From Crisis to Preparedness: Financing Tools for Drought-Resilient Water Systems

The World Bank’s working paper “Financial Tools for the Water Sector to Support Drought Risk Management”, authored by Hila Cohen Mizrav, Markus Enenkel, and Nathan L. Engle, offers an urgent appeal for rethinking drought preparedness, particularly through financial strategies that empower the water sector. The study is rooted in research supported by the World Bank’s Global Department for Water, the Global Water Security and Sanitation Partnership (GWSP), and the Centre for Research on the Epidemiology of Disasters (CRED). It calls for immediate action to develop financial mechanisms tailored to meso-level actors, such as water utilities, reservoir operators, and irrigation associations, who are often left out of both emergency response and long-term resilience planning. Despite an increase in climate-driven droughts, especially sudden-onset “flash droughts,” existing financial approaches remain heavily skewed toward post-disaster relief rather than proactive investment.

While flood events are more commonly reported in global databases, droughts often affect more people per event and have far-reaching, long-lasting effects. Between 2000 and 2024, over 400 drought events were recorded globally, with Africa accounting for 42% of these events. In countries like India, Afghanistan, and across Latin America’s Dry Corridor, droughts have slashed agricultural yields, cut GDP growth by up to 0.85% in extreme cases, and led to mass migration and food insecurity. Yet the funding landscape has been largely reactive, prioritizing short-term emergency aid over strategic resilience-building.

The Meso-Level Gap: A Crucial Blind Spot

Most financial instruments for disaster risk management are designed for either the macro (national government) level or the micro (individual households, farmers) level. The meso level, where operational institutions like water utilities and irrigation groups function, has been largely ignored. These organizations face a critical paradox: during droughts, they are encouraged to reduce water consumption, but doing so cuts into their revenues, making it difficult to maintain services or invest in adaptation. Without access to affordable, responsive financial instruments, they are unable to withstand prolonged drought shocks.

Creditworthiness plays a pivotal role here. Many meso-level institutions, especially in low-income countries, cannot access loans or investment capital during crises. The paper argues for financial mechanisms that support both liquidity and long-term resilience. The authors make a strong case that tools like pre-arranged credit, reserve funds, and insurance mechanisms should be made available to these actors, not just governments or large businesses.

Innovative Tools to Build Resilience

A wide array of financial instruments is outlined, categorized by their ability to support either resilience or emergency response, or both. Parametric insurance, which pays out when specific climate indicators like rainfall or soil moisture thresholds are triggered, offers quick liquidity without requiring post-event loss assessments. Indemnity insurance, while more accurate, is slower and costlier. The authors stress that parametric models can prevent service disruption and are particularly useful for utilities managing drought-triggered financial shocks.

Risk pooling is another promising strategy. When water utilities or regions collaborate to purchase insurance jointly, it spreads risk and reduces premiums. The Caribbean Catastrophe Risk Insurance Facility (CCRIF) is cited as a successful example, having already extended products to electric utilities and now piloting drought coverage for water utilities with support from the Inter-American Development Bank. Similarly, catastrophe bonds, which unlock funds when severe drought parameters are met, offer financial protection to operators like reservoir managers who need to invest quickly in water transport or treatment technologies.

The report also explores tools like Contingency Emergency Response Components (CERC), Catastrophe Deferred Drawdown Options (Cat DDO), and Program-for-Results (PforR), which are already used in World Bank financing and could be customized to benefit water sector institutions. The Colombian government’s zero-interest credit line for water utilities during COVID-19, facilitated through its national development bank, is offered as a real-world precedent for such approaches.

Bringing Theory Into Practice

To illustrate practical applications, the authors provide fictional but plausible use cases. A water utility facing revenue shortfalls during a drought could use parametric insurance to cover the cost of operating emergency supply infrastructure. An irrigation association could establish a drought relief fund, providing grants or loans to farmers when rainfall deficits reach critical levels. A reservoir operator might issue a catastrophe bond tied to water level thresholds, unlocking emergency liquidity when conditions worsen.

These scenarios show how diverse instruments, when linked to objective, data-driven triggers, can help institutions respond quickly and avoid prolonged service disruptions. But regulatory support is key. Without enabling legislation or structured delivery systems, even the most well-designed instruments may fail to reach those who need them.

A Call for Integrated, Forward-Looking Finance

The report closes with a call for greater integration between drought and flood risk management. The World Bank’s EPIC (Enable, Plan, Invest, Control) framework is highlighted as an example of this holistic approach, recognizing droughts and floods as two sides of the same hydrological coin. The authors also recommend the use of the Drought Risk Resilience Assessment (DRRA), a tool designed to help countries and stakeholders select appropriate preparedness investments based on their regional vulnerabilities.

The working paper is both a roadmap and a rallying cry. It urges the global community, governments, development banks, and private financiers to pivot from crisis response to proactive risk management. By equipping water sector institutions with the right financial tools, countries can safeguard critical infrastructure, protect livelihoods, and avoid developmental backsliding in the face of increasingly erratic and destructive droughts. Investing in the meso level is not just strategic, it is essential.