A mission-driven approach to water finance Open Access

The world's water is in crisis. Countries and regions increasingly grapple with the problems of too much water, too little water, or water that is too dirty (GCEW, 2023). Approximately 90% of natural disasters are related to water, and droughts and floods alone could be responsible for economic losses of $5.6 trillion worldwide by 2050 (World Bank, 2023). A total of 700 million people are at risk of being displaced due to water scarcity by 2030, while two-thirds of the world's population already experienced severe water scarcity for one month or more per year (HLPW, 2018). More than one million people die each year because of dirty water, nearly all of them in Sub-Saharan Africa, South Asia, and Southeast Asia (Ritchie et al., 2019). The global water crisis requires significant action to mitigate these problems.

One key area for such action is water finance. Countries around the world face a water financing gap. Meeting Sustainable Development Goal 6 demands an annual investment of approximately $1.04 trillion in water and sanitation infrastructure from 2015 to 2030, with developing countries shouldering 69% of this need (Strong et al., 2020). The current annual investment gap stands at about $680 billion for 2023–2030, indicating a requirement three times greater than historical spending levels (Hutton &Varughese, 2016). Public sector funding dominates, comprising 86% of total annual spending, which is around $165 billion (2017 constant prices). In contrast, the private sector contributes only about 2% (Joseph et al., 2024). Achieving universal access to clean water, sanitation, and hygiene by 2030 will necessitate an additional $200–400 billion per year in low- and middle-income countries.

Several factors contribute to the persistent financing gap in the water space. Water is often undervalued, leading to insufficient pricing structures that fail to attract adequate investment, particularly in regions lacking robust regulatory frameworks (McCoy & Schwartz, 2022). High capital costs and long payback periods deter investors, who prefer quicker returns unless clear, long-term policy signals are present (OECD, 2022). The impacts of climate change, demographic shifts, and other megatrends exacerbate the gap, as they impose unforeseen strains on water resources (Altamirano et al., 2023). Additionally, fragmented and small-scale investments result in high transaction costs and inefficiencies (CEEW & IWMI, 2023; Taneja et al., 2024). Lastly, low tariffs and poor cost recovery, coupled with inadequate operation and maintenance practices, further widen the investment gap, creating a cycle of underperformance and increased future costs (UN-Water & WHO, 2019).

But this is not just about the quantity of finance; it is about the quality of finance. Finance at large operates in a way that is overly short-term (Mazzucato, 2015). Water has become increasingly financialised, with public investors focused on de-risking private investors and private investors prioritising short-term gains (Arrojo-Agudo, 2021). Instead, water needs finance that is strategic, patient, long-term, and mission-oriented. This means structuring financial agreements such that risks and rewards are governed by strong conditionalities in the interest of the common good (Mazzucato & Zaqout, 2024). The common good approach promotes five key pillars to tackle wicked problems: (1) purpose and directionality; (2) co-creation and participation; (3) collective learning and knowledge-sharing; (4) access for all and reward-sharing; and (5) transparency and accountability. Viewing the global water challenge through a common good lens promotes the cross-sectoral approach needed to unlock diverse financial resources for resilient water investments (ibid). Properly managing finances can help provide solutions to the big problems facing water globally.

This paper reflects on the challenges around the quality of water financing. Section 2 explores trends that have contributed to the extreme financialisation in water and consequently diverted focus away from public value creation. Section 3 discusses governance approaches aimed at tackling these issues, such as patient finance, conditionalities, and symbiotic partnerships as a vehicle to achieve public value before Section 4 concludes.

This section examines three key problems in water finance: (1) financialisation of water and the resulting short-termism, (2) corporate governance issues that stem from this short-termism, and (3) the narrowly conceived role of public finance as merely to de-risk private investment. Each of these trends often prioritise private financial gains over the common good. Mitigating these problems will require different approaches, namely patient, long-term finance; contracts that use conditionalities to prioritise the sharing of risks and rewards; and building partnerships oriented towards public value creation.

The trend towards financialisation in some water sectors, including in the United Kingdom, has reduced water infrastructure to a mere ‘financial product’ troubled with high risks and financial engineering to increase investment return with little regard to its utility and capacity to address challenges like the uncertainty of climate change and the increasing inequalities in access to water (O'Neill, 2015). Private control of water utilities has reduced service users (the public) to ‘revenue streams’ to further access debt (Loftus & March, 2016), which is partly used to pay huge dividends to their private shareholders while the water utilities become more susceptible to bankruptcy and other social costs (Morgan & Nasir, 2021). A more proactive and intentional approach to collective public value creation is urgently needed to reform water financing while attracting private finance.

The current water financing landscape is dominated by private equity (PE). PE interest in infrastructure peaked after the 1980s and again after the 2008 global financial crisis as it offered a reliable investment yield as opposed to the volatile financial sector at the time (Christophers, 2023). The increasing interests were translated as excessive premiums paid by investors based on their expected returns leading to excessive valuation of assets and thus excessive returns and debts throughout the lifespan of the private investor operations (Ashton et al., 2012). Ashton et al. (2012) suggest that the inflated valuation is reflective of the gap between the actual market value of the asset (which the state can estimate) and the investments' value. The latter is generated from the capital structure and the size and timeline of cashflows from the deal, whereas the market value is generated from the business operations and infrastructure.

A key problem with PE control of water projects is short-termism. PE managers are inclined to maximise the company valuation so they can exit quickly which undermines the productive development of the company. The water sector, like other basic service infrastructure, requires long-term investments to improve service quality and recover investment costs (Christophers, 2023). Coupled with this short-term focus, PE is also preoccupied with diverse investment portfolios which means that their interests and expertise in running such complex and essential areas such as water are questionable. After the partial privatisation of the Berlin Water Company in 1999 wherein 49.9% of the company became owned by two private investors, disputes occurred in 2006 that called for re-municipalisation of the company; the two investors (Veolia and the German utility Rheinisch-Westfälisches Elektrizitätswerk) had their own conflict where the former wanted to remain in the company and the latter wanted to leave to focus on the energy sector (Blanchet, 2016). Similarly, in California, investment banks, pension funds, and other private entities whose expertise is in financial return rather than in water management have invested large sums in farmland for high-value ‘permanent crops’ like almonds, pistachios, and walnuts, which require huge amounts of water (Waldman et al., 2023). Agricultural irrigation has driven decades of massive groundwater depletion in California (Liu et al., 2022). Despite documented knowledge that the groundwater pumped for irrigation will run out soon, investors have continued to dig deeper wells so as to ‘reap handsome returns before that day comes,’ leading to thousands of shallower domestic wells running dry and inducing land subsidence causing billions of dollars in damages to public infrastructure (Waldman et al., 2023). Private finance's focus on short-term returns is directly at odds with public value creation.

Another consequence of short-termism in water investment is water utilities taking on unsustainable debt burdens. PE is primarily concerned with increasing the value of the acquired company before selling it, consequently generating returns for their investors (Appelbaum & Batt, 2014) and making the asset attractive for the next buyer (Christophers, 2023). As this process takes place over a short time span, PE managers increase the value of a company through financial engineering to carry over more debt instead of investing in the company's assets. Since the 1980s, several water services utilities in England and Wales, such as South East, Thames, Anglian, Yorkshire, and Southern Water, were acquired by PE on the premise of improving efficiencies with Ofwat regulating to protect customers from monopolistic behaviour. United Kingdom water companies have securitised customers' bills to increase their debt borrowing while maintaining their credit rating through financial restructuring (Allen & Pryke, 2013; Bayliss, 2017). Securitisation therefore allowed those companies to generate funds that had nothing to do with the actual operations of the services (Allen & Pryke, 2013). Ofwat regulatory regimes have supported this approach that minimises long-term investment needs to supposedly protect the customers from water price increases, despite the pressing need to expand the service to serve the growing population (Nelson, 2023). Ofwat's vision of its regulatory role does not go beyond price control and fails to scrutinise the corporate financial structures that have led to increasing debts (Bayliss, 2017). Debts of Anglian Water and Yorkshire Water have increased by 60% since their Whole Business Securitisation (WBS) arrangements in 2002 and 2006, respectively (Anglian Water 2003; Yorkshire Water 2007). Rising debt, however, did not prevent these companies from paying dividends; in the year of its WBS, Yorkshire Water allocated a total of £826 m in the form of special and normal dividends to its owners (Yorkshire Water 2007).

In California, municipalities struggled during the 1980s with raising capital for their operations, leading them to seek private financing that gradually diverted them to revenue-based debt in the form of revenue bonds instead of low-risk tax-based debt (Gibson, 2022). They relied on credit rating agencies to inform their investment decisions towards water through securitisation of water bills, resulting in further commodification of water as revenue-backed debt incentivises more water sales instead of increasing the allocative efficiency of water resources (McDonald & Ruiters, 2004). In the same vein, between 1993 and 2005, Portuguese municipalities had to contract out their water and sanitation services through concessions (Stadheim, 2022). Those concessions were based on increased water consumption forecasts which did not materialise, causing the municipalities to socialise investment risks (reimbursement of private investors) without any risk sharing with the private concessionaries (Stadheim, 2022). While this paper calls for the private sector to shape the financing landscape of the water sector prioritising equitable and sustainable investments, it is also responsible for attracting private investments through an enabling environment, clear regulatory system, reduced uncertainty, and fair returns on investments.

In an environment where short-term returns are the priority, water utilities and investors are incentivised to adopt unsustainable corporate governance practices. Paying out dividends or buying back stocks decreases the amount of capital available for a company to reinvest in its operations (Mazzucato, 2022b). In cases where private companies are expected to make investments in water assets, their decisions are informed by investments that can be monetised to appease the next buyer (e.g., through raising customers' bills or increasing the valuation of the asset) and not necessarily to increase the public value delivered by the asset (Christophers, 2023).

The PE managers of Thames Water have elected to invest in controversial projects like Thames Tideway Tunnel, also known as the ‘super sewer,’ and the Thames Water Desalination Plant, to serve London despite huge public opposition including from then-Mayor of London Ken Livingstone, who described the plant as ‘energy and carbon guzzling’ and argued that it should be a priority to fix massive leakages in the water system first (Sherwood, 2006 cited in Loftus & March, 2016). Loftus & March, (2016, p.47) argue that Thames Water's investment decisions are concerned with finding a guaranteed ‘range of investments opportunities’ rather than promoting sustainability and public value due to the increasing leverage and asset valuation of infrastructure. McDonald et al. (2021) even argue that private investors focus more on ‘value-added niche investments’ such as desalination instead of the modest returns on investments in municipal service delivery.

Shareholder value maximisation poses a conundrum not only when dealing with the private sector. As part of the continuous globalisation of water services, governments became large multinationals operating overseas to further boost their business. Vattenfall, a Swedish international public shareholder, entered the hydropower market of Germany and other countries (Clifton et al., 2016). While Vattenfall has performed well in its home country in terms of public value creation through hydro and nuclear power, the company did not produce public value in Germany, instead behaving as a private shareholder, mining brown coalfields in East Germany and running outdated nuclear power plants in West Germany, worsening its environmental profile dramatically (Vattenfall 2015).

The argument for expanding the private sector's role in the water sector is based on the notion of higher efficiency and effectiveness of private operations. There is still no evidence supporting any such advantage over the public sector (Bayliss et al., 2023), and focusing on these attributes undermines important metrics like social costs and benefits (Morgan & Nasir, 2021) and contributes to increased commodification – and subsequent financialisaton – of water (Gibson, 2022). Private business models in the water space that push for full cost recovery from user payments are impractical in some contexts, especially where water consumption is declining; in 2020, Paris had a 9.8% decline in water consumption during the COVID-19 pandemic (Butzbach & Spronk, 2022). It is crucial to reform the institutional financial ecosystem to foster a greater emphasis on the provision of long-term, patient finance and investment (Macfarlane & Mazzucato 2018).

Since the global financial crisis in 2008, public banks have reemerged as key players in combating volatility in the global financial system (McDonald et al., 2021). Public banks can offer substantial financial advantages to state authorities through the utilisation of a fractional reserve system, wherein they extend loans exceeding the actual cash reserves they possess, as highlighted by von Mettenheim (2010). This strategy reduces dependency on short-term capital inflows and lessens the influence of major banks, as indicated by Kodrzycki & Elmatad (2011). Furthermore, public banks demonstrate proficiency in spatial integration by linking urban and rural areas, as well as regions with diverse capital resources, leveraging their extensive branch networks and developmental mandates at both regional and national levels, as discussed by Myrdal (1963), Marois (2012), and ALIDE (2018). Despite the important role played in several countries by public banks, which are globally estimated to own US$49 trillion in assets, it continues to be overlooked in favour of the privatisation agenda persistently promoted by multilateral development banks such as the World Bank (McDonald et al., 2021).

In many countries, public development banks are also providing patient finance for water. Banco Desarrollo del Ecuador, BNDES in Brazil, Banco Nacional de Obras y Servicios in Mexico, Caisse de Depot et de Gestion Capital in Morocco, and the Development Bank of Southern Africa (to name a few), are increasingly providing loans, grants, and equity funding to drive water projects (Reghizzi et al., 2022). However, in many cases, public banks take on a de-risking role for private investments (Griffith-Jones et al., 2022; Marshall & Rochon, 2022), instead of an arrangement where public and private actors share in the risks – and rewards – of investment (Mazzucato, 2015). In Turkey (Ilbank) and Canada (The Canada Infrastructure Bank), public banks are not politically neutral. In Turkey, Ilbank is moving away from financing water infrastructure projects towards more profit-maximizing investments such as real estate development and de-risking private investments promoted by the Justice and Development Party government and international financial institutions (Marois & Güngen, 2016). Similarly, the Canada Infrastructure Bank is moving towards de-risking private investments to extract natural resources from Indigenous territories (Stanley, 2019). More extreme examples of private sector de-risking exist, such as the case of the UK Infrastructure Bank (UKIB) which not only interferes with investment policies but also uses de-risking interventions such as guarantees, equity shares, and debt financing to attract private investors at the expense of potential public benefits (McArthur, 2024).

One of the UKIB's lending deals was a £107 m concessional financing loan to the Tees Valley Combined Authority to build the deepwater Quay in Teesside (Teesworks), North Yorkshire, aimed at de-risking the freeport by financing a key infrastructure asset to attract investments from the region's offshore wind sector (McArthur, 2024). Although this loan aligns closely with the country's ‘Green Industrial Revolution,’ it failed to leverage and socialise benefits to the public as this freeport mainly benefits investors and landowners (Ibid). To date, 90% of the Teesworks is owned by property developers, based on the promise that the developers would raise £200 m to complete the remediation in addition to the £270 million in grant funding already awarded by the government (Metcalfe, 2022). The case of Teesworks is a stark illustration of how de-risking water-related investments does not necessarily promote equitable distribution of water finance. Losing control over land to private investors cannot be justified by the marginal benefits to the public such as job creation, especially given that, as McArthur (2024) argues, labour cannot effectively advocate for better working conditions after the passage of the anti-strike legislation in the United Kingdom. Returns for such investments need to reflect the scale of the public sector contribution through, for example, the government retaining significant equity stakes (Mazzucato, 2022a).

Portugal's water sector offers insights about public value loss in light of public banks' contributions. Service delivery in Portugal has been a contested space since the 1990s, which saw privatisation and/or corporatisation of water municipalities and centralisation and decoupling of retail and bulk water services (refer to Stadheim, 2022 for more details). Since then, the water sector has regularly received funds from the European Investment Bank (EIB), a much-needed refuge to compensate for the absence of national banks. In 2021, during the COVID-19 pandemic, Portugal launched Banco Português de Fomento (BPF) to promote development after the failure of Caixa Geral de Depósitos – an explicitly market-oriented bank and the only state-owned bank at the time – to meet development needs; municipalities needed to apply through public tenders to access bank loans. The BPF focuses on improving financing for corporations, fostering investment, innovation, and environmental sustainability, while also managing state guarantees and investment funds and raising finance from global capital markets (Diário da República, 2020; Stadheim, 2022). However, access to public banking finance within the water system varies significantly. While the Águas de Portugal (AdP) group seems to have ample funding, municipal actors face severe constraints. Austerity measures and requirements for full-cost recovery discourage or prevent municipal actors from taking on any debt, whether from private or public banks. AdP is a publicly owned multi-municipal company, majority-owned by the national wealth fund Parpública, and is a regular recipient of loans from public banks including the EIB, which hugely benefit its municipal subsidiaries without the burden of protecting their credit rating and reporting to their lenders (Stadheim, 2022). Municipalities that are not part of multi-municipal companies like AdP are directed by their political leaders to not apply for loans and depend on full-cost recovery as part of the country's austerity measures which also included cuts in national government transfers (Stadheim, 2022).

The next section will dig into the possibilities for a water finance ecosystem oriented towards public value.

This section examines how governments can mobilise and direct patient, and long-term finance, build symbiotic partnerships through conditionalities, and design Just Water Partnerships. Instead of simply aiming for broad outcomes like ‘economic growth’ and ‘competitiveness,’ an improved approach to financing the water sector would promote challenge-led policies and practices focused on well-defined societal challenges (Mazzucato & Zaqout, 2024). Mitigating the short-term, exit-driven mindset of the financial sector – not just in water, but across the financialised economy – requires patient finance. By attaching conditionalities to the investments it makes, the public sector can build more symbiotic relationships with the private sector, directing finance towards increased consumer benefits, climate-friendly goals, and more equitable, productive distribution of funds, including to workers as well as towards reinvestment in training and R&D (Mazzucato & Rodrik, 2023; Mazzucato & Zaqout, 2024).

As discussed in Section 2, governments and public development banks play an important role in providing patients with long-term finance, but this finance needs direction (Lazonick & Mazzucato 2013; Macfarlane & Mazzucato 2018). Mission-oriented water finance entails leveraging finance that prioritises both the operational and financial capability of the investment. Borrowers like municipalities can seek financial tools that align with their values and vision and empower them to promote efficiency, sustainability, and equality through their operations. Consequently, those institutions could shape markets through their strategic investments, instead of pursuing strategies dictated by external financial institutions that are often unrealistic and destined to fail (e.g. corporatisation of water municipalities) (Mazzucato 2018a, 2018b).

In addition, mission orientation encourages cross-sectoral financing; investing in the right type of financing for water contributes to high economic growth in sectors such as energy and agriculture (Mazzucato & Kattel, 2024; Mazzucato & von Burgsdorff, 2024). Tools like cost–benefit analysis (CBA) could make the case for patient long-term finance by defining the real social and environmental costs and benefits of water investments. To do so, a whole value chain CBA needed to represent the cross-cutting priorities and needs of the different sectors and industries that rely on water as opposed to traditional project-based CBA (Global Commission on the Economics of Water, 2024). Adapting mission-oriented financing needs enabling institutional environment and policies championed by political leadership throughout the different public institutions as the willingness of municipalities to take ownership of such missions could be hindered or encouraged by the political and economic agendas of their governments as we demonstrate next.

India's National Mission for Clean Ganga employs a hybrid annuity model for water infrastructure projects, wherein the government pays out the bulk of construction costs over a 15-year period, contingent upon the performance of the wastewater assets (Global Infrastructure Hub 2022; U20 Task Force 2023). Due to their mandates and stable sources of finance, public development banks are appropriate partners for the private sector to co-finance riskier water projects. Redesigning public development banks to become more strategic in their efforts to shape water markets, instead of just de-risking the private sector, is crucial (Mazzucato, 2023).

The Nordic region relies on public banks to finance water utilities through a pooled banking model owned by national governments and municipalities to allow water utilities to access international capital markets at low rates (Juuti et al., 2022). Although water utilities in Nordic countries are owned by municipalities, they operate as corporates with autonomous financial and management structures to avoid political influence on their operations (McDonald, 2016). Such models also promote transparency as the utilities would have a separate account of their financial accounting (Andrews et al., 2020; Bel et al., 2022). The pooled banking model, mediated by a central institution and with mutual trust between the member municipalities, combines the financial and technical expertise as well as their assets as a single entity allowing even small municipalities to access affordable credit, especially since the finances are backed by their governments (Schmit et al., 2011; Kommunalbanken, 2020; Kommuninvest 2020; KommuneKredit, 2020). Pool banking has also promoted symbiotic relationships between member municipalities as they also share the financial risks. According to Juuti et al. (2022), the four Nordic public banks have not defaulted on any loans in the past 120 years, which increases their credit rating and further allows them to raise more funds. The approach of these public banks de-risking public utilities goes beyond the status quo of socialising costs and privatising profits (Mazzucato, 2015). Instead, these public banks embrace their role as investors of first resort in the water sector, promoting public value through patient, long-term, and sustainable financing and ultimately shaping markets in ways that debunk the myth of risks in water investments (Mazzucato, 2022a).

On a smaller scale, the regional Dutch water authorities jointly established the Nederlandse Waterschapsbank (NWB – Dutch Water Bank) in the 1950s, a goal-oriented, politically independent public bank designed to support public financing for the water sector in the Netherlands (Schwartz & Marois, 2022). The bank has consistently provided low-cost financing to water utilities since it is not a profit-maximising entity but has also managed to expand its assets from €57 billion in 2010 to €107 billion in 2020 and is able to capture long-term finance for its clients while occasionally paying dividends to its public owners (Schwartz & Marois, 2022). However, this support is not without limits, since the Dutch water utilities are not covered by state guarantees, instead treated as a private corporation independent from the government. Therefore, the Dutch Water Bank cautiously finances the water utilities to avoid losing its highly-rated creditworthiness in the global financial market. The authors argue that if the state explicitly offers a financial guarantee to water utilities, the Dutch water bank can unlock more financing for the utilities without undermining its credit rating. Nevertheless, the current relationship between the bank and utilities promotes public value creation because, unlike private financers, the bank is not swaying utilities to increase their water sale, for example, to raise their credit rating. Volatile and unsustainable financial resources can potentially impair the capacity of a service provider to achieve the desired outcome. The role of the state in setting the direction of private sector investments is crucial in order to safeguard and promote public value. Deleidi et al. (2019) found, based on their study of the impact of public investments in renewable electricity technologies for 17 countries in the period 2004–2014, that public investment has a large effect on private investment flows when compared to other factors such as taxes and the renewable energy portfolio standards.

Across Latin America and the Caribbean, the Central American Bank for Economic Integration (CABEI) channels funds to WASH and water resource management projects in the public and private sectors. Most of these funds are long-term loans, typically with durations of 20–25 years, and others come in the form of contingent pre-investment financing to assess the feasibility of water projects, moving ahead with projects that prove viable and owning the pre-investment losses for those that do not (Smits & Rodríguez, 2022). In this way, CABEI provides patient financing to carefully chosen water projects without saddling its beneficiaries with financial risk. CABEI works with partners to bring in outside funds where necessary, allowing co-financing approaches to back projects that it may not be able to support on its own, and is accredited by the Adaptation Fund and the Green Climate Fund, allowing it to issue green bonds for water and renewable energy projects (Smits & Rodríguez, 2022). As of 2021, CABEI had issued over US$300 million in green bonds for sustainable water management in Central America, including projects in drinking water supply, sewerage, sanitation, and integrated water resource management, connecting hundreds of thousands of homes and millions of people with basic water supplies (CABEI, 2021).

The French financial system, including water basin agencies, operates on an extended cost recovery model, allowing costs from water utilities to be covered by water basin agencies at the basin level rather than within individual entities (Butzbach & Spronk, 2022). This principle is vital for smaller water operators, both public and private, especially in challenging environments. The municipal water company Eau de Paris relied solely on loans from the Seine-Normandie Water Agency (AESN) for its first decade. Rather than elective affinities between two various models of service delivery (i.e. patient capital combined with public services) or, on the contrary, a vicious ‘political’ circle in line with mainstream economists' expectations (with captive public banks compounding inefficient public utilities). The case of water remunicipalisation in Paris shows an occasional alignment of interests and missions between the public water operator and a public bank, which implicitly builds on the extended cost recovery principle.

Partnering with the private sector often leads the state to socialise the risks and privatise the rewards of investment, leading to unbalanced partnerships that prioritise private interests over public value (Laplane & Mazzucato, 2020). Setting conditionalities is crucial to ensure that investments benefit the private sector, people, and the planet. Conditionality involves creating agreements between the public and private sectors, where specific financial tools such as grants, loans, or subsidies or other deals such as permits, contracts, or different types of rights are contingent upon the private sector meeting certain predefined requirements that contribute to public goals. Conditionality can help establish a reciprocal risk- and reward-sharing relationship, ensuring that public policy leads to broader economic or societal benefits. Mazzucato & Rodrik (2023) introduce a taxonomy that categorises conditionalities along four dimensions: (1) the type of firm behaviour targeted (for example, ensuring equitable and affordable access to products or services, directing firms' activities towards societally desirable goals, requiring profitable firms to share returns, or requiring reinvestment of profits into productive activities), (2) the nature of the conditions (fixed or negotiable), (3) the mechanisms for sharing risks and rewards, and (4) the criteria for measurable performance and monitoring.

Conditionalities can shape investments and markets within the private sector when they take over basic services and industries like water. The increasing role of private finance in the water sector necessitates regulatory and contractual solutions to prevent opportunistic behaviour and resource capture, such as acquiring crucial infrastructure through contracts and partnerships. In 2002, Chongqing municipality in China embarked on an experiment of a 50-year joint venture between its water company and Sino French to deliver potable water services for Jiangbei, an urban district near the Jialing River. The joint venture followed a pragmatic approach instead of following prescribed financing tools or theoretical frameworks promoted by international financial organisations (Lorrain, 2016). This meant setting out ‘very general objectives’ to solve the problem of water access and making decisions that are challenge-oriented and not necessarily based on orthodox approaches (e.g., selecting firms without a competitive tendering process). The joint venture entailed close and meaningful cooperation between the public authority and firms without separation at any level. A key aspect of the venture was to expand the services in the northern part of the urban district, which meant that the municipality would acquire operational knowledge and financial expertise while remaining in control of the service in other districts (Lorrain, 2016).

Lorrain (2016) reflects on how dividends paid to shareholders were governed by the investment needs of the company and the national rules that dictated dividends as a percentage of the net assets of the company (8% for a Chinese company and up to 12% to a foreign company) and thus, the dividends varied yearly to reflect the financial performance of the company. The joint venture has also dictated that the amount of borrowing for investments did not exceed 65% of the assets. Such regulatory and contractual arrangements have ensured a symbiotic partnership between the public and the private investors to prevent unrestricted profit maximisation and excessive private sector compensation that hinders the company's capacity to expand its operations (Appelbaum & Batt, 2014). New approaches to valuing water investment and its associated gains and risks need to counter the narrative about the bankability of water services as shown through the securitisation trend in the British water industry to access debt.

There are conflicting views on whether water utilities are risky investments, which has shaped the relationship between those water utilities and their public and private financers (and owners in the case of the private equity model). Risks are often to blame when it comes to financers' and investors' behaviours and policies of short-termism, financialisation, and high-cost debt which push water utilities away from public value creation. Embedding conditionalities into contracts can allow private and public actors to share – and therefore reduce for both parties – the risks of major investments, as well as spreading the rewards, like lower operational costs for businesses and greater public value provision by governments, facilitating flourishing innovation in the private sector while simultaneously directing benefits to the public (Laplane & Mazzucato, 2020; Mazzucato & Rodrik, 2023). Outcomes-aligned financing tools, detailed further in the next subsection, can be employed to crowd in typically risk-averse finance to back sustainable investments in water utilities.

In cases where public banks are diversifying their financing to low-risk private investments such as real estate, the state could impose conditions that align with sustainable water governance such as bearing the capital costs of extending water and sanitation to those newly-constructed developments. This could also include incentivising the use of construction methods that improve key water outcomes, like sustainable drainage systems and permeable pavements, as components of new developments (Fisher, 2024). Real estate developers in the United Kingdom are only paying for the new connections to the water and sanitation networks with complete disregard for the infrastructure needed to extend those services to the new developments while existing users are bearing the costs through increased water bills (Fisher, 2024). In 2021, Chichester City Council and local activists in England urged Ofwat to hold Southern Water accountable for rendering the Chichester Harbour uninhabitable; the region was witnessing increasing real estate development as part of the state goal to increase housing while Southern Water's wastewater treatment plants were failing to meet this increased demand for connecting new users (Laville, 2021; Nelson, 2023). Housing policies need to align with the increasing water challenges in the country. Water stakeholders can leverage financial commitments from other sectors, including the housing sector. Utilities and real estate development are closely intertwined. Developers must consider the availability and capacity of local utilities when planning new projects, as they are essential for a habitable property. Conversely, new development can drive the expansion of utility infrastructure and services. Coordination between developers and utility companies such as Peace Power is key to ensuring reliable utility provision in new developments.

Innovative financing tools using conditionalities can boost public value in the municipal water space. Traditional municipal bonds are often used to finance large infrastructure projects, allowing governments to raise capital while giving investors a secure return. To ensure their ability to pay out bonds when they have matured, municipalities tend to opt for lower-risk, ‘business-as-usual’ approaches like stormwater tunnels and other ‘grey infrastructure’, instead of less-conventional green infrastructure (GI) like constructed wetlands and permeable pavement (Quantified Ventures, 2022; Alberta WaterPortal, 2023). But while grey infrastructure options may offer a more reliable return on investment, they eschew many of the public value benefits of GI such as reducing urban heat islands, capturing atmospheric CO₂, providing green recreation space, and improving wildlife habitats (CNT & American Rivers, 2010). Grey infrastructure projects also tend to have higher capital costs than GI (HRWC, 2021).

In Washington, DC, as the city planned to update its aging, flood-prone sewage infrastructure that violated Clean Water Act standards, government officials faced this dilemma: either spend $2.6 billion to build three new sewers, which would reduce sewage overflows by 96% but also cause significant utility bill increases, or significantly reduce costs by launching a $100 m GI project that, while projected to produce similar benefits in overflow reduction to the grey infrastructure, was considered a riskier bet because these GI technologies had not been used at a large scale before in Washington (Rycerz et al., 2020; Quantified Ventures, 2021).

Together with financial advisors, the city's water utility, DC Water, initiated a new kind of funding mechanism called an Environmental Impact Bond, wherein an environmental target is set – in this case, additional gallons of stormwater runoff diverted through sewage systems – and investor payouts are based on whether the project hits the targets (Quantified Ventures, 2019). Runoff diversions of 18.6–41.3% would result in a standard interest rate level payout; diversions below that range would trigger risk share payments from investors to DC Water; diversions exceeding the target would trigger outcome payments from DC Water to investors. In this way, the utility and private investors were able to share the risks of the GI potentially underperforming, as well as the money saved if it overperformed. Ultimately, the GI project met its targets, as well as providing public value in the form of green recreational space, improved wildlife habitats, useful data on the efficacy of GI tools like bioretention and porous pavements, and a jobs and workforce development programme built in partnership with the Water Environment Federation (Quantified Ventures, 2021).

On a broader scale, the DC Water bond created an even more substantial boon: a replicable financing model that offers conditional payouts based on predetermined water outcomes that deliver public value. Similar impact bonds have since been deployed in numerous projects around the United States, in water management contexts but also in missions as diverse as health care for unhoused residents, food security for high-risk post-discharge hospital patients, and even construction of mountain biking trails (Quantified Ventures, 2022). Financing partnerships that share risks and rewards based on public value outcomes are powerful tools for governments to shape markets and mobilise critical private investment around clean water needs (Deleidi et al., 2019).

To codify solutions to the problems of water finance, Just Water Partnerships (JWPs) provide an intriguing framework. In JWPs, governments and development finance institutions can collaborate to build capacity and enact policies that unlock the right type of investment. By structuring investment opportunities to pool together smaller projects for increased bankability, designing guarantees and co-investment arrangements to hedge against risks, and properly regulating the agreements facilitating these investments, governments can attract finance that might otherwise not have mobilised to fund important water projects (GCEW, 2023). JWPs align with the five pillars of the common good approach, which the authors have set out in separate papers: (1) purpose and directionality, (2) co-creation and participation, (3) collective learning and knowledge-sharing, (4) access for all and reward sharing, and (5) transparency and accountability (Mazzucato & Zaqout, 2024).

The Kenyan Pooled Water Fund (KPWF) provides insights into how countries' water sectors can attract funding for projects that might not otherwise be seen as ‘bankable,’ bundling water investments under one umbrella organisation to provide more diversified and therefore lower-risk opportunities for funders (GCEW, 2023). KPWF has by no means provided a perfect solution to the country's water financing gap, facing some early challenges that have contributed to funding shortfalls, but it has shown promise and can provide useful lessons for future JWPs. An analysis from USAID's WASH-FIN program highlights the importance of KPWF in recognising the need for pursuing private financing in light of a water financing gap that is too large for public funds to cover alone. It also emphasises the need for initial funding structures that better fit the borrowing capacity of local water utilities, as well as more assertive government action in restructuring existing debts that may hinder financing opportunities (Kazimbaya-Senkwe & Mutai, 2021).

Countries can design JWPs tailored to the specific needs of their water sectors, combining financial and institutional arrangements that serve their particular contexts. In the case of Kenya, the existing KPWF structures can be combined with other sources of financing to ensure development efforts are coordinated and aimed at specific gaps (Kazimbaya-Senkwe & Mutai, 2021). Innovative financing tools like the Environmental Impact Bonds detailed earlier in this section can be designed to address the particularities of local and national water systems. They can be combined with other forms of public value-oriented financing to create bundled investment structures that catalyse necessary water financing. JWPs frame a potential path forward for addressing the water financing gap in a way that promotes public value, and there is a great deal more room for research and experimentation around how such arrangements can be institutionalised.

Massive financing shortfalls imperil access to water for billions of people and perpetuate grave imbalances in the global hydrological cycle. Although there is a pressing need to attract financing for water, the quality of this financing is even more important to leverage sustainable development in the sector. The focus on short-term finance, de-risking investments within the private sector, and excessive corporate financialisation serve to uphold this unsustainable status quo. Public development banks play a pivotal role in steering water services towards the common good rather than solely prioritising profit maximisation, and they can provide patient financing to facilitate necessary long-term water investment. While attracting private finance remains important, fostering mutualistic partnerships is essential to safeguard and promote the public interest and the common good. This involves implementing conditionalities alongside strategies to not only de-risk but also share risks with the private sector, enabling states to transition from merely correcting market failures to actively shaping markets and generating public value. Moreover, the water sector possesses the leverage to intersect with other industries, including renewable energy and housing, among others, thus amplifying its impact beyond its immediate domain. By strategically tapping into these interconnections, the water sector can further enhance its role in fostering sustainable and equitable water governance. This literature-based article sheds light on the applicability of a mission-driven approach to water financing through exploring various case studies. Therefore, the key limitation of this article is the lack of empirical data to further explore the potential of mission-driven water financing which, to our best knowledge, is yet to be adopted by governments for the water sector and this article would be the first peer-reviewed work to explore it. Hence, empirical studies will be needed to test and verify the potential of mission-driven water financing in different contexts and to showcase how the prevailing institutional contexts and political and socioeconomic challenges contribute to or hinder achieving equitable and sustainable financing outcomes. Although the bottlenecks of water finance are increasingly researched, future research agenda could help address the conflicting incentives and priorities of the various stakeholders towards equitable and sustainable investments in the water sector and the opportunities and challenges of collaborative mission-oriented water financing programmes.

All relevant data are included in the paper or its Supplementary Information.

The authors declare there is no conflict.