Water Pricing as a Signal for Investment: A Theoretical and Empirical Analysis of Financing for Water Infrastructure

Water infrastructure faces a global financing gap, yet the mechanisms through which water pricing influences investment mobilization remain undertheorized. Existing research treats water pricing as a cost-recovery tool rather than a policy signal capable of shaping investor expectations and fiscal behavior, leaving the transmission pathways from pricing adjustments to financing outcomes unexplored. This study proposes a “dual-pathway transmission mechanism” model that conceptualizes water price adjustments as investment signals operating through two parallel channels: the returns expectation pathway and the fiscal substitution pathway. Using data from the Shanxi Provincial Water Network Project (2006-2023), the model is tested empirically using system GMM estimation and Interpretive Structural Modelling. Results reveal that each 1 RMB/ton increase in water intake price stimulates a 16.3% increase in financing scale. ISM confirms a three-tier hierarchical structure of influencing factors—deep-rooted factors (water price level, regional economic scale, water supply-demand imbalance), mediating transmission factors (projected returns, fiscal pressure), and surface-level decision factors (social capital participation, financing costs)—and validates the two parallel transmission pathways. This study extends water pricing research beyond the traditional cost-recovery paradigm by theorizing price adjustments as policy signals, offering practical guidance for water-scarce regions confronting financing challenges. While the empirical analysis is based on the Chinese case, the dual-path transmission mechanism is theoretically generalizable to other water-scarce regions with similar institutional and market characteristics, subject to localized calibration based on each country's regulatory independence, fiscal constraints, and capital market development.