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FINANCINGINVESTMENT INWATERSECURITY

RecentDevelopments andPerspectives

Editedby

XAVIERLEFLAIVE

OECDEnvironmentDirectorate

KATHLEENDOMINIQUE

OECDEnvironmentDirectorate

GUYJ.ALAERTS

IHE-DelftInternationalInstituteforWaterEducation

Elsevier

Radarweg29,POBox211,1000AEAmsterdam,Netherlands

TheBoulevard,LangfordLane,Kidlington,OxfordOX51GB,UnitedKingdom 50HampshireStreet,5thFloor,Cambridge,MA02139,UnitedStates

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Thisbookandtheindividualcontributionscontainedinitareprotectedundercopyright bythePublisher(otherthanasmaybenotedherein).

Notices

Knowledgeandbestpracticeinthisfieldareconstantlychanging.Asnewresearchand experiencebroadenourunderstanding,changesinresearchmethods,professionalpractices, ormedicaltreatmentmaybecomenecessary.

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ISBN:978-0-12-822847-0

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CoverDesigner: VictoriaPearson

CoverPhotograph: PascalKobeh, http://www.pascalkobeh.com,Instagram:@pascal_kobeh

TypesetbyAptara,NewDelhi,India

Contributorsxi Generalintroductionxiii

XavierLeflaive,GuyJ.AlaertsandKathleenDominique

PARTIInvestinginWaterandGrowth:AGlobalPerspective

1.Ifnotnow,when?Convergingneedsforwatersecurity, systemicchange,andfinanceandinvestment3

MarkSmith

1.1 Waterintheeconomy:multipleobjectivesandcompetingneeds3

1.2 Priorities:evolvingglobalandnationalwateragendas5

1.3 Foundations:theinvestmentcaseforwater6

1.4 Transitions:failingassumptionsofplenty9

1.5 Newimperatives:adaptingtoclimatechangeandthenewsystemicmission11

1.6 Wayforward:towardanewfinancingandinvestmentagendaforwater13 References14

2.Water,physicallyconnectedyetinstitutionallyfragmented— Investinginitsstrategies,assetclasses,andorganizations17 GuyJ.Alaerts

2.1 Introduction17

2.2 Waterandland:Investingproductively,recognizinglimits, seekingefficiencies19

2.3 Water-relatedassets,operationalpractices,andinstitutionalarchitectures23

2.4 Value,cost,andprice—sometimesaligned,oftennot41 2.5 Conclusions50 References52

3.Financialstructuring:keytoolforwatersectorinvestments55 HeinGietema

3.1 Introduction55

3.2 Financialstructuring57

3.3 Theprojectcycle63

3.4 Comparisonwithothersectors75

3.5 Conclusions76 References78 v

4.Financinginstrumentsandtheecologyofthefinancialsystem79

MireilleJ.Martini

4.1 Introduction79

4.2 Theecologyofthefinancialsystem:macroaspects79

4.3 Theecologyofthefinancialsystem:microaspects86

4.4 Constraintsonthefinancingofwaterinvestmentsinadvancedeconomies92

4.5 Constraintsonthefinancingofwaterinvestmentsinemergingeconomies94

4.6 Perspectivesofferedbythedevelopmentofsustainablefinance95

4.7 Conclusions98 Reference99

5.Criticaldisconnectionsbetweendonoranddomesticrealities101

MartinS.Baker

5.1 Introduction101

5.2 Projectdefinition102

5.3 Financingconsiderations107

5.4 Domesticissues113

5.5 Conclusions118 Reference119

PARTIIInvestmentNeedsandFinancingChallenges

6.Characterizingfinancingneedsandfinancingcapacitiesin differentregions:aglobalperspectiveonwater-related financingflowsanddriversforinvestmentneeds123

RichardAshleyandBruceHorton

6.1 Introduction123

6.2 Theneedforwatersupplyandsanitationassetsandtrendsininvestment123

6.3 CurrentinvestmentandfinancingflowsforWASH128

6.4 Driversforandscaleoffutureinvestmentneeds131

6.5 Conclusions144 References145

7.SDG6globalfinancingneedsandcapacitiestoensureaccess towaterandsanitationforall151

GuyHutton

7.1 Introduction151

7.2 Studiesassessingfinancingneedstocoverthecapitalcosts ofachievingSDG6153

7.3 Methodologiesusedbycostingstudies154

7.4 Globalspendingneeds156

7.5 Regionalspendingneeds161

7.6 Estimatedfinancinggaps164

7.7 Affordability168

7.8 Conclusions171 References173

8.FinancingwaterforgrowthanddevelopmentinAfrica175

AlexSimalabwi

8.1 Africa’swaterfinancechallenge175

8.2 TransformingAfrica’swaterfinanceandinvestmentoutlook183

8.3 Opportunitiestonarrowthefinancegap186 References189

9.FinancingwatersecurityinAsia191

SilviaCardascia,CoralFernandez-IllescasandXavierLeflaive

9.1 Backgroundandrationale191

9.2 FinancingwatersecurityintheAsiaPacificregion.Needs,capacities, andgaps192

9.3 Market-basedmechanismsandvaluationtoolstofinancewater-related investmentsinSouth-EastAsiaandChina199

9.4 Conclusions206

References207

10.FinancingmechanismsforwatertreatmentprojectsinChina209

ElaineWu

10.1 Introduction209

10.2 BackgroundonChinawatersituationandrelevantgovernmententities209

10.3 Varioustypesofwaterprojects211

10.4 DevelopmentofsewagetreatmentinChina213

10.5 Fundingforprojects215

10.6 Waterconservancyprojectsusingbuild-transfermodes216

10.7 Emergenceofpublic–privatepartnerships217

10.8 Rootingoutlow-qualityprojects218

10.9 Equitymarketforfundingwaterprojects219

10.10 REITstofundinfrastructureprojects220

11.Financingneedsandcapacitiesforthewatersupplyandsanitation sectorintheEuropeanUnion223

Nele-FrederikeRosenstockandXavierLeflaive

11.1 Introduction223

11.2 TheEUwatersector—contextualizinginvestmentsintheEU223

11.3 AssessinginvestmentneedsintheEU—methodologicalanddataissues226

11.4 FinancingwatersupplyandsanitationinEurope—thestateofplay227

11.5 FinancingwatersupplyandsanitationinEurope—Projectionsto2030230

11.6 Optionstoclosethefinancinggapforwatersupplyandsanitation inEurope235

11.7 Lookingahead:renewedambitionforwatersupplyandsanitation inEurope238

11.8 Conclusions243 References245

PARTIIIFinancingmodelsinpractice:Casestudies

12.Introductiontothewaterfinancinglandscape:Selectproven andemergingapproaches249

KathleenDominiqueandAlexMoney

12.1 Thewaterfinancinglandscape:abriefintroduction249

12.2 Selectprovenmodelsandemergingapproaches:insightson prerequisitesforreplication255

12.3 Reflectionsonfuturedevelopments:arolefordecision-ready datatoinformfinancing259 References261

13.Waterinfrastructurefinancing:theexperienceoftheUnitedStates263

JamesGebhardt,RickC.ZeiglerandAlexMourant

13.1 Introduction263

13.2 Federalpolicysupportforlocalwaterinfrastructureimprovements264

13.3 Staterevolvingfundmodels:capabilitiesanddesigns268

13.4 WaterInfrastructureFinanceInnovationAct(“WIFIA”)NationalDirect LendingModel280

13.5 ContextforthesuccessfuladoptionofUSwaterfinancemodels284

13.6 Internationalcontext286

13.7 AUSwatermodeladoptionchecklist291 References291

14.Mobilizingprivatecapitalforlarge-scaleecologicalrestoration andconservation:InsightsfromtheUSExperience293 AdamDavisandSaraL.Johnson

14.1 Introduction293

14.2 Thehistoryofmitigationbankingpolicydevelopment294

14.3 Whatisanecologicalcredit?298

14.4 Howcreditsincentivizeinvestment:alignmentofinterests301

14.5 Casestudies302

14.6 Lessonslearned306 References308

15.Tappinglocalcapitalmarketsforwaterandsanitation: thecaseoftheKenyaPooledWaterFund309 JorisvanOppenraaij,RoyTorkelson,DickvanGinhoven,MaartenBlokland, Ng’ang’aMbage,JeanPierreSweertsandEddyNjoroge

15.1 Introduction309

15.2 Background310

15.3 KPWFstructure319

15.4 Challengestoestablishingarevenue-basedlong-tenordebtfinancing facilityinKenya322

15.5 WFF/KPWFbusinessapproachtosuccessfullyaccessingprivate-sector financing324

15.6 KPWF’scomparativeadvantage338

15.7 Furtherdevelopmentoflocalcapitalmarketfinancing340 AnnexDetailedstepsintransaction-relatedactivitiestosupportissuing thefirstpoolbond342 References344

16.Investingincatchmentprotection:TheWaterFundmodel345 BertDeBièvreandLorenaCoronel

16.1 Introduction345

16.2 Principlesandrationale345

16.3 Applicationtocatchmentprotection347

16.4 Economicbenefitsandreturnoninvestment354

16.5 Trends:cobenefits,waterfundsbeyondsourcewaterprotection?356

16.6 Conclusions357 References358

17.4

17.5

17.6

Contributors

GuyJ.Alaerts

IHE-DelftInternationalInstituteforWaterEducation

RichardAshley

EmeritusProfessorUniversityofSheffield,DepartmentofCivilandStructuralEngineering, UnitedKingdom

MartinS.Baker Counsel,Dentons

BertDeBièvre

FondoparalaProteccióndelAgua(FONAG),Quito,Ecuador

MaartenBlokland WaterFinanceFacility,Kenya

SilviaCardascia

AsianDevelopmentBank

LorenaCoronel AquaNature,Quito,Ecuador

AdamDavis

EcosystemInvestmentPartners,Baltimore,Maryland

KathleenDominique

OECDEnvironmentDirectorate

CoralFernandez-Illescas AsianDevelopmentBank

JamesGebhardt OfficeofWater,USEnvironmentalProtectionAgency,Washington,D.C.

HeinGietema

CSCStrategy&Finance,Rotterdam,TheNetherlands

DickvanGinhoven WaterFinanceFacility,Kenya

BruceHorton EnvironmentalPolicyConsultingandStantec,UnitedKingdom

GuyHutton

SeniorAdviserforWater,SanitationandHygiene,UNICEFNewYork,NY,UnitedStates

SaraL.Johnson

EcologicalRestorationBusinessAssociation,McLean,Virginia

XavierLeflaive

OECDEnvironmentDirectorate

MireilleJ.Martini

OECDEnvironmentDirectorate

Ng’ang’aMbage

KenyaPooledWaterFund

AlexMoney

SmithSchoolforEnterpriseandtheEnvironment,UniversityofOxford

AlexMourant

OfficeofWater,USEnvironmentalProtectionAgency,Washington,D.C.

DeanMuruvenNalandhren

GlobalPolicyLeadFreshwater,WWF,Switzerland

EddyNjoroge

KenyaPooledWaterFund

JorisvanOppenraaij WaterFinanceFacility,Kenya

Nele-FrederikeRosenstock

EuropeanCommissionDGEnvironment

AlexSimalabwi GlobalWaterPartnership

MarkSmith

InternationalWaterManagementInstitute,Colombo,SriLanka

JeanPierreSweerts WaterFinanceFacility,Kenya

RoyTorkelson WaterFinanceFacility,Kenya

ElaineWu

J.P.Morgan

RickC.Ziegler

OfficeofInternationalandtribalAffairs(OITA),USEnvironmentalProtectionAgency, Washington,D.C.

Generalintroduction

XavierLeflaive a,GuyJ.Alaerts b andKathleenDominique a

a OECDEnvironmentDirectorate

b IHE-DelftInternationalInstituteforWaterEducation

Anewconversationonfinancingwater

Financinginvestmentinwatersecurityisamajorglobalchallengeand isincreasinglyrecognizedasanissueattheheartofsustainabledevelopment andfinancialsustainability,aswellaspeaceandinternationalsecurity.The globalrecognitionoftheroleofwatersecurityinbroaddevelopment, economic,environmental,andfinancialagendasemergedabout20years ago.Sincethen,thisconversationhasgaineddramaticallyinurgencyand indepthdrivenbytheglobalpolicydiscoursesonclimatechangeand theUNSustainableDevelopmentGoals.Still,waterishardlyontheradar formostfinanciersandfinancialpolicymakers.Whetherornotwaterrisks arefinanciallymaterialtoday(orhavethepotentialtobeinthefuture) isthesubjectofdebate.Thisvolumeclearlyarguesinfavorofafurther deepeningofthisdebate,towardthegrowingattentiontotheopportunities andchallengesrelatedtowaterinthesphereoffinance.

Therecognitionoffinancingwaterasamajorglobalchallengefirst gainedtractionattheinternationallevelwithinthewatercommunity itself.MichelCamdessus,formerManagingDirectoroftheInternational MonetaryFund(IMF),wasseminalinputtingfinanceontheagendaof thewatercommunityatthe2003WorldWaterForuminKyoto.Angel Gurría,thenSecretary-GeneraloftheOECD,reinforcedthismessageatthe subsequentForuminMexicoCityin2006.Sincethen,financehasbecome arecurrentthemeoftheWorldWaterForumsasthecriticalenabling condition,togetherwithgovernance,toachieveprogresstowardincreased watersecurity.ThiswasencapsulatedintheSustainableDevelopmentGoal 6(SDG6)onwaterandsanitation.Traditionally,publicfinancehadalways beenconsideredthedefaultoptionbutconstrainedfiscalresourcesinmany countriesstrengthenedthecasetoattractmoreprivaterisk-bearingcapital.

Whilethedebatearoundtheseissuesremainedinitiallywithinthewater community,theglobaldiscoursealsostartedemphasizingthatwaterisnot aninsularsectorbutisstronglyaffectedbypoliciesandinvestmentsinthe FinancingInvestmentinWaterSecurity:RecentDevelopments andPerspectives.

economy,landuse,andecosystems.Hence,sustainableuseandmanagement ofwaterresourcesrequirepolicyalignmentandcollaborativeactionacross severalsectorsandministries,raisingtheexpectationsregardingfinancing andaddingcomplexityaroundthequestionsofwhoshouldandhowto financeneededinvestments.Thepoliticalvisibilityofwaterwasfurther elevatedin2020whenthefirstG20WaterDialoguetookplaceunder thePresidencyofSaudiArabia.TheG20Leaders’Declarationdedicated, forthefirsttime,afullparagraphtowater1 ,andtheG20committedtoan annualdialogueonwater.Thebackgroundnote(authoredbyOECD,FAO, andIIASA)thatinformedtheG20WaterDialoguecoverednotablypolicy, finance,andinnovation.

Importantly,thetenoroftheconversationaroundwaterfinancinghas shifted.In2003,themessagefocusedonthefinancinggap—financingneeds farexceedavailablefinanceforwater-relatedinvestments—andreiterated thecallformorefinancetoclosethisgap:“Thereiswidespreadagreement thattheflowoffundsforwaterinfrastructurehastoroughlydouble,with theincreasetocomefromallsources[publicandprivate]”(Winpenny,2003, p.11).Inmanydevelopingcountriesonlyaquarterofthecalculatedfinancial “need”—toconnectpeopletosafewaterandimprovedsanitation—isactuallycovered,oftenevenless.Subsequentstudiesandhigh-levelfora,however, havekepthighlightingthepersistentshortageof“bankable”projectsand theneedtoimprovethequalityofinvestmentproposalsforwater-related investments.Whilethislineofthoughtremainsprominentandcertainly relevant,morerecentanalysesalsoexplorewhetherfinancialmarketsandthe financeindustryareequippedtodirectasignificantshareoffinancialflows toprojectsthatcontributetowatersecurityandotherglobalwater-related goalssuchasthoseunderSDG6.Thesegoalshavesocialandeconomic valueandmayhaveasolidbusinesscase.Yetthenatureoftheseinvestments andtheirpoliticaleconomyappeartodiscouragetransactions.Thesituation isarguablycompoundedbyill-adaptedfinancialinstrumentsandmisaligned incentivesystems.

Forthefinancialactors,mostwaterinvestmentsarestilllessattractiveand perceivedasriskiercomparedwithmanyalternativeinvestments.Concern startedgrowingthatfinancialassetsthemselvesareincreasinglyatmaterial andsystemicriskfromwaterinsecurityacrosstheworld:underthepressure

1 “Weacknowledgethataffordable,reliable,andsafewater,sanitation,andhygieneservicesareessential forhumanlifeandthataccesstocleanwateriscriticaltoovercomethepandemic.Wewelcomethe G20DialogueonWaterasabasistosharebestpracticesandpromoteinnovation,andnewtechnologies,onavoluntarybasis,thatwillfostersustainable,resilient,andintegratedwatermanagement”. (http://www.g20.utoronto.ca/2020/G20_Riyadh_Summit_Leaders_Declaration_EN.pdf).

ofdemographic,economicdevelopment,andclimatechange.Sustained adequateprovisionofwaterforproductivepurposessuchasforagriculture, industrialandenergyproduction,andprotectionfromriverorseaflooding, couldnolongerbetakenforgrantedforthedurationofanasset’slife.

Withrealestateandindustrialassetsthreatened,watersecurityandhence itsfinancing,arenowemergingasaconditionforahealthyfinancialindustry, andforthestabilityofthefinancialsectoritself.Centralbanksandregulators aretakingarapidlygrowinginterestintheimplicationsofclimateand environmentalrisks,includingwater,asexemplifiedbythe2017and2021 RecommendationsbytheTaskForceontheClimate-relatedFinancial DisclosuresoftheFinancialStabilityBoard,andemergingdiscussionsinthe NetworkforGreeningtheFinancialSystem.Suchissuesweretopicalon theagendasofthe2020and2021meetingsoftheRoundtableonFinancing Water2 .Inasense,“water”isnowincreasinglyperceivedashavinga financial valuetoo.

Anewcontextforthediscourse

Thecontextforthediscourseonfinancingwaterischangingaswell. Threedevelopmentsdeserveparticularattention,astheypointtovaluable directionswhileidentifyingfurtherchallengestofinancingwater.

First,webetterunderstandhowwatermanagementdrivesgrowthand sustainabledevelopment.Theeconomiccaseforwatermanagementand moreinvestmentinwatersecurityhasbeenfirmlyestablished.In2015, InvestinginWater,SustainingGrowth (Sadoffetal.,2015)firmlypositioned watersecurityasaconditionforsustainabledevelopment,atbasinandglobal levels.Itdocumentedthecostofinactionandoutlinednovelperspectives forwater-relatedinvestments,inparticularinvestmentpathwayssupporting successfuldevelopmentstrategiesandeffectiveinvestmentsindifferentparts oftheworld.Thatsameyear,theIMFpublishedalandmarkstaffdiscussion note(Kochharetal.,2015)documentingtheimpactofwaterchallengeson growthandmacro-stability;thereportalsorecommendedmacro-economic policies,suchasreplacingsubsidiesforwatersecuritybytargetedsocial support.

2 TheRoundtableonFinancingWaterisaglobalpublic-privateplatformestablishedbytheOECD, theNetherlands,theWorldWaterCouncilandtheWorldBank,tofacilitateincreasedfinancing ofinvestmentsthatcontributetowatersecurityandsustainablegrowth.Formoreinformation,visit https://www.oecd.org/water/roundtable-on-financing-water.htm

Morerecently,theDutchinitiativeWaterasLeverage3 exploreshow investinginwateriseffectivetobuildresiliencetoclimatechange.It documents,andendeavorstoaddress,thechallengeofinvestingthecatalytic firstmillionsofUSDthatcanleverageinvestmentatscale.Its Reflect report (Ovinketal.,2021)notesthatmoststakeholders—includingdevelopment financeinstitutions—welcomethisnotion,yetstruggletoapplyitinpractice. Inparticular,ithighlightstheimpedimentsinprevailingfinancingmodalities tofinanceurbanresilienceandwater-relatedprojects.

Second,theglobaldiscourses,policies,andinitiativesrelatedtoclimate actionandsustainablefinancearegrowingmoreurgentandintensiveandthe linkagestowaterincreasinglyrecognized.Whileclimatemitigationconcerns predominantlyenergyandtransport,climateadaptationisprimarilyabout thewatercycle,agriculture,andhabitats.Watersecurityandresilience,thus, aregainingadditionaltractioninthesenarratives.Financingclimateaction forbothmitigationandadaptationisarapidlyexpandingfieldofwork,on theglobalagendaandinpractice.Theserecentdevelopmentsinclimate andsustainablefinanceareopeningnewopportunitiesforfinancingwater. However,asIPCCreportsobserve,ofallclimate-relatedfinancecurrently onlyabout5%–10%isgearedtoadaptationmeasures(Guptaetal.,2014). Newdedicatedfunds(suchastheGreenClimateFund),financinginstruments(e.g.,greenbondsandSpecialPurposeVehicles)andengagementby awideningrangeoffinanciers(including,butnotlimitedtoinstitutional andimpactinvestors)canaccelerateinvestments,whichwillsignificantly contributetoclimateresilienceandwatersecurity.Theyarebenefiting frominstitutionalandregulatorydevelopmentsintendedtoguideconducive investmentdecisionsandavoidinvestmentswithhighcarbonand/orwater impacts.Taxonomiesandguidelinesarebeingformulatedwhichsetcriteria thatdefinegreen,low-carbon,climate-resilientinvestments,andforfinancial disclosures.WhiletheEuropeanCommissionispioneeringthisapproach, othercountriesandinstitutionsareproceedingalongsimilarlines.

Whilepromising,suchdevelopmentsalsofacelimitations.Uncertainties andambiguitiesmayariseindefinitionsandthereisadistinctriskof“greenwashing.”Thesizeofsustainablefinanceisstillmodestcomparedtomainstreamfinancialflows.Whilesupportingthesteadyexpansionofsustainable financematters,amajorchallengeliesindisplacingenvironmentally-harmful investmentsandre-aligningfinancingflowstowardinvestmentsthatsupport environmentalobjectivesintimetoachieveanet-zero,resilientworldby

3 Formoreinformationandinspiringstories,visit https://www.worldwateratlas.org/curated/water-asleverage/

mid-century.Andfinally,someambivalenceremainsbecausewhatqualifies asclimate-resilientorsustainablefinancemaynotnecessarilysupportother keytenetsofthewateragendasuchasforinstanceprovisionofsafewaterto communities.

Third,atglobalscalethedebateregardingthepublicversusprivateroles inwaterservicesandregardingthewaterresourcehasmaturedandtaken amorepragmaticturn,focusingontheirrespectivecomparativeadvantage ratherthanascompetingsolutionstowaterfinancing.Deeperanalysisand, indeed,experience,withamuchwidersetoffield-testedarrangements suggestthatnationsandcommunitiescanretaincriticalresponsibilitiesand functions—suchasownershipoftheresourceandofcriticalinfrastructure, andregulatoryfunctions—inthepublicdomainwhileproductivelypartneringwithprivatepartiesandinitiativesforotherfunctions.Inthepast, thisdebatehadtendedtobenarroweddowntotwoarenas.Ononehand, watersupplyandsewerage(and,rarely,irrigationandriverinfrastructure) servicescouldbedelegatedtoprivateoperatorsinconcessionalorlease constructions.Theassumptioninthelate1990sthatsuchoperatorswouldbe distinctlymoreeffectiveinraisingcapitalforinvestmentsdidnotmaterialize. Afterthe2008financialcrisis,theappetiteandcapabilityoftheseoperators toscaleupalsoprovedconstrained.Ontheotherhand,therightofaccessto waterisanintrinsicallyculturalandpoliticalissue.Privateownershipsystems haveremainedexceedinglyrare(south-westernUS,Chile)butseveral nationshaveinitiatedmarket-basedoreconomic-value-basedarrangements toallocateentitlementstousewaterunderscarcityconditionstotheir optimaluse(e.g.,AustraliaandsomeEUcountries).Sucharrangements areincreasinglyalsoappliedto,e.g.,wetlandconservationandmanagement (DavisandJohnson;DeBiévreandCoronel;andMuruven,thisvolume). Still,thesecureaccesstotapordrinkingwaterisoftenperceivedasof “nationalstrategicimport”asdescribedbyWu(thisvolume)forChina, wheremostwastewatertreatmentandindustrialwaterprovisionisdelegated toprivateoperatorsincontrasttothepublicwatersupplywhichremainsin thehandsoflocalgovernments.Nonetheless,publicutilitiesindeveloped anddevelopingeconomiesalikethataretechnicallycompetent,sizeableand well-governedfinditeasiertoattractfinancefromcapitalmarkets.They dosointheformof(municipal)bonds,loansorotherfunds,sometimes througha(semi-)publicfinancialintermediarysuchasforinstancetheUS EnvironmentalProtectionAgency(Gebhardt,thisvolume),theNetherlands WaterBank,andanarrayofnewdedicatedfundsinAsia(FernandezIllescasetal.,thisvolume)andelsewhere.Inthisvolume,discussionson privatefinanceineffectexploretheopportunitiesandconditionstoaccess

commercialsourcesoffinance,irrespectiveofthestatusofoperatorsofwater services.

Ambitionandscopeofthebook

Thisvolumeaimstoframewaterfinancingascentraltothedebate andactiononsustainabledevelopment.Itraisesthesenseofurgencyto resolveoutstandingchallengesinordertoscaleupinvestments,fasterand moreeffectively.Itdoessowhilereflectingonthenewcontextoutlined above.Itintendstopushtheboundariesbytakingstockofthediversityof newdevelopmentsanddocumentingnewopportunitieswhileattempting tobetterunderstandandaddresssomeofthepervasivebottlenecks.

Todoso,thescopeofthebookisdistinctivelybroad: Thevolumeisglobalinscopeandambition,yetitstressesthecritical importanceofregionalandlocalspecificcircumstancesandaction.

Itendeavorstocoverthefullspectrumofwater-relatedinvestments; whilewatersupplyandsanitationinfrastructureandservicesfeature prominently,otherdimensionsfeatureaswell,notablyirrigation,ecosystemmanagement,andwatersecurityatlarge.

Whileitfocusesonwater,itarguesthatfinancingwaterextendsbeyond thetraditionalscopeofthewatersector,aswaterisdeeplyimpactedby decisionsindifferentsectorssuchasenergy,landuseandagriculture;it is,thus,amatterofinterest—and,often,concern—forawiderangeof policycommunities,financiers,andinstitutionsinchargeofregulating financialmarkets,consumeraffairsandtheenvironment.

Todeliveronitsambition,thisvolumebuildsonthreesetsofexpertise: Scholarsandotherexpertswhoargueconvincinglyaboutwhyfinancing watermatters,andwhatconditionsneedtobesatisfiedtoalignfinancing flowswithneedsandcapacitiesatlocal,national,andgloballevels. Analystswhoassessthefinancingneedsandcapacitiesanddescribethe policiesrequiredtoachievethem.

Practitionerswhohaveputinplacefinancingpolicies,institutions,financialinstruments,andcontractualarrangementsthatleadtotransactions andactuallyhavecontributedtofinancingwater.

Thebookisintendedforawideaudiencefromthewaterandfinance communities,aswellasfromothersectorsandpolicycommunitieswhich eitherheavilydependonwaterand/orwhoseactivitiesstronglyimpact theresource,suchasagriculture,industry,andecosystemsandbiodiversity management.Withinthesesectors,thebookshouldbeabletoprovide

insightandguidancetothoseinvolvedintheindustries,suchaswater serviceproviders,agro-businesses,andfinanciers,butalsoinsurers,credit ratingagencies,financialandenvironmentalaccountants,andconsultancies specializinginclimateandsustainablefinancetaxonomies.Thisaudience wouldalsoextendexplicitlytoregulatinginstitutionsonboththewaterand environmentalside(e.g.,ontariffs,performanceandconservation)andthe financingside(capitalmarketregulators;bank,pensionfunds,andinsurance oversightbodies;centralbanksandtreasuries).

Thebook’sstructurereflectsthisambition.InPart1,fivechapterslay thefoundationsforathoroughdiscussiononfinancingwater.Theyset thescenebydescribingandanalyzingthebroadercontextthataffects financingwateraswellasbasicoperationalaspects.MarkSmithhighlights the“systemicmission”ofwaterasregardstheSDGs.Heemphasizesthat theassumptionofwaterabundanceisnolongervalidandthatthepolitical economydetermineshowwaterisvaluedandtakenintoaccountbydifferent authoritiesanddiversestakeholders.GuyAlaertsoutlinesthemismatch betweenthesystemicandintegratednatureofwaterasresource,andthe fragmentedinstitutionallandscape.Heanalysesthediversewater-related assetclassesandtheirdistinctivefeaturesasrelevantforfinancing.Atthesame time,heclarifieshowfinancialassetsareincreasinglyexposedandvulnerable towater-relatedrisks.ThismessageprovidesagoodsegueintoMireille Martini’schapter,whichexplainswhy,underprevailingpost-financial-crisis conditions,thefinancialsectorisill-equippedtoconsiderwaterandwaterrelatedrisks.Shecallsforarevisionoffinancialandeconomicregulation tohelpredirectfinancialflowstowardinvestmentsthatcontributetowater securityandsustainablegrowth.Thereafter,HeinGietemafocusesonakey elementintransactions;heillustrateshowfinancialstructuringcanhelp enhancetherisk-returnprofileofwater-relatedinvestmentsovertheproject lifecycle.Finally,MartinBakerprovidesapractitioner’sreflectiononthe complexityofdraftingcontractualarrangementsdesignedtoreconcilethe differentperspectivesandprioritiesofthepartiestoatransaction.

Part2presentsevidenceoffinancingneedsandcapacities,globally andinseveraloftheworld’sregions.Thefirsttwochapterscharacterize financingneedsandcapacitiesglobally.BruceHortonandRichardAshley lookintothedriversofthefinancingneedsandcapacityforinvestments inwatersupplyandsanitation;theymakeaheuristicdistinctionbetween geographicalareaswithextendedcoverage,andthoseinneedoffurther coverageextension.Theyintroduceinnovationasanoptiontomitigate therisingcostsofserviceprovision.GuyHuttoncomparesthemostrecent

projectionsofwater-relatedfinancingneedsandcapacities,takingSDG6as theoverallambition.Thechapterprovidessomelevelofdisaggregationby worldregion.Itintroducesthediscussiononaffordabilityofwaterservices,a conceptthatisoftenoversimplifiedandnotadequatelyreflectedinpolicymaking.Then,fourchapterscharacterizefinancingneedsandcapacityat regionallevel,withfocusonAfrica,Asia,China,andEurope.Projectionsand analyses,however,sufferfromthepaucityofcomparableandrobustdata,in particularbeyondwatersupplyandsanitation.Still,somedistinctivefeatures emerge,suchasthebenefitsofhavingaharmonizedpolicyframework anddatacollectioneffortinEurope,andthemagnitudeanddiversityof financingneedsandopportunitiesacrossAsia.ElaineWudocumentsthe latestdevelopmentsoffinancingwastewatermanagementinChina,which ismarkedbytheintroductionofmoresophisticatedfinancialinstruments suchasrealestateinvestmenttrusts.

Part3collatesreal-lifepracticalexamplesoffinancingmechanismsand enablingconditionsthatfacilitatetransactionsandfinancingflowstoprojects thatcontributetowatersecurityandsustainablegrowth.Lessonsarelearned ontheprerequisitestomakethesemechanismsandarrangementsdeliver andtoadaptandscalethemup,ifandwhenappropriate.Toprovidean introductiontothecasestudies,KathleenDominiqueandAlexMoneyprovideanoverviewofdifferenttypesofwater-relatedinvestments,financing models,andtheextenttowhichtheycouldbeadaptedtoaddressadiverse setoffinancingchallengesandcontexts.Severalcasestudiesfollow,detailing distinctivewaterfinancingapproaches.

JimGebhardtetal.discussthehistoryofthepublicfundingprovidedto waterandsanitationinfrastructurethroughthelensofUSgovernmentprogramsestablishedtoaddressnationalwatermanagementgoals.Thechapter documentsindetailthetwodominantUSfederalloanprograms—notably theCleanWaterandDrinkingWaterStateRevolvingFundsmanagedby thestatesandtheWaterInfrastructureFinanceInnovationActandreflect onthenecessaryenablingconditionstodeploytheseapproachesinother contexts.AlsodrawingonexperienceintheUnitedStates,AdamDavisand SaraL.Johnsonfocusonmobilizingprivatecapitalforlarge-scaleecological restorationandconservation.Theydetailthekeyelementsforthemarket andregulatoryrequirementsthatunderpinthisfinancingmodelandhowit appliesinspecificcases.

Exploringfinancingmodelsindevelopingcountries,thefollowingtwo chaptersdetailanapproachtofinancingwatersupplyandsanitationas exemplifiedinKenyaandanapproachtocatchmentprotectiondeployedin

numerouscountriesaroundtheworld.JorisvanOppenraaijandco-authors depicttheestablishmentandoperationsoftheKenyaPooledWaterFund, whichaimstoaccesslocalcapitalmarketstomobilizewaterandsanitationinfrastructureinvestments.Theyrecountthekeystepsandchallenges encounteredinsettingupsuchafund,aswellasthedesignfeaturesthat underpintheapproach.Turningtocatchmentprotection,BertDeBièvre andLorenaCoroneldocumenttheexperienceofWaterFunds,mostnotably viathefirstofsuchfundsestablishmentover20yearsagoinQuitoEcuador. Thelessonslearnedprovideinsightsonhowsuchfundscanbeestablished andadaptedtonewcontexts.Finally,DeanMuruvenexploresopportunities todevelopbankableandbeneficialprojectsthatcontributetosustainable andresilientfreshwaterecosystemswithinthecontextofbroaderlandscape financingplans.

Cross-cuttingmessagesandwaysforward

Astrongeconomiccasehasfailedtotranslateintofinancing flowsatscale

Theworkcollatedinthevolumeconcursintheobservationthatthe economiccaseforinvestinginwatergenerallyiscompelling,butstruggles tobetranslatedintofinancingflowsatthescalecommensuratewiththe challenges(OECD,2022).Thisobservationhasbeenmadebefore.Since theendorsementoftheSustainableDevelopmentGoalsbytheglobal communityin2015,itiswellacknowledgedanddocumentedthatwater— inadditiontobeingthesubjectofadistinctiveSDG—isaconditionto achievemultipleothergoals.Fromthatperspective,waterisendowedwith a“systemicmission”asregardstheSDGs(Smith,thisvolume).

Theeconomiccaseforfinancingwater,however,stillsuffersfromseveral caveats.Distinctcaveatsrelatetothedifficultieswithvaluingwater(Alaerts, thisvolume,documentsthecommonmisalignmentbetweenwatervalue, cost,andprice);andthesplitincentivesbetweentheoneswhobenefit fromtheseinvestmentsandtheoneswhoshouldbearthecosts.Additional complexitytoassessingthecaseforinvestmentanddesigninginvestment underuncertaintyderivesfromtheuncertaintiesaboutfuturewaterdemand andavailabilityandthepronouncedvulnerabilitytorisksunderachanging climate(Smith,thisvolume).

Allprojectionsoffinancingneedsandcapacitiesconcurtostressthatan enduringfinancinggapexistsbetweencurrentlevelsoffinanceandneedsto

meetnational,regional,orglobalgoalsrelatedtowater(SDG6,orregional objectiveswheretheyexist)andtosustainabledevelopmentatlarge(see mostchaptersinPart2ofthisvolume).Theyalsoconcurinclaimingthat thisgap,mostly,doesnotreflectanyshortageofmoney,asfinancialresources aregloballyabundant,includinginanumberofdevelopingcountrieswhere localcapitalmarketshavebeenemergingandmaturingoverthepasttwo decades.

Intheirownways,eachchapterofthebookstressessomeofthe reasonswhyfinancestrugglestoreachsomeofthemostneededand valuablewater-relatedinvestments.Well-recognizedcausesarepoorproject definition,weakcredit-worthinessofwateragenciesandmunicipalutilities, anunattractiverisk-returnprofileduetoweakenablingconditions,deficient institutionalcapacity,andlackoffinancialstructuring(Baker,andGietema, thisvolume).However,newanalysesalsoemphasizetheissuesarisingfrom theprevailingconditionsunderwhichthefinancialsectoroperates(e.g., prudentialregulations),whichimpedefinancingflowstoactivitiesthatare valuablefromaneconomic,social,orenvironmentalperspectiveandmay alsoundermineinvestmentscontributingtowatersecurityandsustainable growth.Thisperspectivefurtherexplainsthewell-establishedinsight—that commercialfinanciersandcapitalmarketscurrentlyplayaminimalrolein financingwaterinmostcases.

Asaconsequence,thereisaroleforpolicies,regulations,andinstitutions tosetenablingconditionsthatdirectfinancialflowstowardinvestmentsthat contributetowatersecurityandsustainablegrowth.Thisvolumearguesthat suchenablingconditionsincludewaterandenvironmentalpolicy,aswellas abroaderrangeofdomainsaswell,mostprominentlyfinancialregulation andprudentialrules.Aligningneedsandcapacitieswillrequireactionfrom arangeofstakeholders,includingpublicbudgets,accountingstandardsand watertariffs,aswellascentralbanks,intheircapacityofregulatorsofthe financeindustry.

Dataarepivotalinmakingtheeconomiccaseforwater-relatedinvestments, inparticular,tomonitorexposureandvulnerabilitytowater-relatedrisks andthebenefitsofinvestinginwatersecurityandsustainablegrowth.The factthatalargeshareofrelevantdataonwaterrisksisinprivatehands (e.g.,theinsuranceindustry)cancreateasymmetriesofinformationthat hinderpolicydevelopmentandaffectafairallocationofriskandbenefits

frominvestinginwater.Acombinedeffortfrompublicauthoritiesatlocal, national,andinternationallevelsisrequiredtoproduce,standardize,share andupdatepublicdataonrelatedissues.

Additionalsourcesofinformationshouldbedesignedtoinformanalyticaltoolsthatcandocumentexposureandvulnerabilitytowaterrisksand thebenefitsofinvestinginproductiveandsecurewater.Foursetsoftoolsare discussedinthisvolume,whicharetakenforgrantedandseldomquestioned intheliteratureandpolicyguidanceonfinancingwater.

First,cost-benefitanalysesfalltypicallyshortwhenassessingthe“true” valueofwaterandofwater-relatedinvestments,inparticularinanuncertainfuture.Investmentdecisionswouldbenefitfromnewanalyticaltools designedtoassesstherobustnessofinvestmentandpolicydecisionsacross arangeofpossiblefuturewaterregimes(Smith,thisvolume)andtovalue flexibilityandthecapacitytoadapttoshiftingconditionsandunexpected events.

Second,environmentalimpactassessments(EIA)needtobedeepened orredesignedtocapturethepotentiallydiverseconsequencesof(seriesof) investmentsinwateratdifferentgeographicalscales.Alaerts(thisvolume) arguesinfavorofsectoralEIA.Othersrecommendtosupplementproject levelanalysisbythemulticriteriaanalysisofinvestmentpathways,informed bythevaluesofstakeholderstoassessaportfolioofprojectsinaparticular landscapeorbasinandhowthesemayevolveovertimeunderdifferent scenarios(BrownandBoltz,2022).

Third,itisincreasinglyessentialthatfinanciersconductduediligenceon thewaterimpactsoftheirinvestments(Alaerts,andGietema,thisvolume). Thismattersaseachnewwaterappropriationnowimpingesonalready existingones,triggeringcascading,orspill-overeffectsandaffectingtherisks andreturnprofilesofotherinvestments.Thisisinlinewiththerequirements ofemergingtaxonomiesthathelpdefinegreen,climate-resilient,orwaterwisesustainableinvestments.Forreasonsnotedabove,relianceondue diligenceisalsoplaguedwithconceptual,methodological,andinstitutional challenges.

Howarewaterimpactsdefined?Howarepotentialinconsistenciesacross geographicalscalesandtimehorizonsconsideredandaddressed?

Howtodealwithuncertainties,betheyderivedfromthepaucityof data,orfromdeepuncertaintiestriggeredbyclimatechangeandhardto-predictchangingwaterregimes?

Inwhatwaysaredifferentcategoriesofwaterusers,stakeholdersand communitiespotentiallyexposedtowater-relatedrisks,andhowarethey involvedintheassessmentandintheinvestmentdecision?

Finally,expandedandmorereliabledataonexposureandvulnerabilityto waterrisksandonthevalueofwatercaninformnewmodelingtools,which canthensupportdecisionsacrossarangeofpolicydomainsandinvestment opportunities(Martini,thisvolume).Oneareathatislikelytoreceivemore attentioninthefutureistheuseofgeospatialdata,andinparticularits potentialforimprovingtheallocativeefficiencyofcapitalinvestmentsinto thewatersector(Dominique&Money,thisvolume).

Thewaythefinancialmarketsandindustryoperatetoday hamperswaterfinance

Therearetwobroadwaysinwhichfinancialmarketsandtheprevailing modalitiesofthefinanceindustry’soperationtodayfailtoproperlyvalue water-relatedinvestmentsandincorporatewater-relatedrisks.

First,whilefinancialassets,suchasproductiveassetsandrealestate,are increasinglyexposedandvulnerabletowaterrisks(Alaerts,thisvolume), thefinanceindustryseemstoonlyslowlycometotermswiththeserisks (withthenotableexceptionoftheinsuranceindustry).Ithelpstomakea distinctionbetweenlong-tenorinvestors(institutional,impactinvestors,etc., butalso,increasingly,fund,andassetmanagers)andshort-termfinanciers. Theformeronesarerampinguptheireffortstocometogripswithnew sustainabilityriskcategoriesinthefaceofenvironmental”tippingpoints” thatareprojectedforthenext2–3decades.Investorswithonlyshorttermpositionsarestartingtorealizethat,eventhoughtheyarenotdirectly affectedbywhatwillbehappeningafterthenextdecade,asystemicrisk isarisingwithassetvaluegettingdestroyed-attimesonveryshortnotice. Suchasystemicriskmayresultfromassetsbeinglocatedinvaluechainsor locationsthatunexpectedlymayproveparticularlyvulnerabletowaterrisks; orfromallinvestorsgettingaccesstothesameinformationatthesametime, triggeringasell-off;orfromregulatorsorgovernmentstakingregulatory actiononshortnotice,nationalizingassets,ordecidingtointervenein marketstopushgreenstrategiesorprotectnationalinterests.

Fromthatperspective,thevoluntary(andinthefuturepossiblymandatory)disclosureoffirm-leveldataonexposureandvulnerabilityto,and mitigationstrategyofwater-relatedrisksisasignificantdevelopment(seethe recommendationsoftheTaskForceforonclimate-relatedFinancialDisclosureoftheFinancialStabilityBoard).However,disclosurestillcannotfully ensurealignmentoftheeconomicandfinancialimplicationsofwater-related risksorthebenefitsofinvestinginwater.Thisisparticularlyaconcernin

thecaseofbanksandfinancialinstitutions.Whileregulatorydevelopments underseveraljurisdictionsmandatebankstodiscloseinformationabouttheir portfolio’sexposuretowater-relatedrisks,sucharequestpartlymissesthe pointbecause,asanalyzedby Martini(2022),thetransmissionofriskscaused byfloods,droughts,orwaterpollutionintomaterialfinancialimpactsonthe financialsectorremainsminimal.Underprevailingprudentialregulations andaccountingstandards,disclosureremainsvoluntary.Moreimportantly, banksandfinancialinstitutionsmayarrangetoignore,hedgeoroutsource theserisks.Ground-breakingworkonthematerialityofwaterrisksfor financialinstitutionspointstoanewroleoffinancialregulators(including centralbanks)insettingtheincentivescorrectly(Martini,2022)andreconcilingtheeconomicandfinancialperceptionofwater-relatedrisksand theirsectoralandpotentiallysystemicimplications.Untilfurtherregulatory initiativesaretaken,itisunlikelythatthevastmajorityoffinancialflowswill starttoconsiderandreflecttheissuesrelatedtowatersecurityandsustainable growth.

Second,Martini(thisvolume)explainshow—inseveralworldregions— thecombinationofprudentialregulationsandcreditderegulationforces banksto“originateanddistribute,”makingfinancingthroughmarkets (bonds)muchmorecommonthanfinancingthroughdebt(loans).Thisshift infinancingmechanismsisconsequentialforawiderangeofwater-related projects,whichtendtobelessadaptedtomeettheexpectationsoffinancial markets,becausetheydooftenlackastrongrevenue-generatingcapacity.In suchacontext,opportunitiestoscaleupfinancingforwater—inparticular throughdebtfinance—willremainlimited,despiterepetitivecallsforaction fromtheglobaldevelopmentcommunity;thissituationiscompoundedby thesometimespoorcreditworthinessoftheborrowingentityforwaterrelatedinvestments(sovereign,city,utility,etc.).Suchopportunitieswillneed tofocusontheleveloftransactions,asatransformationofthefinancial systemisoutofreach.Still,theglobalnewdrive,acceleratingrapidly,for climateandgreenfinancemayleadtomoreconduciveenvironmentsand createnewsuitableinstrumentsandarrangements.

Waterprojectsarediverseanddistinctassetclasses(Alaerts,thisvolume)will havedifferentcapacitiestoaccessfinance.Thedistinctrisk-returnprofile andprojectattributesofeachinvestmentshouldinformtheappropriate