its G7 allies have a unique set of development finance tools that can strengthen developing country governments and local communities’ capacity to implement regulations and build the knowledge base to sustain these investments in the long term. When it comes to addressing water infrastructure challenges, the U.S. government and its G7 partners should utilize these tools to (1) implement state revolving funds that develop a steady stream of funding for water infrastructure projects, (2) create a strong enabling environment to ensure water infrastructure is properly built and maintained, and (3) provide innovative technologies that create sustainable water infrastructure.

Implement State-Revolving Funds

In the United States, all 50 states, in addition to Washington, D.C., and Puerto Rico, operate two state revolving funds (SRFs) to finance water infrastructure: the Drinking Water State Revolving Funds and the Clean Water State Revolving Funds. These funds are both operated by the Environmental Protection Agency (EPA) and distribute low interest loans to high-quality water projects. The funding for these loans comes from both the federal and state government and repayments are recycled back into the funds. SRFs support disadvantaged communities in the United States by providing flexible financing terms, additional subsidization, technical assistance, and funding partnerships.  by providing flexible financing terms, additional subsidization, technical assistance, and funding partnerships.

There would be immense benefits for the G7 to support the creation of SRFs in LMICs. SRFs have the potential to build a strong foundation for the payment and development of water infrastructure on a local level. Similar programs already exist in the form of revolving loan funds (RLFs) which are a “mechanism that offers contingent loans that are repaid to the fund as the project matures and generates income.” RLFs function similarly to SRFs in that they are provided in the form of low-interest loans with the intention of the repayment being funneled back into the original fund. Additionally, RLFs usually have an environmental focus, prioritizing clean water and green infrastructure. A difference between SRFs and RLFs is that funding for SRFs comes from governments while funding for RLFs usually come from various development actors such as the World Bank or African Development Bank. Advantages of using SRFs to finance water infrastructure in LMICs include that they support the financing of projects across communities, finance water projects in the local currency, and leverage local capital markets supported by the expertise of the G7. Creating SRFs in communities will develop markets on a local scale and generate options for communities to fund infrastructure outside of the centralized national system.

Create an Enabling Environment

Given the tremendous costs of water shortages to the global economy, the private sector is also incentivized to invest in water infrastructure. The Organization for Economic Cooperation and Development (OECD) predicts that as populations increase and changes in climate cause a shrinkage in the supply of water, 40 percent of the world’s population will live in water-stressed regions. An article published by Nasdaq highlights that if water shortages are not addressed, they could cost businesses $301 billion. Addressing these issues would cost $55 billion, creating an immense incentive for the private sector to invest in water infrastructure. However, without the proper enabling environment, the availability of this financing will not be enough. Currently, water infrastructure projects are either not properly prepared for financing, inadequately implemented, or insufficiently maintained. This is where the G7 should step in to create a strong enabling environment through technical assistance:

1. The first step in creating a strong enabling environment is helping businesses prepare for investments from the private sector. In many cases, small businesses that aim to provide services in the water sector do not have an understanding on where to find initial financing, how to break into a new market, how to develop a new product, or how to structure an investment.
2. The second step in executing a successful water infrastructure project is ensuring that once firms have received financing, the projects are properly implemented. In many cases, governments have not created suitable policies or regulations to set necessary standards.
3. The third step of creating successful water infrastructure is ensuring that the projects are sustainable over time. NGOs, donors, and governments have spent $360 million on wells and boreholes that can no longer be used due to a lack of maintenance. This demonstrates the importance of investing in maintenance and training local communities on repairing damaged systems.
4. Finally, technical assistance (TA), which USAID and DFIs have extensive experience in providing, is going to play an integral role in supporting water-related infrastructure projects through the project’s lifetime. Aid agencies have the ability to provide TA in the form of providing guidance to governments on regulatory reforms, collecting and disseminating data, and building capacity. DFIs’ TA also includes feasibility studies and measuring the environmental and social impact of various projects. Each of these types of technical assistance are critical to all three of the steps listed above and thereby creating a strong enabling environment.

Utilize Innovative Technology

Innovative technology is also an important piece of achieving sustainable and effective water infrastructure. Various emerging technologies are present in the water sector, from UVC-LED technology for water disinfection to biogas generation and recovery technology in wastewater treatment plants. There is also vast innovation underway to improve water purification, including nanotechnology, acoustic nanotube technology, and photocatalytic technology. Analysis of water systems is another area where technology will be integral. For example, artificial intelligence (AI) can be utilized to collect data on water quality, detect and analyze issues, inform possible solutions, and evaluate performance. USAID, with its Global Water Strategy, has the opportunity to play a leading role in helping to expand the use of innovative technologies in LMICs. This is a space where the United States and its allies have a unique ability to engage in knowledge and technology transfers through partnerships with local governments and small and medium-sized enterprises.

In this context, one significant innovation, especially in reaching rural communities, is using micro-utilities. A micro-utility functions similarly to a traditional utility system, but it can be disconnected from a standard grid and operate independently. Water micro-utilities not only provide a more consistent supply of water but also constitute a much cleaner and healthier alternative to the tanks and wells that currently supply water to low-income rural communities. Various filtration processes are a standard aspect of micro-utilities and can help prevent the spread of diseases such as cholera. Investing in micro-utilities can also spur economic growth in communities. For example, the Safe Water Network, which helps implement micro-utilities in rural communities, usually works with and trains local entrepreneurs. Additionally, women and girls have more time to seek an education or economic opportunities since they are spending less time gathering water.

Conclusion

Addressing challenges in the water infrastructure space will require a combination of financing tools, including but not limited to implementing SRFs, creating an enabling environment through TA, and providing innovative technology. The specific combination of tools should be determined based on local needs, which can differentiate vastly between communities, and especially between urban and rural ones. SRFs, technical assistance, and technology are specific areas where G7 countries excel in providing development assistance and can enable local governments and communities to tackle these issues long after donor projects are complete.

Conor M. Savoy is a senior fellow with the Project on Prosperity and Development at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Janina Staguhn is a research assistant for the Project on Prosperity and Development at CSIS.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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