Many water networks and installations in mature economies are aging or deteriorating, while in developing and emerging market economies the pace of growth and urbanization (combined with rising environmental expectations) is creating the need for costly new investments.

Ultimately, there are only three sources of financing: user tariffs, public expenditure, and external aid (official or philanthropical). The main costs of water-related services in developing countries are currently borne by governments through taxation and service charges and, to a lesser degree, by donor assistance. The private sector is only modestly involved in water-related services.

Investment in improved water supply and sanitation has a strong potential for yielding three to thirty-four times the original investment, depending on local circumstances. Unfortunately, water often gives minimal returns over very long payback periods primarily because of the way it is governed. The introduction of more effective governance systems with a strong autonomous regulatory authority and reliable, transparent financial management will make it possible for water authorities and governments to attract external aid that can supplement their own sources of capital.

The challenge is both to have more funds flow to the water sector and to ensure its financial sustainability. Sound, strategic financial planning is needed to balance funding requirements with cost-effective management that focuses on demand as well as supply. Full cost recovery has been advocated as a solution to the water financing crisis for many years. In the real world, however, water resources management and services delivery always receive some level of subsidy. Keeping in mind the obligation to meet the basic water services needs of all, the challenge for policy-makers is to make decisions about acceptable trade-offs among different objectives and about who bears their costs.