Financing for Water—Water for Financing: A Global Review of Policy and Practice
1.1. Scope and Purpose
1.2. The Water Sector in International Development
1.3. The Financial Sector
2. Financing to Develop and Manage Water
2.1. The Economic Case for Investment in Water Security
2.2. Capital Flows to Water
2.3. Seeking Increased Finance
2.4. Incentives and Disincentives for Commercial Financing to Water
2.5. Options for the Road Forward
- Financial risk mitigating measures can be explored to make projects more attractive, such as contingent subordinated guarantees to better share risk; a facility to cover debt service default risk emanating from regulatory changes; a counterparty risk cover facility; and a refinancing facility to allow commercial banks to extend the tenor of their loans—with water projects often demanding tenors of up to 30 years, commonly longer than for loans in the energy sector or in industry .
- Blended finance is increasingly recognized as an innovative important tool, where concessional finance is applied (“structured” into a deal) specifically to help lower risk profiles and transaction costs with the aim to facilitate entry of commercial finance for development purposes in EMDEs [51,52,53]. Several financial and development institutions are actively piloting different arrangements to use concessional funds to crowd in commercial funds. The OECD has outlined five principles for blended finance: (i) anchor blended finance to a development rationale, (ii) design blended finance to increase the mobilization of commercial finance, e.g., deploy blended finance to address market failures, while minimising the use of concessionality, (iii) tailor blended finance to local context, (iv) focus on effective partnering for blended finance, e.g., by allocating risks in a targeted, balanced and sustainable manner, and (v) monitor blended finance for transparency and financial and development results. Instruments include insurance and guarantee systems to transfer part of the risks from the investing partners to a guarantor. Examples are SIDA’s Guarantee Portfolio with specialized instruments , and the Philippine Water Revolving Fund with guarantees provided by JICA . Pioneering institutions are the MIGA that insures foreign direct investments against losses related to currency inconvertibility and transfer restrictions, expropriation, war, civil disturbance, terrorism and sabotage, breach of contract, and the non-honouring of financial obligations. Nonetheless, MIGA has had few transactions for water thus far. Also, the International Finance Corporation (IFC) offers guarantees, such as one for the bond issued by the Mexican municipality of Tlalnepantla de Baz for a local water conservation project; here, IFC provided a partial credit guarantee that allowed the bond to obtain a better credit rating, higher than that of the municipality itself . Currently, many donor agencies are engaged in developing guarantee-like systems.
- Intermediary institutions can be designed to better connect the interests and capabilities of the water and financing industries. Intermediary agencies are able to pool specialized knowledge on finance supply and investment projects. As transpired from the above, the financial industry and the water sector are rather separate epistemic communities with different language, interests and procedures. Intermediaries have been functioning in richer economies for several decades such as the Netherlands Water Boards Bank (NWB Waterbank), Aquafin (Belgium), the Agences de l’eau (river basin-based Water Agencies, France) and USEPA (US). They possess intricate knowledge of both the water sector and its financing demands, and of the capital markets. The governance system and incorporation of these institutions differs, depending on the administrative structure and needs of the country. However, they help pool the financing requests for different projects of their clients, i.e., water utilities, municipalities and water boards, sometimes packaging small-scale investments into larger vehicles and ensuring quality control; on the supply side, they also pool the financial resources, e.g., combining public funds or income from tariffs with funds attracted from banks and institutional investors. This pooling (syndication) helps mitigate risk profiles of individual investments, scale-up operations, and thus, lower transaction costs.
- Debt in local currency denomination may prove superior to dependence on the international markets using denominations in strong currencies, even taking into account the comparatively high interest rates prevailing in local markets. The World Bank  compared the net present value of borrowing in low-interest strong currency versus high-interest local currency and found that local currency often has the advantage due to the likely depreciation of the local against the stronger currency. Also, international markets go through cycles of tightening, and of fluctuating interest rates and exchange rates. Such fluctuations may push vulnerable borrowers into default. In addition, local financiers may be more familiar with local conditions and its regulatory climate. As the financial industry globally has grown fast (Table 1) so have local capital assets expanded and are achieving scale, capability and appetite for water investments. Because the local demand for water finance is also still of modest scale, it may be well suited for the local markets. The Philippine Water Revolving Fund , the Water Financing Facility  and others are therefore arranging their capital demand in local currency.
- Alaerts and Kaspersma  conclude that the development of institutional capacity (the “capacity to act”) is a systemic requirement for development in the water sector as described before, however, also the financing community and its regulators are dependent on reliable data and information and the institutional capacity to utilize this information and translate it into effective decision-making. Institutional capacity development is also known as knowledge management in the corporate sector. It typically implies a knowledge transfer process as well as a (more political) agreement to engage in a change process for the institution, i.e., for the utility, ministry, department, company or sector . The capacity development process is preferably laid out in a realistic implementation strategy based on a gap analysis between the available and the desired capacity. Instruments for individual capacity development include education, training, peer learning, mentoring and experiential learning. At the level of institutions such as organisations and the whole sector, knowledge can be acquired, shared and developed through educating and training the individual staff but also through institutional tools such as twinning arrangements, communities of practice, dedicated formal and informal networks, internal knowledge management procedures and targets to make sure staff share and build on knowledge, and human resource management. This knowledge may aim to impart or develop (i) technical knowledge and knowhow (e.g., on design of dikes and accounting), (ii) skills and operational procedures (e.g., on negotiation, management), (iii) attitudes (e.g., on leadership and values), and (iv) to set in motion an autonomous and endogenic learning process . This applies, e.g., to government agencies, local governments, utilities, regulators, but also local banks and other potential financiers, as well as to local consumer associations, NGOs, politicians and the press. Muhairwe , who turned around the Uganda National Water and Sewerage Corporation in 2000–2004 to become one of the best performing water utilities in the EMDEs, recommends to start preparing for and maintaining the institutional change processes by conducting sustained but targeted training for different groups in the organization.
- Finally, the focal area of enhancing the creditworthiness of water supply utilities can be addressed by taking simple straightforward steps. In a large sample of 690 utilities across the globe, only an estimated 15% of service providers were found to cover their O&M costs and create a basic surplus (assumed as having cash revenues exceeding costs by at least 20%), a requirement for access to commercial credit . Figure 5 shows how four measures are able to cut costs and bolster revenue, rendering up to 77% of utilities financially viable—without raising tariffs. Full creditworthiness is more likely to occur when the provider recovers at least 150% of operating costs.
3. Water for the Financing Sector—A Changing Climate
3.1. A Changing Dynamic to Protect Assets from Water Risk
3.2. Assessing Exposure to Climate Risk
Conflicts of Interest
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|1990||2000||2015||2020 Forecast||Increment 1990–2020 (compounded)|
|Population 1 (billion)||5.33||6.15||7.38||7.80||+46%|
|+1.9% p.a.||+1.3% p.a.||+1.2% p.a.||+1.1% p.a.||+1.5% avg. p.a.|
|GDP 2 (US$ billion)||22,574||33,571||74,843||83,824||+271%|
|+2.9% p.a.||+1.5% p.a.||+2.8% p.a.||+3% p.a.|
|Financial capital (US $ tr)|
|+9% p.a.||-||+12.7% avg. p.a.|
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Alaerts, G.J. Financing for Water—Water for Financing: A Global Review of Policy and Practice. Sustainability 2019, 11, 821. https://doi.org/10.3390/su11030821
Alaerts GJ. Financing for Water—Water for Financing: A Global Review of Policy and Practice. Sustainability. 2019; 11(3):821. https://doi.org/10.3390/su11030821Chicago/Turabian Style
Alaerts, Guy J. 2019. "Financing for Water—Water for Financing: A Global Review of Policy and Practice" Sustainability 11, no. 3: 821. https://doi.org/10.3390/su11030821