Financial Innovations for Rural Water Supply in Low-Resource Settings

The Sustainable Development Goals (2015-2030) aim to increase water service levels while ensuring affordability and leaving no vulnerable population behind. The United States Agency for International Development (USAID) Rural Evidence and Learning for Water (REAL-Water) program focuses on identifying ways to expand water access and safety in rural areas. Community-based savings and credit associations, known as Village Savings and Loan Associations (VSLAs), offer rural dwellers in low-income settings an opportunity for member-only access to loans, emergency support, and small annual investment returns. These associations have been leveraged in some cases to improve financial management of rural water systems, providing a framework for creating dedicated, affordable, and transparent savings funds to pay for high-quality maintenance and repairs. Field results from limited-scale water initiatives in several African countries have maintained an above-average reserve fund to support water point maintenance, repairs, or upgrades. Digital financial services have also been explored in the context of rural water supply. Prepaid metering of automated water dispensing devices and postpaid digital water service accounting provide benefits for both water system operators and customers, improving fee collection consistency and convenience. Digital payment systems may also simplify subsidy delivery to vulnerable customer segments. However, converting to digital payment brings some hurdles, such as added transaction fees and costly startup infrastructure. Local training support and social inclusion outreach could benefit digital service expansion. In addition to VSLAs and digital financial services, other financial innovations have been identified as promising in the context of rural water supply. Water quality assurance funds aim to reduce the risk of contamination in rural water systems by providing a dedicated source of funding for water quality testing and treatment. Performance-based funding models reward water service providers for meeting specific performance targets, such as water quality or customer satisfaction. Development impact bonds offer a new financing mechanism for water infrastructure projects, where investors are repaid with interest if the project meets specific performance targets. Standardized life-cycle costing provides a framework for estimating the costs of water infrastructure projects over their entire lifespan, from design and construction to operation and maintenance. This approach can help water service providers and donors make more informed decisions about investment in rural water supply. Blended public/private finance models combine different types of funding, such as grants and loans, to support water infrastructure projects. The REAL-Water consortium has identified several models for bolstering financing of rural water supply, including the use of development impact bonds, performance-based funding, and standardized life-cycle costing. These models have the potential to increase access to safe and affordable water in rural areas, but their effectiveness will depend on careful implementation and monitoring. The report concludes that financial innovations have the potential to address the challenges of rural water supply financing, but more research is needed to fully understand their effectiveness and scalability. The REAL-Water consortium recommends that donors, practitioners, and communities consider a range of financial options when developing and managing rural water supplies, and that they weigh these options relative to their local setting and context.