Financing transboundary water investments – from public good to shared interest
This blog by Belynda Petrie, OneWorld Sustainable Investment, was originally published on the One World Group website on 25th August 2019.
In many regions around the world the impacts of climate change are putting and will put water resources under strain. Promoting water security and equitable access to water resources under climate change is particularly challenging in transboundary river basins that serve and thus require investments from multiple nations.
Informed by the outcomes of the Blue Peace Index Research Programme, an action-oriented panel at World Water Week discussed the central challenges and opportunities of transboundary water resource management.
The panel explored the persistent issues of inclusive water resource development, evidence-based decision making in transboundary river basins, and the difficulties associated with financing transboundary water investments.
This thought piece briefly considers the financing aspects, seeking to highlight what River Basin Organisations (RBOs) and their riparian countries can do to alter this situation and to open up opportunities for innovation-led transformation.
The Blue Peace Index Research Programme
Established to examine the extent to which countries and river basins are managing their shared water resources in a sustainable, equitable and collaborative manner, the Blue Peace Index is a tool for improving transboundary water cooperation and equitable water management. It does this through enhancing the understanding of decision makers of the challenges and opportunities associated with cooperative resource management, providing pointers for continuous improvement. In its first phase, the index is underpinned by research across five transboundary basins around the world – Amazon, Mekong, Sava, Senegal and Tiger-Euphrates (Economist Intelligence Unit, 2019).
Belynda Petrie provides counsel to the Programme, as a member of the panel of experts for the continued development of the Blue Peace Index.
Financing transboundary water investments under-performs by some margin on the Blue Peace Index. Business as usual prevails – there is not much innovation around how stakeholders and investors are tackling project finance, and the private sector is still significantly under-invested.Yet, without private investment and participation, the water sector financing deficit can only widen, and as a result, lost with it are a host of opportunities for inclusive resource management, employment and enterprise development in the sector.
The critical question that must therefore be answered is: What can River Basin Organisations (RBOs) and their riparian countries do differently to attract private sector investment? Climate change, sustainable development and increasingly scarce water resources leave no option but for substantial, and broad, private sector investment in, and engagement with, the water sector. However, the deficit is not just one of finance. Arguably, cooperative management for water security for all also needs private sector skills and expertise.
Achieving this necessitates that RBOs, typically comprised of public sector officials, learn to think like the private sector. The way RBOs articulate and communicate water security, and how they establish investment criteria for it, should synchronously reflect public and private sector interests.
Currently there is a discord between the private and public sector’s understanding of, interests in, and engagement with, the water sector. This discord is a function of the belief held by both RBOs and governments that the private sector perceives water security in the same way as they do.
To synchronise public and private sector water interests and investment appetites, RBOs can address three immediate areas:
- they can play a significant role in redressing the way water is positioned in societies and economies;
- they can leverage public finance and use this to secure private finance; and
- they can de-risk water sector investments for the private sector.
Reposition water – as a public good, water is not an interesting investment
Water is treated as a basic human right in constitutions around the world. It is defined as a public good, meaning that as a commodity or service, it is provided without profit to all members of society. While its provisioning can be by government or a private sector entity, the for-profit interests of the private sector are at odds with this treatment of water and its services. Moreover, the private sector is a member of society, also perceiving water as its public good.
While locating water as an economic good has gained much traction as a concept in the public sector, the overarching discourse is still confusing. More and more frameworks for national or regional water security are emerging at different scales around the world and this is encouraging. Yet, a framework will seamlessly present actions for ensuring equitable access (to sufficient water) for all, whilst also promising financial sustainability, and pricing for the true cost of water, as if these were inherently reconcilable.
Frameworks neglect to address or mention how equitable access for all, on one hand, will be reconciled with pricing for the true value of water, or define what financial sustainability means, and for whom, on the other. Consequently, private sector stakeholders fail to identify their roles and opportunities in attaining water security and continue to abstain from making significant investments.
Position water as a serious investment option for the private sector
RBOS and riparian countries can play an instrumental role in reorienting this discourse, within the contexts of their river basins. They can provide thoughtful definitions for water security and inclusive water resource development and they can make recommendations for Member States to differentiate between water services for those that under-consume because they are too poor, too remote and too vulnerable, and those that consume enough and can afford to pay the true costs of water. Moreover, RBOs could seek to deepen their understanding of what unlocks and what blocks private sector investments, at scale, in transboundary contexts.
RBOs can understand how to align private and public sector interests. For example, one area where the private sector has made significant water investments, is in hydro-electric power (HEP) generation plants. There are points of alignment between private and public sector interests in HEP. Governments want the electricity for socio-economic development, and private sector investors in the electricity sector seek the new market opportunities yielded in countries with low electricity services.
RBOs can learn important lessons from HEP investment experiences, to position water as a core private sector investment opportunity
Leverage public finance to engage the private sector
RBOs have the advantage and can leverage public finance to engage the private sector.
In today’s terms, the private sector is, in the main, an entry level investor, particularly in transboundary water resource development. The private sector locates water resource management in the public domain, most often acting in a compliance role, and it has little knowledge or understanding of how the sector operates to deliver reliable services to all members of society.
Consequently, the private sector seldom recognises or understands the tradeoffs that are increasingly involved in ensuring inclusive and equitable water security, nor does it seem to recognise its own role in making necessary tradeoffs. As a consumer it does however demand water security. The private sector generally perceives water as being an input to, or peripheral to its core business.
The private sector will display more investment interest if water is core, or close to core business, and if the investment climate is right. The RBOs are central to creating the right investment environment. They are particularly well positioned to leverage concessional finance from public institutions, and to use this to facilitate private sector entry into water investments. They are also in a position to strengthen their legal and institutional base, and through extending a range of financial instruments, such as revolving funds, Public Private Partnerships (PPPs) and joint finance mechanisms.
Using their leverage in this way allows RBOs to de-risk investments for the private sector – essentially an entry level investor into transboundary water resource development. The perceived risks of transboundary investments include sovereign interests, political and economic instability, or ‘unevenness’ between riparian countries, and legal basin agreements. These agreements tend to predate the prevalent drivers of sustainable development, climate change, population growth, urbanisation, and competing demand for the resource. To attract new but substantial investors, governments need to open up the water space, creating opportunities and forging sustainable and equal partnerships. Because investing in the public space is considered high risk, particularly in transboundary situations, guarantees coupled with incentives from the government as a co-investor and enabler, are required. As an entry level investor, the private sector is likely to be more cautious, and generally more risk averse than when acting in its established sphere of business.
De-risking investments for the private sector, at least until transformation of the sector toward tangible PPPs is visible, is a critical condition for attracting their investment at scale in the water sector. This includes creating jobs, developing skills and stimulating small to medium enterprises in the sector, parallel to, and in support of, public water distribution services and utilities.
Use RBO leverage to de-risk private sector investment
RBOs can deploy their leverage in a number of ways:
- Leverage concessional finance from donors or Development Finance Institutions (DFIs) and use this to establish credit lines or guarantees that enable private sector investments;
- Strengthen their legal and institutional base through establishing a Trust Fund, as seen for example in the Nile River Basin, a mechanism that has unlocked significant flows of mainly public finance; and
- Extend the range of financing mechanisms, for example Endowment Funds, revolving funds, PPPs and joint financing mechanisms
Best practice? Lessons from two African river basins
In the Senegal River Basin in West Africa, the Senegal River Basin Development Organisation (OMVS) used donor contributions and loans, guaranteed by export credit agencies, as concessional finance to leverage $620m to finance two dams. At the time, OMVS tried to use this basis to secure private investment for a hydropower plant, but were not successful.
They responded by strengthening their legal and institutional arrangements by establishing a special purpose vehicle, in the form of an inter-state public company, for the management and exploitation of the Manantali Dam. This enabled the interest of Eskom Enterprises, a state-owned South African entity that in many ways, made decisions as if it were a private investor. Eskom was then awarded an $82m contract to operate and maintain the power station. A key lesson from this experience is the amount of groundwork needed to enable private sector participation – at scale – in transboundary water investments (ODI, 2002).
A recent financing innovation, involving RBO leverage, is at an advanced stage in the Cubango-Okavango River Basin (CORB) in southern Africa, where an endowment fund for the basin has been endorsed by ministers from the three member states, with the aim of providing long-term programmatic financing for livelihood improvements and sustainable use actions.
The fund is established to enable consistent withdrawals from invested capital. As such, it combines a sinking fund – for gradually repaying debts or replacing retiring assets – and a capitalisation (cap) fund, for a diverse range of equity-related investments through expensing the costs of the investment over the life of the asset. This is an attractive structure for investors with low risk tolerance:
- investor comfort is provided through a fund that is typically managed through a strict set of long-term guidelines; and
- larger cap funds typically offer steady returns and can usually withstand a falling stock market.
Although cap funds can be more expensive to manage, with lower growth, they limit the risk for entry-level investors, such as the private sector, into transboundary water. The design of the Fund builds in a ‘demonstration’ period, to establish a track record before it seeks funding from corporate and impact investors. In this way, it aims to reach its $200 million target over three investment phases.
The RBOs and the Blue Peace Index
The Blue Peace Index is an important instrument for continuous improvement, particularly on issues that continue to be hard to navigate, or tough indicators – transboundary private sector investment being among the main ones. Achieving maximum impact – measured in terms of step changes in collaborative management – will rely on identifying best practice for tough indicators, and building collaborative partnerships and communities of practice for blue peace. Both can be done in future phases of the development of the index.
In the meantime, RBOs can use the tool to self-assess, even establishing informal communities of practice to peer review each other’s progress. In this way, they can learn from incremental successes, and mistakes, on working with the private sector on investments and benefits within and across borders.