Financing Water Security

1. Context: Challenges to effective investment in water

Abstract

Water-related investments are fundamental to advancing development, not only to enhance water security but also to support other economics sectors that are heavily dependent on water (including energy and agriculture). Yet, the long-term viability of water-related investments remains an area of concern across both OECD and non-OECD countries. Indeed, some existing investment patterns remain constrained by limited cost recovery, inadequate maintenance funding, and weak integration of economic, environmental and social considerations. This chapter outlines the challenges associated with the design of durable financing models for water.

1.1. Definitions and scope of the report

“Water-related investments” refer to a broad range of investments that contribute to water security through the delivery of water and sanitation services, the management of water resources and water-related risks (“too much”, “too little” and “too polluted”) (OECD, 2022[1]). While the term investment refers to the total value of the expenditure incurred for building a given tangible fixed asset or purchasing an equipment, the term financing refers to the underlying finance sources and instruments that make such an investment possible (Jachnik, Mirabile and Dobrinevski, 2019[2]).

In the current research and debates on financing water-related investments, there is increasing recognition that the structure of financing for water is as critical as the volume mobilised (GCEW, 2024[3]). This has prompted a detailed examination of water financing models and approaches to analyse if and how they can lead to long-term, impactful investments.

The objective of this report is not to provide an exhaustive review of all existing financing models and approaches in the water sector, but rather to analyse a selected set of instruments that demonstrate particularly strong potential to enhance the lasting impact of investments or to leverage capital at scale for impact-driven investments. Thus, the report covers the following areas:

• Chapter 2 looks at the use of capital market instruments for water, such as GSS bonds as well as blue bonds.

• Chapter 3 focuses on the deployment of Islamic finance instruments, which aim to achieve a balanced risk sharing between providers and recipients of finance and rely on asset-backed financing models.

• Chapter 4 studies the scaling up of results-based financing mechanisms that tie disbursements to verified performance outcomes, thereby enhancing accountability and incentivising long-term, effective service delivery.

• Chapter 5 analyses the redesign of public-private partnership models to ensure that risk-sharing arrangements are more closely aligned with public interest outcomes.

• Chapter 6 summarises the key findings and recommendations from the report.

1.2. Do water-related investments and financing models deliver lasting value?

1.2.1. Water-related investments, a key driver of water security and economic development

Strategic investment in water security can yield substantial benefits at global level (OECD, 2022[1]). While estimates suggest that every dollar invested in water and sanitation can generate approximately USD 4 in returns (UN, 2025[4]; UNICEF, 2021[5]), this figure may reach up to USD 7 per dollar invested in some regions, such as Africa (AfDB, 2025[6]). Conversely, underinvestment in water security is projected to generate substantial macroeconomic losses by 2050: according to the Global Commission on the Economics of Water (GCEW, 2024[7]), these losses could amount to around 8% of global GDP in the long term1 and reach 10-15% of GDP in low-income countries.2 By 2050, the combined economic impact of floods and droughts could result in cumulative global losses of USD 5.6 trillion (World Bank, 2023[8]). These estimates do not take into account the full economic value of water across the economy (WWF, 2021[9]). The total use value of freshwater from direct and indirect uses in 2021 is estimated at approximately USD 58 trillion, equivalent to 60% of global GDP (WWF, 2021[9]). This includes major ecosystem functions such as protection against extreme events, regulatory services and biodiversity preservation, as well as its value in supporting agricultural production and industrial activity. In addition, in 2020, water-related risks represented a combined threat of USD 301 billion to business value (CDP, 2020[10]). In 2022, companies reported that investing in water-related opportunities, for instance related to water efficiency or resilience to water impacts, could bring over USD 250 million additional gain per company (CDP, 2023[11]).

Investment in water also have the potential to generate significant benefits across multiple sectors. The energy sector relies heavily on water, with hydropower accounting for approximately 18% of global electricity production and 50% of electricity production in 28 developing countries (IEA, 2021[12]). Industrial processes consumed nearly 15% of total freshwater withdrawals worldwide as of 2021 (Aquastat, 2021[13]). In agriculture, efficient irrigation systems can increase crop yields significantly, contributing to food security and rural livelihoods. For instance, research shows that irrigation increases maize yields by 55% in dryland regions of China (Zi et al., 2025[14]). Furthermore, improving access to clean water and sanitation has a direct impact on public health outcomes, with a potential reduction in incidence of diarrhoeal disease by up to 69% and acute respiratory infections by 14% in some regions (WHO, 2023[15]). These figures underscore the critical role that water investments play in driving development and economic growth across diverse fields.

1.2.2. Challenges to effective long-term investment in water

Challenges to assessing the long-term viability of water investments

Yet, measuring the long-term viability of water-related investments remains challenging, as methodologies and suitable metrics differ across water sub-sectors, and many of the benefits involved are difficult to quantify. For piped water-supply projects, this entails tracking operational performance indicators such as service continuity, levels of non-revenue water and energy efficiency across the distribution system. For flood protection investments, it requires quantifying outcomes such as the reduction in flood exposure areas and changes in the frequency or severity of inundation events. In the case of nature-based solutions, relevant indicators include the volume of stormwater runoff diverted from grey infrastructure and other hydrological performance metrics that support a robust assessment of their effectiveness and comparative value. Developing consistent and credible methodologies to measure the long-term viability of such complex infrastructure therefore remains a significant challenge.

The investment backlog undermining asset maintenance and serviceability

Many of the public and private benefits from water-related investments cannot be monetised, which makes it difficult to generate lasting revenue flows. Indeed, traditional economic or financial appraisal tools, such as cost benefit analysis (CBA), struggle to capture the value or full range of benefits and co-benefits from water-related investments. This lack of revenue streams partly explains the historic reliance on public budgets and concessional finance (OECD, 2022[1]). Additionally, affordability concerns (perceived or real) often lead decision makers to keep tariffs artificially low (OECD, 2019[16]), further weakening the financial viability and lifecycle of water investments.

Therefore, water operators sometimes fail to cover operational and maintenance costs, with various rates of cost recovery and persistent operational inefficiencies. On average, for the European Union (EU) as a whole, revenues from water tariffs cover around 70% of the financial cost of providing water services, with public financing covering the remaining 30%. In 24 EU Member States, more than 95% of the population could pay more for water services without facing affordability constraints on 2011-2015 average (OECD, 2020[17]). Furthermore, according to the UN-Water Global Analysis and Assessment of Sanitation and Drinking Water (GLAAS) report, over half of countries surveyed3 stated that, even among higher-performing countries, water tariffs are at a level which allows the recovery of only 80% of operating costs, to say nothing of capital costs. Among UN Member States identified as needing accelerated progress to meet their WASH targets, this coverage drops to 19% (UN-Water, 2022[18]).

Where data on the renewal rates of water assets are available, they frequently indicate a substantial backlog in operation and maintenance investment for existing infrastructure. In the water supply and sanitation sector in EU countries, renewal rates are typically below levels that would be commensurate with assets’ life expectancy (Farnault and Leflaive, 2024[19]). Other parts of the water sector such as agricultural water face similar challenges with ageing and deteriorating assets. Failure to monitor assets, resolve problems or implement upgrades in a timely way can lead to excessive water losses, which undermines the efficiency and effectiveness of water services and raises costs. High rates of non-revenue water are often a sign of operational inefficiency and can provide a partial insight into the extent of backlogs of investment in operation and maintenance. An OECD study found that there is significant potential to reduce non-revenue water in EU countries including in Bulgaria, Poland, Cyprus and Romania, including through targeted maintenance of assets to improve leakage control and drive asset renewal and modernisation (OECD, 2020[20]). This in turn might affect water resources themselves (due to pollution or excess abstraction), which will lead to higher costs later on, thus weakening the economic model for water utilities, making recovery even more uncertain in the future. It also triggers an equity issue, as failure to recover costs today results in transferring costs to future generations (Farnault and Leflaive, 2024[19]).

Irrigation systems, for example, are typically capital-intensive and designed for long-term use, yet their durability is often undermined by suboptimal investment decisions, insufficient funding for maintenance and weak institutional oversight. Many systems deteriorate prematurely due to fragmented planning and inadequate provisions for ongoing upkeep, which reduces service reliability and the value of public spending (Dankova et al., 2022[21]; FAO, 2018[22]). In the EU, cost recovery levels for irrigation are significantly lower than for water supply and sanitation, with significant differences reported within countries both for irrigation water tariffs and for cost recovery levels. These differences reflect factors such as the type of irrigation system, the basis used for charging, the age and condition of infrastructure and whether irrigation water is supplied through collective schemes or self-abstraction (Farnault and Leflaive, 2024[19]). As developed in Chapter 5 on PPPs, well-structured PPPs can help address these challenges by incorporating long-term operational commitments and performance-based incentives (IFC, 2022[23]). In Morocco, a 30-year PPP contract for irrigation modernisation integrated maintenance obligations and service standards, leading to improved water efficiency and reduced losses. In Andhra Pradesh, India, consolidating small-scale irrigation schemes under a single PPP model generated economies of scale and enhanced project viability (IFC, 2022[23]). Durable irrigation systems depend not only on initial infrastructure investments but also on consistent support for environmental stewardship, institutional capacity and system maintenance to ensure long-term functionality and impact.

Another example is handpumps, a critical infrastructure for rural water supply in many developing countries, which are often failing due to weak maintenance systems and limited performance monitoring. In Rwanda, a study of 181 handpumps found that nearly half failed at some point over seven months, with repair times ranging from 20 to over 140 days depending on the management model (UNC Water Institute, 2018[24]). Functionality rates reached 91% under professional systems but fell to 68% when those handpumps are managed through community-led approaches according to the study. These failures not only disrupt services but also diminish the return on investment. Sustained water access requires ongoing maintenance, real-time monitoring and institutional arrangements that support long-term service delivery.

A misallocation of financing resources undermining lasting value of investments

Embedding outcomes related to environmental protection (such as freshwater ecosystems conservation and restoration) and social responsibility (including equity in water access and exposure to water risks), in investments and underlying financing instruments is a challenge for many governments and development funders.

Several critical investments, including flood protection, nature-based solutions, small-scale infrastructure, and rural water supply and sanitation, remain largely underserved by prevailing financing sources and by private finance, which tend to favour large-scale grey infrastructure with well-established funding arrangements (such as desalination plants, wastewater treatment facilities and large reservoirs). Current financing models in these underfunded areas are insufficiently scalable, limiting the mobilisation of resources needed to meet growing infrastructure and resilience demands. Distinctive bottlenecks include disproportionate transaction costs, lack of standardised financing modes and instruments, and the absence of sound regulatory frameworks. Addressing these gaps will require innovative financing mechanisms and targeted public interventions to share investment risks and attract impact-driven capital (GCEW, 2024[7]; OECD, 2022[1]).

When it comes to social aspects, evidence suggests that a significant amount of funding and financing for water investments may be poorly targeted, failing to reach the projects that can deliver the greatest benefits and countries most in need (Leflaive and Hjort, 2020[25]). Indeed, over 50% of public water subsidies are estimated to be captured by the top income quintile in some countries, while people who need public subsidies are not receiving them (Andres et al., 2019[26]). Furthermore, data suggests that water-related ODA is sometimes concentrated in a limited number of countries, while not reaching some of the poorest countries4 (Leckie, Smythe and Leflaive, 2021[27]). While financial innovation abounds for water-related investments, with multiple arrangements to blend public and private finance, they often fail to be deployed in low-income countries at scale (OECD, 2019[28]).

1.3. Can financing models and approaches help strengthen the viability and effectiveness of water investments?

Enhancing the quality of financing for water entails supporting long-term, patient capital that generates not only financial returns but also broad-based economic and social value (GCEW, 2024[7]). Public actors, particularly governments and public development banks, are uniquely positioned to deliver such strategic funding. Concurrently, there remains significant untapped potential to scale private sector investment, provided returns are aligned with inclusive and long-term development objectives. Realising this potential requires moving beyond traditional de-risking approaches. Instead, it calls for a reconfiguration of how risks and rewards are equitably distributed between public and private stakeholders, ensuring transparency, fairness and mutual accountability (GCEW, 2024[7]).

For instance, financing can be strategically allocated to prioritise asset maintenance and serviceability rather than being mainly focused on infrastructure development. By structuring financing to support continuous service delivery and the achievement of essential public policy objectives, resources are directed toward sustaining long-term functionality. This approach not only enhances the viability of service provision and water resources but also optimises the use of limited financial resources. Moreover, it facilitates access to new or underutilised funding sources that often demand stronger assurances regarding viability, thereby unlocking additional financial potential while reinforcing environmental and social outcomes.

This report analyses how the structure or design of financing models and approaches can have an impact on the long-term viability and effectiveness of investments. This includes financing models that share some or all of the following characteristics:

• Take a balanced approach to risk-sharing between providers and recipients of capital.

• Adopt a strong focus on asset maintenance, including through ensuring that sufficient flows of working capital are funded so that asset maintenance can be implemented where and when it is needed to support lasting assets.

• Incentivise delivery of results in line with customer needs and desirable outcomes, measured not only in financial terms but based on other dimensions of performance, including social and environmental indicators.

The report focuses specifically on the following approaches, as they represent a potential to mobilise impact-driven investment in the water sector, either by tapping underutilised asset pools seeking investment opportunities or by enabling the design of instruments that can be aligned with long-term outcomes:

• The use of capital market instruments, such as GSS bonds as well as blue bonds.

• The deployment of Islamic finance instruments, including sukuk (Islamic bonds), PPPs and blended finance, which can support more balanced risk sharing arrangements between providers and recipients of finance and rely on asset-backed financing models.

• The scaling up of results-based financing mechanisms that tie disbursements to verified performance outcomes, thereby enhancing accountability and incentivising long-term, reliable service delivery.

• The redesign of public-private partnership models to ensure that risk-sharing arrangements are more closely aligned with public interest outcomes.

The main categories of instruments reviewed in this report are summarised in the table below. These instruments can be deployed to support a range of water-related investments, which in turn generate diverse benefits across economic, environmental and social dimensions – such as the conservation and restoration of freshwater ecosystems, the mitigation of flood and drought risks, and the expansion of access to safe water supply and sanitation services. As mentioned earlier in this chapter, this report focuses on identifying options to enhance the long-term impact and effectiveness of these financing models and associated investments. It does not aim to quantify or compare their resulting economic, environmental or social benefits. The scope of instruments considered extends beyond traditional loan products to include grants, guarantees and equity-based mechanisms.

Table 1.1. Main types of instruments reviewed and recommendations for enhancing long-term impact (selected)

	Definitions	Main types of instruments reviewed	Recommendations for enhancing long-term impact (selected)	Current limits (selected)
Bond finance	Debt instruments that enable issuers, such as governments, municipalities or corporations, to raise capital from investors over a specified period	GSS bonds Blue bonds SLBs	Develop standards and frameworks dedicated to water bonds, to structure and scale the market Structure instruments that meet investors’ demands (backing issuers to enhance their credit ratings, supporting the aggregation of diversified portfolios…) Mandate robust impact reporting, independent verification and promote methodological consistency Support the development of municipal and local currency bonds, as subnational governments are often responsible for service delivery but face obstacles in accessing capital market Leverage performance-linked or outcome-based bond instruments to drive water investments by aligning financing with measurable social and environmental outcomes	Still mostly focused on oceans (to the detriment of freshwater investments) Large benchmark size issuances; difficult to access for small-scale projects Specific to SLBs: concerns over weak ambition, limited transparency and small coupon step-ups
Islamic finance (IF)	Financial practices and instruments that comply with Shariah (Islamic law) and are based on ethical, asset-backed and risk-sharing principles	Islamic banking, Sukuk, Islamic social finance (zakat, waqf, qard hasan), PPPs, parallel financing, blended finance	Guide the development of IF for water investments through targeted legal, regulatory and economic policy measures Support enhanced data collection, reporting and monitoring to track IF flows into water investments Advocate for international standard-setters to establish harmonised IF product standards that integrate water investment criteria, among other objectives Create a framework and/or a technical assistance facility aimed at developing and implementing innovative Islamic finance instruments for water investments Commission studies on how asset-backed and asset-based financing features can enhance the long-term viability of financing mechanisms, particularly in terms of transparency, accountability, financial resilience and risk sharing	From principles to actual investments: still marginally benefiting water Most sectors benefiting from IF are household consumption, real estate, manufacturing, construction and trade
Result-based finance	Variety of instruments linking disbursements to the achievement of pre-agreed outcomes	Result-based grant Impact-linked loan Development impact bond	Develop credible methodologies to measure operational viability for complex infrastructure and integrate outcome-level results relating to services’ durability (in addition to output-level results) in RBF models Strengthen the results verification processes, as the credibility of RBF approaches is fundamentally determined by the rigor of these processes Set up dedicated financing facilities with established, standardised procedures to manage RBF payments on behalf of funders (notably to reduce transaction costs) Address risks of perverse incentives in results-based grants, for instance incentivising financial performance Commission studies on the cost-effectiveness of RBF models and promote transparency on the costs of designing and implementing RBF Develop guidance to funders on where, when and how to apply RBF and for what policy outcomes to facilitate the adoption of the instrument Provide technical assistance to implementers where needed, to mitigate their exposure to higher performance and financial risks	Concerns over cost effectiveness of RBF models and ability to reach scale Higher performance and financial risks on implementers Risk of perverse incentives (dependency on external funding)
Public-private partnerships	Long-term agreements between a government and a private partner. In some PPPs, the private partner delivers and provides upfront financing for building a capital asset base, sharing the associated risks	Build-Operate-Transfer Concessions	Structure PPPs to incentivise results’ achievements, embedding performance indicators (including ambitious long-term impact targets) and adequate remuneration structures in PPP contracts Develop detailed PPP projects feasibility assessments to identify all potential risks, mitigation measures and trade-offs Build capacity of public sector institutions for designing and managing balanced PPPs Implement regulatory reforms to enable balanced PPPs Engage with the private sector (including potential private operators and investors) to create trust and build awareness of water-related investment opportunities Engage with local financial institutions (including local commercial banks and public development banks) to enable the deployment of local currency lending and blended finance Address political risks through citizens' engagement in national and local fora on forthcoming and ongoing PPP projects	Issues with social acceptability (when PPPs are perceived to be a transfer of responsibilities to the private sector) Failure to adequately structure PPP contracts can lead to widespread environmental and social damage and a financial loss for the public sector

References

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Notes

← 1.  Driven by reduced agricultural productivity, disruptions to food and energy systems, and increased impacts from extreme weather events such as floods and droughts.

← 2.  Where economies are more dependent on agriculture and other water-sensitive sectors and have lower adaptive capacity (related to infrastructure, financial resilience and social safety nets).

← 3.  This includes 121 countries, including 17 high income countries, 38 upper middle-income countries, 42 lower middle-income countries and 24 low-income countries.

← 4.  For instance, In Asia-Pacific, India and Indonesia received a very high amount of ODA per annum compared to other countries, while other countries received no ODA, such as Laos, Bangladesh, Myanmar, Afghanistan and Papua New Guinea.