It is often said that the private sector is not the sole solution, but is part of the solution – an opinion shared by many public sector agencies looking for ways to attract greater private sector participation in the water sector. Specifically, commercial financing is needed to enable the investment required to achieve the SDGs as most of the SDGs depend on water security (and particularly SDG6, the ’water SDG’).

Back in 2015, the OECD and the World Water Council had identified estimates of investment needs to achieve SDG 6 ranging from USD 6.7 trillion by 2030 to USD 22.6 trillion by 2050. The World Bank recently found that developing countries need to triple current expenditure to achieve SDG6 and that the private sector accounted for only 2% of current spending. In Europe, the private sector has long been a more consistent investor; still, its share of total financing is a mere 6%.

DEFICIT IN PRIVATE INVESTMENT

SDG 6.1. and 6.2. concern realizing universal access to safe water and sanitation; 6.3. relates to wastewater treatment, and 6.4 to improving water-use efficiency, aimed at reducing water scarcity. Attaining all the goals will require substantial upfront investment: once networks and treatment units are in place, operational and maintenance spending, as well as ongoing investment are needed to maintain and upgrade the installations and to meet evolving regulations. The OECD has estimated that EU countries will need to increase investment, on average, by 25% between 2020 and 2030, and for countries that have joined more recently, by 100%. This in order to catch up and align with EU requirements.

In terms of private participation in infrastructure, the water sector is lagging behind, with private investment committed to water infrastructure projects in the low- and middle-income countries hovering between 2% and 10% of total private investment between 2014 and 2023. The volume of private investment in water and the number of projects with private participation fell from USD 5.3 billion across 27 projects in 2022 to USD 1.8 billion across 19 projects in 2023. By contrast, over the same period, the volume of energy projects – mainly renewable energy projects – sharply overtook pre-Covid levels, with private investment in low- and middle-income countries at USD 62.4 billion over 187 projects.

The reasons for this deficit in private investment in water include perennially low water tariffs – often kept at below-cost levels for political reasons – and the limited pipeline of investable projects. This is changing, however, as the effects of climate change (floods, droughts and wildfires) impact water, making investment in water security urgent and critical. Many governments, with the support of development finance institutions, are turning to the private sector to help them advance in this area.

While private sector participation in the water sector can be expected to increase, in response to strong demand, it is necessary to be realistic about the role it can and should play in achieving a water-secure future. The focus going forward should be on how to get it right, to avoid past challenges. Important lessons, outlined below, have emerged so as to achieve greater, more sustainable private participation.

APPROPRIATE RISK SHARING BETWEEN THE PUBLIC AND PRIVATE SECTORS

First, broader reforms of the sector need to be considered, to put the foundational elements of well-functioning water services in place. These must be based on a move towards cost-covering tariffs (with redistributive measures to address inequalities) and well-defined service areas for operators – often they are fragmented (for example, the previous rural services in Benin) and sometimes too large (for example, in post-Soviet countries).

Second, appropriate risk sharing between the public and private sectors is necessary. Unrealistic expectations regarding the private sector have persisted since the early 1990s, when many of the landmark concession contracts were granted. At the time, private operators already emphasised their expertise, rather than their funding contributions. Their appetite to invest in water was significantly dampened after early concession contracts were impacted by economic and political instability and were ultimately terminated (e.g. Buenos Aires in 2006, Gabon in 2018). A gradual introduction of private participation, starting with service and management contracts, while protecting private sector’s revenues from tariff fluctuations, is therefore needed to build trust between public and private partners.

Third, a suitable enabling environment is needed to attract private participation. Besides having strong water sector policies in place, it must include indicators of economic stability, broader corporate governance rules and ensuring that policies relative to agriculture or industry are not having detrimental impacts on water security. Political leadership by governments is also necessary to ensure that ministries and autonomous agencies work towards common goals. An OECD tool for assessing the enabling environment for investment in water has been developed and tested in multiple Asian countries, including in Armenia where it helped identify necessary reforms.

Additionally, clear legal frameworks for private participation are essential (e.g. , the BOT Law in the Philippines). Finally, a well-coordinated regulatory framework is essential. In addition to setting tariffs and deploying results-based performance standards, environmental approaches must also be encouraged and integrated into regulations in order to serve broader climate objectives. The OECD and AFD are currently working on a publication on this topic, which will be published in early 2025.