European bank says market failures are root of sustainability funding gap in water

The European Investment Bank (EIB) has pointed to what is sees as market failure in the European water sector and warned that “current investment levels for water are insufficient to address the challenges at stake,” pointing to the United Nations’ Sustainable Development Goals to be achieved by 2030.

In its latest Water Sector Orientation published on World Water Day – 22 March – the EIB laid out its lending priorities in support of EU policies in water supply, wastewater management and flood protection with the specific aim of improving water security.

In its rationale for its involvement in the water sector the EIB said “to address market failures, public intervention is often needed,” including public financing of water sector infrastructure. It added: “In economic theory, private markets lead to efficient decisions. In reality, these conditions are only met to varying degrees. Investment decisions are, in practice, likely to be hampered for several reasons.”

The bank said the root of the 61% funding gap for achieving sustainable water and sanitation for all identified by the UN Department of Economic and Social Affairs “lies in a number of market failures that reduce investment incentives for the private sector.”

It said each segment of the water sector was, “to a significant extent, subject to market failures, such as imperfectly competitive markets, externalities, public goods, and asymmetric information.”

And it pointed to barriers that hinder investments or even prevent them from happening “as is usually the case for environmental investments.” It said the biggest barriers in the water sector are “market fragmentation, regulatory uncertainty, capacity constraints among public sector promoters, and limited access to finance.”