Catalyzing Private Sector Investment Through a Water Nexus Approach

Some of the takeaways from the March 2023 reports of the Global Commission on the Economics of Water (GCEW) were also discussed. Key points are outlined below:  

1. Dichotomy Between the Value and Price of Water. The value of water is based on its various attributes, as a human right, a natural resource, and a commodity, amongst others. While the value of water is high as a vital resource, our economic systems (pricing) do not adequately account for its true value. Our understanding of the complexity and inter-linkages across our water systems has drastically improved since the first UN Water Conference nearly 50 years ago, and the public perception of water as a “public good” needs to change. More than an economic challenge, this will require significant efforts to overcome cultural barriers and public attitudes. The GCEW refers to the water as the global “common good”, which “offers a holistic view of the economic value of water by capturing its varying definitions not only as an outcome but as a process of addressing the associated scarcity and equality challenges.” In financing sustainable water systems, it is therefore important to capture both market and non-market value of water. Market values of water (e.g., irrigated commercial crops, urban water supply) are more readily quantified and prioritized over non-market values (e.g., access to safe and affordable water, cultural and environmental justice, socio-political value). This in return prioritizes certain types of investments (e.g., grey infrastructure with a high financial return), while hampering progress on the Sustainable Development Goals (SDGs) that connect to nature and ecosystems (e.g., green infrastructure for nature-based solutions such as wetland restoration, watershed management). When the full economic costs (including external costs) are not considered, this contributes to the degradation of water resources. We must rethink the value of water, and price it appropriately, so it is used more efficiently in every sector and more equitably and sustainably across countries (with targeted support for the poor). 

2. Pricing and Costing of Water in NDCs and NDC Investment Planning. About 90% of all countries’ Nationally Determined Contributions (NDCs), prioritize action on water for adaptation and nearly all National Adaptation Plans (NAPs) include water and sanitation as a priority sector (UNEP 2022). But including targets for water in these commitments is only part of what is needed. Implementation of climate commitments and the requisite financing to do so are key to ensuring these targets are met. If you can price water, you can finance water. Water pricing involves setting a tariff for water consumption, and water costing involves calculating the full cost of water production, including the environmental and social costs, to ensure that the price of water is fair and reflects its true value. Proper water pricing can inform costing of NDCs and NDC investment planning and improve both the investment in water projects as well as the efficient and sustainable use of water. It is critical for a country to lead those efforts in consultation with the private sector stakeholders representing the relevant segments of the water value chain. 

3. Water As an Organizing Principle for Sustainable Development. We cannot solve climate change or meet the SDGs if we do not solve water. Water is an organizing principle for sustainable development (beyond just SDG6), and a central consideration in economic decision-making. There is no economic growth or food security without efficient use of water. Water is the third most important sector for which support is requested from developing countries through the NDC Partnership, and many other sectors are critically dependent on water. The implementation of water-related targets remains a challenge. A key obstacle cited at the roundtable is the limited integration and coordination of approaches on water among national finance, water and sectoral ministries.  

4. Blended Finance to Scale Private Finance in Water Value Chain. There is substantial scope for the participation of both public and private investors throughout the water value chain. Multi-stakeholder partnerships are critical for enabling investments at scale. Many of these require new modalities of public-private partnerships or other forms of risk mitigation. Multilateral development banks and development finance institutions should also help reduce perceived risk of investments in developing countries through bridging the information gap. During the Roundtable, participants reviewed a blended finance platform model for financing water projects, with support from the public sector stakeholders (e.g., in the form of concessional funding, credit engagement, risk sharing, and government support). This type of financing model would allow scaling, by moving away from a project-based approach to a platform-approach for a portfolio of water projects in a single country or even in multiple countries.  The participants also reviewed examples from water supply projects in Rwanda and Jamaica, in which the viability gap funding was used to address the non-market value (i.e., ensuring that all beneficiaries have affordable access to water), by making up the gap between what is collected from households in vulnerable communities and the marginal cost of supplying and distributing water.  Replicating and scaling these models across countries can help drive investments in water projects at scale. 

5. Other Innovations to Mobilize Private Finance at Scale. The participants also discussed the importance of creating markets for water and innovative solutions being developed by traditional financiers, that could be replicated and scaled. Participants reviewed, in particular, the proposal for creating and monetizing resilience benefits of specific agriculture projects, involving smallholder farmers, as a new financial tool to unlock private finance. Participants also discussed the need for creating a new water asset class for institutional investors and touched upon some other examples of emerging innovative solutions, including debt-for-water swaps, water bonds and insurance products.  

With initial financial support of EUR 5 million from the Netherlands, the NDC Partnership will provide technical assistance to countries to enhance the integration of water in formulating, updating, financing and implementing their NDCs. Specifically, the Partnership will provide guidance to countries on opportunities to strengthen NDC implementation through a water-climate nexus approach. Based on country requests, the Partnership will also help coordinate support from Partnership members. support countries to reduce their climate vulnerability related to water and increase public and private investments in water-nexus opportunities.