Financing Investment in Water Security: Recent Developments and Perspectives

Front cover
Half title
Title
Copyright
Contents
Contributors
General introduction
A new conversation on financing water
A new context for the discourse
Ambition and scope of the book
Cross-cutting messages and ways forward
A strong economic case has failed to translate into financing flows at scale
Available data and analytical tools are evolving but still fall short of being fit for purpose
The way the financial markets and industry operate today hampers water finance
Opportunities exist to scale up transactions that contribute to water-related investments
Bankability needs to be reconciled with other policy objectives, including equity
Political economy is pivotal to make financing water happen where it is most valuable
The editors of this volume
Disclaimer
References
Part I Investing in water and growth: A global perspective
Chapter 1 If not now, when? Converging needs for water security, systemic change, and finance and investment
1.1 Water in the economy: multiple objectives and competing needs
1.2 Priorities: evolving global and national water agendas
1.3 Foundations: the investment case for water
1.4 Transitions: failing assumptions of plenty
1.5 New imperatives: adapting to climate change and the new systemic mission
1.6 Way forward: toward a new financing and investment agenda for water
References
Chapter 2 Water, physically connected yetinstitutionally fragmented—Investing in its strategies, assetclasses, and organizations
2.1 Introduction
2.2 Water and land: Investing productively, recognizing limits, seeking efficiencies
2.2.1 Water and land are intimately connected, pose limits
2.2.2 Toward investments that are productive and sustainable
2.3 Water-related assets, operational practices, and institutional architectures
2.3.1 Water supply, wastewater management, and sanitation services for the public
2.3.2 Industrial water
2.3.3 Flood and drainage management
2.3.4 Agricultural water
2.3.5 River basin management organizations
2.4 Value, cost, and price—sometimes aligned, oftennot
2.4.1 Value, cost, and price
2.4.2 The value of water (in)security
2.4.3 Financial assets values grow vulnerable to systemic water-related risk
2.4.4 Large financing needs but a challenging business case
2.5 Conclusions
References
Chapter 3 Financial structuring: key tool for water sector investments
3.1 Introduction
3.2 Financial structuring
3.3 The project cycle
3.3.1 Introduction
3.3.2 Development phase
3.3.3 Commercial and contractual close
3.3.4 Management and operations
3.3.5 Ownership
3.3.6 Finance and investments
3.3.7 Financial close
3.3.8 Construction
3.3.9 Operations
3.4 Comparison with other sectors
3.5 Conclusions
References
Chapter 4 Financing instruments and the ecology of the financial system
4.1 Introduction
4.2 The ecology of the financial system: macroaspects
4.2.1 Emerging economies lack access to global currencies
4.2.2 In advanced economies, capital markets have overridden lending finance
4.2.3 As a result, long-term credit is less available for water projects
4.2.4 Since the 2008 financial crisis, debt is cheap, but capital is expensive
4.3 The ecology of the financial system: microaspects
4.3.1 Public finance
4.3.2 Corporate finance
4.3.3 Project finance
4.4 Constraints on the financing of water investments in advanced economies
4.4.1 Borrowing capacity of some sovereign borrowers
4.4.2 Water utilities have limited access to long-term finance
4.4.3 Uncertainty and high financial returns increase the cost of capital for project finance
4.5 Constraints on the financing of water investments in emerging economies
4.5.1 Scarce access to hard currency limits technology access
4.5.2 Lack of long-term funding increases the cost of domestic projects
4.5.3 Water is not always prioritized in public infrastructure spending plans
4.6 Perspectives offered by the development of sustainable finance
4.6.1 Global investors are increasingly seeking to invest sustainably
4.6.2 The EU taxonomy and the “Do no harm” concept: raising the profile of water in nonwater investments
4.7 Conclusions
References
Suggested additional reading
Chapter 5 Critical disconnections between donor and domestic realities
5.1 Introduction
5.2 Project definition
5.2.1 Differences in types of “projects” needing financing
5.2.2 Objection to “privatization”
5.2.3 Differences in understanding project solutions and appropriate technologies
5.2.4 Unintended or unexpected conditions or consequences
5.3 Financing considerations
5.3.1 Appropriate financing techniques
5.3.2 Selection of the currency in which financing occurs
5.3.3 Blended finance
5.3.4 Cost of financing
5.3.5 Financing terms should match the useful life of the project
5.4 Domestic issues
5.4.1 Ownership of water
5.4.2 Political and governmental interests
5.4.3 Appropriation of projects and concepts
5.4.4 Tribal, ethnic and religious issues
5.5 Conclusions
Reference
Part II Investment Needs and Financing Challenges
Chapter 6 Characterizing financing needs and financing capacities in different regions: a global perspective on water-related financing flows and drivers for investment needs
6.1 Introduction
6.2 The need for water supply and sanitation assets and trends in investment
6.2.1 The economic case for water-related investment
6.2.2 Types of water supply and sanitation systems
6.3 Current investment and financing flows for WASH
6.4 Drivers for and scale of future investment needs
6.4.1 Drivers for water supply and sanitation investment needs with existing extensive service provision
6.4.2 Drivers for investment in water supply and sanitation where there is limited service provision
6.4.3 Innovation and how this might offset rising costs
6.5 Conclusions
References
Chapter 7 SDG 6 global financing needs and capacities to ensure access to water and sanitation for all
7.1 Introduction
7.2 Studies assessing financing needs to cover the capital costs of achieving SDG6
7.3 Methodologies used by costing studies
7.4 Global spending needs
7.5 Regional spending needs
7.6 Estimated financing gaps
7.7 Affordability
7.8 Conclusions
References
Chapter 8 Financing water for growth and development in Africa
8.1 Africa’s water finance challenge
8.1.1 Water resources and uses in Africa, now and in the future
8.1.2 Two compounding factors: COVID-19 and climate change
8.1.3 Climate finance as an opportunity
8.1.4 The predominant role-yet at a low level-of domestic finance for water
8.2 Transforming Africa’s water finance and investment outlook
8.3 Opportunities to narrow the finance gap
References
Chapter 9 Financing water security in Asia
9.1 Background and rationale
9.2 Financing water security in the Asia Pacific region. Needs, capacities, and gaps22All data and projections in this section refer to AWDO, 2020 \(ADB, 2020\). They were developed and compiled by the OECD \(see OECD, 2021\) building on a range of data sources, which are acknowledged in the figures. Further analyses and developments for this chapter remain the authors’ own and may not reflect the opinion of the OECD Secretariat, OECD member states and the Asian Development Bank.
9.2.1 Drivers for investment in water security in Asia and the Pacific
9.2.2 Projected investment needs
9.2.3 Prevailing sources of finance
9.3 Market-based mechanisms and valuation tools to finance water-related investments in South-East Asia and China
9.3.1 Shandong Green Development Fund (SGDF)
9.3.2 ASEAN Catalytic Green Finance(ACGF) Facility
9.3.3 The rise of eco-compensation in the PRC
9.3.4 Leveraging investments in water services through gross ecosystem product accounting
9.4 Conclusions
References
Chapter 10 Financing mechanisms for water treatment projects in China
10.1 Introduction
10.2 Background on China water situation and relevant government entities
10.3 Various types of water projects
10.4 Development of sewage treatment in China
10.5 Funding for projects
10.6 Water conservancy projects using build-transfer modes
10.7 Emergence of public-private partnerships
10.8 Rooting out low-quality projects
10.9 Equity market for funding water projects
10.10 REITs to fund infrastructure projects
Chapter 11 Financing needs and capacities for the water supply and sanitation sector in the European Union
11.1 Introduction
11.2 The EU water sector-contextualizing investments in the EU
11.3 Assessing investment needs in the EU-methodological and data issues
11.4 Financing water supply and sanitation in Europe-the state of play66This and the subsequent sections build on recent collaboration between the OECD Environment Directorate and the European Commission-DG Environment on the issue. For more detailed information on data, analyses, and method, please refer to OECD \(2020a\).
11.5 Financing water supply and sanitation in Europe-Projections to 2030
11.6 Options to close the financing gap for water supply and sanitation in Europe
11.7 Looking ahead: renewed ambition for water supply and sanitation in Europe
11.7.1 Maintaining high levels of water quality
11.7.2 Managing water quantity
11.7.3 Water supply and sanitation and the circular economy
11.7.4 Water supply and sanitation and climate change mitigation
11.7.5 Digitization
11.8 Conclusions
References
Part III Financing models in practice: Case studies
Chapter 12 Introduction to the water financing landscape: Select proven and emerging approaches
12.1 The water financing landscape: a brief introduction
12.1.1 A diversity of investment types and financiers
12.1.2 A diversity of financing approaches
12.1.3 A diversity of investor types
12.2 Select proven models and emerging approaches: insights on prerequisites for replication
12.2.1 Proven models and key prerequisites
12.2.2 Emerging approaches
12.2.3 Key enabling conditions for scaling and adaptation to new contexts
12.3 Reflections on future developments: a role for decision-ready data to inform financing
References
Chapter 13 Water infrastructure financing: the experience of the United States
13.1 Introduction
13.2 Federal policy support for local water infrastructure improvements
13.2.1 Early history
13.2.2 Clean Water Act amendments jump-starts state revolving fund models
13.2.3 National direct lending vehicle added to cover financing gaps, accelerate private capital investment
13.3 State revolving fund models: capabilities and designs
13.3.1 Underwritten with federal and state capital contributions
13.3.2 Financial assistance parameters
13.3.3 Lending to disadvantaged communities
13.3.4 SRF model adaptability: delivery vehicle for economic stimulus and disaster recovery
13.3.5 Federal-State Revolving Fund governing partnership
13.3.6 State operational frameworks
13.3.7 Models adopted; structures and public capital market relationships
13.3.8 Use of master financing indentures
13.4 Water Infrastructure Finance Innovation Act(“WIFIA”) National Direct Lending Model
13.4.1 Creation under federal authority
13.4.2 Model design
13.4.3 Unique benefits
13.5 Context for the successful adoption of US water finance models
13.5.1 Legal and governance frameworks
13.5.2 Utility operational capacity/financial viability
13.5.3 US public finance markets
13.6 International context
13.6.1 Value proposition
13.6.2 Credit enhancement vehicle and least cost capital provider
13.6.3 International adoption and barriers
13.6.4 US water model replication versus “Bespoke” adaptation strategies
13.7 A US water model adoption checklist
References
Chapter 14 Mobilizing private capital for large-scale ecological restoration and conservation: Insights from the US Experience
14.1 Introduction
14.2 The history of mitigation banking policy development
14.3 What is an ecological credit?
14.4 How credits incentivize investment: alignment of interests
14.5 Case studies
14.5.1 Ecosystem Investment Partners
14.5.2 Mitigation bank
14.5.3 Performance-based contracting
14.5.4 Resource Environmental Solutions
14.5.5 Westervelt
14.5.6 Looking forward
14.6 Lessons learned
References
Chapter 15 Tapping local capital markets for water and sanitation: the case of the Kenya Pooled Water Fund
15.1 Introduction
15.2 Background
15.3 KPWF structure
15.4 Challenges to establishing a revenue-based long-tenor debt financing facility in Kenya
15.5 WFF/KPWF business approach to successfully accessing private-sector financing
15.5.1 Project and loan development support activities
15.5.2 Lessons learned about project development
15.5.3 Transaction-related activities for issuing the first pooled bond
15.5.4 Lessons learned about transactional services
15.6 KPWF's comparative advantage
15.7 Further development of local capital market financing
Annex Detailed steps in transaction-related activities to support issuing the first pool bond
References
Chapter 16 Investing in catchment protection: The Water Fund model
16.1 Introduction
16.2 Principles and rationale
16.3 Application to catchment protection
16.3.1 The case of Fondo para la Protección del Agua(Quito’s WF-FONAG)
16.3.2 Water Funds in Latin America: state of play
16.4 Economic benefits and return on investment
16.5 Trends: cobenefits, water funds beyond source water protection?
16.6 Conclusions
References
Chapter 17 Leveraging private finance for landscape-level impact: the growing role for bankable nature solutions
17.1 Introduction
17.1.1 The opportunity for bankable water solutions
17.2 Support for bankable water solutions
17.3 Bankable projects case studies
17.3.1 Agricultural and industrial water usage
17.3.2 Water supply networks and leakage prevention to curb nonrevenue water
17.3.3 Restoration of freshwater ecosystems
17.4 Case study: Büyük Menderes river basin
17.4.1 Background
17.4.2 Investment context
17.4.3 Project description
17.4.4 Investment structure
17.4.5 Business model and revenue-generating activities
17.4.6 Risks and safeguards
17.4.7 Lessons learned
17.5 The roles of the stakeholders in financing partnerships
17.5.1 Corporates
17.5.2 Financiers
17.5.3 Governments and regulators
17.5.4 NGOs
17.6 Conclusions
References
Index
Back cover