Climate change, WASH and financing

SNV climate wash

In this blog, SNV CEO Meike van Ginneken offers some tips to the WASH sector on how to capitalise funding opportunities offered by climate finance.

Climate mitigation is a global public good. Water, Sanitation and Hygiene (WASH) services and climate adaptation bring private benefits to households but also have large public externalities. Climate resilient WASH services are difficult to finance because it is hard to recover costs from users and thus, such services are not able to create sufficient cashflow to attract investors.

Attracting reimbursable or commercial financing to WASH has been a priority for years. Despite much effort, the sector remains highly dependent on public grants and as a result has been chronically underfunded.

Many in the WASH sector hope that climate finance can fill the financing gap. A few years ago, the world’s wealthiest countries collectively pledged US$ 100 billion annually to support climate actions. This commitment has not been fully realised. Most available climate finance is reimbursable financing ranging from concessional soft credits to commercial loans. While there is some climate finance in the form of grants, this is very limited.

In this blog I present some tips on how the WASH sector can use climate finance. By doing so, we free up scarce public funds for investments, services and groups of people that need support the most.

Tip 1: Learn how private or commercial financing works

As a WASH professional you believe in your project. You believe in the imperative of access for all and the SDGs. In doing so you might well overestimate the financeability of your project. Over the years, most WASH professionals that I have seen interacting with investors have been in advocacy or lobbying mode. My first advice is to shift to a more fact-based approach. You need to learn a new language. You need financial data. Building trusting relations with investors is anchored in presenting a full, quantitative and brutally honest picture.

I have been amazed at how risk averse financiers are. You must realise that financiers, including those focusing on climate or sustainable development, are presented with thousands of investments options. They can invest in a chocolate factory, in government bonds, in an electricity firm, or in your WASH project. They will compare the financial returns and the risk profile of these options.

As a sector, we need to get better at articulating a strong climate rationale for water and sanitation. I have seen quite a lot of climate finance go to solid waste, landfills and off-grid energy projects. Some of these projects have relatively low greenhouse gas impacts. But proponents of these projects have clear climate stories, including data. We need to do the same. How many tonnes of CO2 are saved by reducing leakage in urban water supply thereby saving total energy consumption? What is the greenhouse gas footprint of various wastewater or sludge management technologies?

Tip 2: Consider the vertical unbundling of WASH services financing

As WASH professionals we can learn from the energy sector where reimbursable, climate, and private finance are more commonplace. The basis for this approach has been vertical unbundling – separating various parts of the chain to provide services and managing each part through a specific organisational and financial set-up. In the energy sector, most of the private finance goes into power generation because unbundled power stations have a more attractive financial and risk profile for investors than power grids.

When translated to WASH, vertical unbundling means separating out drinking water treatment or wastewater treatment from the rest of the service chain into distinct organisational and financial set-ups.

A few years ago, I was surprised to learn that almost 100% of the WASH portfolio of the IFC (International Finance Corporation, the private sector arm of the World Bank Group) consisted of financing sewerage treatment plants. I see similar patterns with (non-grant) climate finance. Desalination plants have been able to attract climate adaptation finance, as the world becomes more water scarce. Wastewater or sludge treatment plants have been able to attract climate mitigation, as they reduce greenhouse gasses.

SNV co-manages the Dutch Fund for Climate and Development (DFCD) with the Dutch Development Bank FMO and others. The first WASH projects we are considering for DFCD financing include desalination projects and producers and installers of solar pumps – again unbundled projects. The work we do at SNV to attract private firms to manage and invest in faecal sludge management for septic tanks is another example of unbundling, albeit at a smaller scale.

It has proven easier to secure reimbursable financing for infrastructure projects that are ring-fenced, both financially and physically. Payment for services normally come from a customer, such as for a distribution utility. This payment stream can be guaranteed by a central government or an international financial institution. The infrastructure is in one specific site.

Compare this to water grids or sewers for which it has been close to impossible to attract reimbursable financing. Here the revenue flow is dispersed and needs to be collected from thousands of households. Tariff setting is political. And land-related issues around network infrastructure in dense urban areas scare off investors.

While I worked at the World Bank on WASH in India, we advised on a number of successful private financing schemes for wastewater treatment plants along the Ganges River. These deals were based on a combined revenue stream from adjacent industries buying clean treated wastewater and fee per volume of treated wastewater paid by state governments, with a guarantee from the treasury of the India union government. These revenue streams made the project sufficiently attractive to a mix of private investors and multilateral development banks.

Tip 3: Mix and match grants, soft credits, and more commercial financing

Public financing is fungible. Our efforts to attract investors (including climate finance) should focus on projects that interest them. Going back to the Government of India’s wastewater treatment example, when the government tried to attract investors to finance the treatment plant, it simultaneously allocated public funds to cover basic sanitation. Similarly, if bilateral or multilateral donors leave those WASH projects that can attract reimbursable financing to other investors – scarce Overseas Development Aid can be used to finance services for projects focused on basic access and network infrastructure, especially in poor countries and with targeted subsidies for low-income and vulnerable households.

We need to convince governments and donors to increase grants to finance basic services. WASH investments in Europe still rely heavily on public finance. Let’s be clear. It is not fair to expect citizens in less affluent countries to pay more than what average Europeans pay. Even if the former will have a lower service level, they cannot be expected to pay the full investment costs. Instead, kick-start cost recovery through operations and maintenance (O&M) services.

Tip 4: Address the underlying causes of lack of finance in WASH systems

Let’s make sure that climate finance does not become a distraction. Climate finance is an additional but relatively small stream of financing. Climate financiers will want to see the same things as all other financiers: strong utilities, cost recovery, stable policy and regulatory regimes, transparent finances, and accountability to customers. Climate financing does not fundamentally change what we should do in the WASH sector. Let’s continue to focus on getting the basics rights. Finance will flow to a well-performing WASH sector.