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Target 6.2 of the Sustainable Development Goals calls for universal access to sanitation by 2030. The associated indicator is the population using ‘safely managed’ sanitation services. Shared sanitation is classified as a ‘limited’ sanitation service and some donors and governments are reluctant to invest in it, as it will not count towards achieving Target 6.2. This could result in poor citizens in dense slums being left out of any sanitation improvements, while efforts are diverted towards better-off areas where achieving ‘safely managed’ sanitation is easier. There are sound reasons for labelling shared sanitation as ‘limited’ service, the most important being that it is extremely difficult – for global monitoring purposes – to differentiate between shared toilets that are hygienic, accessible and safe, and the more common ones which are poorly designed and managed. There is no reason to stop investing in shared sanitation. ‘Safely managed’ represents a standard countries should aspire to. However, the 2030 Agenda and the human rights recognise the need for intermediate steps and for reducing inequalities. This calls for prioritising investments in high-quality shared toilets in dense informal settlements where it is the only viable option (short of rehousing) for improving sanitation services.

The sanitation sector is gradually realizing that the effectiveness of approaches such as Community-Led Total Sanitation (CLTS) is limited by inadequate access to finance. Households are not able to construct durable facilities and sanitation services are unable to develop so as to respond to demand. At the same time, there is fierce competition among microfinance services providers that is pushing institutions towards more remote customers and to offer innovative products. In addition, the rise of mobile banking and digital finance has lifted many poor people out of financial exclusion. These factors have created a nexus between microfinance and sanitation with high growth potential. However, the sanitation microfinance market remains small to date. Since 2010, the SHARE research consortium has investigated global experiences and lessons for using microfinance to develop sanitation services. A SHARE action-research in Tanzania triggered selected financial institutions to offer financial products for sanitation and generated lessons for scaling up sanitation microfinance. This article presents the findings from the SHARE research, in the context of broader developments in the microfinance markets and key findings from other donor-led initiatives.

Providing sustainable water supply and sanitation (WSS) services in developing countries remains an immense, and increasingly urgent, challenge. Chapter two sets out how the sector is currently funded and why business as usual is insufficient for meeting WSS-related goals, covering the size of the investment gap, and the challenges presented by the status quo. Chapter three proposes a financing framework toward more effective use of existing funds to enable the mobilization of new sources of finance, and explains the benefits and costs of commercial finance. Chapters four to six detail the three components of the financing framework, providing practical advice and global experiences that demonstrate how countries can begin to make progress. Chapter seven summarizes how stakeholders can bring the three components together to mobilize commercial finance, and provides the main conclusions and recommendations of the report.

The sector is in the process of repositioning itselftoward the Sustainable Development Goals (SDGs).Under the Millennium Development Goals (MDGs) theinternational focus of the water sector was predominantlyon increasing access to water supply and sanitation(WSS). With the advent of the SDGs the agenda ismuch broader covering all aspects of water (WSS, waterresource management [WRM], and irrigation) and theirsustainability. The water sector is not well equipped to face thesenew financing challenges. The sector has historically relied on public financing to meet its investment needs—through domestic and development partner concessional funds and/or lending. Institutionally many parts of the sector are government departments where mobilizing private finance is almost non-existent. Even when they are established as corporate entities, such as some WSS providers, it is rare for them to borrow from commercial lenders due to weak incentives and/or poor creditworthiness. Mobilizing additional concessional funds will help— but will not be sufficient. New sources of concessional finance might be tapped (e.g., climate finance) but the gap cannot be filled simply by increasing the volume of concessional funds and lending from governments or development partners. A new sector financing paradigm is required based onfour broad themes. The sector has to realign itself around actions that (a) improve sector governance and efficiency (i.e., improving creditworthiness), (b) crowd in or blend private finance (i.e., leveraging capital ), (c) allocate sector resources more effectivelyto deliver the maximum benefit for every dollar invested (i.e., targeting capital), and (d) improvesector capital planning to reduce unit capital costs (i.e., minimizing capital requirements).Achieving the new financing paradigm requires a more collaborative approach with all stakeholders playing an active role.

The main objective of this report is to provide data and insights on the role of grant funding and concessional financing in meeting the Sustainable Development Goal for water (SDG 6 known as the water SDG)). These sources of funding are collectively referred to in this report as aid flows to the water sector. This report was prepared as an input into the High-Level Panel on Water. Data analysis underlying the report was conducted using two main databases on aid to the water sector. The OECD Development Assistance Committee (OECD/DAC) database is the most comprehensive, while the WASHfunders.org database provides complementary data on aid from philanthropic organizations. The report starts by giving a global-level account of the scale of aid flows (chapter 2). It then examines how this financing is allocated (chapter 3) and who provides development financing to the water sector (chapter 4). Key challenges for improving the use of such development financing in the water sector are identified as a basis for formulating a set of key recommendations for the development finance community (chapter 5).

Output-Based Aid (OBA) ties the disbursement of public funding to the achievement of clearly specified results that directly support improved access to basic services. OBA has emerged as an important way to finance access to basic services, but experience with OBA approaches in the sanitation sector has remained limited and there have been mixed results. Evidence from existing projects suggests that OBA could improve the targeting and efficiency of subsidy delivery, and help to develop and strengthen sanitation providers. OBA subsidies could be packaged to support services along the 'sanitation value chain,' from demand promotion to collection/access, transport, treatment, and disposal/re-use. OBA approaches for sanitation are no panacea, however, and they need to go hand-in-hand with broader reforms in the sanitation sector.