Aysha wakes in darkness. Departing at daybreak, she will spend the next eight hours walking to the nearest river, returning with five liters of water for her family in a remote region of Ethiopia. She is not alone. Around the world, women and girls spend a staggering 250 million hours daily collecting water for essential needs, more hours than are worked each day by the whole labor force of the entire United Kingdom. (Men and boys shoulder this burden less frequently, but nevertheless account for an additional 80 million daily hours fetching water.) Globally, 1.8 billion people live in households that must seek out water off premises.
Securing sufficient supplies of safe, clean water is one of the most pressing challenges confronting communities worldwide. As of 2022, 2.2 billion people—over a quarter of the planet’s population—lacked safely managed drinking water. Inadequate access to suitable water services raises multiple economic, health, and social risks. Time devoted to gathering water represents time not devoted to school or work. Water insecurity can compromise food security, since scarce or polluted water sources hinder households’ ability to grow and safely prepare food. Some 80 percent of diseases and 50 percent of child deaths worldwide are related to poor water quality.
Reliable and resilient water systems generate tremendous societal and economic benefits, delivering up to sevenfold returns for each dollar spent. With appropriate investment in water and sanitation, Sub-Saharan Africa, for example, could boost its GDP by more than 5 percent, equivalent to $200 billion annually. Despite its fundamental importance, however, financing for the water sector is often insufficient, fragmented, or difficult to sustain over time. The World Bank estimates that reaching the global Sustainable Development Goals to achieve universal safe drinking water and sanitation access by 2030 faces an annual spending gap of $131.4–140.8 billion. Strengthening and diversifying funding mechanisms for resilient water systems are indispensable to ensuring long-term water security and improving livelihoods for all.
Under Pressure: Water Sector Funding Challenges
Water-related investment embraces an array of activities and infrastructure for diverse purposes at different scales, from catchment-level water storage schemes to household distribution. Similarly, water-related investments connect multiple sectors and objectives, from producing food and energy to safeguarding public health, and can realize many public and private goods together. In this way, a given dam and reservoir project can provide flood and drought protection while also supplying water for irrigation, hydropower, industrial, municipal, and other uses. The same interconnections that enable such synergies, though, also generate interdependencies, vulnerabilities, and risks. Thus, even as agricultural water withdrawals continue rising to feed growing global populations, relentless urbanization drives escalating municipal water claims. By 2050, vital urban demands will increasingly collide with essential agricultural needs in over 40 percent of the world’s river basins.
The multifaceted nature of water services and the mix of public, private, and cross-sectoral goods they provide complicates the investment environment. Rarely do specific water projects produce distinct revenue streams in the manner of tolls on highways or landing fees at airports, making it difficult to translate investments into monetary returns. This is particularly so for goods like flood protection and disease prevention, whose payoffs come not as revenues realized but as costs avoided. Rather, individual water projects—storage facilities, pipe networks, treatment plants—comprise elements of larger water services systems, generating benefits as an integrated whole, and should be financed in that systemic context.
Building, operating, and maintaining water service systems require significant financial outlays. Water-related investments have typically been funded by public budgets, relying on combinations of the “3Ts,” taxes, tariffs, and transfers, such as official development assistance and grants from international donors. Yet in much of the world, the water sector goes wanting. In Africa, for example, government allocations to water are declining, and even the limited national budgets allotted are not fully spent. State priorities routinely favor other sectors, such as energy and transportation. Water-related budgets, regulatory and decisionmaking authorities, and implementation roles and responsibilities are frequently divided across different ministries and levels of governance, leading to persistent inefficiencies and gaps. Increasingly, many countries possess formal strategies and structures to coordinate national water planning and development. But these official policies all too often remain under-resourced and incompletely implemented.
With limited public budgets, most utilities and water providers in developing nations also do not collect enough revenue from tariffs and user fees to cover their operating costs, much less capital expenditure. Many governments purposely keep water tariffs low, as many consumers could not afford the services otherwise. Funding constraints push many providers to scrimp on proper management, staffing, training, system operations, maintenance, and repair.
Mismanagement and disrepair, in turn, exacerbate system losses (leaks) and service disruptions, motivating consumers to halt tariff payments or abandon providers for alternative water sources, further sapping the sector’s financial resources.
Official development assistance (ODA) constitutes the second largest source of funding in the water sector after national budgets. Yet ODA contributions for water have been decreasing for most regions since 2011. They will fall further as the United States, the United Kingdom, and other donors move to reduce and retrench aid budgets and programming. ODA flows also exhibit considerable regional and economic inequities. Africa exemplifies these disparities. Across the continent, ODA for water concentrates on a handful of states and skews heavily away from the lowest-income countries, failing to reach recipients who need it most. Similarly, ODA focuses predominantly on large water supply and sanitation systems. Few resources address small-scale projects (such as those serving more rural and remote populations) or the invisible infrastructure of effective water resources management policies, institutions, and capacities needed to develop and govern sustainable water services.
The private sector represents an important potential source of finance but confronts challenges in the water sector. Water projects typically require significant upfront investment, while the returns, which can be difficult to quantify, are often spread out over long payback periods. This makes water infrastructure an “illiquid” asset class, hard to value, hard to monetize, and hard to trade, and therefore less appealing to investors. Projects in emerging markets also face exchange rate risks. Investments usually occur in hard currency (e.g., dollars) while returns are denominated in local currencies that may fluctuate. Meanwhile, institutional investors in particular are bound by fiduciary obligations and liability guidelines that prevent them from making investments that do not clear certain risk and profitability thresholds, which infrastructure projects in the Global South struggle to meet. Against this backdrop, private sector investments in the water sphere have been marginal, representing less than 2 percent of total annual spending.
Liquid Assets: Building Resilient Water Systems
Strengthening the funding pathways for promoting resilient water systems will require the ability to integrate various funding sources, develop local ownership and capacity, and ensure that financing models are inclusive and sustainable. By diversifying financing mechanisms and aligning different funding vehicles with the capacities, risk profiles, and timelines of distinct projects and stakeholders, it is possible to build water systems that are both efficient and sustainable. Several strategies embody such collaborative approaches, engaging governments, donors, the private sector, and local communities to achieve the goal of universal access to safe water.
Innovative Financing Models
Innovative financing models combining public and private funds can attract increased investment for water infrastructure projects. Many developing countries cannot readily access commercial capital. They don’t possess “investment grade” credit ratings due to real and perceived market risks. Blended finance models deploy public monies to mobilize additional capital. Through tools such as insurance or guarantees to commercial funders, public finance can mitigate risks, incentivizing private investors. Public-private partnerships (PPPs) leverage private sector expertise, innovation, and capital to bring new efficiencies and resources to water projects. In PPP arrangements, the public sector can offer initial investment or grants, while private sector partners manage the delivery and maintenance of water services. In Rwanda, for example, the African Development Bank and Emerging Africa Infrastructure Fund furnished finance, backed by a guarantee from Rwanda’s Ministry of Infrastructure, funding Kigali Water Ltd. (a private subsidiary of Dubai-based Metito) to construct and operate a bulk water treatment plant. The plant produces and sells drinking-quality water to Rwanda’s public water authority for distribution to 500,000 consumers. After 27 years, Kigali Water will transfer the plant to the public authority outright.
Water Tariffs, Cost Recovery Systems, and Community-Based Financing
Establishing viable water tariffs is critical to ensuring that water systems are financially self-sustaining. Although this approach can be challenging in service areas with low-income populations, solutions such as targeted subsidies for low-income households and flexible payment plans have proven successful. In Uganda, the United States Agency for International Development’s Uganda Sanitation for Health Activity (2018–2023) collaborated with Uganda’s regional water utilities and the Ministry of Water and Environment to fund 170 kilometers of network extensions and 1,400 new water connections in six small towns. By subsidizing connection fees and creating pro-poor bloc tariffs (tiered fees rising with higher consumption), service was substantially expanded among low-income households. Significantly, the initial cost of subsidized connections and tiered tariffs was more than offset by revenues from the enlarged customer base, increasing water access while enhancing the utilities’ financial viability. (Wider subsidy reform must be part of rationalizing financially self-sustaining water services provision. The sector is awash in $320 billion of annual subsidies, yet more than half of global water subsidies go to the wealthiest 20 percent of the population, while just 6 percent of subsidies reach the poorest 20 percent.) Community-driven approaches to setting tariffs, enlisting local communities in decisionmaking processes, can help formulate fair and affordable water pricing while still generating sufficient revenue to maintain and extend service systems. Community-based models, where local groups raise funds or manage fee collections, can help increase financial independence and foster local accountability.
Development Finance Institutions
Development finance institutions such as the World Bank and other multilateral development banks (MDBs) play a key role in funding water systems development through grants and concessional loans. Equally importantly, they can supply technical assistance and capacity building to support effective water systems management. Private funders are reluctant to invest, and governments hesitate to borrow, for such “soft” infrastructure as staff training, integrated planning, and increased operational and regulatory efficiency. Yet water policymakers consistently identify governance challenges such as institutional fragmentation and policy integration as the foremost obstacles to good water management and realizing the Sustainable Development Goals. By the same token, better management, service delivery, and financial performance bolster providers’ creditworthiness, increasing investment possibilities to expand water services and coverage in a virtuous cycle. With public budgets limited and ODA declining, MDBs can apply their resources and long-term engagements with governments and utilities strategically to further foster such reforms, strengthening the enabling environment.
Donor Coordination and Alignment
There is a need for better coordination among funders, governments, and stakeholder communities. Fragmentation of the funding landscape engenders inefficiencies, overlapping initiatives, inconsistent standards, and failure to capture systemic synergies among projects and country-level needs. Different donors, nongovernmental organizations, and international agencies engage in separate projects that risk amounting to less than the sum of their parts. Deliberate mechanisms for promoting policy coherence, sharing knowledge, aligning priorities, and coordinating funding flows can help maximize development effectiveness and investment impacts from limited resources. Multi-stakeholder platforms can pool resources from various international and local sources and distribute them to projects taking a programmatic approach oriented to shared national objectives and cross-sectoral cohesion. By matching funding with local needs and priorities, donor organizations can ensure that investments lead to effective, inclusive, and sustainable outcomes.
David Michel is the senior fellow for water security with the Global Food and Water Security Program at the Center for Strategic and International Studies in Washington, D.C.
