Water financing is an important and strategic element in IWRM planning processes. It should incorporate an in-depth analysis of what are the water financing gaps and opportunities in relation to water management funding needs, hence the importance of developing water financing strategies that will enable the implementation of programmes aiming at achieving water security. Despite progress made during the past 20 years in terms of increased government allocation to WRM, the financing needs for supporting the whole water management cycle are still quite significant. The main challenges when improving the level of financing for the water sector are the following ones. Poor understanding about the economic implications of fragmented water management and climate change. The lack of knowledge about how water users affect the use of water by others needs to be overcome in order to enable transectorial interaction with an IWRM approach. For example, investments in water supply and sanitation can have a very positive impact on the national economy through the improvement of health conditions and subsequent reductions in the public health budget. Another example is an investment in early warning systems to predict and react to extreme floods and droughts. The cost of these disasters might significantly hamper the economic development of the country.
Water Governance at national level. In order to increase funding from government budgets, banks and donors, institutional reform and a sound legal framework are a prerequisite. The use of mechanisms such as appropriate tariff structures that cover operation and maintenance costs, transparent cross-subsidies to reduce any hardship amongst vulnerable populations, require institutions that can clearly undertake the regulation, implementation, supervision and enforcement roles. There is a close relationship between good governance and the capacity to attract funding agencies, which needs to be better understood in order to focus more on improving water governance.
Lack of knowledge on technical and financial solutions at local level. Many financial decisions are made at local, municipal level. Decisions are made based upon a limited analysis of technical and financial opportunities. Plenty of municipal infrastructures were created but, in many cases, it was badly chosen, poorly maintained, and lacked supporting institutions. Consequently, the investments did not realize the expected benefits and did not adequately address the service deficit. Municipalities simply do not have sufficient information on how to invest in specific local situations and rely on state budget allocation (or political preference). As a result, they end up with bad solutions (both technical and financial)
Capacity and knowledge about alternative financial mechanisms. It is often stated that the lack of financial resources per se is the main problem to ensure adequate water resource management. It is the inability of the water sector to access finance due to institutional weaknesses and a serious lack of knowledge and capacity that hampers its ability to benefit from the available financial resources and the range of mechanisms for raising revenues for WRM.
Advocacy. Finance and planning officials very seldom have the chance to interact with water professionals and vice-versa. As a result, they are not well aware of the needs and opportunities of each other’s sectors. It is essential to build bridges between water sanitation management and finance officials and experts. This closeness is expected to develop synergies that will enable finding solutions through the identification of economically and financially viable alternatives to meet social and economic development as well as political expectations.
Capacity building. Improved capacity and understanding are essential for the promotion of policy development and planning that incorporates elements of financing. These initiatives need to especially target government administrators, most of whom have the powers but lack the required knowledge to take the right decisions at the right times.
Progress made in terms of political will and government engagement towards sound water management differs amongst countries. Therefore, careful consideration will have to be given to the kind of capacity building support that needs to be provided in order to foster the implementation of financial and economic instruments.
Application of sound financing strategies. In framing a strategy for water financing, it is important to decide which funding sources could be suitable for each water management function and the potential mechanisms available to harness them. Public finance should be concentrated on public and merit goods; private goods in the water domain (e.g. industry using water resources to generate a profit) should pay for themselves. It is not enough for the water sector to simply call for additional funding; virtually every sector in a developing economy is likely to be able to show financial need. IWRM plans, or general efforts to improve water governance, which make a serious attempt to deal with financing needs and sources, including increasing the efficiency with which existing resources are utilized, will be more credible and more likely to attract the required funding.