Blended Finance Is a Missing Piece of the Water Puzzle

This year’s World Water Week, which took place in Stockholm, Sweden from Aug. 28 through Sept. 2, focused on water as the central engine to set the planet on the path of sustainable growth and development.

The event brought together an array of different stakeholders – more than 3.000 people, from young professionals to practitioners and experts from interdisciplinary fields – to learn skills, share experiences, and discuss ways to tackle the most pressing challenges in the world of water.

During the week, multiple issues were discussed – including efficiency, innovation, governance, and their linkage with food, jobs, energy and poverty.

However, one topic stood out as the key and most cross-cutting theme of the conference: the relationship between water and finance.

“Cracking the Water Finance Puzzle: Crowding in Private Finance” was one of the many discussions of finance at the conference. It aimed to open a conversation about the role of finance in achieving the targets of goal six of the United Nations Sustainable Development Goals (SDGs) by 2030: ensuring access to water and sanitation for all.

The discussion developed around two main topics. First, it introduced the term “blended finance.” This is a way to promote and scale sustainable investments in the water sector. Second, the conversation emphasized the main barriers that currently limit the flow of capital between sectors.

The panel had a diverse group of participants from different sectors – including academia, government agencies, and multilateral and private organizations. Among these were the Federal University of Rio De Janeiro, Organisation for Economic Co-operation and Development (OECD), World Bank, SABESP, 2030 Water Resource Group, Global Water Development Partners, and Kenya’s Water Services Regulatory Board.

What is the role of blended finance?

According to World Bank estimates, ensuring universal and equitable access to clean water and sanitation by 2030 will require a total investment of $1.7 trillion. This figure represents a significant increase compared to the current flow of resources to the water sector. Today, the level of investment is slightly below $600 billion.

The origin of these resources is largely concentrated in two different sectors: the public and the multilateral agencies. According to Bill Kingdom, global lead for water supply and sanitation in the Water Global Practice of the World Bank, only 6 percent of the total investments in the water and sanitation sector come from private finance.

The water sector’s dependence on grants must evolve for funding to bridge the $1.1 trillion gap. It would be naïve to expect that public and multilateral contributions will drastically increase, especially since there are 16 other SDGs to advance. So what are the other alternatives that might solve this problem?

Resource scarcity and fierce competition for funding indicate change is necessary. In this case, water financing must adapt to bring additional sectors into the equation. Blended finance is a viable alternative that includes private and more commercial finance sources.

Blending different types of available private, public and philanthropic resources will allow the water sector to leverage and mobilize additional private capital.

However, this is not an easy task. The challenge requires an extraordinary effort for service providers. They will have to prove they are well governed, economically viable and sustainable, and measurably creditworthy.

Sabesp, Sao Paulo’s water and waste management company, is a good example. According to Jerson Kelman, professor at the Federal University of Rio De Janeiro, three fundamental factors allowed Sabesp to go public in 2002: reliable cash flows, good governance and accountability practices, and financial transparency.

Today, the mixed-capital company – 50.3 percent owned by the Sao Paulo State Government, 30.1 percent traded in the Brazilian stock market (BM&F Bovespa), and 19.6 percent traded in the New York Stock Exchange (NYSE) – doesn’t receive any money from the government. In the last 10 years, it yielded profits of around $4 billion.

Positive results allowed Sabesp to accomplish two goals. First, it showed it was attractive to investors by paying $1 billion in dividends to its shareholders. Second, it leveraged an additional $4 billion – 35 percent from private companies and 65 percent from multilaterals – to continue growing and improving its service. To achieve this, company reinvested a total of $7 billion in its operations.

Today, Sabesp is a trustworthy and economically healthy company that has focused on responsible and transparent management to achieve sustainability through a blend of resources.

What’s next in providing better sanitation and clean water?

Sabesp can be considered an outlier in the world of water and sanitation service providers. However, its experience highlights key steps to eliminate the barriers between two distinct worlds – water conservation and private finance.

Our global desire and responsibility to achieve SDG 6 hinges on our ability to strengthen the water sector’s institutions and create more sustainable and attractive projects for investors.

Most importantly, we must establish effective communication channels for stakeholders with different priorities who want to share knowledge and best practices. In this way, we can coordinate efforts to ensure that people have equitable access to water and sanitation, which is fundamental for survival.

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