As things stand, the true extent of national funding for WASH in Nigeria is difficult to ascertain. Although the country’s water utilities receive subventions from the Government, funding allocations are inadequate, resulting not only in these utilities producing below capacity but also in a widening of the financing gap for infrastructure investments and maintenance over the years. Investment in strengthening the utilities’ structure and systems has also been insufficient. Community members collecting water from one of the two functioning boreholes in Etenyi village, Ado Local government area, Benue state, Nigeria. Adequate funds in the WASH sector and proper targeting of those funds will help ensure we reach everyone with these life-saving services. Urban utilities have not only not extended their coverage in terms of connections, these have actually declined significantly – from 32% in 1990 to 3% in 2015, according to the 2015 Update Report of the Joint Monitoring Programme (JMP) of WHO and UNICEF. From whichever angle you look at it, this level of service can only be described as paltry – but it also underlines the opportunity presented. Revenue streams from taxes have not grown, customers are not metered, and the collection efficiency of tariffs and charges remains one of the lowest in the world. The decentralised rural and small town water schemes provided by the Nigeria Millennium Development Goal office under the Virtual Poverty Fund have largely proved unsustainable, as they were delivered by government agencies with ineffective community sensitisation and participation in most cases. Nigeria is therefore back where it started in 2005 when debt relief was negotiated, except it is now faced with dwindling public finances as the price of oil, its main forex earner, continues to fall. There is increased pressure on what cash is available, compounded by significant reductions in Overseas Development Assistance commitments to Nigeria due to economic constraints in donor countries. The real potential of Foreign Direct Investment The re-basing of the gross domestic product (GDP) in 2014 generated renewed interest in Nigeria as a potential market for repayable finance, due to the adjustments to the GDP/debt ratio. For Nigeria, a substantial proportion of the Foreign Direct Investment (FDI) inflows have targeted the extractive industries. However, from a high of US$8.3 billion in 2008, the trend has been downwards, to $5.6 billion in 2013 and still falling, reflecting the divestiture of oil and gas operations by a number of transnational companies. From overtaking South Africa as the prime destination of FDI in 2010, Nigeria has now slumped to two fifths of South Africa’s FDI by value for 2013. But the FDI potential is real, and the latent capacity for internally generated resource streams still provides possible supply side options for financing the sector in the coming years. So why is it not happening yet? Some of the major issues to consider are on the demand side. But before that, some reflection on the structural issues or anomalies – or ‘critical mismatches’ (an Organisation for Economic Co-operation and Development term) – which seem to have limited flows of repayable finance into the Nigerian water sector: Tariffs and affordability constraints – In the Nigerian context, a legacy of under-charging for services and the failure over the years to adequately link services to real costs has produced a ‘low-tariff’ expectation among customers. So we are dealing with affordability issues more in the context of ‘perceived affordability’ rather than ‘real affordability’. Poorly developed local capital markets – These markets have been unable to meet the financing needs of domestic operators and small-scale water service providers (SSWSPs). Pension fund management is nascent, and, although it holds real potential for the future, these options are only just beginning to gain traction. Risk profile – The Nigerian water sector combines a number of risks – commercial, contractual, forex, sub-sovereign, and the high risk of political interference (which usually has implications for tariff setting and cost recovery). Lack of funds at decentralised level – Fiscal federalism has not delivered the right levels of funding for infrastructure, which is deemed to be the responsibility of state and local governments. Corruption and inefficiencies in the system have meant urban utilities as well as small town and rural water schemes have been grossly under-funded over the years. Many of the state-level water utilities are too small to access market-based repayable finance because of transaction costs and small deal sizes. Short tenure of available financing – Water infrastructure investments are long-life investments, normally lasting 15–25 years. However, most Nigerian financing institutions will only offer short-term borrowing horizons rather than the long-life investments required for major water infrastructure, partly because they do not have the capacities to understand and cover the tenure risk. Under-capitalised balance sheets – All Nigerian water utilities are in dire financial straits. Their ability to raise additional debt is non-existent, because costs would become simply prohibitive. Lack of bankable projects – Because of a complex combination of the above ‘critical mismatches’, the widely shared view is that globally there is more money than there are viable projects, and this potentially applies to the Nigerian water sector. These factors have a significant negative impact on absorptive capacity – Nigeria’s ability to prudently and efficiently use its available financial resources – although there is some lack of understanding of the market by most external lenders and investors. This also means Nigeria cannot meet the required processes, standards and controls attached to provision of such resources. The water sector is generally unfamiliar to many financiers, and, for countries like Nigeria, largely seen as too difficult, especially because of the political nature of tariff setting. However, thinking about the opportunity that Nigeria presents in the context of FDI also requires some consideration of prospect theory. The balance of the determinants of inflows outlined above may therefore be seen as a disincentive, unless there are sufficient counter-measures. As might be expected, much less economic analysis is available on the social and institutional aspects – culture, corruption, institutional deficits, political risk, intellectual property rights, transaction costs, and bureaucracy – of the business climate factors. Putting our house in order So what is the way forward? The answer is not simple. What is clear is the role the Government must play in first tackling some of the institutional issues. It doesn’t help that Nigeria has been kicking around a Water Bill for the best part of ten years without making any progress through the National Assembly. Investors need to have a clear legislative and regulatory framework within which to play, but that is only the beginning. The noises from the Chairs of both the Senate and House Committees on Water Resources suggest that there is now a sense of urgency behind this fundamental building block for the sector. WaterAid will of course be keeping the pressure on both the legislature and the executive to move this along quickly, to ensure we have some chance at universal access to WASH in this country by 2030. Investors will look at the different business models that can work in the context of the specific challenges and opportunities that the Nigerian water sector presents. First, we need to put our house in order. Michael Ojo is the Country Director for WaterAid Nigeria. He tweets as @washmojo and you can read more of his work here.