Finding new sources of finance will be critical to expanding access to urban water supply and sanitation (WSS). Present investment towards the WSS Millenium Development Goals is only half what is needed, and all sources of investment finance for the sector have been declining. Increasing investment depends on the ability of utilities to generate more cash flow from operations by increasing revenues and reducing costs.

Public finance will continue to be the main source of funding WSS investments. In the past years, public investment in infrastructure has halved in many countries, as it is one of the few discretionary spending categories of governments in fiscal squeeze. Private financing has accounted for less than 10 percent of investment in WSS over the last decade. Overseas Development Assistance (ODA) has also been a minor source of funds for the water sector.Governments will have to use scarce public funds efficiently and steer them towards adequate service to the poorest households while leverage funds from other sources to serve other population segments.

Key Challenges
Efficient public financing requires accurate, timely, consistent and disaggregated data per local jurisdictions. WSS sector priorities need to be integrated into government’s strategic objectives and resources are allocated through the government’s public financing policy. In the past decade, some governments have changed the use of their financing from bailing out poorly performing utilities to providing performance based intergovernmental grants and loans stipulating a set of efficiency goals upon local governments and on utilities.

Creditworthiness is the key to accessing new sources of finance - starting at the utility level by generating revenues sufficient to cover recurrent costs. Most new public-private partnership transactions in WSS bring little or no private financing. Meanwhile, some reformed autonomous and accountable public utilities have been able to attract private financing. Development of new transaction models for public-private partnerships and the use of risk-mitigation instruments can attract more private finance into WSS. In most developing countries, creating domestic capital markets is critical to give utilities better access to needed local currency financing over the longer term,. But new approaches for mobilizing private investment also need to also look pension funds, insurers, banks and other institutional investors such as mutual funds, provided that utilities can offer secure long-term investment prospects.

Sanitation and hygiene interventions often require different financial approaches from those in water supply. In low-income countries, public funds must be allocated principally to promoting and stimulating demand for sanitation rather than to subsidizing hardware – in order not to undermine the long-term sustainability of the sector. In middle-income countries where sewage and wastewater treatment is required and affordable, public funds should co-finance these semi-public goods.

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World Bank Response
The World Bank provides financing for infrastructure rehabilitation and expansion. The International Finance Corporation (IFC) provides loans to private operators. A combined initiative of the World Bank and IFC provides direct capital investment without central government guarantees to municipalities and other local public entities in the developing world.

The Bank also supports improved efficiency of public spending on a number of fronts, including supporting utilities in financial stress to deal with unmanageable debts, promotion of incentive based fiscal transfer systems to local governments and utilities, support to the design of hybrid finance schemes to attract private investors, support to financing mechanisms to extend services to the poor through output-based aid. In addition, WSS sector professionals increasingly work on public expenditure reviews and within programs to strengthen municipal finance and intergovernmental fiscal systems.

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