Population growth, climate change and the need for food and energy place huge demands water resources and their finances. Despite hundreds of billions of US dollars being spent every year, there is no authoritative overview of what funding is available or required.

The sector needs to improve its ability to attract, absorb and manage funding in a transparent and accountable manner. The chief sources are the three ‘T’s of taxes, tariffs (user charges) and transfers (including development aid and concessionary loans).

No part of the water financial system is immune from corruption. Overlapping mandates at international and national levels may duplicate resource usage and undermine oversight. Public Finance Management (PFM) systems within countries often have weaknesses that can be exploited while a lack of robust information makes it difficult to track how money is used. Capacity gaps result in financial data being unreliable or unavailable, especially in decentralized systems. The World Bank has developed a Public Expenditure and Financial Accountability tool to assess the effectiveness and integrity of a country’s PFM system.

National subsectors are managed across different ministries and regulated in different ways. The UN system, multilateral lending institutions and regional basin organizations address different aspects of water management without sufficient coordination.

Trillion Dollar Challenge

There is growing concern among public finance experts and institutions that public finance reforms are not translating sufficiently into service delivery gains.

The most comprehensive estimate covering WASH and related infrastructure, capacity development, hydropower, irrigation and environmental services indicates global financing needs of somewhere between US$ 770 and 1,760 billion annually (UNU -INWEH et al., 2013).

It has been suggested that 20 to 40 per cent of water sector finances could be lost to dishonest practices, which would put total losses in the range of US$ 155-700 annually. There is an urgent need for good quality research on the economic costs of corruption in the water sector.

Budget issues

Strategic budgeting addresses objectives for water sector agencies over a three to five years period, while detailed costings are agreed during the operational phase. Scrutiny by independent non-governmental actors is central to reducing opportunities for corruption or inefficiencies. A market-based comparison of unit costs will guard against budgets being inflated by kickbacks or bribes.

A lack of capacity to plan and deliver budgeted services (poor absorption) leads to inefficiency, waste and broken commitments. While absorption of national funds has improved in the water sector, absorption of external funds is much lower.

Integrity risks in climate finance in Bangladesh

Transparency International Bangladesh identified integrity challenges in national climate finance projects, including siphoning of funds by local contractors, poor scrutiny of a river navigation project and funds embezzled from a project to reconstruct dykes. As a result, the Bangladesh Climate Change Trust Fund has reassessed climate change-related water resources projects and included civil society representatives on an oversight body. It has made environmental impact assessments mandatory for any dams and dykes.

Auditing

For civil society to play a role in decision-making, higher levels of transparency and participation are needed.

Supreme audit institutions (SAIs) are tasked with examining whether public funds are spent economically, efficiently and effectively, in compliance with rules and regulations.  Many SAIs are engaging with civil society. However, they can come under political pressure not to be too critical.

There is a need to match the finance books with what is happening on the ground. Funds may be misappropriated through double-counting or ghost projects, where agencies claim for work not done or done by others.

Tariffs

There is a consensus that increasing funds from tariffs will strengthen financial sustainability. Water supply tariffs should reflect costs, take into account affordability (e.g. through cross-subsidies) and provide incentives for responsible water use. Integrity issues include political interference with tariff setting and service failures in poor areas where ability to pay is low.

Transfers

External support from donors remains a major source of funding in the water sector in developing and post-conflict countries. Aid commitments to the sector have increased, but disbursement has remained static due to lack of capacity to take on projects or meet donor requirements. Efforts to close this gap should focus on strengthening the capacities of implementing institutions.

Donors adopt a range of approaches to safeguard funds, but few systematically mainstream anti-corruption policies into water sectors of recipient countries.  It would be more productive to strengthen these government systems than to bypass them.

Benin fraud leads to suspension of development cooperation

An audit of the €70 million phase II national water programme in Benin unveiled alleged misuse of €4 million by the Benin Ministry of Water. This led to a suspension of Dutch development cooperation to safeguard funds from further misuse. Emergency action to prevent fraud means that services the programme was designed to deliver will be delayed.

Private sector finance

Good investment is investment that helps to develop the water sector and provides a fair rate of return for the investor. This implies that there must be sufficient finance in the sector and among the public to repay loans and meet user fees.

Investing in the water sector is considered risky by commercial financiers, due to concerns over debt and interest repayments, future water supplies; and levels corruption and inefficiency. Private investment in the WASH subsector has actually decreased from a high of 15 per cent of total investment in the 1990s. Financial integrity in the sector includes the need for water services providers to remain viable.

In many countries, the private sector operates under stringent anti-corruption laws and compliance management systems. Strengthening integrity management in publicly owned water companies and institutions is an urgent need.

Integrity risks related to private capital need to be managed. Since 2001, new private activity in the water sector has concentrated on water supply, hydropower and agriculture in China, Latin America and the MENA region. Concern has been expressed that social and environmental lending standards established by the World Bank and other multilateral lenders are diluted as commercial banks and energy and construction companies play an increasingly role in financing water resources development.

Private investments can also bring vested interests to the table and capture the agenda. Governments need to attract private investment while retaining stewardship of water resources and independent regulation. Decision-making on awarding water-related contracts need to be transparent, with clear objectives and measurable performance indicators, backed by independent regulation and effective monitoring. Well-organized civil society watchdogs are essential to provide independent oversight and to hold governments accountable.

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Key messages

  • Institutional fragmentation and complex funding arrangements make the water sector vulnerable to financial inefficiencies, mismanagement and corruption.
  • There is no comprehensive overview of funding levels available to the sector worldwide. Weak financial data makes it difficult to track finances and losses.
  • The main sources for sector funds – tariffs, taxes and transfers (the three ‘T’s) – each pose integrity issues, especially as global financing patterns change.

Recommendations

  • Establish a comprehensive accountability mechanism anchored in the public finance system for water sector financing from all sources. Where public finance systems are weak, money can be managed through parallel systems to avoid risks. Nonetheless, planning and reporting should be undertaken jointly by government and civil society to ensure that government fulfils its obligations related to water management and service delivery.
  • Engage with ministries of finance, audit institutions and parliamentarians to make water and sanitation a priority and increase their understanding of the sector. Public finance institutions and water sector actors, including service providers, donors, private investors and civil society, should collaborate to understand where and why systems are underperforming and how these can be improved.

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