Thursday, January 20, 2022

Innovative financing mechanisms pivotal to climate change adaptation, water-related Sustainable Development Goals

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Diplomat Magazinehttp://www.diplomatmagazine.eu
DIPLOMAT MAGAZINE “For diplomats, by diplomats” Reaching out the world from the European Union First diplomatic publication based in The Netherlands. Founded by members of the diplomatic corps on June 19th, 2013. "Diplomat Magazine is inspiring diplomats, civil servants and academics to contribute to a free flow of ideas through an extremely rich diplomatic life, full of exclusive events and cultural exchanges, as well as by exposing profound ideas and political debates in our printed and online editions." Dr. Mayelinne De Lara, Publisher

By Ewoud Kok

Accessing capital is a key challenge for efforts to increase climate change resilience and to fulfil Sustainable Development Goals, including No. Six, which calls for ensuring availability of water and sanitation for all. Business as usual has proven insufficient to mobilize financing of water investments: there is an urgent need to enhance the knowledge and capacity of both the water and finance sectors. A course for water and financing professionals at IHE Delft Institute for Water Education, established in close cooperation with private and public financial institution, is among initiatives aiming to meet the need.  

Securing water for an expanding population is a growing challenge compounded by the effects of climate change and rapidly deteriorating ecosystems.

Several locations around the world face severe water stress due to overexploitation, pollution and climate change.  According to UN data from 2020, 2 billion people lack access to safely managed drinking water and 3.6 billion people lack safely managed sanitation. Climate change leads to floods and droughts that gradually exacerbate the situation. Most of the world’s wastewater – 80 percent flows back into the ecosystem without being treated or reused, and 70 percent of the world’s natural wetlands have been lost, including significant loss of freshwater species.

Scientists predict that by approximately 2050, the world will transition from a predominantly water-abundant place to a predominantly water-scarce one – a serious challenge as water is central to sustainable development and our very survival.

Capital to finance an expanding water agenda

Finding capital to finance the water investments needed is a tough challenge. The public budgets that constitute the main contributor to water finance are increasingly constrained, says Dr Guy Alaerts, an Emeritus Professor at IHE Delft and former World Bank Program Leader who helped develop IHE Delft’s new four-day course designed to help fill a knowledge and capacity gap that hinders water financing.

“Emerging markets and developing economies need twice to four times as much capital as currently available if they are to meet the SDGs. Climate adaptation will add to this, so we face a gap of tens of billions of dollars per year. Commercial finance will need to fill the financing gap, but concerns about the high-risk profiles of many water investments are an obstacle,” he said. “Deals are considered too small or too risky, and the creditworthiness of water agencies and municipalities is weak.”

Blended finance – which combines public and private investments – and better use of intermediary institutions such as the Netherlands Water Boards Bank and the U.S. Environmental Protection Agency can offer solutions, Alaerts said.

The water sector is fragmented and organised in sub-sectors such as drinking water supply, wastewater collection and treatment, irrigation and drainage, and flood protection. Related infrastructure falls under different administrative authorities and government departments, leading to a variety of policies. This, in turn, requires different approaches for cost recovery, funding and financing and a high level of understanding of the mechanisms, requirements and rigour in the financial markets – something water professionals often lack.

On the other hand, the financial sector is diverse, comprising public and private banks, pension funds, insurers, sovereign wealth funds, corporations, private wealth and charities, each with various interests, investment strategies, and each falling under different regulations and mandates.

Through equities, loans, bonds and other instruments, investors can channel capital to finance agency budgets or specific projects. New, innovative products or mechanisms such as “green bonds” and cheaper “climate finance” target water and climate adaptation investments. Arrangements such as public-private partnerships, local development associations and Special Purpose Vehicles can pool finance, mobilize specialist knowledge, de-risk investments, and help negotiate mutually beneficial deals.

Still, the water financing needs by emerging and developing economies are far from met. Water professionals need more skills to better address water finance challenges.

Capacity development

IHE Delft’s new course, offered for the first time in July 2021, helps water professionals broaden their understanding of the many facets of water investment financing, said course coordinator Dr Yong Jiang, an IHE Delft water and environmental economist.  

“This is an area that has not been addressed by existing water-related education and training programs across the globe. This course covers key concepts, theory, and practical knowledge as well as exercises related to water investment financing to help participants develop skills to fill the gap,” he said. 

Nenad Pantic, a Hydraulic Engineer from Serbia with over 15 years of experience in the water sector in Serbia and the Middle East, took part in the first course.  He said his experiences affirm the capacity gap: “We can find engineers who are good at their job, and very experienced people in the financial area, but it is not easy to find a link between these two sectors,” he said, adding that this leads to problems.  “We always come to the main question of who funds it and how it will be funded. And this is the point where everything is clogged.”

The course focuses on four themes: water investment needs and challenges, economics of water finance, financial resources and bankability, financial instruments and innovations, and practices for engaging business and investors.

Course participant Frank Tibben, Senior Asset Manager for Waternet, a water cycle company in the greater Amsterdam region, and Program Manager for its international non-profit organization, World Waternet, joined the course to gain a better understanding of innovative financing mechanisms so that he can create more impact.

“Focus areas in my work, like climate adaptation, circular economy, digitalization, energy transition and the overarching Sustainable Development Goals, ask for a strong multi-disciplinary approach where public and private organizations are brought together and innovate in the way they finance their investments,” he said. “For public water organizations, it is essential to connect these disciplines and work towards overall financial sustainable impact on the long term.”

The course combines lectures with a demanding group assignment, in which participants develop a financial plan for a water project of their choice. Participants define and characterize investment needs, identify finance, build a financial plan, and discuss strategies to engage businesses for implementation. The participants in the July course, held online, chose to work on projects ranging from drinking water supply to flood risk management.

Mr Tibben said the variety of practical examples shared by course lecturers from knowledge institutes as well as public, private and non-governmental organizations benefitted participants. “They offered an in-depth insight in the important field of financing investments. It became clear that bridging the financial gap in the water sector is crucial to reach the Sustainable Development Goals,” he said.  “The water sector is still seen as high-risk for investors, compared to, for example, the energy sector. The course is supportive in making this quite abstract topic more practical for professionals like myself.”

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For information about upcoming courses – – if Covid-19 restrictions permit, to be held  the IHE Delft campus in the Netherlands, please see: https://www.un-ihe.org/financing-water-investments-water-professionals

About the author:

Guy Alaerts, IHE Delft

Guy Alaerts has been Professor at IHE-Delft International Institute for Water Education since 1986, first in Water Engineering and thereafter (part-time) in Knowledge and Capacity Development.

He was also Program Leader at the World Bank 1996-2015 for policy and financial analyses and for investments in irrigation, water supply, flood management and (international) river basin management across the world.

He has published extensively and advised numerous UN initiatives, governments and financing institutions.

Yji Jiang, IHE Delft

Dr. Yong Jiang is a staff water and environmental economist at IHE Delft Institute for Water Education in the Netherlands. He previously also worked as researcher, assistant professor, and consultant across academia, government agencies, and international organizations including VU University Amsterdam, Michigan State University, the National Science Foundation of the U.S., and the World Bank. 

Trained as an applied economist also with background in planning and engineering, Dr. Jiang has expertise and rich experience in integrated, quantitative approach to studying environmental and natural resource issues within a multidisciplinary setting. At IHE Delft, Dr. Jiang coordinates and teaches water economics and finance, contributes economics lectures to other courses across Master of Science programs, and mentors student research on water, climate change, and environment related issues in developing countries. He has delivered many capacity building workshops abroad mainly in eastern African countries on economic valuation of ecosystems. His recent work and interests are focused on policy and management innovations for promoting water and sustainable finance in developing countries.

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Ewoud Kok, IHE Delft

IHE Delft Marketing Officer Ewoud Kok, who oversees the Institute’s  marketing campaigns and plays a key part in communicating the organisation’s marketing messages.

He graduated from the Delft University of Technology in 2003 and since then regularly updated his skills at various workshops and courses, including a short MBA at Nyenrode Business University. Ewoud is part of the IHE Delft’s Communications Office since 2003.

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