Climate funds have great potential to improve the efficiency of underperforming water utilities. Castalia developed a concept for a Climate Fund for Water and Energy Efficiency Performance-based Contracts (PBCs).
Globally, water utilities lose 126 billion cubic meters of water every year, totaling a loss of US$ 39 billion per year. The cost of pumping and treating lost water plus the lost profit of water that is not sold generates huge financial losses for utilities. Non-revenue water (NRW) is the measure of water lost due to leaks, theft, or inaccurate metering. High NRW levels deplete valuable water resources, increase the climate footprint, reduce the financial sustainability of water utilities, and result in poor water service provision. Additionally, pumping water that is lost in the sanitation and distribution process results in wasted energy. Addressing NRW reduces greenhouse gas emissions in the form of saved water and energy and enables utilities to provide reliable water services.
PBCs are 68 percent more effective at addressing utility’s water losses and inefficient use of energy compared to NRW initiatives undertaken by utilities alone. PBCs allow utilities to engage specialized private sector firms to provide NRW reduction services while enabling utilities to retain control of ownership and operations. Developed as a results-driven framework, PBCs link payments to the achievement of specific targets such as reducing water losses and enhancing revenue collection. They also include financial penalties for not meeting targets, transferring project risk from the utility to the contractor. PBCs also foster transparency and accountability by establishing clear performance benchmarks, thereby ensuring that service providers remain accountable for their progress.
Even though PBCs are a demonstrated solution to saving water and energy globally, the wide-spread implementation of PBCs has been limited, particularly in some regions. Some challenges of implementing PBCs include high transaction costs for individual projects, lack of technical capacity in utilities, and lack of fiscal space to finance project preparation and implementation. In the Caribbean, for example, the geography of the countries leads to small-sized projects. Therefore, transaction costs for developing PBCs in the Caribbean are high, making projects financially unviable before they even start.
A climate fund for water and energy can support the uptake of NRW and energy efficiency PBCs. A fund designed to bring together development finance institutions and the private sector would support the creation of standard PBC contracts for water utilities, provide technical support for implementation, aggregate multiple projects, and mobilize climate finance more efficiently for aggregated PBCs.
Involving multilateral organizations to create and manage funds for the widespread adoption of PBCs for non-revenue water reduction increases the chances of effective implementation. Development finance institutions have the capacity, connections, and trustworthiness to guarantee effective collaboration with government, utilities, public and private investors, and service providers. Additionally, their reach enables the adoption of PBC’s in multiple countries, reducing the cost of project implementation.
A fund like this would also be eligible to attract climate finance due to the nature of the work which results in saving water and energy. Climate finance is also more attractive to utilities because it is easier to access and cheaper than commercial finance.