WATER FINANCE:The Imperative for Water Security
and Economic Growth
Prepared by Newsha Ajami, Hank Habicht, Brent Fewell, Tim Lattimer, and Thomas Ng
July 1, 2018

About the Authors
Newsha Ajami, Director of Urban Water Policy, Stanford’s Water in the West program and NSF ReNUWit program
Hank Habicht, Chief Strategy Officer, Sun to Water and Managing Director, U.S. Water Partnership
Brent Fewell, Chair and Founder, Earth and Water Law GroupTim Lattimer, International Advisor, U.S. Water PartnershipThomas Ng*, Staff Engineer, Geosyntec Consultants*Report completed while a Research Assistant with the Urban Water Policy and Innovation team at the Stanford Woods Institute for the Environment.

TABLE OF CONTENTS
Executive Summary......................................................................................................................................................... 1
Recommendations.................................................................................................................................................... 3
Water Finance – A Critical Linchpin for Development...................................................................................................... 5
Investment Requirements.......................................................................................................................................... 5
Domestic Water Finance Challenges, Solutions, and Tools............................................................................................. 8
Water Finance Sources in the United States............................................................................................................... 8International Water Finance Challenges & Solutions..................................................................................................... 15
International Water Finance Sources........................................................................................................................ 15
U.S. Government Finance Agencies.......................................................................................................................... 17
International Finance Institutions.............................................................................................................................. 18
Private Sector......................................................................................................................................................... 19
Philanthropic Organizations..................................................................................................................................... 19
Key Obstacles to Meeting the International Water Finance Gap.................................................................................. 20
Governance: The Key to Unlocking Water Finance..................................................................................................... 21
Key Solutions & Tools to Close the Gap ................................................................................................................... 21
The Way Forward........................................................................................................................................................... 24
Recommendations for U.S. Policymakers.................................................................................................................. 24
Recommendations for International Finance Institutions (IFIs) and Other Donors......................................................... 25
Recommendations for Developing Countries............................................................................................................. 26
Recommendations for Private Investors.................................................................................................................... 27
Elevating Water as a National Security Concern........................................................................................................ 28
References ................................................................................................................................................................... 29

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WATER FINANCE: The Imperative for Water Security and Economic GrowthiLIST OF FIGURES
Figure 1: Number of water systems by their size and the population they served in 2011. .........................................................

6

Figure 2: Total Water Main Replacement and Growth Needs by System Size............................................................................

6

Figure 3: Breakdown of non-household sources of WASH financing (taxes, external sources, and repayable finance).................

16

LIST OF TABLES
Table 1. Loans and Grants Financial Assistance Programs in the U.S.......................................................................................

9

Table 2. Examples of PPP Contract Function Types.................................................................................................................

10

Table 3. Examples of Innovative Financing Mechanisms and Governance Structures.................................................................

13

Table 4. Examples of IFIs that have provided ODA to the water sector, 1995 – 2014.................................................................

18

Table 5. Examples of philanthropic organizations that have provided grants to the water sector, 2001 – 14................................

19

WATER IN THE WEST

iii

WATER FINANCE: The Imperative for Water Security and Economic GrowthAcknowledgements
This report was a collaborative effort between Stanford Urban Water Policy and Innovation Team, a research group bridging
Stanford’s NSF-ReNUWIt program and Water in the West, a program of the Stanford Woods Institute for the Environment
and the Bill Lane Center for the American West, and with U.S. Water Partnership.
Findings, interpretations, and conclusions included in this report are those of the authors and do not necessarily reflect theviews of each individual organization or those who provided review.
We are grateful to the U.S. Water Partnership and Stanford’s NSF-ReNUWIt for funding this research. Thank you to thestakeholder representatives who provided early feedback on this document.
Contact
Water in the West
Stanford University
Jerry Yang and Akiko Yamazaki (Y2E2) Building
473 Via Ortega, MC 4205
Stanford, CA 94305
waterinthewest@stanford.edu
About Water in the West
Water in the West is a partnership of the faculty, staff and students of the Stanford Woods Institute for the Environment
and the Bill Lane Center for the American West. The mission of Water in the West is to design, articulate, and advancesustainable water management for the people and environment of the American West. Linking ideas to action, we
accomplish our mission by engaging in cutting-edge research, creative problem solving, active collaboration with decisionmakers and opinion leaders, effective public communications and hands-on education of students. To learn more visit:
waterinthewest.stanford.edu.

EXECUTIVE SUMMARY
Water is the essential and irreplaceable element for life and livelihoods throughout the globe. Yet, unsafe water and poor sanitation
together are the single largest cause of illness worldwide, as nearly two million children die each year from preventable diarrheal
diseases. Droughts and floods affect more people than all other natural disasters combined. Nearly two-thirds of the world’s people
are expected to live under water-stressed conditions by 2025, impacting levels of disease, food production, and other basic qualityof life measures. Experts in and out of government confirm that safe water infrastructure is a fundamental component of economic
health. In the United States alone, the American Society of Civil Engineers has estimated that failure to close the gap in investments
required for water and sanitation, “would cause the United States to lose nearly 500,000 jobs by 2025. Unless the infrastructure
deficit is addressed by 2040, 956,000 jobs will be at risk relative to what is otherwise anticipated for that year. By 2025, the nation
will have lost over $508 billion in GDP, while the cumulative impact through 2040 is expected to be $3.2 trillion of GDP” (ASCE,
2016). It is also increasingly clear from work done by USWP and other experts that the health of water systems and infrastructure
are essential to domestic and global security as well. Access to water and sanitation depends upon a reliable water infrastructure
system that preserves, treats, and delivers safe drinking water to consumers and a system that collects and treats wastewater
adequately. Growing consumer demands, aging infrastructure, and a changing climate aggravate water scarcity and portend
increased tensions within and between countries in many parts of the world.
Water security challenges do not only exist outside U.S. borders. There are sometimes different financing priorities domestically andglobally, but the challenges are similar. We require a strategy that makes water infrastructure a higher priority for both domestic andinternational investment, and in a system where lessons learned can be effectively shared across borders. There is an imperative
both domestically and globally for public and non-public sources of capital to be as coordinated as possible.
Our research and discussions through our network identifies a number of common themes. The most prominent of these is that themassive need for infrastructure investment is spread across a large number of small to medium size systems. The opportunity to
combine and blend financing around groups of facilities is substantial, as is the need to be sure that new distributed technologies
and approaches are made available to resource-constrained operators in these smaller systems.
In addition, domestically and internationally, both the risks related to water and the value of water are underappreciated. A key tochanging this inertia is a function of improved coordination and communication across sources of funding and key agencies.
The inescapable reality is that meeting all of these challenges requires a rapid tripling of water and wastewater investments beyond
existing levels. In the United States, this means ramping up water investments from about $41 billion to $123 billion per year.
Globally, this means investing in water and wastewater to the tune of about $6.7 trillion by 2030 and $22.6 trillion by 2050. Despitepressing needs and the availability of vast sums of capital and financial tools from a plethora of domestic and international sources,
both public and private, we will not be able to attain such increases in investment without overcoming long-standing obstacles, mostof which are related to governance and institutional arrangements.

WATER IN THE WEST

WATER FINANCE: The Imperative for Water Security and Economic Growth1These obstacles include:
United States

International• Limited federal funding for water and wastewater
infrastructure, as the percentage of federal infrastructure
spending that goes to the water sector has fallen from 63%
to only 9%.

• Uncertainty about the sustainability and availabilityof future funding, owing to serious fluctuations in the
year-to-year amounts of aid provided by both large and small
institutions and a lack of long-term sustained sources offunding for large projects.

• Structural obstacles to investment, such as the water• Shortage of financial and/or human resources, owing
sector’s need for high up-front capital investments combined
to weak cost recovery, the myriad other barriers to domestic
with long-term payback periods.
and foreign investment, and unpredictable flows of foreignassistance.
• Cultural obstacles to investment, which arise fromdivergent views on the role of private water companies.
• Weak managerial and/or financial capacity amongwater and wastewater operators, as nearly half of thenation’s 53,000 water systems are very small (serving
less than 500 people of less), which suggests a need forconsolidation and networking among smaller systems.

• Lack of creditworthy or reliable service providers, asmany water service providers or projects are unable to use
funding effectively, resulting in water finance absorption
rates of 54-60% and 38-48% for domestic and foreign aid
funds, respectively.

• Poor local governance, owing to the political sensitivities
around water pricing that prompt many state and local
governments, in statute or as a matter of policy, to forbid
service providers from charging customers differently basedon their ability to pay.
• Lack of data and information, as project developers andprospective financiers often lack sufficient information, thus
leading to mismatches or missed opportunities for water
investments.
• Affordability, as many utilities struggle to fully recover costs
without adversely affecting low-income communities.

• Lack of data for informed decision-making, owing toinadequate collection, management, and/or use of financial
data by water and wastewater service providers (i.e.,
data on billing, collections, service provision, and budget
performance).

• Lack of full cost recovery in pricing water tariffs, as
only one third of U.S. water utilities have rate structures thatprovide adequate revenue to fully cover their costs.

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WATER FINANCE: The Imperative for Water Security and Economic Growth2

Recommendations
For the United States
1.

Establish a comprehensive, integrated, and strategic approach grounded in robust, bottom-up collaboration.

2.

Refocus and integrate the priorities and authority of U.S. government agencies related to water.

3.

Encourage formation of, and participate actively in, a U.S. water finance exchange or “hub” which focuses on catalyzing actual
projects.

4.

Identify “transformative” policy ideas to change decision-making at local level, including consolidation and partnerships(public-public and public-private)

5.

Increase public outlays in water and wastewater infrastructure.

6.

Incentivize greater private participation in infrastructure service delivery, including investment, by reducing risks and linking
various risk portfolios and products, as appropriate, to federal and private financiers.

7.

Develop a unified water data and information network.

8.

Accelerate the innovation and adoption of new technologies.

For International Finance Institutions and Other Donors
1.

Continue to elevate water as a priority.

2.

Continue to boost stronger coordination of policymaking among water and finance authorities.

3.

Focus on catalyzing and evaluating projects which employ innovative approaches and technologies.

4.

Look beyond traditional “hardware” (i.e., grey infrastructure) solutions and boost emphasis on “green” infrastructure and“software” solutions that strengthen fundamental governance capacities.

5.

Where appropriate, take a stronger role in leading in-country donor coordination.

For Developing Countries
1.

Create and maintain stable and predictable policy frameworks as part of a broader commitment to the rule of law.

2.

Signal government commitment and a “whole of government” approach to water and wastewater infrastructure development.

3.

Maintain a level and competitive playing field.

4.

Undertake transparent and robust stakeholder engagement to balance affordability and cost-recovery in setting water tariffs. If
tariffs are below service costs, and subsidies are needed, governments, not utilities, should bear these costs.

5.

Better targeting of subsidies to the poorest/most vulnerable is crucial. Currently wealthier consumers are benefitting frommost of the subsidies.

6.

Invest in data collection and management, and information sharing.

7.

Develop and publish long-term investment plans to promote greater financing from institutional investors.

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WATER FINANCE: The Imperative for Water Security and Economic Growth3

For Private Investors
1.

Share information to make transparency a two-way “street” with public investors and utility managers.

2.

Implement projects. Work together with key public institutions to generate and evaluate projects.

3.

Support the use of innovative technology.

4.

Collaborate with each other and with likeminded public officials to advance institutional reforms.

5.

Demonstrate genuine good corporate citizenship.

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WATER FINANCE: The Imperative for Water Security and Economic Growth4

WATER FINANCE – A CRITICAL LINCHPIN FOR
DEVELOPMENT“Thousands have lived without love, not one without water.” W. H. Auden

Water is essential to all of life on Earth. Like the air we breathe, water is a crucial for human health and well-being. It is a vitalelement for which there are no alternatives. Globally, between 1990 and 2015, some 2.6 billion people gained access to improved
water sources while about 2.1 billion obtained access to improved sanitation facilities. However, the distribution of these gains was
uneven as, for example, improved sanitation coverage in Sub-Saharan Africa grew by only 6%, compared to a 29% increase in East
Asia (UNICEF and World Bank, 2017). Moreover, despite the gains of the past two decades, an estimated 663 million people still
do not have ready access to clean water and about 1 in 3 people – some 2.4 billion – do not use improved sanitation facilities. At
least 1.8 billion people use water sources that are fecally contaminated, while nearly 1,000 children die each day due to preventablewater and sanitation related diarrheal diseases (UN Water). More than half of the hospital beds around the world are occupied withpatients who suffer from illnesses related to contaminated water.
Water is also essential for livelihoods. Nearly 80 percent of the jobs constituting the global workforce are water-dependent. The
nearly 1 billion people who work in the world’s farming, forestry, and fisheries sectors are heavily dependent on water. Agriculture
accounts for about 70% of total freshwater withdrawals in the world and more than 90% in most least developed countries. Risingfood demand, together with the impacts of climate change, will put added stress on increasingly scarce water resources.
Most of the world’s electricity production depends on water for cooling or for hydroelectric generation. As a result, energy
production uses about 15% of the world’s water. Global energy demand is projected to increase by 30% by 2040. Electricity willtake an increasingly larger share of final energy consumption, from about one-quarter of energy consumption today to nearly 40%
in 2040, which means the energy sector’s water demands will add further stress on water resources (International Energy Agency,“World Energy Outlook 2016”).

Investment Requirements
Infrastructure: Access to water depends upon a reliable water infrastructure system that preserves, treats, and delivers safe
drinking water to consumers. Globally, simply meeting the UN’s Sustainable Development Goals (SDGs) for water would require
the investment of an estimated $1.7 trillion by 2030, which is three times current investment levels. More broadly, global water
infrastructure development is estimated to require $6.7 trillion by 2030 and $22.6 trillion by 2050 (OECD).
In the United States, most of the nation’s 53,000 federally-regulated community water systems have been in operation for 75 to
100 years or longer, typically using infrastructure that has well exceeded expected lifespans. As shown in Figure 1, small operators
represent the vast majority of U.S. water systems. Many communities, particularly those in rural and low-income areas, struggle
to maintain and operate existing water treatment systems. Much of the country’s water infrastructure, including the more than one
million miles of pipes, is nearing the end of, or has exceeded, its useful life and must be replaced.

WATER IN THE WEST

WATER FINANCE: The Imperative for Water Security and Economic Growth5Figure 1: Number of water systems by their size and the population they served in 2011.
139.5

140
Number of Systems (in thousands)

124.3
120

109.5

Number of people (in millions)
100
80
60
40
20

14.1

19

30

25
5.2

3.8

0.4

0
Very small(serving 500 or
fewer people)

Small(serving 500-3,300
people)Medium(serving 3,301-10,000
people)Large(serving 10,001-100,000
people)Very large(serving 100,001
or more people)

Source: Environmental Protection Agency 2013. Note: “Water systems” refers to active public drinking water systems regularly supplying drinking water to at least
twenty-five people or having fifteen service connections for sixty or more days of the year.

The American Society of Civil Engineers (ASCE) estimates that the United States must invest at least $123 billion per year inwater infrastructure over the next ten years to achieve a “good state of repair.” Yet we currently invest only about $41 billion, i.e.,
funding only about one-third of our water infrastructure needs, leaving a gap of about $82 billion per year. The U.S. Environmental
Protection Agency (EPA) estimates that the country will need a $660 billion investment for water and wastewater systems overthe next 20 years. The American Water Works Association has estimated that restoring and expanding water and wastewater
infrastructure in the United States will cost more than $1 trillion over the next 25 years. Figure 2 shows AWWA’s estimate solely forwater mains in the United States.

Figure 2: Total Water Main Replacement and Growth Needs by System Size
$60
Large

MediumSmall

Very Small$50

Billions

$40
$30
$20
$10
0
2010

2015

2020

2025

2030

2035

2040

2045

2050

Source: American Water Works Association, “Buried No Longer: Confronting America’s Water Infrastructure Challenge,” 2016.

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WATER FINANCE: The Imperative for Water Security and Economic Growth

6

The water infrastructure crisis also represents a tremendous opportunity as water infrastructure development means more jobs.
In the United States, every $1 billion invested in infrastructure creates or supports 28,500 jobs, and every dollar invested in water
and wastewater infrastructure adds $6.35 to the national economy. With the increase in GDP, every dollar of water infrastructure
investment generates $1.35 in tax revenue to the federal government and $.68 to state and local governments, representing tax
revenues to help pay for infrastructure investment.
Institutions: Many water operators around the world face systemic challenges associated with the technical and managerial
capacity of their personnel, aging workforces, staff attrition and the associated loss of experience, and weak interest from new
graduates to join the water industry (OECD, 2017). This is a particular challenge for water operators in rural and low-income
communities. As a result, water and finance industry experts increasingly recognize that institutional shortcomings (i.e., governance)
represent the main obstacles to greater investment in water and wastewater infrastructure. This points to a need for significant
investment in human resources (including technical capacity building), technology, and data and information tools.

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WATER FINANCE: The Imperative for Water Security and Economic Growth

7

DOMESTIC WATER FINANCE CHALLENGES,SOLUTIONS, AND TOOLS
Water Finance Sources in the United States
Public Agencies
Traditional financing for water system improvements and maintenance is currently predominantly handled by utilities in one of twoways, through: (1) cash financing: which draws from current revenue at hand for utilities gathered from water rates, service fees,
connection fees from new accounts, or taxes; or (2) debt financing: which raises upfront capital through the issuance of municipal
bonds (The Johnson Foundation, 2012; Ajami & Christian-Smith, 2013). Due to the often large-scale, capital-intensive nature ofconstructing new water projects, debt financing is usually the preferred method for utilities who are often already too cash-strappedfrom just handling day-to-day operations (The Johnson Foundation, 2012).
Local governments can use one or several of the following three financing instruments to acquire capital:
Bonds: One of the primary tools of debt financing used by local governments to acquire capital, bonds enable utilities to generate
funds by selling bonds to investors with the promise to repay them the initial principal plus a specified rate of interest calculated overthe life of the bond (U.S. Securities and Exchange Commission, 2017). Specifically, municipal bonds, which are debt securities
issued by local governments, have been the most popular (Epstein, 2016; Ajami & Christian-Smith, 2013). Three common types ofmunicipal bonds include: (1) general obligation bonds, which are issued by states, cities, or counties to the public and are backed
simply by the taxing power that they have on taxpayers to repay their investors; (2) revenue bonds, which are similarly issued
by government authorities to the public, but are backed by revenues generated from the operation of the project being financed(USEPA, 2008); and lastly, (3) private activity bonds, which are issued by a or on behalf of government project sponsor authorities,
or on their behalf by a conduit municipal entity, for the purpose of funding a project being developed by one or several private
partners, such as in a PPP (Internal Revenue Service, 2016).
Loans and Grants: Other methods of financing available to utilities to generate capital for projects. In the case where utilities’
capital needs are too small for the bond market, they must rely on other sources such as loans or grants at the federal, state, or
local level to administer their capital improvement programs (The Johnson Foundation, 2012). Loans are sums of money usuallyprovided by governments, at a lower interest rate compared to commercial loans, associated with a specific goal in mind for projects
that will have to be repaid after a certain amount of time. Grants on the other hand are sums of money awarded by agencies ororganizations with specific goals in mind, similar to loans, that often have more difficult application procedures, deadlines, andmandates than bonds, but do not require a payback at the end of its funding period (USEPA, 2008).
There are several major loans and grants programs available for utilities, but they are typically tied to specific mandates set by theissuing organization and have strict application procedures and deadlines (USEPA, 2008). Examples of several major loans andgrants sources at the federal, state, and local level in the U.S. are listed below. Although the major funding sources have been listed
here, there are many additional types of bonds, grants, and loans available that can provide both financial and technical resources
for local governments.

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WATER FINANCE: The Imperative for Water Security and Economic Growth8

Table 1. Loans and Grants Financial Assistance Programs in the U.S.
ProgramDescription

EPA Office of Water – Clean Water State
Revolving Fund (CWSRF)

Established in 1987 following amendments made to the Clean Water Act (CWA),
states, working in partnership with EPA, provide financial assistance, largely in theform of loans to communities of all sizes to construct wastewater infrastructure
projects. State CWSRFs have provided more than $111 billion to communities
through 2015 (USEPA, 2017b). The CWA allows financial assistance to be madeto private sponsors for non-point source projects.

EPA Office of Water – Drinking Water
State Revolving Fund (DWSRF)

Established in 1996 following amendments made to the Safe Drinking Water Act(SDWA), states working in partnership with EPA, provide financial assistance,largely in the form of loans to communities of all sizes, to construct water
infrastructure projects. State DWSRFs have provided over $32.5 billion to water
systems through 2016 (USEPA, 2017b). The SDWA allows financial assistance tobe made available to public or private project sponsors for all classes of projects.

Water Infrastructure Finance andInnovation Act (WIFIA) Program

Established in 2014, WIFIA is a federal loan/credit program managed by EPA tohelp communities finance water and wastewater projects, expected to leverage$1.5 billion in federal loans (USEPA, 2017b).

U.S. Department of Agriculture (USDA)– Rural Development Water andEnvironment Program (WEP)

Provides water and wastewater infrastructure financing to communities withpopulations less than 10,000. USDA has funded over $13.9 billion for 5,825
projects. WEP also provides technical assistance and training to rural communities
for their water and wastewater activities (USDA, 2017b).

U.S. Department of Housing and Urban
Development (HUD) – Community
Development Block Grants (CDBG)

Established in 1974, CDBG provides block grant funds to states for distribution to
low and moderate-income areas to fund local community development activities.
It is estimated that about 10 percent of funding is used for water and wastewater
infrastructure projects (Gomez, 2013; HUD, 2017).

Department of Commerce Economic
Development Administration (EDA)– Public Works and Economic
Development Program

Provides grants to small, disadvantaged, and economically-distressed communities
to construct public facilities, including drinking water and wastewater facilities, tocreate jobs and attract private investment (USEPA, 2017b; U.S. EDA, 2017).

Department of Interior (DOI) – Bureau
of Reclamation (BOR) – Title XVI Water
Reclamation and Reuse

Provides funding for the planning, design, and construction of water recycling andreuse projects in partnership with local government entities. Since 1992, Title XVI
has used approximately $639 million in federal funds and more than $2.4 billion in
non-federal funds to construct projects (U.S. DOI – BOR, 2017).

BOR – Rural Water Supply Program

Established following the Rural Water Supply Act of 2006, the Rural Water Supply
Program provides financial assistance for individual water supply projects incommunities with populations less than 50,000 (U.S. DOI – BOR, 2015).

U.S. Army Corps of Engineers (ACE)Provides assistance for water supply and wastewater infrastructure projects forlocations authorized by Congress (Gomez, 2013).

Indian Health Service

Provides funding for water and wastewater infrastructure projects on tribal lands(Gomez, 2013).

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WATER FINANCE: The Imperative for Water Security and Economic Growth9

Private Sector
Aside from public financing assistance programs, utilities can also find resources in the private sector. Public-private partnerships(PPPs), or contracts between a private party and a government entity for providing public assets or services, can provide utilities
with resources beyond what they currently have at their disposal (Epstein, 2016). The private role in the U.S. water and wastewaterprovision dates back to the mid-1800s when most water utilities were privately owned and operated. Private sector participationin the United States will range in both respects to the degree and duration of private sector participation from simple consulting
contracts to full-fledged investor-owned utilities. Although PPPs have been around ever since the early 1900s, they have beenused relatively little in the water sector in the United States, especially when compared to the energy or telecommunications
sectors (Engel, Fischer, & Galetovic, 2009); however, given the limited amount of funding options presently available to stressed
utilities seeking to restore aging water systems or to construct new water projects, PPPs offer an increasingly attractive financing
pathway to secure the necessary resources that would otherwise be tougher to obtain from bonds, loans, or grants (The Johnson
Foundation, 2012). A number of existing examples in the United States include private capital funding arrangements which were
essential for communities to address financial stresses that were otherwise limiting its funding options and its ability to address
system needs (see Bayonne, NJ example on page 13).
Public-private partnerships can come in many different contract types that dictate how much responsibility and risk is borne by
the public sector versus private investors (World Bank, 2014). Contracts are described through a combination of project phases orfunctions that determine the extent of the private party’s responsibility in each project (World Bank, 2014). It is important to notethat PPPs often come with higher upfront costs. This is largely attributable to the unique advantages that PPPs can offer and isin part the result of alternative procurement arrangements. Such arrangements require a full vetting and allocation between thecommunity (the project sponsor) and service provider of all project delivery and operational risks across the project lifecycle that
tend to be overlooked under traditional Design, Bid, Build (“DBB”) procurements. Higher upfront costs generally associated with
PPPs result from these risk transfers to the service provider that, in DBB procurements, are fully absorbed by the project sponsor
and are seldom quantified. Given the many different combinations of functions possible, PPPs offer public utilities the flexibility
to seek project delivery, management and financing arrangements however they desire by defining their preferred contractual
agreements in the beginning. A few examples of typical functions are listed in Table 2 below:

Table 2. Examples of PPP Contract Function Types
Functions

Description

DesignDeveloping construction-ready design specifications using the project’s initialconcept and output requirements.

Build

Constructing the designed specifications and installing equipment.

Finance

Funding all or part of the project’s capital expenditures.

Maintain

Maintaining the infrastructure asset up to a certain standard over the life of acontract.

OperateOperating the asset to continue providing services to either a government off-taker,
direct users, or simply by providing technical support.

Transfer

Transferal of asset ownership from the private entity to the public agency after
completion.

Source: World Bank, 2014

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WATER FINANCE: The Imperative for Water Security and Economic Growth10

If structured appropriately, PPPs can potentially generate value for money by delivering projects more cheaply, faster, and with higher
quality compared to public sector delivery, assuming fiscal risks are properly managed. PPPs can also provide numerous benefits
throughout the entire procurement process of water projects (Boyer, Cooper, & Kavinoky, 2012). They can allow communities to gain
access to alternative financial and technical resources, allow for greater scrutiny and quality of work conducted, share project risks, andprovide opportunities for private partners as they seek to fulfill project outcomes in innovative ways (Boyer, Cooper, & Kavinoky, 2012).
Recently, a new PPP model known as Community-Based Public-Private Partnerships (CBP3) has started emerging in the water sector.
It includes many features of a traditional PPP but also seeks to establish a “relational” contract based on long-term trust and confidence
between partners, as opposed to a “transactional” contract based on static metrics for reimbursement that are less complex and flexible(USEPA Region 3 Water Protection Division, 2015). CBP3s focus on benefiting not only water providers and their private partners, butalso the local community in which the project is being constructed. CBP3s strive to create local jobs, provide opportunities for community
outreach and educational advancement, and improve the lives of those living in urban and underserved communities.
Concessionaire models have also gained increasing popularity in the U.S., where the community retains ownership of the assets,
but a private entity steps into the shoes of the public entity, assuming operational control as well as responsibility for capital
investment. For example, in 2012 the City of Bayonne, New Jersey, entered into a 40-year contract with Suez/United Water andKohlberg Kravitz & Roberts, with an upfront concession fee of $150 million with annual expenditures up to $500,000 for operations(OPEX) and $2.5 million in capital (CAPEX).
By working with private entities interested in long-term investments, as opposed to those interested in quick, short-term returns,
municipalities can take advantage of the benefits of a traditional PPP and in addition help to stimulate local economic growth,preserve the environment, and improve the quality of life for urban and impoverished neighborhoods (USEPA Region 3 Water
Protection Division, 2015). Promising community- and sustainability-oriented PPPs are starting to gain traction as private interestsalign with public agencies’ goals, long-term trust and confidence between stakeholders is established, and regulatory performancetargets are affordably, efficiently, and promptly met.

Key Obstacles to Meeting the U.S. Water Finance Gap
The financial landscape is laden with challenges that prevent utilities and municipalities from securing the funds needed to finance new
projects (Hanak, et al., 2014), thus hampering the country’s ability to close the aforementioned annual investment gap of $82 billion.
As a result, despite the broad range of different sources of funding available to water service providers, several key obstacles continue
to prevent the United States from closing the water/wastewater infrastructure finance gap. These obstacles are summarized below.
1.

Lack of full cost recovery in pricing water tariffs. Approximately 98% of water projects are financed by local water
utilities through their rate structures. However, there exists a disparity between the needs of water utilities and their ability togenerate funds at the local level due to inefficient water pricing models that provide variable revenue streams while paying
fixed expenses (Bartlett, Cisneros, Heartwell, McAndrew, & Warnock, 2017). Thus, many utilities face a conundrum whenrevenue streams are insufficient to cover the costs of operational and maintenance costs. A recent survey found that only
one-third of water utilities are operating under rate structures that provide adequate revenue to fully cover their costs. This
undervaluation of water as a commodity creates severe constraints on the ability of utilities to finance the investment requiredas their infrastructure continues to age. Further, owing to the political sensitivities around water pricing, many state and local
governments don’t allow service providers to charge customers differently based on their ability to pay. As a result, manyutilities may struggle to find a way to recover costs without adversely affecting low-income communities (Bartlett, Cisneros,
Heartwell, McAndrew, & Warnock, 2017). When customers conserve water during times of drought or economic hardship,
revenue for utilities will also drop, creating a problem as their debt payments for fixed capital costs as well as other fixed
cost related to operational and maintenance of the system remains unchanged (Bartlett, Cisneros, Heartwell, McAndrew, &Warnock, 2017).

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WATER FINANCE: The Imperative for Water Security and Economic Growth

11

2.

Significant declines in federal funding for water and wastewater infrastructure. Although federal funding first enabled
the construction of much of the water and wastewater infrastructure we see today, current levels of federal funding forinfrastructure projects are insufficient to maintain and upgrade existing systems (Table Rock Capital, 2014). Today, the UnitedStates has a $60 billion backlog in congressionally authorized but unfunded water and wastewater projects. Since 1977, thepercentage of federal infrastructure spending that goes to the water sector has fallen from 63% to only 9%. For example, theClean Water State Revolving Fund (CWSRF)—one of the primary sources of water and wastewater infrastructure funding in
the nation—appropriated a total of $2.5 billion in 2012 (Table Rock Capital, 2014), representing only about 2% of the ASCE’s
estimated annual need of $123 billion in water and wastewater infrastructure spending. Cuts in federal and state assistance inrecent years have also exacerbated the situation; between the years 2008 and 2012, 32 states cut aid to municipalities (Table
Rock Capital, 2014). With limited public funding, local utilities and municipalities have also started to consider private sector
partnerships for a much-needed boost in capital (The Johnson Foundation, 2012); however, private investors are hesitant toinvest due to potentially high risks, lack of experience, slow rates of return, long pay-back periods, and small earnings (Musick& Petz, 2015; Leonard, 2015).

3.

Lack of policy coherence. Water policy and regulation in United States is highly fragmented. More than forty congressional
committees and sub-committees oversee various aspects of water policy, while as many as thirty federal agencies,
commissions, and other organizations administer dozens of overlapping and often conflicting agendas, priorities, andprograms. Each state administers its funding allocations from the EPA’s Clean Water State Revolving Fund (CWSRF) and theDrinking Water State Revolving Fund (DWSRF). These silos of competing and conflicting regulatory and statutory regimes
create significant inefficiencies and waste scarce resources, while hamstringing the effective management of water andwastewater infrastructure.

4.

Structural and cultural obstacles to investment. Even though an estimated $100 billion in private capital is available toinvest in the U.S. water and wastewater market, the sector’s infrastructure typically requires high levels of initial investments
and long payback periods, thus limiting prospects for private investment. Only about 12% of water and wastewater financecomes from the private sector, all of which is limited to state and local projects. Moreover, current regulations discourage manymunicipalities from entering into cost-saving and efficiency-driven partnerships with private water companies for the operationof municipal water supply and treatment facilities. There are also cultural obstacles to greater private sector participation basedon divergent views involving the role of for-profit water companies. For example, advocacy groups such as Food & Water Watch
work with certain environmental activists and labor groups to oppose any level of private sector participation.

5.

Lack of data and information. Project developers and prospective financiers alike often lack sufficient data and information,
which can lead to mismatches or missed opportunities for greater investment flows into the water and wastewater sector.

6.

Weak managerial and/or financial capacity of water/wastewater operators. Nearly half of the nation’s 53,000 water
systems are very small, i.e., serving fewer than 500 people. These utilities undertake the complex challenge of consistently
delivering safe drinking water with a small and under-resourced staff with limited technical skills and training. Not surprisingly,
the EPA reported in 2011 that very small system operators have the highest percentage of health-based violations of all systemsizes (74 %), putting at risk the health of customers served by those systems.

Solutions & Tools to Close the U.S. Water Finance Gap
Key success factors for water investment, or any infrastructure investment, can be summarized into four broad areas:• Finance – Structure sector-appropriate finance, including a blend of public and private finance, to finance long-term investment
programs. A key requirement is the ability to define and estimate long-term investment programs.

WATER IN THE WEST

WATER FINANCE: The Imperative for Water Security and Economic Growth12• Infrastructure – Design sustainable and resilient infrastructure to ensure long-term water security, including integrated
infrastructure combining the water source, water treatment, wastewater treatment and recharging/regeneration of water sources
as well as cross-sector integration such as water and transportation.
• Innovation – Include both technology and business model innovation in order to “leap frog” water system development.
• Governance – Put in place regulatory and legal frameworks to facilitate greater investment, and strengthen public institutions
with know-how and expertise to engage with finance, technology and infrastructure providers.
Faced with many issues that still plague the financial landscape for the water sector in the U.S., new solutions to water management
are needed. Large-scale, centralized water infrastructure has been the traditional model for many water treatment, supply, anddistribution networks in the U.S. Yet, these centralized systems can have high operational and maintenance costs, inflexibility,
vulnerability to disruption of the natural hydrologic cycle and natural disasters, and exposure to physical security risks. This makes
distributed systems an attractive alternative (Quesnel, Ajami, & Wyss, 2016; The Johnson Foundation, 2014). As the watersector is transitioning into a more hybrid model encompassing both centralized and decentralized infrastructure, it is important todevelop innovative financing mechanisms and governance structures that allow the sector to access resources beyond traditional
mechanisms. Table 3 below lists a few examples:

Table 3. Examples of Innovative Financing Mechanisms and Governance Structures
Financing Mechanisms &Governance Structures

Description

Project Aggregation

Grouping of many projects or financial resources to make one larger consortium. In doing so, theimplementer and funding source can often be directly connected to facilitate transactions andovercome risk.

Credit Trading

Credit trading facilitates the buying and selling of credits by property owners in an open market.
Credits can be associated with conservation, stormwater retention or alternative water generation
and are generated based on going beyond a target set for every household or community to meetwithin a specific timeframe.

Reverse Auction

A type of auction where sellers compete with one another to provide a service or good to the buyer.
Given competition between many sellers, the reverse auction serves as a cost-effective tool toidentify and secure bids that provide the highest environmental benefit at the lowest available costto the buyer.

On-Bill Financing

Also known as utility-enabled financing and repayment, helps residents or businesses overcome
the financial barriers by installing customer-level distributed projects at no upfront cost, but thenrecoups their investment by assessing customers with a fee on their water or property bills.

Impact Bonds

Environmental or social impact bonds are pay-for-success contracts, whereby the utility will either
pay or be paid an outcome amount from its investors depending on the success of a project.
Investors are only repaid if outcomes are achieved, thereby helping to share the risks traditionallyborne by utilities.

Stormwater Credits

Property owners who implement green infrastructure to capture runoff are rewarded with discounts
on their stormwater or other water service fees

Sources: Quesnel, Ajami, & Wyss (2016)

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WATER FINANCE: The Imperative for Water Security and Economic Growth13

There also remains tremendous potential for State Revolving Funds to support financial innovation, particularly as it may pertain to
decentralized and natural infrastructure solutions. The current strength of U.S. State Revolving Fund balance sheets affords many
SRF programs the opportunity to expand financial assistance capacity to triple-A rated financial guarantees without diminishing
the capacity of their highly successful loan programs. The highest use potential for such a product would be in partnering withpublic and private project sponsors of decentralized and natural infrastructure. Emerging models in this area rely on either
market incentives for private investment by the establishment of price signals through regulatory regimes (i.e., stormwater feesthat differentiate between pervious and impervious surfaces) or incentives provided by models that can tap into existing market
mechanisms (i.e., pay for performance contracts). The availability of a highly rated financial guarantee can meaningfully reduce longterm project capital costs, assure market access and facilitate project aggregation by effectively eliminating credit risk to off-takeinvestors (EPA Financial Advisory Board, 2014).

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WATER FINANCE: The Imperative for Water Security and Economic Growth14

INTERNATIONAL WATER FINANCE CHALLENGES &SOLUTIONSInternational Water Finance Sources
While developing water infrastructure is crucial for the well-being of any country in the world, there is not a single, best model
for financing water (World Water Council, 2015). Different countries typically follow different methods to finance infrastructure
projects, but the 3Ts, or Taxes, Tariffs, and Transfers, concept is one way of describing financing approaches in the water sector.
In 2009, The Organization for Economic Co-operation and Development (OECD) developed the 3Ts framework which categorized
the three major sources of water financing available to countries: (1) Taxes: funds gathered from national, regional, or local levelof government taxes; (2) Tariffs: funds obtained from fees placed on users of water, sanitation, and hygiene (WASH) services;and lastly, (3) Transfers: funds received from international donors and foundations in the form of grants, concessionary loans, or
guarantees (Trémolet & Rama, 2012).
The 3Ts illustrate the cash flow used to finance “recurrent costs,” i.e., operation and maintenance expenses of water projects,
and “capital investments,” i.e., investments used to acquire or upgrade physical assets (World Water Council, 2015). The 3Ts alsoenable intermediate forms of funding from repayable sources, which include loans, bonds, and equity used to meet short-termbudgetary needs (Lago, et al., 2011). To establish a sustainable and effective financing framework for water projects in the future,countries must find the proper balance and relationship between the three ultimate sources of long-term funding.
In addition to domestic financing, external sources of funding are also significant contributors to financing water projects. Financial
aid, or official development finance (ODF), to the water sector is also widely accepted and described using terms coined by theOECD as either: official development assistance (ODA): which describes aid provided by official agencies that has a minimum
grant element of 25%, calculated at a discount rate of 10%; or other official flows (OOF): which are all other official sectortransactions that do not meet the ODA criteria, and includes the use of instruments such as export credits and subsidies (OECD,
2017; Winpenny, et al., 2016).
As reflected in Figure 3, a significant portion of developing countries depend heavily on external funding sources for water andsanitation.

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WATER FINANCE: The Imperative for Water Security and Economic Growth15

Figure 3: Breakdown of non-household sources of WASH financing (taxes, external sources, andrepayable finance).
Government

External Source

Repayable FinanceFiji (2017)
Peru (2015)
Serbia (2015)
Mexico (2015)
Columbia (2016)
Panama (2015)
Pakistan (2016)
Argentina (2015)
Bhutan (2016)
Rwanda (2015)
South Africa (2016)
Azerbaijan (2015)
Costa Rica (2015)
Honduras (2015)
Dominican Republic (2015)
Brazil (2014)
Nepal (2015)
Uzbekistan (2015)
Guinea (2015)
Bangladesh (2015)
Georgia (2014)
Albania (2015)
Cuba (no year indicated)
Mali (2014)*
Lesotho (2015)
Zambia (2016)
Zimbabwe (2016)
Mozambique (2015)
Madagascar (2015)
Paraguay (2016)
Kenya (2016)
Burundi (2013)
Ghana (2014)*
Viet Nam (2015)
Solomon Islands (2017)
Tajikistan (2015)
Vanuatu (2016)
Bosnia and Herzegovina (2014)
Cambodia (2016)
Uruguay (2014)
Kyrgyzstan (2016)
0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Sources: GLAAS 2016/2017 country survey; TrackFin, 2017 where indicated with an asterisk *WATER IN THE WEST

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ODF from outside organizations are categorized under one of two categories: (1) bilateral aid: which describes aid transferred
between two governments or countries; or (2) multilateral aid: which are funds provided from a group of countries or from a single
institution that represents a group of countries (OECD, 2017). While the total ODA of both types of aid was relatively comparable inprevious decades, increases in multilateral development funding in recent years has consistently placed it above bilateral forms offunding; multilateral aid has commanded over 60% of the total ODA since 2010 and peaked at 71% in 2011 and 2013 (Winpenny,
et al., 2016). Even so, there are still substantial, on-going debates questioning the efficacy and use of one form of aid over the other(Gulrajani, 2016). Although smaller in total ODA when compared to multilateral aid, bilateral aid remains a large portion of total
foreign aid to this day (Winpenny, et al., 2016).
Given the wide range of financial resources, both internal and external, available to countries to improve on drinking waterand sanitation, it is critical that each resource be leveraged appropriately and as-needed to provide sustainable and lastingwater solutions. The following sections describe in further detail the major sources of funding from U.S. government agencies,
international financial agencies, and private sector that exist today.

U.S. Government Finance Agencies
In previous decades, the U.S. government has helped to finance water and sanitation-related activities worldwide. Spurred by global
resolutions such as the Millennium Development Goals (MDGs) pledging to halve the proportion of people without access to safe
drinking water and basic sanitation by 2015 (United Nations Children’s Fund [UNICEF], 2014), and more recently as an update to
the MDGs, the Sustainable Development Goals (SDGs) which aim to achieve universal and equitable access to safe and affordable
drinking water and provide basic sanitation for all by 2030 (United Nations, 2017), the U.S. has been at the forefront of international
projects to support water-related projects in many developing countries. As part of these efforts, the U.S. passed the Senator Paul
Simon Water for the Poor Act of 2005, which has since fostered greater U.S. government funding for clean water and sanitation
around the world (Natural Resources Defense Council, 2012). Since the bill was passed, appropriations for the Water for the Poor
Act has steadily increased over time, most recently bringing the approved total allocation to $400 million for FY 2016 and 2017, thehighest WASH appropriation in history (Millenium Water Alliance, 2016).
While there are many different U.S. agencies involved in implementing foreign assistance, the three leading organizations jointly
working to implement the Water for the Poor Act are: the U.S. Department of State (DoS), which plans, reports, and provides
oversight for activities; U.S. Agency for International Development (USAID), which is the leading implementer of water andsanitation programs abroad; and the Millennium Challenge Corporation (MCC), which, although similar to USAID in helping toprovide financing for projects abroad, is focused on reducing poverty through economic growth. MCC operates by providing grants
to countries that invest in removing binding constraints to economic growth. Therefore, strategic planning for expanding access toclean water and basic sanitation is jointly managed by the DoS and USAID, while implementation of designated efforts is handled byboth USAID and MCC (Salaam-Blyther & Tiaji, 2012).
Most recently reported U.S. government investments in FY 2013 for international water-related activities exceeded $783.6 million,of which USAID invested $523.8 million for WASH, water resources management, water productivity, and disaster risk reduction
activities, and MCC obligated $95.5 million for water projects (U.S. Department of State, 2014).
In addition to the major undertakings by DoS, USAID, and MCC, there are also 20 other U.S. government agencies and departments
involved in providing technical and financial resources to countries abroad. Some of these agencies include: Overseas Private
Investment Corporation (OPIC), U.S. Trade and Development Agency (USTDA), Export-Import Bank (EXIM), U.S. Geological Survey(USGS), USEPA, U.S. National Aeronautics and Space Administration (NASA), U.S. Department of Defense, U.S. Department of
Health and Human Services, National Oceanic and Atmospheric Administration (NOAA), U.S. Department of Agriculture, Centers for
Disease Control and Prevention (U.S. Department of State, 2014; Oldfield, 2017). Examples of other assistance programs include:
a $4.3 million investment in FY 2013 implemented jointly by USAID, USGS, and NASA to improve water management around the

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world; and a $161 million obligation by the U.S. Department of Defense to repair Afghan water infrastructure (U.S. Department ofState, 2014).

International Finance Institutions
In addition to funding from the U.S. government, other countries and international institutions have also contributed significant
amounts in the past and have been stepping up their involvement in the water sector. The Development Assistance Committee (DAC),
a group of 27-member countries that make up the OECD, is among the largest contributors to bilateral ODA financing. From 1995
to 2014, DAC contributed 66 percent of all ODA financing to the water sector, with an annual average contribution of $6 billion per
country (Winpenny, et al., 2016). Among the top contributors were countries such as Japan, Germany, United States, France, andNetherlands. Additionally, international financial institutions (IFIs) such as multilateral development banks (MDBs) have provided
abundant support for the water sector. Collectively, IFIs provided more than $8.35 billion and other international organizations such as
UNICEF, United Nations Development Program, UN-HABITAT provided $33.16 million in funds for water-related activities in FY 2013
(U.S. Department of State, 2014). Contributions from key multilateral funders are listed in Table 4 below.

Table 4. Examples of IFIs that have provided ODA to the water sector, 1995 – 2014
Average ODA Commitment Average OOF Commitment($, 1995 – 2014)($, 1995 – 2014)

Multilateral funders
World Bank - International Development Association (IDA)

920 million––

20 million

Asian Development Bank (ADB) Special Funds

234 million

610 million

African Development Fund (ADF)

212 million

90 million

Inter-American Development Bank (IADB) Special Funds

120 million

810 million

Islamic Development Bank (IDB)

85 million

270 million

Arab Fund (AFESD)

82 million–

UNICEF35 million–

OPEC Fund for International Development (OFID)

76 million

10 million

Global Environment Facility (GEF)

58 million––

1.86 billion

European Union (EU) institutions

International Bank for Reconstruction and Development (IBRD)
Source: Table recreated from Aid Flows to the Water Sector (2016), by Winpenny, et al.

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WATER FINANCE: The Imperative for Water Security and Economic Growth18

Private Sector
Compared to the transportation and energy industries, the water sector has seen very little private investment in the past. In the
United States, private participation in the water/wastewater sector is about 12%, which reflects the continued dominance of public
sector ownership and operation of water systems (Blackstone, 2017). Although the private sector role remains small relative to
public sector, the amount of infrastructure investment is significant. For example, six of the largest private utilities in the U.S.
collectively invest $2.7 billion annually, which is comparable to the total annual expenditures from the U.S. EPA’s drinking and cleanwater SRFs. Globally, in 2015, water only captured 4% of the total private sector infrastructure commitments whereas transportand energy garnered 63% and 34%, respectively (Kolker, Kingdom, Trémolet, Winpenny, & Cardone, 2016). The idea of “water
as a financial risk” remains a predominant part of the private sector’s attitude towards investments in water, and as a result has
not brought a lot of private funding into international water programs as many would have liked (Jägerskog, Lexén, Clausen, &Engstrand-Neacsu, 2016).

Philanthropic Organizations
Nongovernmental organizations can also supplement funding from domestic, foreign, and private sector sources. Although
donations may be smaller in size when compared to other sources, grants made by philanthropic organizations have nonethelessprovided valuable funding for key water and sanitation projects throughout the world (Table 5). Moreover, philanthropic organizations
represent important laboratories for developing and accelerating dynamic new solutions to complex development finance challenges,(i.e., the Rockefeller Foundation’s major commitment to innovation in financing).

Table 5. Examples of philanthropic organizations that have provided grants to the water sector, 2001 – 14
Organization

Total amount granted ($, 2001 – 14)

The Bill & Melinda Gates Foundation

655.3 million

Conrad N. Hilton Foundation

126.7 million

The Coca-Cola Foundation, Inc.

104.1 million

Howard G. Buffett Foundation

76.2 million

Queen Elizabeth Diamond Trust

62.3 million

The PepsiCo Foundation, Inc.

46.8 million

Caterpillar Foundation

23 million

Source: Table recreated from Aid Flows to the Water Sector (2016), by Winpenny, et al.

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WATER FINANCE: The Imperative for Water Security and Economic Growth19Key Obstacles to Meeting the International Water Finance Gap
To achieve the goals stipulated in the SDG of providing access to basic water, sanitation, and hygiene services to the rest of theworld will cost approximately $28.4 billion per year from 2015 to 2030 (Hutton & Varughese, 2016). While there are number ofsources of domestic, foreign, and private funding that can be leveraged by governments around the world, there are still multiple
barriers that prevent many from adequately closing the finance gap.
In many countries, there is a shortage of financial resources despite growing international sources of funding, increasing domestic
budget allocations, and having self-defined national targets (UN-Water Global Analysis and Assessment of Sanitation and DrinkingWater [GLAAS] 2017 Report, 2017). For example, meeting the SDGs is expected to cost about three times the current global
investment level (Hutton & Varughese, 2016). Further, 80% of countries have already reported that they have insufficient funds
to meet their own national standards—which are lower than SDG standards (GLAAS, 2017). Financing water services across theworld will require significant reinvestment on behalf of each country into their own services.
Other barriers to international water and wastewater financing include:(1) Weak ability of water providers to recover their operations and maintenance costs. Even though many service
providers have access to government subsidies, almost 20% of countries report that there is not a financial mechanism
available that allows them to recover the financial costs of providing those services (GLAAS, 2017). This has resulted in thedeterioration, loss of efficiency, and increased failure of water systems in many countries.
(2) Lack of creditworthy or reliable service providers. Despite the availability of domestic and foreign funding sources,financing that has been provided to certain water service providers or projects may or may not be effectively utilized
completely. The challenge is how to increase the creditworthiness of water/sanitation utilities so that they can access local
commercial financing sources. This would be a gradual process of moving up the ladder of creditworthiness. Domestic andforeign aid funds for water projects have absorption rates of 54-60% and 38-48% respectively (Oliver, Mazza, & Wang,2016).
(3) Lack of data for informed decision-making has been a major issue for all stakeholders involved in allocating resources forwater and sanitation-related activities (GLAAS, 2017). While financial data is gradually improving, with nearly 70% of countries
indicating use of such data in decision-making processes, there is less information about whether the financial plans andbudgets are being consistently followed and implemented (GLAAS, 2017). Credit ratings can also be a helpful source of dataand information to support lending.
(4) Uncertainty about the sustainability and availability of future funding. Even though external funding has been increasing
in recent years as discussed in previous sections, there have been serious fluctuations in the year-to-year amounts of aid
provided by both large and small institutions alike (Winpenny, et al., 2016). Tariffs are the most reliable source of funding. A
lack of long-term sustained sources of funding have also made financing large projects even harder (World Bank, 2015).

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WATER FINANCE: The Imperative for Water Security and Economic Growth20

Governance: The Key to Unlocking Water Finance“Governance” is the primary common denominator that can either limit or enable sufficient flows of financing to the water andwastewater sectors, be it in the United States or anywhere else in the world. Whether it is fragmented, incoherent policymaking
structures across federal or state/provincial levels, dysfunctional local authorities, or poorly managed and equipped water providers,weak governance is at the core of most barriers to water finance. Moreover, governance failures also tend to aggravate othercomplex challenges, such as terrorism, organized crime, migration, environmental degradation, and healthcare, among others.
The main challenges that face the water sector are not always or necessarily a lack of technologies, data, science, or even money.
It is often the need to break down institutional silos and foster greater inter-institutional collaboration. Solving domestic and global
water challenges requires greater focus on creating the systems to better enable project preparation and development, rather thansimply focusing on infrastructure projects alone. This means looking beyond traditional “hardware” (i.e., infrastructure) solutions
and putting greater emphasis on “software” solutions, such as behavioral changes, improved governing systems, and stakeholder
engagement.
In other words, focusing on good governance is the key to unlocking water finance and to better tackle other significant
development challenges. Thus, public and private water sector players would do well to collaborate more closely with others that are
working to strengthen the fundamentals of good governance, such as the rule of law, judicial reform, property rights, democratic
processes, transparency, financial disclosure, media access and integrity, and public participation in decision-making.
Likewise, while top-down federal approaches may have been useful in past development of water and wastewater systems, perhaps
the greatest need now is to foster closer coordination and open collaboration at local, state, and regional levels.

Key Solutions & Tools to Close the Gap
U.S. Government Programs and Tools
The U.S. government agencies offer several programs that can help to alleviate financial hardship and close the gap for many
international water service providers. The U.S. Agency for International Development (USAID), and Millennium Challenge
Corporation (MCC) both provide ways through which international funding can be obtained and allocated. Budgets for WASH, water
resources management, water productivity, and disaster risk reduction are allocated every year by USAID (USAID, 2013). Further,
MCC provides investment and resources to countries dealing with issues related to water, sanitation, and irrigation (MCC, 2017).
Other U.S. government agencies and departments such as USGS, USEPA, USDA, NASA, and NOAA have also been responsible forinvesting in water projects abroad (U.S. Department of State, 2014; Oldfield, 2017).

Donor Coordination
More prevalent use of donor coordination in host countries can enable more efficient allocation of aid resources, keep transaction
costs low, promote cooperation between stakeholders, and generate incentives for better policy choices (Leiderer, 2015). A concept
developed in the early 1990s, Sector-Wide Approaches (SWAps) has been an effective method to bring together and establish
more transparent relationships between government, donors, and other stakeholders in a region (World Health Organization, 2017).
Despite being a long-standing approach, the method has continued to be a popular choice of method to reduce fragmentation while
promoting harmonization in countries around the world (Peters, Paina, & Schleimann, 2012).

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WATER FINANCE: The Imperative for Water Security and Economic Growth21International Finance Institutions
International Finance Institutions (IFIs) represent a significant portion of international funds being invested in the water sector. The
World Bank has played a significant role as an innovator and focal point in advancing water and sanitation finance solutions. In
2015, MDBs and International Monetary Fund (IMF) announced that they would invest more than $400 billion over the next three
years to meet the SDG agenda (International Monetary Fund, 2015). Further, bilateral aid from countries or organizations suchas the OECD DAC contributes to bilateral ODA financing. Collectively, IFIs can influence change in developing countries not only
through providing direct aid, but also by incentivizing and mobilizing private finance in local markets which is more sustainable in thelong-term (World Bank, 2015).

Developing Country Tools to Mobilize Local & Foreign Sources of Capital
Developing countries must work on creating stable and predictable policy frameworks to not only attract foreign and private sourcesof capital investment, but also enable sustainable, well-designed projects (Corfee-Morlot, et al., 2016). Providing supporting andinclusive political environments for PPPs can also help significantly to secure private engagement in developing countries, which
serve to further reinforce investor confidence and increase scale of projects in the future (Corfee-Morlot, et al., 2016). Community
based PPPs (CBP3s) can also be good models and tools for developing countries and help them leverage both private andphilanthropic monies in meeting their water resources and sanitation needs and goals.
Blended financing refers to the use of funds from different sources to create a single tailored solution for constructing multi-purpose
infrastructure (World Water Council, 2015). This mechanism has shown great promise in recent years to mobilize local and foreignsources of capital more effectively. It can help to bridge the gap for high impact projects that have initially high perceived risks and/or costs, but can be commercially viable over time (Gonzalez, 2015; World Water Council, 2015).

Private Investor Solutions
Although private investment in the water sector so far has not been significant due to perceived high risks, lack of a proven trackrecord, and small earnings paired with slow rates of return (Musick & Petz, 2015; Leonard, 2015), PPPs are slowly gaining
momentum as the market matures. Currently, there are more than 2,000 water and wastewater facilities in the U.S. that aredesigned as PPPs, but there is potential for more (Ernst & Young, 2013). With limited public funding, local utilities and municipalities
are starting to consider PPPs for a much-needed boost in capital (The Johnson Foundation, 2012). Additionally, CBP3s, a much
more attractive model for public utilities, have also started to gain traction as social, political, and economical incentives for local
communities are established as deliverables in the new contract type. Given the success of several CBP3s in development currently,
private investors should be poised to take advantage of these long-term, relational contracts in the future which are highly rewarding
for both parties involved.

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WATER FINANCE: The Imperative for Water Security and Economic Growth22

Examples of Innovative Public-Private Partnerships and Financing Approaches
As one of the first CBP3s implemented in the United States, the Clean Water Partnership in Prince George’s County, Maryland, isa great example of a successful PPP between Prince George County’s Department of Environment and Corvias Group LLC, theirprivate partner (Prince George’s County Department of the Environment, 2016). By selecting a single long-term private sector
partner to be the program manager of a $100 million effort to construct stormwater retrofits, the Prince George’s has streamlined
and accelerated the timeframe of project delivery, at the same time promoting opportunities for innovative green technologies,
reducing financial risks to the utility, and creating local job, education, and community outreach opportunities for the County (Prince
George’s County Department of the Environment, 2016). Further, remuneration in the form of pay-for-performance will also ensurethat stormwater retrofits are up to par and that the County’s private partner is held accountable for all phases of project delivery in
the program (Prince George’s County Department of the Environment, 2016).
The Environmental Impact Bond introduced by DC Water in partnership with its private investors, the Goldman Sachs and Calvert
Foundation, is another example of an innovative PPP model. Proceeds from the sale of the bond are being used to finance theconstruction of green infrastructure in Washington, D.C. neighborhoods, while private investors are repaid over time, based in parton the performance of the constructed green infrastructure 4.5 years later (Valderrama, 2016). Construction of additional green
infrastructure will help to control the amount of contaminated water that flows into the city’s waterways during intense rainfall
events. Further, increased investments can help support local economic development by creating jobs for people interested in green
infrastructure construction and maintenance.
Lastly, the Forest Resilience Bond program initiated by Blue Forest Conservation in partnership with World Resources Institute(WRI), American Forest Foundation, and several other stakeholders, is planning to introduce a pilot bond soon to fund forest
restoration projects (Blue Forest Conservation, 2017). The bond is used to generate funds from private investors to finance forest
restoration projects; and following the projects’ completion, will repay its investors over time for their principal plus interest, frommonies received from pay-for-performance contracts with the projects’ beneficiaries (Ozment, et al., 2016). While this bond isoffered by an end-to-end service provider, Blue Forest Conservation, it can also attract private investment through cost-sharing
methods garnered from public utilities.

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WATER FINANCE: The Imperative for Water Security and Economic Growth23

THE WAY FORWARD
Recommendations for U.S. Policymakers• Establish a comprehensive, integrated, and strategic approach grounded in robust, bottom-up collaboration. As
noted previously, the lack of policy coherence is a primary barrier to investment in the water sector. The federal government
should take the lead by elevating the priority of water and leading a collaborative, bottom-up strategic planning process
involving relevant U.S. government agencies, state and local authorities, tribal authorities, the private sector, and civil society
organizations. This means breaking down existing silos and ensuring effective coordination across the water sector. A number ofpromising ideas have been put forward for action at the federal level, which include the following:– Issue a Presidential Policy Directive (PPD) for an integrated and effective water infrastructure policy and strategy.
– Establish a Presidential Commission on Water Infrastructure Policy Coordination and Security or a similar inter-agency
coordination mechanism to evaluate and create a coordinated, rational, and efficient water infrastructure policy and a process
for administration.
– Appoint an Assistant to the President for Water Policy and Security.
– Incorporate water security as a priority in the National Security Strategy.
– Complete the congressionally-mandated Global Water Strategy by October 2017.
• “Demystify” the priorities and authority of U.S. government agencies related to water. Beyond establishing the abovenoted strategic framework for policymakers, it is important to proactively engage the private sector to get direct inputs about thecharacteristics of projects, financing institutions, and risk reduction tools that might raise private sector interest in investing.
• Encourage formation of, and participate actively in, a U.S. water finance exchange or “hub.” This would bring public
and private water operators together with financial institutions (public and private) to help fill the information gap by effectively
linking water operators with sources of finance and better enable water operators to collaborate on procurement. The U.S.
EPA’s recently launched “Water Finance Clearinghouse” and Stanford University’s “Living Map of Innovative Water Financing
Mechanisms in the United States” represent a significant and exciting development that can lay the groundwork for knowledge
sharing and peer-to-peer learning opportunities. They will be integrated into our work, but no comprehensive efforts yet exist.
• Encourage formation of, and participate actively in, a U.S. water finance exchange or “hub.” This would bring public andprivate water operators together with financial institutions (public and private) to help to fill the information gap by effectively
linking water operators with sources of finance and better enable water operators to collaborate on procurement. The U.S. EPA’s
recently-launched “Water Finance Clearinghouse” is a significant and exciting development that will be integrated into our work,
but no comprehensive efforts yet exist.
• Increase public outlays in water and wastewater infrastructure. Budgets are a reflection of priorities. The United Statescannot close its annual water investment gap of $82 billion without allocating greater resources in public budgets and using its
policy levers to unlock the vast resources of our capital markets. At a minimum, the federal government should:– Significantly increase congressional appropriations for State Revolving Funds (SRFs) and enable private sector participation in
SRF projects.
– Increase the funding and revisit priorities for the Water Infrastructure Finance and Innovation Act (WIFIA) Program.
– Fund the U.S. Army Corps of Engineers Public-Private Partnership Demonstration Program.

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WATER FINANCE: The Imperative for Water Security and Economic Growth24• Reduce risks to incentivize increased private investment. Availability of capital is not the problem. Institutional barriers,
weak governance structures, a lack of transparency, and inconsistent tax policies present risks that discourage private investors.
Federal and state authorities should, as appropriate:– Develop a water workforce for the 21st century through deployment of the “Blue Wave” program and other capacity building
efforts that strengthen the technical, managerial, and financial acumen of water operators, particularly those in rural andsmall systems;– Require water utilities and operators to fully account for total costs and address the pricing of water to reflect the full costs of
its provision;– Revamp existing procurement systems to expand the successful use of a broad range of water delivery models that involve
both public and private sector actors;– Promote the bundling and consolidation of investment opportunities in smaller and rural systems;– Remove the volume cap on private activity bonds (PABs); and– Grant greater flexibility to the states to make use of unliquidated obligation balances to provide an additional source offunding for projects.
• Develop a unified water data and information network. Open, available, and secure data is crucial to breaking down
institutional silos and to enhancing accountability and transparency at all levels of implementation. Such a network would
promote more cohesive planning and development among water stakeholders.
• Accelerate the innovation and adoption of new technologies. The federal government should:– Establish and capitalize a “National Innovation Fund,” through matching grants with state, not-for-profit and private capital.
The focus of the funds’ mission would be to advance water technology development by de-risking early stage water utility
procurements;– Establish a “National Test Bed Network” composed of a coordinated network of universities, laboratories, regional incubators,
test bed facilities, and national research foundations to validate emerging technologies at scale and facilitate faster adoption
by utilities; and,– Enact regulatory reforms to promote adoption of better infrastructure technology.

Recommendations for International Finance Institutions (IFIs) and Other Donors• Continue to elevate water as a priority. The international community took a significant step to elevate water as a priority in
September 2015 when world leaders adopted the UN’s 17 “sustainable development goals” (SDGs). This included SDG 6, to“ensure availability and sustainable management of water and sanitation for all” by 2030. Progress on water and sanitation is
crucial to achieving other SDGs (i.e., poverty reduction, health, education, gender equality, sustainable cities, etc.).
• Continue to boost stronger coordination of policymaking among water and finance authorities. IFIs such as the WorldBank and International Monetary Fund have already taken steps to boost integration of water and sanitation into broader
development finance proceedings. By working with the Sanitation and Water for All (SWA) partnership to incorporate HighLevel Meetings of finance and water sector ministers as part of their April 2017 Spring Meetings, the World Bank and IMF
demonstrated the importance and utility of putting water squarely in the forefront of IFI engagement.
• Focus on catalyzing and evaluating projects which employ innovative approaches and technologies. The best way to
encourage partnerships at the country level is to facilitate projects using new techniques and technologies. This helps showcase
the value of innovative approaches, and increases the prospects that these new ideas will be funded and replicated.

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WATER FINANCE: The Imperative for Water Security and Economic Growth25• Look beyond traditional “hardware” (i.e., grey infrastructure) solutions and boost emphasis on green infrastructureand “software” solutions that strengthen fundamental governance capacities. Development assistance oriented topromoting stronger rule of law, transparency, procurement reform, stakeholder participation, property rights, judicial reform,
and managerial/technical capacity building is vital to creating the enabling environments necessary to increase both public andprivate investments in water and wastewater. Moreover, sector-specific capacity building related to improving the collection,
management, and use of water use data and utility performance metrics is key to bolstering the creditworthiness of water andwastewater service providers.
• Where appropriate, take a stronger role in leading in-country donor coordination. Given the multiplicity of bilateral andmultilateral development assistance entities and private donors engaged in water and wastewater sectors around the world,
donor coordination remains an ongoing challenge, yet a vital necessity to avoid duplicative efforts and to optimize potential
synergies. Resident representatives, particularly those from regional IFIs, are often particularly well-placed to play a leading role
as a convener and facilitator for in-country coordination among donors.

Recommendations for Developing Countries• Create and maintain stable and predictable policy frameworks as part of a broader commitment to rule of law. Water
infrastructure and related investments are long-term propositions. In an era of increasingly tight public monies, the attractionof private capital from both domestic and foreign sources is crucial to advance water and sanitation development. Accordingly,“policy predictability” is a top investor concern. Public authorities can best address such concerns by conducting transparent
and consultative rulemaking and policy reform processes that involve stakeholders at all levels, including the private sector. They
should also maintain effective, transparent, and objective dispute resolution mechanisms and processes;• Signal government commitment and a “whole of government” approach to water and wastewater infrastructuredevelopment. Such signals are crucial to reassure prospective investors of a government’s long-term political commitment
to develop water and wastewater systems. The OECD has stressed that “securing necessary resources for infrastructuredevelopment, and making infrastructure networks attractive for private participation, are made easier when infrastructure
policy priorities and medium to long-term goals are clearly stated and fully embedded in the country’s economic development
strategies” (OECD, 2015). This points to the need for comprehensive national infrastructure plans, laying out a credible pipelineof infrastructure projects (including the bundling of small projects, where appropriate), communicating priorities and roles
expected from both the public and private sectors, and forecasting costs, including those for short-term and long-term operationand maintenance.
• Maintain a level competitive playing field. This is a particular concern in a sector historically dominated by state-owned
utilities. Strong corporate governance standards should be applied equally to state-owned and private enterprises to maintain ahealthy competitive environment and reduce investor concerns about the potential risks of arbitrary and capricious rulemaking.
• Undertake transparent and robust stakeholder engagement to balance affordability and cost-recovery in setting
water tariffs. Few issues are as politically volatile as the matter of price-setting for essential public services such as water.
At the same time, the provision of clean water and sanitation services is not cost-free. Any enterprise that does not maintainsufficient revenues to cover its full costs is not sustainable. Water and wastewater service providers must be able to meet not
only immediate operational needs, but also invest for long-term system operation, maintenance, and improvements. Including
consumers, service providers, and eventually private capital market participants and other stakeholders in proactive andtransparent rate-setting processes is vital to meeting both affordability and cost-recovery needs. Ideally, this means empowering
regulatory agencies that are independent from line ministries and service providers and that have clear lines of authority andaccountability.

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WATER FINANCE: The Imperative for Water Security and Economic Growth26• Invest in data collection and management and information sharing. Many water utilities do not collect data on services,
system performance, and reliability. As a result, policy decisions can often be made in a vacuum, with limited supporting data
and analyses. Moreover, the lack of data impairs their ability to raise capital. Investing in the collection, analysis, management,
and publication of relevant data is fundamental to the enhancing the financial viability and creditworthiness of water andwastewater providers.
• Develop and publish long-term investment plans to promote greater financing from institutional investors. Institutional
investors, such as pension funds, insurers, and sovereign wealth funds, can offer an important source of potential capital, as
their long-term investment horizons can line up well with the nature of water and wastewater infrastructure developments.
National governments should refer to the “G20/OECD High-Level Principles of Long-term Investment Financing by Institutional
Investors” for guidance on specific actions that could unlock capital from institutional investors, particularly domestic sources.

Recommendations for Private Investors• Share information to make transparency a two-way street. Asymmetries in information can hamper the functioning ofmarkets. Where appropriate, investors should boost procurement reforms by sharing information on the extent to which theirinvestment strategies are in line with their investment horizon, how they address long-term risks, and other considerations that
could better inform policymakers of the parameters that may affect investor decisions.
• Implement projects. Work together with key public institutions to generate and evaluate projects. Prove what works and behonest about and learn from what does not work.
• Support the use of innovative technology. Partnerships that apply innovative approaches and technologies as key factors in
improving sustainability and cost effectiveness of water systems. Encourage the development of financing instruments to support
these innovations.
• Collaborate with each other and likeminded public officials to advance institutional reforms. “Traditional” ways of doing
business and entrenched oligarchs can thwart the most well-intentioned efforts to modernize institutions, boost professional
capacities, or enact procurement reforms. Private investors, even those with a strong in-country presence, can seldom
overcome such challenges when acting alone. However, banding together with each other and with likeminded public officials(i.e., reformist crusaders in legislative, executive, or judicial branches) can generate the clout necessary to achieve fundamental
improvements in governance and thus investment climates. Moreover, in some instances, bringing private sector actors into thesector can give local officials the “cover” needed to overcome hurdles and impose the discipline needed to resolve long-standing
governance/investment issues that local authorities have been unwilling or unable to confront.
• Demonstrate genuine good corporate citizenship. As water represents a public good, consumers in much of the world view
water as free entitlement or, in some instances, a “gift from God.” This can engender public resistance to private investmentin the water sector. For example, some communities in the United States have seen support for private engagement collapse
as soon as utilities or the public realize that a firm could “profit” from water. Taking an active and public role as constructive
corporate citizens can better enable private firms and investors to build the trust and understanding necessary for public
education campaigns to effectively reduce resistance to private water investments.

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WATER FINANCE: The Imperative for Water Security and Economic Growth27

Elevating Water as a National Security Concern
Since its launch in March 2012, the U.S. Water Partnership (USWP) has been implementing the vision of working together
for a water secure world. Recognizing that water security cannot be achieved without a significant increase in investments ininfrastructure, technology, and capacity building, USWP embarked in late 2016 to harness its broad network of public and private
sector experts to examine the factors that have hampered water investment and to identify practical steps that can be taken
by relevant actors to mobilize the enormous sums of capital required to achieve a water secure world. This included a review ofextensive existing literature produced by international finance institutions, U.S. agencies, and private sector organizations, as well as
the conduct of multiple expert roundtables between February and June 2017.
The USWP is also working with a number of organizations and investors on generating projects in the water sector and is very
focused on catalyzing projects and partnerships, both domestically and globally. This overview synthesizes much existing thinking
and analysis in the sector and puts the major issues and challenges into context. This document is designed to help provide agood entry point for entities interested in partnering and understanding the water finance space and will help guide the USWP
partnership-oriented efforts going forward.
This report contains the key challenges we have identified and a set of recommendations that the USWP, ReNUWIt, Water in theWest and other partners believe are critical to unlocking water finance quickly and significantly.

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WATER FINANCE: The Imperative for Water Security and Economic Growth28

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For more information visit:
waterinthewest.stanford.edu
Water in the West
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473 Via Ortega, MC 4205
Stanford, CA 94305
waterinthewest@stanford.edu