Public Development Banks: Untapped Potential in Financing Water Infrastructure

Public Development Banks (PDBs) can play a critical role in financing water infrastructure in developing and emerging economies where investment gaps persist. As institutions designed to provide long-term financing for public goods, they have the potential to bridge funding shortfalls, mobilise private sector participation, and support progress towards the provision of sustainable water access. However, despite their capacity, PDBs remain an underutilised resource in the water sector, with many focusing their investments elsewhere. Unlocking their full potential requires addressing key challenges that limit their engagement in water infrastructure projects.

The Role of Public Development Banks in Water Infrastructure Financing

PDBs have the ability to provide long-term and concessional financing, which is crucial for water projects that require significant capital investment and have extended payback periods. Many private investors hesitate to enter the water sector due to uncertainties surrounding revenue generation and return on investment, but PDBs can reduce this financial burden by offering favorable lending terms to utilities and municipalities. Their involvement can help ensure that necessary infrastructure projects move forward, even in regions where private sector interest is low.

Another key role of PDBs is their ability to de-risk investments, making water projects more attractive to both public and private financiers. By offering credit enhancements, such as guarantees, insurance mechanisms, and first-loss capital, they can mitigate financial risks that typically deter commercial lenders. In addition, PDBs can provide technical assistance and project preparation support, helping governments and utilities develop sound financial and operational strategies to improve the bankability of their projects.

Public-private partnerships (PPPs) are another area where PDBs can drive progress. Water infrastructure projects often require collaboration between the public and private sectors to balance financial sustainability with public service objectives. PDBs can facilitate this process by co-financing projects, structuring risk-sharing mechanisms, and ensuring that agreements are designed to protect public interests while maintaining investor confidence. Their financial and technical expertise enables them to support well-structured PPPs that expand access to safe and reliable water services.

Challenges Limiting PDB Engagement in Water Infrastructure

Despite their potential, the water sector has not yet fully leveraged PDBs capacity to finance water infrastructure, largely due to a combination of institutional priorities, financial constraints, and market dynamics. One of the biggest barriers is that many PDBs prioritize sectors such as energy, transport, and industrial development over water projects. This is often due to a lack of specialised knowledge within PDBs about the water sector, as well as a perception that water infrastructure offers limited financial returns compared to other industries.

Another significant challenge is the lack of bankable projects and strong financial analysis in the water sector. Many water infrastructure projects suffer from weak financial structuring, with inadequate project preparation, poor feasibility studies, and unclear revenue models. Without a clear demonstration of financial viability, these projects struggle to secure financing, limiting their ability to move forward.

Currency-related issues also pose a major obstacle. Many PDBs provide financing in foreign currencies, while water utilities and local governments generate revenue in local currency. This creates foreign exchange risk, making debt repayment unpredictable and potentially unsustainable if local currency depreciates. The additional cost and uncertainty associated with currency fluctuations make water projects less attractive to both PDBs and private investors.

A further challenge is the lack of private sector partners and financially literate institutions within the water sector. Many water utilities operate with weak financial management practices and have limited experience in structuring financing deals. This makes it difficult for them to access funding or negotiate favorable terms with PDBs and private investors. Additionally, the private sector remains hesitant to engage in water infrastructure due to weak regulatory structures and uncertain revenue streams.

Unlocking the Potential of PDBs in Water Infrastructure

Despite these challenges, there is significant untapped potential for PDBs to become major drivers of water infrastructure financing. Addressing barriers such as sector prioritization, financial structuring, and currency risk mitigation can help unlock new opportunities for investment. Strengthening project preparation, improving financial literacy among water institutions, and creating incentives for private sector involvement will be key to enhancing PDB engagement. By leveraging their unique position as development-focused financial institutions, PDBs can play a transformative role in ensuring sustainable and resilient water systems that meet the needs of growing populations and changing climates.