A Hole in Our Bucket? Water Integrity Network Launches 3rd Global Integrity Outlook

2024 report presents ways to ensure fair and transparent financing to achieve SDG 6 targets

On the 11th of September 2024, the Water Integrity Network launched its third Water Integrity Global Outlook (WIGO), which focuses on the integrity of finance in the water and sanitation sector. Against the background of a general shortfall in investments in the sector and an estimate by the World Bank that countries need to increase their current spending by around USD 140 billion annually to achieve SDG targets, the report points out that corruption, mismanagement and other integrity failures -taken together - result in the effective loss of up to 26% of money invested in the sector. This loss in funds is taking place against the background of some influential trends: the need for climate change adaptation implies a rapidly growing need for funds, the closing of civil space in many countries over the past few years renders transparency and access to information more challenging and complex, and the rapid expansion of digital technology and machine learning systems can assist in reducing corruption risks while also potentially introducing new vulnerabilities.

These failures, the WIGO report argues, undermine the effective use of funds, divert resources, contribute to major financial losses in the sector and serve to unnecessarily widen the existing funding gap for the achievement of SDG 6. In this way, sector institutions are weakened, financial losses are incurred, and new investments are misdirected away from key priorities and from those who need it most. At the same time, taking action to improve integrity is a relatively low-cost option to help close the funding gap.

The water and sanitation sectors are particularly susceptible to corruption due to fragmented and complex institutional arrangements, natural monopolies, and high infrastructure capital, maintenance and refurbishment costs. The infrastructure sector, on which water and sanitation services depend heavily, is unfortunately one of the most corrupt sectors globally. The IMF estimates that 30-50% of general infrastructure costs (not just water and sanitation) are 7 lost due to poor management, including corruption.

The finances of the water and sanitation sector are sourced from tariffs, taxes, and transfers, otherwise known as the 3Ts. By volume, the largest source of funding is generally the users themselves through taxes and tariffs (accounting for 90% of funding globally), followed by government, although there is considerable variability from region to region. In Latin America and the Caribbean, for instance, tariffs cover over 80% of sector costs, while in Asia, governments cover more than 60% of sector expenses. Repayable finance such as loans are also an important source of funding for infrastructure development, which carries risks such as rising debt and difficulties in the transparency and potential for tracing of financial flows. Oceania (excluding New Zealand and Australia) is the only region highly dependent (72.9%) on repayable finance.

All these financial flows contain integrity risks, which each operate through different mechanisms.  One of the first issues with integrity that is mentioned in the report is that the service providers often act as natural monopolies. In monopoly situations, there are often opportunities for capture by vested interests, whereby public boards and commissions may be influenced by interests other than the public interest or the interest of the client. individuals with vested interests., creating opportunities for capture.  

A second integrity risk mentioned in the report is the result of the fragmentation of budgets and responsibilities across a large number of institutions as well as between national and local government. If there are situations whereby there are conflicting or overlapping mandates, this creates an accountability challenge and makes the tracking of financial flows intended to improve service provision more difficult. These complex institutional arrangements, the report argues, necessitate robust regulatory frameworks to ensure efficient use of available funds and fair user charges.

A third and fairly specific integrity issue arises because of the range of different service delivery models that exist, varying from fully privatized services on one end of the spectrum to full national control over service provision on the other. Where service provision is contracted out to a service provider, the procurement process can carry risks of collusion or bid rigging, especially in contexts of systemic corruption. And while public service institutions are operating under public scrutiny, the oversight over and accountability of the practices of private sector providers – often operating at smaller scales - is generally in need of improvement.

Within the field of tariff setting and subsidies as well as project budgeting, the way in which costs are estimated, tariffs are set and expenditures are determined can strongly affect outcomes, especially for the poor.  High levels of discretion in project decisions and budget allocation processes, combined with opaque budget and project preparation processes, may enable corruption and / or undue influence in budget allocation and project planning. Inclusive processes such as citywide inclusive sanitation can ensure that the interests of the poor are taken on board in project and technology decisions which have an impact on the price of the service.

Integrity issues may also exist within a utility. The viability of a utility is determined by its non-revenue water – water that is lost in the system either through physical losses or by ineffective metering and billing systems.  Technical losses and leaks can be symptoms of issues in quality of infrastructure or of biased and inadequate planning and budgeting related to corruption. Commercial losses can be fed by integrity issues related to billing, meter-tampering, manipulation of financial systems, staff misconduct, and more. In both cases, establishment of effective regulatory frameworks and stringent anti-corruption measures—such as whistleblower mechanisms—can help address these weaknesses.

In the public sector, the way in which funds are allocated, salaries are paid, and funds are released for project purposes are determined by the design of Public Financial Management (PFM) systems. Therefore, identifying and acting on integrity risks in PFM systems remains a crucial area of work. In doing so, the work of accountability and oversight institutions, such as sector regulators, anti-corruption bodies, and public auditors, are crucial in identifying and sanctioning corruption in water and sanitation financing.

Overall, in developing effective integrity strategies for water and sanitation finance, and based on recent research on the effectiveness of anti-corruption, integrity, and open government initiatives, the WIGO report proposes a three-pronged approach, referred to as No Reason, No Room, and No Reprieve. The ‘No Reason’ pathway seeks to influence social and institutional norms to weaken the rationalisation of wrongdoing, as well as strengthen the collective commitment to integrity. This can be influenced for instance through ethical leadership and the rewarding of behaviour demonstrating accountability and integrity as well as through awareness campaigns emphasising the negative impact of corruption on communities and peers.

The ‘No Room’ pathway relies on changes in the structure and management systems so as to reduce the space for those responsible for water and sanitation delivery to act corruptly.