Non-revenue water (NRW) is discouraging investors when it comes to financing water infrastructure.
Reducing NRW can have many benefits, including increasing universal access to safe water, mitigating water stress, reducing the impacts of freshwater withdrawals on ecosystems and mitigating greenhouse gas emissions.
Yet when it comes to resolving the issue, there is no silver bullet. Contributing factors are varied and complex, and in many cases – particularly emerging markets – access to funding is limited and regulatory incentives are insufficient. As such, investment decisions made today, which will directly impact the future of the industry, must be carefully thought out.
Out of sight, out of mind?
NRW refers to water that is withdrawn from groundwater or surface water sources and treated to local standards, but for which a utility does not receive payment. These losses result primarily from leakage from pipes and interconnections; ageing meters that underestimate water usage; illicit withdrawals; or public policy decisions to provide some water without charge.
However, underinvestment in water infrastructure is rarely visible unless a major main break occurs. Loose valves or leaky pipes allow treated water to seep into the soil, accelerated by the high pressure needed to prevent contamination of the water supply. In addition, it is difficult for utilities to gather information about the number, size, and location of illicit taps.
From a stakeholder perspective, withdrawing, treating and transporting billions of gallons of water that is not used for household, agricultural, or industrial uses could exacerbate numerous concerns.
Water stress, the maintenance of healthy ecosystems and the affordability of providing safe water to the public must all be taken into consideration. What’s more, high levels of NRW could increase the challenge of meeting the Paris Agreement target of limiting global climate change to well below two degrees Celsius.
Near-term funding, long-term implications
Given the various impacts that NRW can have on stakeholders, maintenance is essential to preventing lost water. Whether capital investment is sufficient will become apparent sooner in various metrics, such as the average age of pipes.
Indeed, as the average age of pipes rises, the risk of leaks increases; similarly, as meters age, the difference between water delivered and water billed increases – and not in the utility’s favour. If leading indicators like average age do not improve, it will be difficult to achieve reductions in outcomes like NRW.
While it is clear that today’s investment decisions could significantly affect future NRW rates, the amount of investment needed is highly uncertain.
A study by Alan Wyatt for the Inter-American Development Bank found that, of 27 countries investigated, 16 had significant NRW reduction projects that could have a payback period of less than five years, while seven had potential payback in five to 10 years.
As it stands, much of the water infrastructure around the world is financed through government budgets with the assistance of development banks. This can subsidise water, meaning prices do not always cover investment needs – further limiting utilities’ revenue generation.
In addition, globally, water infrastructure is built, operated and maintained under a range of public and private financing models. And, in some regions, water infrastructure faces heightened barriers to access to private sector funding.
The factors contributing to NRW are myriad and the sustainability and financial materiality of NRW can vary significantly. But many factors – such as physical losses and illicit use – drain natural capital and can affect utilities’ finances in a meaningful way.
While NRW might not be financially material for all utilities, a thorough water audit can increase knowledge of a utility’s assets. Understanding what these losses are is a starting point for calculating their associated impacts on water stress and the environment, safe water service, and financial capability, and could be instrumental in making a stronger case for needed investment.
Greater focus on climate resilience and adaptation projects could provide new avenues to increase investment in water infrastructure, including reducing NRW. But more investment in water infrastructure might also require more explicit attention from both the public and private sectors.