14 May 2013: The Global Water Forum (GWF) released a discussion paper, titled “Water Finance: Preparing for the Next Critical Juncture,” which explores public and private financing for water infrastructure and sanitation services in developing countries. The authors, Diego Rodriguez and Amanda McMahon, recognize limitations in water financing but argue that a new generation of water infrastructure financing will emerge.

The authors formulate recommendations on how countries can best position themselves to benefit from this financing when it materializes. They argue investments in water infrastructure and sanitation services alone will not ensure infrastructure and services, and instead call for changing budget allocation, targets and execution.

Rodriguez and McMahon explain that 75% of public sector water financing is through what the Organisation for Economic Co-Operation and Development (OECD) calls the three “T’s,” namely tariffs, taxes and transfers. They argue the three T’s fail to incentivize long-term investments or efficiency improvements because they support the status quo. For instance, if tax revenues decrease, water budgets are also likely to decrease. Further, many developing countries allocate budgets annually, resulting in long-term uncertainty about water budget allocation and perverse incentives for long-term planning.

Rodriguez and McMahon recommend the public sector maintain control over delivery and performance, protect consumers and share risk. They recommend governments push service providers towards financial sustainability through efficient public spending and services that recover most or all of their costs. They also underline the need for, inter alia: enforced regulations; greater transparency; separation of institutional powers; sound governance structures; and information sharing, such as on creditworthy utilities and potential water markets.

Rodriguez and McMahon highlight examples of countries that have implemented such recommendations. For instance, Uganda’s National Water and Sanitation Corporation doubled its revenue through efficiency improvements and paying staff to reach performance targets. In the Philippines, the Government acted as a financial broker to pool risk, strengthened local government capacity to design and implement projects and supported private participation.

GWF was established in 2010 as an initiative of the UN Educational, Scientific and Cultural Organization (UNESCO) Chair in Water Economics and Transboundary Water Governance in order to present knowledge and insight from leading water researchers and practitioners. [Publication: Water Finance: Preparing for the Next Critical Juncture]