1. Why are project development and financing facilities needed?

Estimates of the funding required globally to meet MDG Target 10 vary from US$7.5 to $70 billion for developing countries alone. Current funding flows are inadequate to meet the funding gap between needs and allocations in most countries.

Domestic sources of finance have emerged as a potential source of finance for water sector infrastructure. Domestic finance can help to alleviate the currency risks that often constrained private sector participation (PSP). This complements parallel trends in decentralisation and demand-led approaches to development. Domestic finance ranges from user-finance and micro-finance initiatives at local level, to capital markets, pension funds, and domestic banks and has proved effective at leveraging additional funding flows to the sector. The Camdessus Panel (Financing Water for All – Report of the World Panel on Financing Water Infrastructure – 2003) and the EU Water Initiative (Final Report of the Financial Component – 2003) called for leveraging private finance into the water sector through innovative financing schemes, including local currency lending, credit guarantees, and lending at provincial, district or municipal level.

Any discussion about finance must consider policy and governance issues. In many countries, limited public administration and financial management capacity at central and sub-sovereign levels, affects the timely transfer of funding as well as the capacity to use funds effectively, efficiently and in a timely manner to meet policy objectives

Constraints that limit water sector finance

A common constraint identified by donors and the private sector is lack of bankable, financially viable projects in the water sector in developing countries. However, communities, NGOs, and would-be project sponsors often say that donors and the private sector do not address practical realities, particularly regarding time, size, technology and disbursement. In addition, donors continue to fund non-viable projects, whether for political or other purposes. This has resulted in an increased debt load, without achieving progress towards development targets.

Research by the EU Water Initiative Finance Working Group (FWG) identified constraints to water sector finance, as perceived by different stakeholders, under the following headings:

• Politics and governance
• Project preparation
• Technical, administrative, and financial capacity
• Cooperation and coordination
• Financial risk

Project preparation and financial risk

The water sector poses significant financial risk for potential investors, including weak cost recovery, governance issues and many others. Many private sector or community-based projects cannot proceed without bridging the period between developing a project and attracting a loan or other form of market-based finance.

Financing facilities aim to reduce the real and perceived risk, using a range of finance mechanisms to attract donor or private sector investment. A financing facility increases the potential for sub-sovereign finance (provincial, district or municipal authority) and non-sovereign finance (such as the World Bank, the EU financing mechanism, the private sector or NGOs), and greatly reduces bureaucratic measures.

However, it will take time to start up new businesses and approaches and to bring successful ventures to scale to address the needs of 1.6 billion people who lack sustainable access to a safe water supply, and 2.6 billion who lack access to basic sanitation.