A Water Bank: securing financing to develop water services to all and for life in low and middle income countries

Published on: 19/05/2014

It took high income countries in Europe and North America about 100 years to universalise the access to tap, safe and unlimited water to all. Starting with dense, industrial or wealthy areas, the development of modern water services slowly reached remote, rural and poor places. Among other challenges these countries had an urgent need for long-term and massive public financing.

Governments in low and middle income countries are not investing enough in water services

Part of this public financing came from the wealth that water services created in cities where they developed in the first place. In France, for instance, a tax was collected on citizens that enjoyed tap water at home in order to serve the unserved. The more people got water at home, the bigger the total public financing available to reach the more expensive to serve.
Looking at rural water services in low and middle income countries today, the difference with the progress experience by high income countries is striking.

Governments are not investing enough in water services (www.wsp.org/content/pathways-progress-status-water-and-sanitation-africa and www.unwater.org/fileadmin/user_upload/unwater_new/docs/Publications/GHA_pagebypage.pdf. Investment in the water (and sanitation) sector is largely left to aid agencies that fund 3 to 5 years projects and cannot guarantee long term financing even though this exact same type of financing has been taking place for the last 50 years.

It can be argued that in low and middle income countries governments don't have the required financial resources at hand to invest massively in rural water supply. It can also be argued that priorities change and that the commitment to invest regularly and massively into one sector is quite challenging in a context of competing priorities.

There are also factual evidences that, at the moment, the wealth which is being created by increasing access to water supply is also being directed to other priorities. For instance in Burkina Faso US$10 million were collected on urban water users through VAT last year, but the government is not reinvesting this money into the sector, and not into rural water supply. Similarly, when the State is granted a loan for urban water and sanitation services at 6% interest rate by donors, this money is provided to the water utility at an 8% interest rate, generating capital that could be re-invested in the water sector.

The issue of long term financing is not only a matter of new public finance being made available, but it is also a matter of securing the additional capital that the water sector is generating. In the example above, if the VAT was geared towards the development of modern services in rural areas, further capital would be made available thanks to the connection (and the VAT) of a growing number of users which in turn would result in increased public financing available every year.

A possible option for ensuring that taxes generated by the water sector are kept within the water sector as a basis to levy additional capital is to create a sector bank. How could a sector bank fulfil this mission? The tax collected on water users could compose the initial capital of this bank which, in the case of Burkina Faso, means a predictable and annual capital of $10 million per year. On the basis of $10 million of secured funding per year, a bank should be able to borrow $40 million on the international market and to pay it back in maximum 5 years. A financing capacity of $50 million equals the investment that is currently been made by aid agencies and the government in Burkina Faso.

The main advantages for this kind of institution to succeed in what governments and aid agencies have been unable to achieve so far include:

The issue of long term financing is also a matter of securing the additional capital that the water sector is generating

1. A bank is an institution submitted to strict accountability and transparency regulations
2. The tax already collected on water users is secured and fully reinvested into the development of modern water services
3. Though the provision of water services is a local issue, the financing of these services is not. Mutualisation of funds is required to ensure a sustainable access to the more expensive to serve and up hazard major repair  expenditures can be covered wherever needed in a country. Thus a water bank stands as a good mechanism to mutualise funds at country scale. 

Such a bank needs a well thought governance structure with a board that can take sound decisions on where and how much to invest. A cooperative bank having on board local authorities responsible for the delivery of water services should be considered.