A manifesto for change at the UN Water Conference

Belated holiday greetings as we enter a new year! I would like to pick up on Christopher Gasson’s recent column advocating for “one voice” leading into the UN Water Conference in Abu Dhabi later this year. While these remarks are timely, clearly articulated and touch on all the major issues, I’d like to take this opportunity to put some meat on the bone and focus on the critical implementation priorities that need be addressed in Abu Dhabi in December, especially those relating to emerging markets.

The concept of “one big message” means we need to prioritise - and more concisely, prioritise the implementation of key policy reforms and investments. Don’t get me wrong, digitalisation, reuse, AI, desalination, etc. are all vitally important for the water sector. But none of these will become a reality if our service providers don’t prioritise: 1) becoming technically and financially efficient; and 2) creating governance and administrative and regulatory regimes that are clear, transparent and implemented with integrity. I know that people are sick and tired of me repeating these points. Trust me, I’m even more frustrated with delivering the same message over and over again! Yet these two priorities are essential, fundamental and foundational. Without them, nothing will change.

Improved efficiency and better governance need to become the central message at the UN conference. More importantly, they need to become the driving force behind every strategy and work plan for each local government and utility struggling to provide sustainable services. Without these, none of the other priorities will happen. Equally important is that without these priorities, none of the public or private money the sector so desperately needs will materialise.

A central role for the World Bank (actually, all multi-national finance organisations) is key, but leadership has to be provided by the national and local service providers and policymakers. The dramatic cut in foreign assistance over the past year, coupled with the messages coming out of the Bridgetown Initiative, all push the leadership to implement these service and governance improvements firmly on local service providers. Yes, money is part of this equation, and I recognise this is more challenging than before. But while the multilateral development banks (MDBs) are essential, the ownership and responsibility to turn this around has to be at the national and local levels.

Speaking of money, underpinning these two reforms is a third focus: identifying stable and transparent revenue streams. For decades we’ve been plagued by the debate over whether water is a human right or an economic commodity. It’s time to revise the narrative. Two decades ago, OECD identified three revenue streams: tariffs, taxes and transfers, or the “three T’s”. The latter referred to official development assistance (ODA) and the last 12 months has decimated that funding source, and the expertise that came with it. Now the new “three T’s” are “tariffs and taxes, or trouble!” Simply put, service providers need a clear sustainable revenue stream.

Revenue streams mean more than tariffs. First, we have to spend the existing money we have more wisely. Second, if we’re going to argue for more tax money, we need to prove we can use it efficiently and maintain our assets. Third, let’s recognise that our most sustainable revenue streams are in local currency. National debt levels are severely constrained, and the depreciation of local currencies can be as high as 5% per annum. That means we need to pivot to tap local pension funds and insurance companies, coupled with guarantees and smart versions of blended finance. Yes, I recognise that local capital markets in the global South are often underdeveloped. But this means groups like the International Finance Corporation and other similar bilateral international finance groups like Proparco, KfW, USDFC, and FMO need to support market development by encouraging the full array of financial instruments, including bonds, commercial loans, and even microfinance, rather than solely focusing on public-private partnerships. Frankly, they’re also too focused on large, hard currency transactions. It’s time they start focusing on quality over quantity.

The MDBs, and not just the World Bank, need to up their game. As noted, money is a problem and the MDBs have resources, but this has to be about more than individual institutions, and how they use those resources needs to change. The emphasis on building infrastructure is important, but it is even more essential that we focus on improving the systems to make service providers more efficient and better governed. This is actually harder than laying pipes, and the reality is that there is no other set of organisations that can play this essential role.

The MDBs have done this in the past; just look at the transformations in Brazil, Kampala, Manila, Lilongwe and elsewhere. The reform process is damn hard but the “secret sauce” comes in the form of technical assistance, training and capacity building linked to infrastructure. These “soft” inputs are relatively inexpensive compared to infrastructure but the MDBs’ client countries typically don’t want to use long-term, hard currency loans on “soft” investments. With the demise of ODA, and tight national budgets, the MDBs are the only large players who can fund these soft interventions. The fact that they can combine infrastructure investments with the reforms needed, is another plus. Finally, if the MDBs don’t play this role, they’ll just perpetuate a process where they finance water systems that are designed, built, then neglected and ultimately rebuilt. What a waste!

If compacts indicate a signal of government commitment, water providers need to get serious about investing in efficiency and governance, and ultimately bankability. If this is going to work, we need to invest in both the software (technical assistance and training) and hardware (infrastructure) and national policy makers and water providers need to either fund it or ask the MDBs to finance it through their loans. This “skin in the game” is essential – allow me to explain. What if the next compact in Indonesia includes a $100 million component with the explicit goal of making half the PDAMs in the country efficient, well-governed and bankable? Of course, we could focus on households served or rupiah leveraged (not dollars), but instead let’s prioritise measurements on efficiency and governance. The end result would be more money for capex and opex, less forex risk, deeper local markets and, more local financial partners. Ultimately, the MDBs could focus on fixing the institutions rather than the pipes and truly become Knowledge Banks that also finance infrastructure by leveraging other players.

Measurements matter and fortunately they exist. Rather than serving millions of water customers (or a billion), or leveraging billions of dollars (or trillions) we need an independent, credible assessment tool to track the efficiency and governance of water service providers. In mature markets, the independent credit rating agencies play this role while in emerging markets water regulators, like the one in Kenya, assess the efficiency of providers. Rating agencies exist, they are independent, operate in many emerging markets, have relatively low costs, and are well understood by ministers of finance, who are not only a key stakeholder, but also the keepers of public finance. Credit ratings can help keep the reform process on track and honest.

But the MDBs need to relook at their motivation. At the World Bank, the current focus isn’t on efficiency or governance, rather it’s what’s called "Private Capital Mobilization" and the key measurement is private money leveraged. There is a secondary measurement tool, called "Private Capital Enhancement", but while it focuses on the efficiency of water providers and governance, its key measurement tool is, again, money leveraged. In other words, a supply- rather than demand-driven approach. The incentives at the MDBs need to be realigned with the real problem rather than just looking at money leveraged.

Trust me, none of this will be easy, but if the sector is really serious about transforming water and sanitation service delivery, these reforms need to be prioritised and embedded in any major initiative.