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Water: Unclogging the finance

How to improve water systems is one challenge; financing them is another. Public authorities in most countries play the main role in implementing and funding water infrastructure, but it is a model that is under increasing pressure, with government budgets stretched and banks still prudent about issuing credit. 

There is no generic funding model that can be applied to every need; the sheer diversity of water infrastructures and sources of financing need to be identified, scanned and tapped in line with particular investment types and needs.

There may be small-scale projects initiated by local entrepreneurs, or large infrastructures that serve multiple purposes, such as energy and heavy manufacturing. Some investments may involve green ecosystems to supply, store or filter water.

Not only will these infrastructures have different financing needs, but will access funds in different ways, for instance through capital markets, loans, funds, public expenditures, etc.

Take large dams and large reservoirs. These are costly, long-term affairs. The Three Gorges Dam project in China, for instance, could cost over US$22 billion, according to government estimates, including construction, relocation of residents and financing costs. Moreover, cost recovery is not expected to occur for 10 years after full operation starts.

Such major projects tend to be financed by major development banks such as the Asian Development Bank and World Bank, and institutional investors such as pension funds. The sources for long-term financing are expanding, with the emergence of sovereign funds and philanthropists, as well as of new groups like the Chinese-led Asian Infrastructure Investment Bank, which opened in March 2015.

But before leaping into major undertakings such as dams, policymakers must answer several questions. Will the construction lock them in and still be valuable in 25, 50 or 100 years’ time? After all, there are several cases of investments that have fallen into disuse or underuse, such as a desalination plant in Sydney that was built during a severe but temporary drought, and dams in France’s Loire Valley that are now being decommissioned at some cost. Had a more forward-probing “value options” approach been used in planning them, they might not have been built in the first place.

There are other basic questions that can be expensive to overlook, such as whether the gleaming new waste-water treatment plant fits the wider network, and will not lead to a cascade of background costs to make it work properly. Getting such sequencing right can save money and create more value.

Not every water project has to be major. In fact, cheaper, more modest projects can be more effective, more flexible and far more easily financed, too. Policies that encourage households to buy their own water-saving appliances, for instance, or farmers to invest in water-efficient crops and irrigation techniques not only are cost-effective but offer flexibility in the face of climate change.

In fact, efficiency and flexibility gains should be systematically mainstreamed into any water-wise policies anyway. Moreover, when a problem emerges, policymakers should act sooner rather than later to avoid accumulating costs for the future: had São Paolo acted five years ago to address water shortages, the solutions then might have been more affordable than today. Likewise, properly maintaining existing water assets, such as pipes, can save money in the long run, as OECD countries are finding out.

Innovative “green” solutions can also offer a cheaper route than costly, heavy “grey” approaches. Cities such as Philadelphia are discovering this: rather than build a new sewage treatment plant to handle storm water run-off from streets and car parks, for a fifth of the cost they are looking at replacing hard surfaces with sponge-like porous ones, which storm water can percolate through.

To attract financing, what matters is for policymakers to put forward truly bankable and appropriate projects that are capable of attracting a variety of suitable investors. Financiers have a “risk and reward” mentality, and will generally go for low returns only if they are thought to be safe and constant, and back riskier investments for higher returns.

Policymakers should remember that private firms involved in water systems may have funding of their own to bring to the table. They would do well to create the innovative business and regulatory environment that allows them to enter the fray, as this would bring not only technical and managerial skills, but some very useful financial capital as well. Rory J. Clarke

For more information on financing and water, contact Xavier.Leflaive@oecd.org

Water: Fit to Finance? Catalysing National Growth through Investment in Water Security, report by High-Level Panel on Financing for a Water Secure World, a joint initiative by the OECD and the World Water Council

OECD (2012), A Framework for Financing Water Resources Management, OECD Publishing, Paris.

More:

OECD Programme on Water Governance

Nurturing our water empire

Water governance at stake

OECD Observer articles on water

wwww.oecd.org/water

7th World Water Forum 2015

©OECD Observer 302 April 2015