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Executive Summary

This report provides data and insights on the role of grant funding and concessional financing in meeting the Sustainable Development Goal for water (SDG 6, known as the water SDG). These sources of funding are collectively referred to in this report as aid flows to the water sector. This report was prepared as an input into the High-Level Panel on Water.

Data analysis was conducted using two main databases on aid to the water sector. The Organisation for Economic Cooperation and Development Assistance Committee (OECD/ DAC) database is the most comprehensive, while the WASHfunders.org database provides complementary data on aid from philanthropic organizations. These databases were complemented by an inventory of the main institutions providing aid to the water sector, as well as interviews with selected providers of aid to the water sector, including leading multilateral development banks (MDBs), bilateral donor agencies, and international nongovernmental organizations (NGOs). This analysis provides the basis for recommendations on how to improve the aid architecture to the water sector and mobilize financing to achieve the water SDG.

Analysis of Aid Flows: Main Findings

Official development finance (ODF) to the water sector comprises of concessional (official development assistance, or ODA) and nonconcessional financing (referred to as other official flows, or OOF). As per the OECD/DAC definitions, ODA comes in the form of grants and concessional loans provided by official agencies on concessional terms. Loans are deemed to be concessional when the financial flows contain a minimum grant element of 25 percent, calculated at a discount rate of 10 percent. Development banks typically adapt their lending terms to countries’ circumstances and make concessional loans through a “soft-lending” window (such as the International Development Association) and nonconcessional loans through a “hard-lending” window (such as the International Bank for Reconstruction and Development). While concessional loans count as ODA, nonconcessional loans would be included in total ODF but not in total ODA.

ODF to water nearly tripled between 2003 and 2014, rising from an annual allocation of $6 billion in 2003 to close to $18 billion in 2014. This increase coincided with the implementation of the Millennium Development Goals (MDGs) and the International Water Decade adopted by the United Nations, which ran from 2005 to 2015. This response is in keeping with the appeal to international financiers made by the Camdessus Report of 2003 to double the annual flows of financing to water (World Panel on Financing Water Infrastructure 2003).
Between 2010 and 2014, 42 percent of ODF funds in the water sector was allocated as loans, 28 percent as grants, and 29 percent as nonconcessional loans. Equity and other “grant-like” financing represented only minuscule amounts. Grants from philanthropies also remained at fairly low levels: at their highest reported level, they accounted for less than 2 percent of total ODA to water.

ODA to the water sector also nearly doubled from 1995 to 2014, rising from $6.8 billion to $12.9 billion per year (in constant 2014 prices). ODA for water did not keep pace with the growth in ODA for all sectors combined, however, which increased from $42 billion in 1995 to $140 billion in 2014. While water ODA grew by 90 percent during this period, overall ODA increased by more than 230 percent. The water sector has historically attracted smaller amounts of ODA than other social sectors, including education, health, population planning, and government and civil society. The sector has lagged relative to other social sectors.

ODF for water is primarily targeted to water supply and sanitation activities as opposed to irrigation or water resources management (WRM). From 1995 to 2014, WSS received approximately 57 percent of all water sector ODA commitments and 52 percent of nonconcessional financing from MDBs. This was consistent with the MDG focus on WSS. Irrigation and hydropower made up most of the balance. WSS had a higher proportion of grants than loans (with 31 percent provided through grants). In contrast, 82 percent of irrigation development finance came in the form of loans (both concessional and nonconcessional).

In terms of geographic distribution, Sub-Saharan Africa and South and Central Asia have been the largest recipient regions of ODA for water over the 20-year period, with 29 percent and 25 percent of ODA respectively. More than 70 percent of the funds are channeled through the public sector and only 1 percent represent support through public-private partnerships.
Funding has overwhelming supported projects: 91 percent versus 5 percent for core contributions and pooled programs, 3 percent for budget support, and 1 percent for technical assistance.

The largest bilateral funders from 1995 to 2014 were Japan (with an average annual ODA contribution of $1.3 billion), Germany (averaging $711 million), and the United States (averaging $494 million). Other significant funders included France, the Netherlands, Spain, and the United Kingdom.

ODF for the sector is mainly channelled via multilateral agencies, whose share of total flows has increased significantly since 2003. The largest multilateral funders were the World Bank Group, with its soft-lending window, IDA (the International Development Association), topping the list with $920 million per year on average between 1995 and 2014, and its “hard-lending” window, IBRD (the International Bank for Reconstruction and Development) committing an average of $1.86 billion per year in loans to middle-income and low-income countries. Other significant multilateral funders for ODA included the institutions of the European Union, the Asian Development Bank (ADB) Special Funds, and the African Development Fund of the African Development Bank (AfDB). With respect to nonconcessional funding, IADB (Inter-American Development Bank) and ADB have played major roles, with $0.81 billion and $0.61 billion annual lending commitments over the 1995– 2014 period.

Nontrade guarantees from MDBs have been a relatively small portion of MDBs’ portfolios.
Overall, the total cumulative commitment from 2000 to 2013 for guarantees was $37 billion, or about 4.5 percent of the MDBs’ total lending. This number effectively doubled between 2004 and 2012/13, which is an encouraging trend. However, the vast majority of these guarantees were for the banking and financial services sector, with minimal use of this instrument in the infrastructure sector. Unfortunately, no breakdown for water-related investments is available. The World Bank is currently the MDB that makes the greatest use of guarantees.
It recently agreed to double its portfolio of guarantees from 2017 to 2020.

While international climate finance has risen sharply, the water sector has captured only a modest proportion of that funding to date. An analysis of seven of the major MDBs shows that from 2011 to 2014 their annual commitments to climate finance varied between $23 billion and $28 billion (ADB et al. 2016). The World Bank and the European Investment Bank have been the largest contributors. In 2015, seven MDBs committed $25 billion to climate finance, of which 80 percent was for mitigation, with the remainder allocated to adaptation.
Of the amount assigned to adaptation finance, water and wastewater management received 27 percent of the financing, or $1.32 billion.

This report identifies main challenges in the way development finance for the sector is managed at present and offers recommendations. These are summarized in table ES.1.