4 ways to scale up finance for India's water sector

While the world is reeling from COVID-19 statistics, the numbers on basic commodities essential for human survival are equally staggering. Water is a prime example.

One-third of the world’s largest groundwater basins have been depleted. Water shortages affect 40% of the global population. Many large-population cities, mostly in emerging economies, are severely water-stressed. The World Economic Forum ranked water crises amongst the top-5 risks in terms of impact in its Global Risk Report 2020. In India, a water supply shortfall of up to 50% is expected by 2030, as per UNICEF. According to federal think tank NITI Aayog, 21 major Indian cities are in immediate danger of running out of groundwater. Three-quarters of Indian districts, home to 638 million people, are hotspots for water-related disasters.

Since humankind cannot exist without water, substantial efforts are needed to improve its access. However, this costs money. The global financing gap in water is already estimated at $114 billion for SDG targets 6.1 and 6.2 alone.

Here are four ways to improve the financing ecosystem for water, focusing specially on India – a country home to 18% of global population but which ranks a dismal 120th on the Water Quality Index.

1. Policy, reforms and governance. Instituting an independent water regulatory authority and mandating disclosures by water-intensive industries on water usage, treatment and recharging must be priorities for the government. Leveraging India’s priority-sector lending norms for banks or mandating a specific allocation for water in infrastructure debt funds – or in the development finance institution proposed in India’s recent budget – can attract dedicated capital.

Reforms must encourage municipalities to issue financial instruments. Recent muni-bonds by the cities of Ghaziabad and Pimpri-Chinchwad are a good start. Regulations that scale up nature-based solutions, like porous pavements that absorb stormwater, can also help create resilience to climate shocks. Policies must replicate global use-cases like Chicago’s green-roof initiative or Singapore’s target to become a 'city of gardens' by integrating its canals. Indian textile manufacturer Arvind has constructed a wastewater treatment facility in its Gujarat apparel factory to save groundwater for local communities. Policy-makers must create incentives for more industrial units to implement and scale up these kinds of measures. Last, the development of usage-based billing (using smart metering) or tax-slab based tariffs for water may enable the generation of internal revenue.

2. Developing innovative financing structures. Since it is tough to ensure cash flows towards development sector projects (like water), innovative financing structures to mitigate risks become necessary. Blended finance structures that combine public and philanthropic capital with private investments using credit enhancement instruments can be useful. For example, The Philippines’ Water Revolving Fund blends aid and public funds with commercial finance to offer a lower cost of capital to water service-providers. WaterEquity’s WCIF3 fund uses a blended approach through low-interest loans and first-loss guarantee. Pooled funds – such as the Kenya Pooled Water Fund, which pools domestic pension and institutional money – fit into this category.

Solar energy projects in Kenya and Rwanda have demonstrated the power of the pay-as-you-go (PAYG) model to tackle the issue of relative unaffordability – and this model can be extended to water. In irrigation, India’s Claro Energy offers a PAYG service using e-rickshaws fitted with solar panels, which then power water pumps. The hybrid annuity model (HAM) is an instrument that reduces the pressure of upfront payment in long-gestation projects like water. This is relevant for projects that entail operating revenue. The yieldco approach disaggregates low cashflow-yielding activities from high cashflow ones, reducing perceived risks for investors. Pension funds, often signatories of the UN's Principles for Responsible Investment (PRI) network, are looking at emerging economy infrastructure. Extending this to water infrastructure in India would attract patient capital. Lastly, combining corporate social responsiblity funds with outcome-based financing would help achieve measurable outcomes. And instruments like blue bonds, which are mainly focused on marine conservation, must be extended to water projects. Given the challenges of water as an investment avenue, most solutions will require innovative structuring.

3. Investor action. This includes improving investor engagement as well as the disclosure of water risks to facilitate investor confidence. A deeper understanding of the sector would augment investor interest; Ceres’ Investor Water Toolkit helps investors to identify, evaluate and manage water risks in investment decision-making. PRI and WWF have together developed a Water Stewardship Framework which includes practices for facilitating investor dialogue with companies. The usage of such toolkits and frameworks must be encouraged in water-risk nations such as India.

4. Community-based models. This includes water-tech solutions managed by communities. Small-scale water ATMs – which can be located in villages, stations and slums – provide access to low-cost clean drinking water in places where last-mile connectivity is a logistical challenge or where packaged drinking water is unaffordable. Water.org’s WaterCredit combines microfinance for local communities with loans for water solutions. Community-based peer-to-peer (P2P) trading models can spur rainwater harvesting by creating an incentive for collection. Bangladesh’s SolShare has demonstrated this P2P model with solar home systems. Of course, education and creating awareness are a prerequisite for creating buy-in from communities.

At the end, given water’s role as an existential resource in a world whose population is growing, it is urgent to drive stakeholder action towards water financing. The silver lining is scalable interventions are possible. Scaling up, and replicating such interventions in other places, can go a long way towards improving the worrying water statistics we are currently facing.