Under-financing is a serious problem for the water sector, according to the OECD. Though water is needed by everyone and the demand for water is largely independent of financial cycles, many developing and indeed some OECD countries are struggling to attract investors.
This is serious since large parts of the global water infrastructure is hopelessly out of date: The capacity is insufficient, the sustainability of the actual water provision is often questionable and environmental issues are frequently overlooked to the detriment of lakes and rivers.
To counter this, the OECD has studied the sector and in 2009 produced a report: Managing Water for All: An OECD Perspective on Pricing and Financing. A smaller report, Innovative Financing Mechanisms for the Water Sector (IFM), was published in 2010 and forms the backbone for this blog entry.
The argument in IFM is that the lack of finance opportunities often could be helped by structural reforms. Often the water is managed so poorly that it cannot return the costs of financing it. Without reforms to taxing, tariffs and the legal system, not investors will touch the sector. Nor will the provision of water ever be able to pay for the upholding of this provision.
However, even if reforms are made and long-term financing will one day be secured from taxing and tariffs, the infrastructure needs to be updated here and now. Therefore, there is no way around repayable finance as in financing via loans, bonds and equities.
And there is no way around private investments in water.
If you find yourself asking why private investments are necessary to finance something so obviously in demand as water, then the finger of blame points squarely to the issue of failings in public governance.
In those countries where decades of insufficient funding have left the water infrastructure in shambles – and as mentioned, even OECD countries are among them, though after the Greek ‘almost default’ this shouldn’t really shock anybody reading the news – there may not be enough cash in the public coffers to deal with the costs of maintenance let alone extension of the service.
Raising more money for water through taxes will not get any politician re-elected. It would also strain the private purses even more than they already are and indeed might make water unaffordable for large swathes of the financially challenged public.
There is public funding available for water investments but not enough and competition is fierce.
Basically, there is no way around private investments. And for these to happen, there has to be a framework for making the provision of water profitable and the investment secure.
The only questions worth asking are:
- how to attract the private money
- how public money can be leveraged to enhance the quality of water as an investment
- how to get the best deal for the public, and
- how to keep public oversight on private investments into water.