Dreampipe II: New Sources of Financing to Reduce Non-Revenue Water
The water sector faces many challenges. None is greater, or with greater potential for impact, than achieving Sustainable Development Goal 6, on water and sanitation. This includes targets to ensure universal, equitable and sustainable access to safe and affordable drinking water for a global population estimated to reach 8.5 billion people in 2030. It also challenges us to improve water quality, increase the efficiency of water use and reuse, to ensure water abstractions are sustainable, and to replenish water sources to reduce water scarcity.
One ‘quick win’ is to address the issue of non-revenue water (NRW), the water lost from leaking pipes, broken mains, inaccurate metering and illegal connections. This is no small challenge. In some developing countries up to 50 percent of water is lost on the journey from treatment plant to household tap. The World Bank has estimated that this costs around US$2.9 billion annually. Fixing the problem could provide water for 90 million people without requiring one drop of additional water.
Many NRW solutions and technologies exist, but the problem of financing remains. The financing required for improving water supply in developing countries far exceeds what “traditional sources” of funding such as international financial institutions, bilateral development agencies and governments can provide. Generating more financing from non-traditional sources, to meet the challenges of improving urban and peri-urban water supply in developing economies, remains a major barrier. We need to find ways to tap into new sources.
Traditional providers of funding are indispensable for large capital expenditure programmes, such as the installation of new water mains, but financing to reduce NRW falls into a different category. In many utilities, the financial gains generated from the highest-yielding set of NRW reduction activities, arising from decreased costs and increased revenue, can pay back up-front investments and financing costs in three to seven years – without increasing user tariffs.
Why then, aren’t local commercial banks rushing to lend to water utilities or other service providers for NRW projects?
One of the main problems is the high-perceived risk of lending to (or for) water utilities. Physical assets cannot generally be used as collateral, and water utilities in many countries are subject to high political, regulatory and operational risk. Another problem is the lack of knowledge and familiarity of how to lend in this sector.
Dreampipe II, a new innovation prize aimed at reducing NRW in developing countries, seeks to stimulate new ways to attract more non-traditional providers of finance for NRW reduction projects. There is no consensus about what the best, most viable and replicable solutions are – they will certainly depend on local conditions – and a prize competition is well suited to unearthing new, innovative solutions and financing partners. The longer-term aim is that the winning solutions will be shared widely to inspire others to design their own locally tailored solutions.
Dreampipe II has a tournament format with three distinct phases. Prizes will be awarded to the winners of each phase. In Phase 1 (open for applicants now), contestants need to prepare a business plan. Phase 2 involves implementing a small demonstration project in a selected water utility in a developing country. In Phase 3, contestants will need to negotiate a fully structured deal for an expansion project in the same utility company – with much of the financing coming from non-traditional sources.
The key will be to find ways to reduce perceived risk for new financing partners, especially (but not only) for commercial lenders. One way to help convince financiers of the viability of larger efforts is by first carrying out successful smaller demonstration projects. Another way is to put together deal structures that make the best use of concessional financing to mobilise additional financing from more commercially oriented sources.
Phase 1 of Dreampipe focuses on planning a NRW-reduction demonstration project, and so technical and water-utility expertise is of prime importance; but, by the time contestants reach Phases 2 and 3, they will need to bring experts in financing into their teams. Dreampipe II will be a challenge, but unless we overcome it, the bigger challenge of achieving the SDGs will remain beyond our grasp.
Dreampipe II, a new innovation prize aimed at the reduction of non-revenue water in developing countries, was launched on 21 October 2016. Dreampipe II is funded by the UK Department for International Development (DFID). The cash prizes to be awarded total £1,000,000. The competition is open to anyone – individuals and organisations of any kind.
The deadline to register for Phase 1 is 15 February 2017. Please think about applying, and do tell your colleagues about the contest!
Chris Shugart is an independent consultant specializing in water-sector economics, financing and contracting, and is the Dreampipe Technical Lead.