Scaling Up FINANCE FOR WATER A World Bank Strategic Framework and Roadmap for Action Rochi Khemka, Patricia Lopez, and Olivia Jensen ABOUT THE WATER GLOBAL PRACTICE Launched in 2014, the World Bank’s Water Global Practice brings together financing, knowledge, and implementation in one platform. By combining the Bank’s global knowledge with country investments, this model generates more firepower for transformational solutions to help countries grow sustainably. Please visit us at www.worldbank.org/water or follow us on Twitter: @WorldBankWater. ABOUT GWSP This publication received the support of the Global Water Security & Sanitation Partnership (GWSP). GWSP is a multidonor trust fund administered by the World Bank’s Water Global Practice and supported by Australia’s Department of Foreign Affairs and Trade, Austria’s Federal Ministry of Finance, the Bill & Melinda Gates Foundation, Denmark’s Ministry of Foreign Affairs, the Netherlands’ Ministry of Foreign Affairs, Spain’s Ministry of Economic Affairs and Digital Transformation, the Swedish International Development Cooperation Agency, Switzerland’s State Secretariat for Economic Affairs, the Swiss Agency for Development and Cooperation, and the U.S. Agency for International Development. Please visit us at www.worldbank.org/gwsp or follow us on Twitter: @TheGwsp. Scaling Up FINANCE FOR WATER A World Bank Strategic Framework and Roadmap for Action Rochi Khemka, Patricia Lopez, and Olivia Jensen © 2023 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Please cite the work as follows: Khemka, Rochi, Patricia Lopez, and Olivia Jensen. 2023. Scaling up Finance for Water: A World Bank Strategic Framework and Roadmap for Action. Washington, DC: World Bank. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Editing and design: Clarity Global Strategic Communications Contents Foreword iv Preface v Acknowledgments vi Abbreviations vii List of Figures, Tables, and Boxes viii Executive Summary x 1. Introduction 1 2. Lessons Learned 13 3. Strategic Directions 17 4. WB Roadmap 27 5. Implementation Arrangements 41 Appendix A: Sub-Sector Opportunities for MFD 45 Appendix B: Demand and Supply Side Assessments and Financing Solutions 51 Appendix C: Country-Level Case Studies 57 Appendix D: Experience with the Multi-Stakeholder Platform Model 67 Appendix E: IFC’s Engagements in Water 70 Endnotes 71 References 73 Foreword Water is a critical natural resource. The availability and The resultant strategic framework provides a set of sustainable management of water are key contributors to strategic directions and a customizable roadmap for the the attainment of nearly all the Sustainable Development public sector, private sector, international organizations, Goals (SDGs). Water security is crucial for countries to intermediaries, and others to collaborate towards meet long-term development objectives. At the same catalyzing greater financing and innovation for the water time, threats of water insecurity are exacerbated by sector. This builds on the collective experience and climate change and impact vulnerable populations, knowledge of the World Bank and development partners infrastructure assets, and agricultural, energy, and on addressing the barriers to mobilizing additional industrial production. The transboundary nature of water resources in the sector. resources resembles the characteristics of global public goods, necessitating coordinated international action. We look forward to working closely with our partners However, water resources are under severe stress from the public sector, private sector, international and water services delivery is deficient on account of agencies, and civil society to operationalize this strategic underinvestment in the sector. Closing the investment framework to catalyze the much-needed financing gap requires a combination of public, concessional, and and capacity to meet national, regional, and global private sources of finance, which are directed to meeting development priorities linked to water in the context of key sector goals, while optimizing the contributions and increasing climate change challenges. complementarity of both the public and the private sector. The World Bank’s vision is to create a world free of Juergen Voegele poverty on a liveable planet, supporting impactful Vice President development that is inclusive, resilient, and sustainable, Sustainable Development including through access to clean water. With this goal World Bank in mind, different parts of the World Bank, including the International Bank for Reconstruction and Development (IBRD), the International Development Association Mohamed Gouled (IDA), the International Finance Corporation (IFC), the Vice President Multilateral Investment Guarantee Agency (MIGA), Global Industries and 2030 Water Resources Group (2030 WRG), a IFC public-private collaboration platform, have committed themselves to scaling up finance for water-related investments in emerging and developing economies, Ethiopis Tafara focusing specifically on crowding additional private sector Vice President and innovation, expertise, and capital into a sector that has Chief Risk, Legal, and been historically funded through public and concessional Administrative Officer financing in most of the developing world. MIGA iv Preface This strategic framework was written under the leadership While the strategic framework to scale up finance for the of the World Bank’s Water Global Practice, with inputs water1 sector builds on extensive research, analytical from a working group of colleagues from different work, and consultations with various partners from the units across the World Bank (WB), including the WB’s global development community, it is primarily directed Infrastructure Finance, PPPs, and Guarantees (IPG) at WB management and staff, as one of its main and Treasury, the International Finance Corporation’s objectives is to facilitate private sector participation (IFC’s) Public-Private Partnership Transactions Advisory (PSP)2 in providing water security for the world through Department, Upstream, and Investment teams, and the the WB’s operational engagements at the country level, Multilateral Investment Guarantee Agency (MIGA). It in partnership with emerging and developing countries was prepared through a collaborative process, covering and development partner institutions. Hence, a key area consultations with WB global and regional teams of focus of the framework is a proposed WB Roadmap (including Task Team Leaders, Investment Officers, to achieve this. Financial Innovation Team colleagues, Global Leads, Practice Managers, Country Management Units) as well as external partners (e.g., Roundtable on Financing Water, multilateral and bilateral development agencies, private sector developers, operators, private financiers, and others). v Acknowledgments This strategic framework was co-developed by Rochi Infrastructure, PPPs, and Guarantees), Dan Vardi Khemka (Senior Water Resources Management (Principal Investment Officer, IFC), Joel Kolker (Lead Specialist, 2030 Water Resources Group, World Bank Water Supply and Sanitation Specialist, World Bank Water and Task Team Leader) and Patricia Lopez Water), Laila Nordine (Senior Advisor, World Bank (Senior Water Specialist, World Bank Water and co- Operations Policy and Country Services), Steen Byskov Task Team Leader). The activity received research (Senior Financial Officer, World Bank Treasury), and support from Olivia Jensen (Consultant, World Bank) Wenhe Zhang (Senior Underwriter, MIGA). and coordination support from Sudipto Sarkar (Lead Water Resources Management Specialist, World Bank In addition, technical inputs were received from a Water). The work was carried out under the leadership number of colleagues throughout this exercise for which and guidance of Saroj Kumar Jha (World Bank Water the co-authors are grateful (in alphabetical order): Aileen Global Director), Merli Baroudi (MIGA Director), and Castro, Akinchan Jain, Amal Talbi, Christian Borja-Vega, Laurence Carter (IFC Senior Advisor). Diego Juan Rodriguez, Eileen Burke, Esha Dilip Zaveri, Fan Zhang, Francois Onimus, Gustavo Saltiel, Hooman A core working group of experts across the WB Dabidian, Iain Menzies, Jacob Kim, Jane Jamieson, provided inputs and support to this activity, including (in Jean-Martin Brault, Jemima Sy, Joop Stoutjesdijk, alphabetical order): Anthony Molle (Lead Infrastructure Junglim Hahm, Lalima Maskey, Miguel Vargas-Ramirez, Finance Specialist, World Bank Infrastructure, PPPs, and Nathan Engle, Rajesh Advani, Rome Chavapricha, Guarantees), Anupurba Roy (Financial Analyst, World Sean Christopher Nelson, Ye-Rin Um, Yogita Mumssen, Bank Treasury), Caroline Otonglo (Senior Infrastructure and Zael Sanz Uriarte. The communications efforts for Finance Specialist, World Bank Infrastructure, PPPs, this activity have been supported by Alida Pham, Sarah and Guarantees), Fabio Aparecido Da Silva (Senior Farhat, and Zubedah Robinson. Financial Officer, World Bank Treasury), Fook Chuan Eng (Lead Water Supply and Sanitation Specialist, World Bank Water), James Seward (Senior Financial Officer, World Bank Treasury), Lalrinpari Sailo (Strategy Officer, IFC), Michael Mueller (Junior Professional Officer, IFC), Midori Makino (Lead Water Supply and Sanitation Specialist, World Bank Water), Moritz Nikolaus Nebe (Sector Manager, MIGA), Naoll Cyrille Mary (Senior Operations Officer, IFC), Nicola Saporiti (Senior Investment Officer, IFC), Ntombie Z. Siwale (Operations Officer, World Bank Water), Rogerio Pilotto (Senior Investment Officer, IFC), Zhimin Mao (Water Specialist, World Bank Water), and William Llewelyn Davies (Senior Infrastructure Specialist, World Bank Infrastructure, PPPs, and Guarantees). The peer reviewers for this work included technical experts across the WB to whom the co-authors express their sincere appreciation: Aijaz Ahmad (Lead Public-Private Partnerships Specialist, World Bank vi Abbreviations 2030 WRG 2030 Water Resources Group MWSS Metropolitan Waterworks and Sewerage BOT Build-Operate-Transfer System CAPEX capital expenditure MWI Ministry of Water and Irrigation CAT catastrophe NDC nationally determined contribution CCDR Country Climate and Development Report NMCG National Mission for Clean Ganga CPF Country Partnership Framework NUWAS National Urban Water Supply CPSD Country Private Sector Diagnostic NUWSP National Urban Water Supply Project CWIS Citywide Inclusive Sanitation NRW non-revenue water DBO Design-Build-Operate NWSC National Water and Sewerage Corporation DFI development finance institution O&M operation and maintenance DPO Development Policy Operations OECD Organisation for Economic Co-operation EFI Equitable Growth, Finance, and Institutions and Development EMDE emerging market and developing economies OPEX operating expenditure ESG environmental, social, and governance PCE private capital enabling Fintech financial technology PCM private capital mobilization FIT Financial Innovation Team PER public expenditure review FLID farmer-led irrigation development PES payment for ecosystem services FONADIN National Infrastructure Fund Trust PIR policies, institutions, and regulations GDP gross domestic product PPIAF Public-Private Infrastructure Advisory GHG greenhouse gas Facility GSG Global Solutions Group PPP public-private partnership GP Global Practice PSD private sector development GWSP Global Water Security & Sanitation PSP private sector participation Partnership PSW Private Sector Window HAM Hybrid Annuity Model RIs results indicators IBNET International Benchmarking Network SCD Systematic Country Diagnostic IDA International Development Association SDGs Sustainable Development Goals IDI Infilco Degremont, Inc. SOE state-owned enterprise IFC International Finance Corporation SPC single purpose company IFI international financial institution SSP supplementary service provider InfraSAP Infrastructure Sector Assessment Program STP sewage treatment plant IO Investment Officer TA & CB technical assistance and capacity building IPG Infrastructure Finance, PPPs, and TT task team Guarantees TTL task team leader LADWP Los Angeles Department of Water and Power VCUs Verified Carbon Units LBP Land Bank of the Philippines VGF viability gap funding LGs local governments WASH water, sanitation, and hygiene MDB multilateral development bank WB World Bank MFD maximizing finance for development WICER Water in Circular Economy and Resilience MIGA Multilateral Investment Guarantee Agency WRM water resources management MOF Ministry of Finance WSS water supply and sanitation MSP multi-stakeholder platform MTI Macro, Trade, and Investment MWCI Manila Water Company, Incorporated vii List of Figures, Tables, and Boxes FIGURES ES1 The Roles of the Public and Private Sector xii ES2 Strategic Framework for Scaling up Finance for Water xiii ES3 WB Roadmap: 10-Step Engagement xvi ES4 Financing Solutions for Water Resources Management, Storage, Floods, and Drought Resilience xx ES5 Financing Solutions for Water Supply and Sanitation xxi ES6 Financing Solutions for the Irrigation Sector xxii ES7 Joint WB Collaboration on the Roadmap xxiii 1.1 Strategic Framework for Scaling up Finance for Water 4 1.2 A Systems Approach to Private Sector Participation across the Water Cycle 7 1.3 Financing Solutions for Water Resources Management, Storage, Floods, and Drought Resilience 9 1.4 Financing Solutions for the Irrigation Sector 10 1.5 Financing Solutions for Water Supply and Sanitation 11 2.1 Binding constraints to Private Sector Participation 13 2.2 Downward and Upward Operational and Financial Performance Spirals in Water Services 15 3.1 Key Strategic Directions 17 3.2 Strategic Direction on Establishing the Enabling Environment 19 3.3 Strategic Direction on Mobilizing Private Sector Expertise 20 3.4 Strategic Direction on Diversifying and Expanding the Spectrum of Finance 23 3.5 Strategic Direction on Advancing Climate Outcomes 26 4.1 WB Roadmap: 10-Step Engagement 28 4.2 One WB Approach for Operational Engagements in Water 29 4.3 Market Maturity Assessment 30 4.4 Map of Water Projects and Investor Interest 37 4.5 Financing Options 38 4.6 Multi-Stakeholder Platforms for Financing Water 40 5.1 Roles and Responsibilities in Delivery of the WB Roadmap for Scaling Finance for Water 42 C1 Project Structure and Capital Flows 59 C2 Structure of Angola Bita Water Project 60 C3 Financial performance of Jordan’s water sector with/without efficiency gains 62 C4 NUWSP Framework 63 D1 Structuring MSPs for Financing 68 viii TABLES ES1 Blended Finance Structures xix 4.1 Blended Finance Structures 37 B1 Water Sector Finance Indicators (adapted from InfraSAP2.0 Finance Pillar) 51 B2 InfraSAP 2.0 Finance Pillar 52 C1 Metro Manila Project Key Dates 64 C2 Financing by Entity 64 BOXES 1.1 Challenging Macroeconomic Context 2 1.2 Terminology used in the Strategic Framework 5 1.3 Private Financing, Control, and Risk 6 1.4 Water Supply – Supplementary (Non-Utility) Service Providers 11 2.1 Valuing Water 14 3.1 Forms of Regulation in the Water Sector 19 3.2 Blended Finance 21 3.3 Vietnam Clean Water Bond 25 4.1 WB Technical Assistance Packages and Tools 29 4.2 WaterSAP 31 4.3 PIR Reforms 33 4.4 The Utility of the Future Methodology to Ignite Transformation in Water and Sanitation Utilities 34 4.5 Examples of Country-Level Financing Models 36 B1 Framework for Debt Capital Market Financing Options – Thematic Bonds 54 ix EXECUTIVE SUMMARY WATER INSECURITY, CLIMATE CHANGE, AND THE INVESTMENT CHALLENGE Undervalued and poorly managed: The water and climate crisis Constraints to mobilizing investment in water Water—and the related crises brought about A major part of the problem is that water has been by climate change—is one of the most urgent chronically undervalued by public and private challenges we face today. Water is the planet’s actors. In most countries, the price of water does not lifeblood, a critical resource sustaining people, reflect its real economic value nor the cost of provision biodiversity and the environment, food and energy of multiple water services. Water is often not sufficiently production, business and industry, and entire considered in investment, economic planning, and economies. However, there are multiple water crises policy making. Water as a resource is commonly manifesting globally, with too much, too little, or too taken for granted and regularly wasted, threatening polluted water. Under prevailing trends, the world human health, and prompting social, environmental, will face a 40 percent shortfall between demand and and economic crises triggered by unsustainable supply of water by 2030, with 10 percent of the global approaches. population already living in countries with high or critical water stress.3 Moreover, more than 2.3 billion people At the same time, water services are often decentralized lack access to safe drinking water and 3.6 billion at the municipal level and delivered by municipal people lack access to sanitation, with implications divisions or sub-sovereign entities, resulting in highly for health, education, and human capital development. atomized institutional structures. The developmental imperative of the human right to water, coupled with Water and climate change are fundamentally linked, political economy factors, has led to weak incentives with climate change amplifying water-related risks and for the operational and financial efficiency of affecting the hydrological cycle. Nine out of 10 natural service providers, as well as poor governance. Low disasters are water-related and, by 2050, flood and tariffs and modest or poorly planned public investment droughts could cause $5.6 trillion in cumulative losses have undermined the creditworthiness and financial to the global economy.4 Moreover, climate change viability of service providers and the bankability of is threatening lives and livelihoods and heightening water infrastructure projects. international tensions over scarce resources. With respect to access to financing, the lack of It is in the world’s interest to prioritize and protect creditworthiness of water service providers limits this precious resource and secure sustainable their access to public and private resources. It makes access to various water services for communities them dependent on scarce public and concessional and economies, yet action is not being taken at the funding and financing to maintain and expand their scale and with the urgency needed. Water knows no services. At the same time, weak enabling conditions at borders—this is a local, national, regional, and the country level to attract private and public investment, global issue that requires attention and resources including technical and operational inefficiencies; the slow at every level. Water is akin to a global public good, pace of reforms to policies, institutions and regulations; flowing across national boundaries, which means that the absence of supportive governance arrangements; pollution and overuse in one country can become and high transaction costs have traditionally discouraged another country’s problem. investment in the water sector. x How do we close the investment gap? Governments have a leading role to play in establishing the enabling conditions and necessary reforms to Large, coordinated flows of public, concessional, facilitate a greater flow of public and private finance and private capital are needed to compensate for for required water sector investments. International decades of underinvestment in the water sector, financial institutions and multilateral development and to meet present and future challenges. Current banks need to support these efforts, together with global levels of investment are inadequate to address other stakeholders, at the country level. Governments water sector risks and to achieve the Sustainable can create an enabling environment for improving Development Goals by 2030. The investment needed sector governance, efficiency, financial sustainability, in water-related infrastructure has been estimated and private sector involvement. They can also drive at $6.7 trillion by 2030 and $22.6 trillion by 2050.5 in-country coordination among stakeholders to enable Achieving water security for all requires coordinated an efficient multi-stakeholder approach for financing action and a massive increase in investment and water investments (see Figure ES1). financing flows across the water value chain. The private sector, in addition to being a key user of Water sub-sectors have very different institutional water resources and a beneficiary of water services, has and economic characteristics, which shape the an important role to play in providing financing, innovative types of reforms and interventions that are possible approaches, and expertise, as well as absorbing and appropriate, and their potential to mobilize private risk, with aligned incentives for achieving targets and capital. However, across all water sub-sectors, there efficiency levels. The private sector can help enhance are some common priorities for mobilizing investment the operational and technical efficiency of water service and financing from public and private actors. These providers, making them more financially sustainable measures include designing and enforcing policies and creditworthy and therefore able to access more and regulatory instruments; developing public sector financing through various contractual arrangements and skills and capacities; and improving governance and public-private partnerships. At the same time, credit institutional arrangements to strengthen investment enhancements and blended finance approaches6 planning, monitoring, and execution. can help de-risk projects for investors and improve creditworthiness of service providers to access financing for water sector projects. xi FIGURE ES1: The Roles of the Public and Private Sector PUBLIC SECTOR PRIVATE SECTOR Use water resources and services Improve sector governance, efficiently, promoting water efficiency, and creditworthiness stewardship Provide debt and equity financing Create and regulate water pricing through loans, capital market mechanisms operations, public-private partnerships, and other structures Allocate sector resources more Provide innovative approaches and effectively and equitably to deliver expertise via various contractual the maximum benefit for every modalities dollar invested Improve sector capital planning to Absorb risk reduce costs Crowd in or blend private finance with Align incentives for achieving targets public funds and efficiency levels to recover costs It is important for these instruments to be tailored to the has enabled the development and modernization of the maturity of the country’s capital markets and service sector. The private and financial sectors have played providers to ensure the specific context and risks are a crucial role in driving technological innovation, well understood and the investment opportunities are digitalization, the management and delivery of feasible and relevant. water infrastructure and services, and the provision of commercial financing to creditworthy service Addressing the investment gap requires public and providers. This concerted public-private engagement is private collaboration. Governments and private actors also needed in the water sector of developing countries. have a key role to play in facilitating investments and financing, drawing on their unique capabilities to The nature of water as a public good requires manage different kinds of risks at the international, international collaboration. It requires a new level national, and local levels. In most of the developing of partnership that transcends national borders and world, the water sector has historically been funded traditional public sector approaches and brings in through public and concessional financing. In more multiple sovereign, sub-sovereign, and corporate developed regions such as Australia, the European actors, international agencies and intermediaries, Union, and the United States, a combination of public and civil society stakeholders. The implementation funding and the facilitation of private and commercial of transboundary investments and solutions also financing and private sector participation through requires innovative financing mechanisms and supportive policies, institutions, and regulations regional approaches. xii A STRATEGIC FRAMEWORK FOR SCALING UP FINANCE FOR WATER The water sector has lagged behind other sectors such as energy and transport in accessing volumes of The World Bank (WB) recognizes the water-climate- commercial debt financing. Private sector engagement food-energy nexus and the importance of a water- in water through public-private partnerships in secure world for all. While different countries may developing countries over the last few decades has had approach the water problem differently, any holistic a mixed track record. A renewed effort by development strategic vision must encompass elements related to: partners to enable public-private collaboration in the (1) sustaining water resources, in light of various water sector must take account of lessons learned. Key and often competing economic and social activities; lessons learned from past efforts to mobilize private (2) delivering services of water supply and sanitation, sector involvement in the water sector provide a strong bulk water for irrigation and agricultural production, foundation for the strategic framework (see Figure ES2). hydropower, industrial manufacturing and other uses, and wastewater treatment and reuse; and (3) building The constraints on private sector participation resilience to climate change and water-related risks. require differentiated approaches tailored to the size and income level of countries (e.g., middle-income The WB’s Scaling up Finance for Water strategic countries vs low-income countries) and macro-fiscal framework outlines actions and priorities for national situation, as well as the level of banking sector and governments, the WB, and other development partners capital market development. While the largest source to improve the planning and mobilization of funding and of finance for water investments is likely to remain public financing for water sector investments, and to promote and concessional financing, the mobilization of private efficiency in spending. It aims to do so by optimizing the capital, especially domestic private or commercial contributions of the public and private sectors, and finance, offers tremendous potential. The lessons facilitating greater engagement of the private sector learned on binding constraints are reflected in the in the provision of capital, innovation, and expertise. strategic directions which guide this framework. FIGURE ES2: Strategic Framework for Scaling up Finance for Water LESSONS LEARNED STRATEGIC DIRECTIONS WB ROADMAP What has/has not worked? Based on lessons learnt, Across the strategic which approaches can be directions, what actions Binding constraints to private sector participation and private scaled? need to be taken by the capital mobilization, based on WB and other development 1. Establishing the enabling past/ongoing initiatives conditions for financial partners? sustainability, creditworthiness, The roadmap focuses on a • Undervaluation of water and access to financing combination of demand- and • Lack of financially viable service 2. Mobilizing private sector supply-side solutions for financing providers expertise to improve through the following themes: • Absence of enabling conditions operational efficiency and address climate impacts • Training and Capacity Building • Social reluctance to pursue • Analysis and Diagnostics public-private partnerships 3. Diversifying and expanding the spectrum of finance solutions • Financial Planning • Multiple risks and high • Turnaround Strategies transaction costs for public- with a cross-cutting theme on private partnerships Advancing Climate Outcomes • Financing Solutions • Stakeholder Engagement Meeting Climate Goals and the Water-related Sustainable Development Goals xiii STRATEGIC DIRECTIONS The framework is built around four strategic directions: Governments need to establish the enabling conditions for financial viability and creditworthiness in the water sector at the sub-national level. This will open 1. up access to financing from private sources. Key measures include supportive policies, institutions, and regulations, introducing economic regulations, restructuring the sector, Establish and incentivizing service providers to support water security and climate outcomes. the enabling Examples include corporatizing water service providers, consolidating entities, and conditions establishing shadow credit-rating programs in Angola, Kenya, Turkey, and Peru; turning around the technical and financial performance of water utilities, enabling them to issue bonds in Uruguay; and designing reforms to employ private and commercial finance and expertise in water projects in Brazil, Indonesia, and Nigeria. Governments can mobilize private sector expertise through performance-based contracts and other contractual arrangements with the goal of improving the 2. operational efficiency, technical capacity, and financial viability of service providers. This expertise can help reduce water losses; increase efficiency in water and energy Mobilize use; lower operating costs; raise revenues through more efficient billing and collection private sector processes; construct, operate, and maintain complex infrastructure; conserve and expertise recover scarce water resources; and increase resilience to climate risks. Performance- and output-based contracts have been successfully implemented in the Middle East and Africa (Algeria, Oman, and Saudi Arabia), Latin America (Brazil and Honduras), and Asia (Armenia, Philippines, and Vietnam). Governments and other stakeholders need to diversify and expand the range of solutions available to each country depending on its context, from commercial 3. debt, bonds, and microfinance to public-private partnerships, blended finance, Diversify and and equity instruments. The World Bank’s interventions and products can be used to expand the ensure contractually balanced and financially sustainable projects whose commercial and political risks are well mitigated and whose returns to private sector reflect the risks borne spectrum of by the investors and can be considered attractive vis-à-vis other investment opportunities finance solutions within the markets in question. An example is the Multilateral Investment Guarantee Agency’s political risk guarantees to the AS Samra Wastewater Project in Jordan (see case study in appendix C). Blended finance can also make public-private partnership programs or projects in such markets attractive to sponsors and lenders, for example in the Metro Manila Wastewater Management Project and through the provision of viability gap funding in India’s Clean Ganga Program (see case study in appendix C). Climate change manifests itself primarily through water, exacerbating water security challenges, with substantial costs to society. The water sector offers the 4. opportunity for both adaptation and mitigation investments. The development of Advance projects for onsite sanitation, floating solar, irrigated rice, and hydroelectric retrofits of storage dams offer strong mitigation potential. Opportunities for climate adaptation cover climate a range of interventions, including strengthening early warning systems for extreme outcomes climate and weather events, making new infrastructure climate resilient, improving dryland agriculture for crop production, protecting mangroves, and fostering a transition to more resilient and robust management of water resources. Tapping climate finance requires a number of areas of focus. There is currently no established method to price the resilience value of reduced land subsidence, flood risk, and drought risk. Better data are required on current and planned investments in adaptation to track progress in mobilizing public and private finance. Technical assistance is needed to prepare investment-ready national adaptation plans and project pipelines to identify, sequence, and prioritize policies and interventions that reduce greenhouse gas emissions and boost resilience, and to reduce costs for private financing through risk mitigation and credit enhancement instruments. xiv CHARTING A ROADMAP TO A WELL- understanding constraints and identifying FINANCED, SUSTAINABLE WATER opportunities to increase public and private SECTOR financing of water sector investments. The analysis would look at macro-level fiscal The framework sets out a roadmap of 10 steps to indicators, such as the country’s debt ceiling, operationalize the strategic directions and boost credit rating, risk profile, cost of capital, financial investment and participation in the water sector market maturity, and regulatory frameworks for (see Figure ES3). The roadmap can be customized to public-private partnerships. Insights from this the country’s macro-fiscal conditions, the fundamentals assessment process would enable the client of water service providers, and the level of water sector government to target actions, support, and and financial market maturity, with potentially a subset of financing packages. steps applied in a country. The roadmap steps need not be applied sequentially, but can be adapted based on the Aligning water security with climate country context. While recognizing that addressing 3 goals and economic development the issue of creditworthiness is a medium-term To understand the full context, it is important effort, it supports various supply-side innovations to examine the entire water sector value and credit enhancement solutions to meet short- chain to assess the role of water in the term financing goals. country’s economic, social, and environment development and policy goals, and the risks The roadmap assesses the entire suite of financing posed by climate change to this development. solutions from commercial debt and bonds to The analysis will be based on national climate microfinance, vendor finance, and public-private change adaptation and mitigation strategies partnerships, including performance-based contracts, and nationally determined contributions, viability gap funding, and the use of de-risking and information gained from existing diagnostic credit-enhancement instruments such as guarantees. It tools, and consultations with governments, the covers specific actions that countries and other partners domestic banking sector, and private financiers can take, including technical assistance, capacity and investors on their priorities, strategic building, and financing, and outlines instruments to development, and investment plans. The goal address constraints. is to identify the most realistic opportunities to mobilize public and private expertise and Building capacities to support the financing for investments in water security, 1 foundations of creditworthiness aligned with priority climate outcomes. Sector investments are constrained by poor performance, lack of financial viability of Investing in energy efficiency and renewable service providers, and lack of solid frameworks energy (such as solar photovoltaic systems) is for policies, institutions, and regulations. one way in which water supply and sanitation Addressing foundational elements related utilities can start targeting specific climate to creditworthiness is at the heart of mitigation outcomes, while improving their mobilizing finance for water investments. financial outlook. Viable sources of climate This step focuses on building the capacity of finance to incentivize mitigation and adaptation governments and water service providers to investments include results-based financing improve policies, institutions, and regulations; for emissions reductions, grants, private sector monitoring and benchmarking systems; loans and investments, loans from public and utility performance; financial management multilateral lenders, and philanthropic support. and creditworthiness; and circular economy solutions. Various technical assistance Designing supportive policies, packages developed by the WB and other 4 institutions, and regulations development partners can be used to do this. There is considerable evidence that country- level and city-level reforms to policies, Assessing macro-fiscal conditions, institutions, and regulations can transform 2 financial market maturity, and the operational and financial performance. Regulation has a central role to play in investment climate Assessing a country’s macro-economic and enhancing financial sustainability and fiscal conditions, financial market maturity, supporting an appropriate investment and investment climate is important for climate. This step focuses on specific water xv FIGURE ES3: WB Roadmap: 10-Step Engagement STEPS OF ENGAGEMENT TOOLS AND INSTRUMENTS Training and Building Capacities to Support the Foundations of Creditworthiness Capacity Building 1 International Benchmarking Network of Water Utilities; Water Utility Creditworthiness e-course; Water Utility Financing e-course; Shadow Credit Ratings; Utility of the Future; Citywide Inclusive Sanitation; Utilities for Climate Cross-Cutting Theme Assessing Macro-Fiscal Conditions, Financial Market Maturity, and Investment Climate 2 Systematic Country Diagnostic; Country Partnership Framework; Country Private Sector Diagnostic; OECD scorecard; InfraSAP Diagnostic for Water Analysis & Diagnostics Aligning Water Security with Climate Goals and Economic Development 3 Country Climate and Development Reports; Climate and Economic Analyses of Resilience in Water; Water Security Diagnostics; Water in Circular Economy and Resilience framework (WICER framework) Designing Supportive Policies, Institutions, and Regulations 4 Water Supply and Sanitation Policies, Institutions, and Regulation: Adapting to a Changing World; Public Expenditure Reviews Integrating Financial Sustainability Analysis in Sector Planning and in the WB Project Cycle Financial Planning 5 Financial modeling; financial viability analysis; analysis of tariffs, taxes, and transfers Turning Around Technical Efficiency and Operational and Financial Performance of Water Service Providers Turnaround Strategies 6 Performance improvement plans (Utility of the Future); performance-based contracts for non-revenue water reduction and improving efficiency; irrigation modernization Developing a Pipeline of Bankable Projects 7 Better data and information; market-making; support for project development; pooling projects to reach economies of scale and reduce viability risks Financing Solutions Creating Markets for Local Currency Financing and Mobilizing Domestic Finance 8 Domestic commercial lending and capital markets development Mobilizing the Full Suite of Funding and Financing Solutions 9 Efficient public spending; blended finance; public-private partnerships; viability gap funding; commercial debt; microfinance; risk retention instruments; payment- and loan guarantees; WB Scaling ReWater Platform Developing a Coordinated Approach with Stakeholders Stakeholder Engagement 10 2030 WRG multistakeholder platforms; principles of engagement with multilateral development banks; donor roundtables; high-level events Cross-Cutting Theme xvi sector policies, institutions, and regulations to This step would ideally be conducted at the identify gaps and binding constraints for optimal national level in order to introduce strategic sector funding and financing. financial planning to achieve national water security goals, but it could also be done at the Policy and regulatory tools to improve sub-national and utility level. financial sustainability include designing and implementing tariffs and subsidies that are Turning around the technical efficiency transparent and predictable and incentivize 6 and operational and financial efficiency; mandatory financial modeling and performance of water service providers regulations on financial management and Requisite elements of a good turnaround reporting by service providers; targeted programs strategy for water supply and sanitation and to bridge the gap between service providers, irrigation service providers include strong the domestic banking sector, and local capital human resource and financial management, markets; and capacity building for financial a customer-oriented vision, and appropriate analysis in the sector. Sector restructuring and incentives. reforms can help improve the accountability and efficiency of water service providers. Development partners can help governments design and implement programs at national Integrating financial sustainability or regional level that put in place the right 5 analysis in sector planning and the WB incentives for institutional change at the project cycle utility level through new regulations, results- Analyzing the financial sustainability of based financing, improved monitoring, and water service providers can help improve benchmarking. It can also help client utilities their creditworthiness in order to attract design and finance turnaround strategies and commercial and private financing. This entails performance improvement plans, through financial modeling and public expenditure programs such as the World Bank’s Utility of the reviews to assess funding and financing Future. Improved efficiencies and performance sources and the costs of meeting water sector enable service providers to offer better services goals. Corporate governance and financial at lower costs, freeing up resources that can be performance would be assessed to guide the invested in improving or expanding services. analysis of constraints and recommendations for priority focus areas. Where data availability New technology has boosted irrigation and resources allow, the analysis could include efficiency, both in terms of conveyance and a cost-curve assessment to identify highest on-farm application of water, reducing the return investments and facilitate a cost-benefit costs of irrigation services. This has led to analysis of alternative solutions to achieve more entrepreneurial and market-oriented water supply and security goals. approaches in the public provision of irrigation services, while purely private irrigation has Financial viability analysis will help assess expanded enormously, notably with the rapid the “bankability” of specific investments development of groundwater. Performance- and projects to support public-private based contracts can support the involvement partnerships, portfolio investment approaches, of the private sector to advance key metrics of and pooled financing mechanisms (see step 8). efficiency, access, and resource sustainability. Since all projects carry a degree of economic, The use of automated systems, corporatization social, financial, technical, environmental, of service providers, and integrated water and operational risk, a “bankable” project management from the water source to the farm is one where these risks are allocated in a level can support better water management in sufficiently optimal way to give a lender or the irrigation chain. investor the confidence to finance the project. The analysis should include economic cost- Developing a pipeline of bankable projects benefit analysis, the use of competitive bidding 7 This step focuses on supporting clients in whenever possible to determine the size of identifying and actively promoting water- needed subsidies to make the project financing related investments for which private financing viable, and fully transparent assessments can be mobilized. Pipeline development regarding subsidy size, policy objectives, types focuses on assessing the most appropriate, of beneficiaries, and payment mechanisms. viable, and cost-effective investment, and xvii the best value-for-money investment. The This approach has seen great success in risk-return profile and thus the attractiveness Indonesia, where the National Urban Water of any investment depends crucially on the Supply program has created a structured and financiers’ ability to assess investment and systematic way to help local governments and operation risks. This covers access to better utilities improve their water supply service data and information, market-making, financial delivery. The program provides customized support for project development, assessing support packages to help utilities at different the financial efficiency of programs, and stages of creditworthiness move towards pooling projects to reach economies of scale commercial financing (see case study in and reduce viability risks. appendix C). Creating markets for local currency Mobilizing the full suite of funding and 8 financing and mobilizing domestic 9 financing solutions finance Recommendations on financing options for It is vital to encourage local currency financing governments and other development partners and domestic finance for water sector projects need to be tailored to the scope and priorities and investments in developing countries, identified in the previous steps, with relevant including deepening local capital markets through actions for all parties involved that are time- changes to the financial architecture, where bound, action-oriented, and achievable within required. Sustainable financial instruments like the short to medium term. A key focus is to green, blue, or sustainability-linked bonds may identify potential blended finance solutions to be suitable for governments or utilities seeking secure the required financing for priority water to fund water-related investments, with more investments. advanced middle-income countries having relatively well-developed institutional investors The roadmap presents a range of financing and capital markets. solutions that have been successfully applied by the WB and others in the water sector National development banks can play a and can be tailored to sub-sector and local crucial role going forward in providing long-term conditions, including commercial debt and financing to small and medium-sized entities bonds, microfinance, vendor finance, and that are unable to access commercial financing. public-private partnerships. In addition to financing, national development banks can provide technical assistance to Given the limited budget and the high cost of service providers for project preparation, capital in developing countries, development advisory support in structuring project finance, partners and multilateral development and building financial and technical capacity. banks can play an important role in de- Overall, such banks offer a valuable source risking investments and providing credit of funding and support for mid-sized entities enhancement, as well as providing grant and looking to expand their operations, while also concessional funds, investment, and lending promoting sustainable growth in the sector. needed for water projects, applying a blended finance approach. The use of public, grant, National and regional water-financing and concessional sources of finance and facilities can also help mobilize local currency investment can be done in several ways based financing for sub-national governments and on the needs and circumstances of specific state-owned enterprises for water investments. projects. Guarantees and credit enhancement These facilities would serve multiple roles, can promote blended finance projects and including centralizing performance monitoring facilitate private investment in the water sector, and incentives for service providers, directing including in high-risk countries. It ensures that public funds to underserved populations and the investors and lenders will be repaid in case Sustainable Development Goal priority projects, of a default event by the government or water providing technical assistance for project utilities. Table ES1 outlines typical blended preparation and management, mobilizing private finance structures. finance by presenting more and better water projects, and helping to build capacity for banks to lend to different types of projects. xviii Developing a coordinated approach with Global Practice of the WB. These 2030 WRG- 10 stakeholders supported platforms have created the upstream Establishing a country-level multi- conditions for private sector participation, stakeholder platform is an effective way to public-private partnerships, and private capital build a constituency of support for scaling mobilization in the water sector in several up finance for water and ensure cooperation countries, including Bangladesh, Brazil, India, between public, private, and multilateral Kenya, Mongolia, and Peru. Key factors of financiers. These platforms facilitate dialogue a successful multi-stakeholder platform are and decision-making among high-level strong support from the central government, representatives of government, public agencies, strategic network organization and division of the WB, development partners, the private responsibilities according to the nature of the sector, civil society, and academia. Bringing project, innovative financing schemes, and stakeholders into dialogue with one another incentives for businesses to actively participate. early in the reform process and continuing this engagement over the long term is essential to As outlined above, unlocking financing for the water implementing successful and lasting water sector requires building capacities and thoroughly sector reforms. reviewing the context, institutions, market conditions, and proposed investments (Steps 1–6), the pipeline of The platform approach for financing has been projects (Step 7), and the availability of concessional approved by the G20 and its effectiveness financing and investor appetite to design blended has been demonstrated in the work of the finance solutions in a tailored way to ensure success 2030 Water Resources Group (2030 WRG), (Steps 8 and 9), while coordinating closely with other a multi-donor trust fund within the Water stakeholders and partners (Step 10). TABLE ES1: Blended Finance Structures APPROACH DESCRIPTION APPLICATION Grants Private capital (equity and debt), with grant funds from the host For non-creditworthy projects or water government, WB and multilateral development banks, UN agencies, utilities, and/or support in the early (e.g., bilateral and multilateral donors to lower cost and bring a project to preparation) stages of a project. bankability, including support through technical assistance during the project preparation stage. Concessional Private capital (equity and debt) with concessional funds on below- For non-creditworthy projects or water funds market terms from WB/multilateral development banks, development utilities. finance institutions, and policy banks to lower the overall cost of capital and strengthen a project’s commercial viability. Guarantees Guarantees to cover equity and debt against political risks, including For developing countries, including high- a government’s (or water utility’s) failure to meet specific obligations risk countries and projects; for non-/ to the project under a water purchase agreement and/or government low-creditworthy water utilities/ water off- guarantee. These provide credit enhancement, bring down borrowing takers. costs, and facilitate private investment in the water sector. Insurance A practice by which an entity provides a guarantee of compensation For projects facing high political and (demand guarantee or corporate guarantee) in case of an adverse credit/commercial risks. event. Depending on the circumstances, political risk and/or credit/ commercial risk insurance may be appropriate. Other forms Support from the government through subsidies by temporary tax For non-/low-creditworthy projects or of support exemption or relief; subsidies provided conditional on the service water utilities; low tariffs; upfront capital delivery and quality; upfront project capital input; and public funds required; and where private financing is in used to hedge currency and/or interest rate risks. hard currency and/or on floating interest rate terms. xix a broad portfolio of engagements ranging from upstream 4. THE ROLE OF THE WB AND policy, institutional, and regulatory reforms, financing DEVELOPMENT PARTNERS of large-scale water infrastructure, improvement of performance and creditworthiness of service providers The WB is committed to bringing together and state-owned enterprises, to transactions such as development partners, governments, and financial equity investments, debt financing, and public-private institutions in order to fundamentally shift how the partnerships that can drive the scaling up finance global water sector is financed, and ultimately how agenda. water is valued and managed for a more sustainable future for all. The implementation of the strategic framework will vary for the various water sub-sectors, depending on country- The WB is in a unique position to leverage its country- level needs and demand, guided by the strategic based engagements with regional and sub-regional directions. The main priorities and opportunities efforts in areas such as sustainable transboundary to mobilize additional public and private financing water management, flood control, and disaster risk for water-related investments are outlined in management that crosses national borders. It maintains Figures ES4 to ES6. FIGURE ES4: Financing Solutions for Water Resources Management, Storage, Floods, and Drought Resilience WATER RESOURCES STORAGE, FLOOD AND DISASTER RISK MANAGEMENT DROUGHT RESILIENCE MANAGEMENT • Public-private partnerships for • Public-private partnerships • Catastrophe bonds hydropower, desalination, reuse, for grey and green capital • Parametric insurance and multipurpose projects investments in flood risk management • Pooled risk facility (e.g., • Blended finance (e.g., Pamir Caribbean Catastrophic Risk energy project in Tajikistan, with • Blue assets for green bond market Insurance Facility) for hurricane, IFC equity stake) • Financing based on revenue excess rainfall, earthquake • Catchment investments by streams and land value capture insurance downstream commercial or • Asset-based instruments • Regional risk facilities for industrial water users (e.g., countries with similar risks food and beverage companies, • Flood risk insurance facilities for finance and insurance companies, flood disaster risk pool private water utilities, and energy • Pooled investment facilities generation firms) • Payment for ecosystem services and nature-based solutions (e.g., Banten, Indonesia) xx FIGURE ES5: Financing Solutions for Water Supply and Sanitation WATER TREATMENT & WASTEWATER COLLECTION ONSITE SANITATION AT THE DISTRIBUTION & TREATMENT HOUSEHOLD LEVEL Traditional Financing: Traditional Financing: Traditional Financing: • Governments; Design-Build-Operate • Governments; Design-Build- • Households arrangements Operate arrangements New Solutions: New Solutions: New Solution: • Commercial debt for corporatized • Public-private partnerships • Microfinance for extension of utilities with creditworthiness (e.g., for water reuse, particularly access by micros, small, and Uganda; Indonesia) to industrial users (e.g., WB medium-sized enterprises • Equity finance for high-performing ReWater initiative) (e.g., donor and philanthropic utilities through IPOs and partial • Hybrid annuity model for contributions in Sub-Saharan divestiture (e.g., SABESP) wastewater treatment and Africa and Asia) • Loan financing for small-piped water reuse (e.g., Ganga) systems (e.g., Kenya) • Revolving funds for rural • PPPs for desalination and solutions concessions in cities with end-user • Off-grid (non-utility) tariffs (e.g., Brazil) services and delivery by • Component-based financing for microenterprises energy efficiency improvements xxi FIGURE ES6: Financing Solutions for the Irrigation Sector OPERATION & SYSTEM ON-FARM MAINTENANCE MODERNIZATION MODERNIZATION & WORKING CAPITAL Basin-Level Traditional Financing: Traditional Financing: Investments • Governments and international • Subsidized financing in & Major finance institutions irrigation programs (e.g., Headworks New Solutions: Rwanda SSIT) • Public-private partnerships for dam New Solutions: construction/operation (e.g., Chile), • Design of financial desalination, and reuse incentives for smallholders to use efficient irrigation (e.g., Development Traditional Financing: Traditional Financing: Morocco’s Plan Maroc and • Governments and international • Public schemes with Vert) finance institutions, with low capital high subsidies and low • Farmer-led irrigation Modernization cost recovery cost recovery development for access of Large-Scale to finance, technology, Irrigation New Solutions: New Solutions: and markets Schemes • Recovery of investment costs (e.g., • Public-private • Private sector solutions Turkey) partnerships for (e.g., India JOHAR) with • Public-private partnerships to irrigation management, matching grants (e.g., leverage private capital and reducing public subsidies Punjab) management (e.g., Peru, Karnataka) (e.g., West Bengal and • Access to finance by • Green bond issuance (e.g., Brazil and Gabiro agribusiness hub) intermediaries (e.g., MFIs, Turkey) rural banks), including blended finance (e.g., Philippines) and with Groundwater Traditional Financing: High level of public third party guarantees Systems; • Largely farmer-led or public financing subsidies for energy, (e.g., Tanzania) Small-Scale (e.g. Morocco, Yemen, Afghanistan, usually farmer financed • Agri-tech service provider Collective or etc.) models (e.g., rentals, Individual New Solutions: leasing, pay-per-use in Systems • Community or individual investments India) through cost-sharing (e.g., Chile) • Value chain finance (e.g., • Public-private partnerships using consumer credit in India; blended finance (e.g. Karnataka) supplier credit in Nigeria; • Establishment of private institutions outgrower contracts in for financing through public support Kenya) (e.g. Niger) xxii Private capital mobilization is well established in the resources, and help countries develop and adopt clear water supply and sanitation sub-sector through multiple frameworks for the financing of water investments and channels, including domestic commercial debt and advancing climate outcomes with incentive structures equity, and public-private partnership models. However, for the public and private sector (see Figure ES7). The there is considerable untapped potential in catchment 2030 Water Resources Group (2030 WRG), a public- management, water storage, unconventional water private partnership platform, will play a central role in source development, urban stormwater management, implementing the strategic framework through its work flood risk insurance, and irrigation efficiency projects. as catalyst, convenor, and coordinator. Within the WB, the strong support from the leadership Together with development partners, the WB will of the International Bank for Reconstruction and focus on creating the enabling environment for reform, Development (IBRD), the International Development fostering public-private collaboration, and promoting Association (IDA), the International Finance Corporation stakeholder engagement, aimed at maximizing finance (IFC), and the Multilateral Investment Guarantee for development through a combination of blended Agency (MIGA) to scaling up finance for water creates financing, public-private partnerships, and other an important opportunity to work collaboratively with instruments. client governments and country teams, combine FIGURE ES7: Joint WB Collaboration on the Roadmap 2030 WRG and Water and Finance GSG support for upstream enabling reforms and public-private collaboration DEMAND-SIDE ASSESSMENT SUPPLY-SIDE ASSESSMENT IPG: Utility governance and creditworthiness IPG: Procurement and origination support, support, InfraSAP for Water, Value financial structuring, risk allocation, Enabling guarantee products for Money analysis, analyses of fiscal Conditions commitments and contingent liabilities + Financial PIR Governance Structuring WB Treasury: Innovative financing + + IFC: Bankability and financial solutions, including climate finance, Service Provider Innovative sustainability assessment CAT bonds etc. Performance & Financing Creditworthiness Solutions Water GP: Project design, lending, and Water GP: PIR reform, existing funding/ technical assistance financing for sector, revenue sources, efficiency levels, capacity building on performance turnaround, utility IFC: Project support, transaction advisory, financing and creditworthiness etc. project-level financial structuring, lending, and technical assistance MIGA: Macro screening, creditworthiness MIGA: Guarantee products, political risk assessment insurance, blended finance solutions etc. Combination of upstream reforms, midstream interventions, and downstream project implementation xxiii 1| INTRODUCTION 1.1 CONTEXT 3. There is considerable evidence of the wide range of losses accruing from insufficient water 1. Water is a critical natural resource, a global public and sanitation investments, with implications good, and an essential service. It is fundamental to for macroeconomic performance, health, poverty the attainment of nearly all the SDGs. Water security is alleviation, income and gender inequality, and social central for countries to achieve long-term development and human capital development. The scale of global objectives in the current context of climate change, economic losses related to water insecurity and poor including protecting infrastructure assets, safeguarding sanitation stands at US$470 billion per year, comprising agricultural production, producing sustainable US$260 billion per year from inadequate water supply energy, and protecting vulnerable populations. Water and sanitation, US$120 billion per year from urban resources and services are critical for social and property flood damages, and US$94 billion per year economic development, even where the resource is a of water insecurity to existing irrigators.10 In 2019, the relatively abundant asset. The transboundary nature combined risk to business value from water-related of water, combined with the challenge of pollution and losses was US$425 billion.11 At the industrial level, the over-abstraction of the resource upstream leading to cost of addressing harmful impacts to freshwater for downstream impacts, lends itself to classification as a large packaged meat and apparel companies could total global public good. close to US$1.8 billion per year, with potential reductions in company valuation of up to 47 percent.12 However, 2. However, water resources are under severe the economic value of freshwater and the costs of water stress and water services delivery is deficient due insecurity are still rarely taken into account in investment to underinvestment in the sector. Under prevailing decisions.13 trends, the world will face a 40 percent shortfall between demand and supply of water by 2030, with ten percent 4. Moreover, climate change is amplifying water- of the global population already living in countries with related risks and affecting the hydrological cycle. high or critical water stress. Meanwhile, 1.8 million Worsening droughts, floods, and storms already people die every year due to poor water, sanitation, and impact millions of people each year, with floods and hygiene (WASH) services and 80 percent of the world’s waterlogging accounting for 70 percent of deaths related wastewater is currently released to the environment to natural phenomena on the planet.14 Between 2000 without treatment.7 In addition, water security has and 2019, over 4 billion people worldwide were affected ramifications for food and energy security. In terms of by disasters, with over 1.2 million deaths. By 2050, flood cropland affected, about 11 percent of rainfed land and and droughts could cause US$5.6 trillion in cumulative 14 percent of pastures experience severe, increasingly losses to the global economy and cost some regions up recurring droughts, and more than 60 percent of irrigated to 6 percent of gross domestic product (GDP)15 through cropland is highly water stressed. With more than losses in agriculture, health, income, and property, 40 percent of wheat grown in areas facing high or entailing sustained negative growth. An ongoing World extremely high levels of water stress, and 58 percent Bank (WB) study assesses the economic costs of past of the world’s thermal and hydroelectric power plant and current droughts and dry shocks on GDP growth. capacity, which is heavily dependent on water availability, The estimates reveal that an additional severe or located in highly water-stressed areas, both food and extreme drought reduces between 0.4–1 percentage energy security could be affected with the increasing point of GDP growth per capita depending on the level variability in water availability.8 Moreover, it has been of development, baseline climate, and severity of the estimated that 41 percent of current global irrigation shock, with a majority of impacts concentrated in low- water use occurs at the expense of environmental flow and middle-income countries.16 Compared with an requirements.9 average growth rate of 2.19 percent over the time period of the sample, this implies that even more moderate 1 shocks can send impacted areas into a deep growth 6. Domestic resources in developing economies will slump. The recent 2022 Global Assessment Report not be sufficient to close the funding and financing on Disaster Risk Reduction, which looks at all types of gap.23 Additionally, existing public funds raised by and disasters, from rapid onset events like typhoons, floods, allocated to the water sector are often used inefficiently, and earthquakes to other events like droughts, saltwater disincentivizing operational and financial performance intrusion, and air pollution, finds that poorer countries and failing to provide water services for the poorest lose on average 0.8–1% of their GDP growth per capita and most vulnerable. At the same time, failures in to disasters per year, compared to 0.1–0.3% in higher policies, institutions, and regulations (PIR), technical income countries. Investments that contribute to water and financial inefficiencies of water service providers, security also support climate adaptation, resilience, and inadequate project preparation, ad hoc political mitigation. Net benefits of climate adaptation investments intervention, and overall weak governance continue in the water sector are estimated at US$7.1 trillion.17 There to discourage both public and private investment in are also important mitigation benefits from initiatives to the water sector in developing countries. For several decarbonize the water sector. Mobilizing investments at decades, the development community has been different levels is central to accelerating the transition to seeking ways to expand the pool of total funding and net-zero carbon emissions and to strengthening climate financing for the water sector, with limited success. The resilience for economies and communities.18 Private absence of robust, multisectoral, and comprehensive financial institutions also have a role to play in pricing national water strategies, the poor financial health of water risks into investment decisions and incentivizing many water service providers and utilities, and the water stewardship by companies in productive sectors.19 lack of bankable projects with adequate revenues, stable regulation, and where needed, concessional 5. Current levels of global investment in water finance and guarantees, have limited private sector are inadequate to meet the Water Sustainable participation and severely limited access of sector Development Goals (SDGs) and address climate entities to domestic commercial financing. With regard impacts. An acceleration in global investment is to accessing international investments and finance, water urgently needed. The water sector constituted less infrastructure is exceptionally capital intensive, with high than two percent of all public spending between 2009 fixed capital costs, long payback periods and low profit and 2020,20 or roughly 0.44 percent of GDP on average. margins, and perceived risks are generally high vis-à-vis This is much lower than estimated public expenditure returns expected by institutional investors. The current levels needed in some regions. For example, in South- macroeconomic context further compounds the challenge Saharan Africa, expenditures required to reach universal of expanding financing for the sector (see Box 1.1). water supply and sanitation (WSS) services alone are as high as over 4 percent of GDP during the period 2017–2030. However, in many countries, current levels of funding, including revenues from customer fees and BOX 1.1: Challenging Macroeconomic public funding from fiscal budgets, are inadequate to Context meet even operating and maintenance costs, resulting in significant underinvestment in much-needed water The current global context of high inflation, rising infrastructure, along with inefficiencies in operations. interest rates, weak growth forecasts, currency The annual spending gap for 2017–2030 to achieve only depreciation, and capital outflows from emerging WASH-related SDG Targets (6.1 and 6.2) is estimated markets24 offers a challenging backdrop within to be US$124.2 billion in 2017 constant prices or which to mobilize private capital. The latest 0.42 percent of the global GDP in 2017 for the 113 growth forecasts suggest a sharp, long-lasting countries covered in the analysis.21 The estimates suggest slowdown, with a decline in global growth to an increase in annual spending of 166.7 percent from 1.7 percent in 2023.25 This context requires the current average annual spending to achieve SDG immediate action to mitigate the risks of a global recession and debt distress, while ensuring Targets 6.1 and 6.2. Depending on the cost scenario, vulnerable groups are protected and financial the annual spending gap for irrigation is estimated to systems remain resilient. range from US$3.9 to 7.3 billion in 2017 prices between 2015 and 2030 or roughly 0.08–0.15 percent of GDP for the 41 countries covered in the analysis. The aggregate financing requirement for planetary water security in water-related infrastructure has been estimated at US$6.7 trillion by 2030 and US$22.6 trillion by 2050.22 2 7. However, it is possible to unlock more public and water investments with incentive structures for the public private finance in the water sector by accelerating and private sector. With the fast-approaching deadline PIR reforms, addressing the creditworthiness for the SDGs, investment needs are escalating on of underlying entities, and designing bankable account of climate change, while global conditions are projects and innovative financing instruments, as constraining the availability of governments to provide many past and ongoing WB and other engagements in funding. With a focus on the underlying fundamentals the water sector demonstrate. The collective evidence of the water sector and appropriate project structures, suggests that the private sector has an important role concessional funds have the potential to help crowd in to play not only in providing the much-needed capital private capital across a broad range of water projects. investment, but also in providing innovation, know-how, This strategic framework document was developed and expertise, with the aim of enhancing operational through extensive internal collaboration among experts efficiency, lowering operating costs, raising revenues, in IBRD, IDA, IFC, and MIGA. A core team with conserving and recovering scarce resources, and representatives from these institutions was established increasing resilience to climate risks, among other and met periodically to set the direction of the document. areas. Where seen as a public service, it is possible to Various interviews were conducted with individuals enable efficiency in water delivery, with cost-reflective and teams across the WB with specific expertise in remuneration that encourages investments. maximizing finance for development (MFD) and water sector financing. In addition, interviews were conducted 8. As one of the largest financiers in the water sector with other development partners, private companies, and climate space at the global level, the WB can and financial institutions external to the WB. play a leading role in scaling up finance for water. The WB provides global thought leadership backed by frontier analytical work and has the convening power 1.2 SCOPE to bring together bilateral and multilateral development banks (MDBs), governments, and financial institutions to 10. The Scaling Up Finance for Water Strategic work towards a common agenda. The WB is in a unique Framework aims to better align the WB approach position to leverage its country-based engagements and resources to help client countries improve the with regional and subregional efforts in areas such planning, mobilization, and efficiency of funding and as sustainable transboundary water management, financing26 for water sector investments to achieve flood control, and disaster risk management that the SDGs on water and address climate change, with crosses national borders. The WB maintains a broad a focus on crowding in private sector capital and portfolio of engagements ranging from upstream policy, expertise. The Framework recognizes that it is critical to institutional, and regulatory reforms, financing of large- work on the demand side of financing by strengthening scale water infrastructure, improvement of performance SOEs, water service providers,27 other water sector and creditworthiness of service providers and state- agencies, and a broad range of intermediaries, along with owned enterprises (SOEs), to transactions such as catalyzing the supply side of financing. The preparation equity investments, debt financing, and public-private of the Strategic Framework has involved three steps, partnerships (PPPs) which can drive forward the scaling as outlined in Figure 1.1. The first step extracts lessons up finance agenda. The 2030 WRG, a partnership from past experience to understand the key constraints housed by the Water Global Practice (GP) of the WB, to scaling up finance for the sector. The second step has supported the formulation and implementation of defines strategic directions by identifying working models groundbreaking reforms in a range of countries and and scalable approaches based on the lessons learned. demonstrated the effectiveness of a multi-stakeholder, The third step articulates a WB roadmap which defines an inclusive, and consultative model to generate momentum overall approach and the steps that the WB needs to take for changes to the upstream enabling environment for to scale up financing, including mobilizing private capital public-private collaboration and finance facilitation. and expertise, to address emerging water challenges, including climate change. 9. Within the WB, the strong support from the leadership of the International Bank for Reconstruction and 11. The Framework looks broadly at public and Development (IBRD), the International Development private collaboration, considering the roles of Association (IDA), the International Finance Corporation both governments and private actors in facilitating (IFC), and the Multilateral Investment Guarantee investments and financing. It considers their unique Agency (MIGA) to scaling up finance for water creates capabilities to manage different kinds of risks at the an important opportunity to work collaboratively with client international and national levels. Governments play governments, combine WB resources, and help countries a central role in providing funding for water sector develop and adopt clear frameworks for the financing of investments, creating enabling conditions for private 3 FIGURE 1.1: Strategic Framework for Scaling up Finance for Water LESSONS LEARNED STRATEGIC DIRECTIONS WB ROADMAP What has/has not worked? Based on lessons learnt, Across the strategic which approaches can be directions, what actions Binding constraints to private sector participation and private scaled? need to be taken by the capital mobilization, based on WB and other development 1. Establishing the enabling past/ongoing initiatives conditions for financial partners? sustainability, creditworthiness, The roadmap focuses on a • Undervaluation of water and access to financing combination of demand- and • Lack of financially viable service 2. Mobilizing private sector supply-side solutions for financing providers expertise to improve through the following themes: • Absence of enabling conditions operational efficiency and address climate impacts • Training and Capacity Building • Social reluctance to pursue • Analysis and Diagnostics public-private partnerships 3. Diversifying and expanding the spectrum of finance solutions • Financial Planning • Multiple risks and high • Turnaround Strategies transaction costs for public- with a cross-cutting theme on private partnerships Advancing Climate Outcomes • Financing Solutions • Stakeholder Engagement Meeting Climate Goals and the Water-related Sustainable Development Goals sector involvement, and supporting needed water capital with limited deployment of public funds), sector financing through policies and regulations at the including through changes to the fiscal framework country level. Governments also need to lead and drive and the use of public funds (e.g., provision of in-country coordination among stakeholders, including escrow arrangements and multi-year annuities) to various financiers who may have different interests provide payment security to the private sector for the and mandates, to enable an efficient multi-stakeholder mobilization of additional capital. approach for financing water investments. Furthermore, the nature of water as a public good requires 13. The Framework considers the full spectrum of private public-private collaboration as well as international sector roles, from being a key user of water resources collaboration, calling for a new level of partnership that and services; to providing financing, innovation, and transcends national borders and traditional public sector expertise; to absorbing risk, providing economic approaches. exposure, and aligning incentives for achieving targets and efficiency levels to recover invested capital and 12. The public sector can lead on actions that: realize profits. Such alignment in incentives serves to attract the innovation and expertise from the private  Provide funding for water sector investments; sector. More specifically, the private sector:  Improve sector governance, efficiency, and creditworthiness;  Provides finance through various instruments,  Create and regulate water-pricing mechanisms; including debt and equity (banks and commercial  Allocate sector resources more effectively and lenders, private equity funds, impact investors, equitably to deliver the maximum benefit for every project sponsors, and institutional investors such as dollar invested (i.e., targeting capital); insurance companies and pension funds) and grants  Improve sector capital planning to reduce unit (philanthropists, corporate social responsibility capital costs; and programs, private trust funds etc.);  Crowd in or blend private finance (i.e., mobilizing  Provides innovation and expertise through multiple 4 contract types, including procurement of civil works, agencies or service providers) and supply (financing goods and services, management and service institutions and financiers at large) side of financing, contracts, outsourcing, and technical assistance and a wide range of intermediaries28 operating at the contracts; and interface between them.  Uses water resources and water services for 15. This document mentions various terms, which different economic activities, with industries, are explained in Box 1.2, aligned with WB corporate corporates, and businesses as key sector terminology and as agreed with other multilateral stakeholders. Within water users, households development banks under joint private capital deserve special consideration, given that they mobilization (PCM) efforts. contribute to revenue through payment of tariffs and taxes, although affordability and social aspects are 16. Box 1.3 outlines the Strategic Framework’s crucial (given water is a human right). In addition, approach to private sector participation, particularly farmers usually access third-party irrigation services, private financing, control, and risk. along with individual contributions and/or financing raised for farm-level equipment. 14. In addition, the sector involves a wide range of public and private organizations working on the demand (water BOX 1.2: Terminology used in the Strategic Framework Private sector participation (PSP) Maximizing finance for Private capital enabled (PCE) refers refers to private sector involvement development (MFD) is the WB’s to the monetary value of all private in the water sector through private coordinated approach with other investments, resulting from projects finance, absorption of risk, and/or MDBs to responsibly crowd in private that reduce or remove binding management, the latter in which the capital without pushing the public constraints to sustainable private private party does not necessarily sector into unsustainable debt and sector solutions through policy and provide finance or absorb risk (e.g., contingent liabilities. This entails sector reforms, institutional capacity management and service contracts). pursuing private sector solutions building, and an improved investment In addition to private financing, the where they can help to achieve climate. The broader metric of PCE Framework aims to mobilize private development goals and reserving is of particular relevance to this sector expertise and innovation to scarce public finance for where it is activity, emphasizing the importance achieve key technical and financial most needed. This is the central goal of establishing the enabling efficiency objectives, and address of the proposed strategic framework environment for private investments capacity gaps in the sector, which – identifying where the private sector beyond single operations. may need to be addressed before can best contribute to achieving the private financing can be mobilized. water SDGs and climate goals, with Private capital facilitated (PCF) support from the WB. refers to a combination of PCM and Public-private partnership (PPP) PCE. refers to a long-term contract Private capital mobilization between a private party and a (PCM), a metric tracked by the government entity for providing a WB and other MDBs, refers to co- public asset or service, in which financing by a private entity, which the private party bears significant is autonomous from government. commercial risk and management This activity considers the role of responsibility, and provides at least the private sector more broadly to a part of the required investments, include commercial financing for and in which remuneration is linked government-owned entities. to performance. 5 1.3 WATER WRIT LARGE 17. The water sector encompasses several sub- sectors (including water resources management, hydropower, irrigation for agriculture, drinking water supply, sanitation, and flood and drought prevention). These cut across the activities of several WB units, including the Water, Energy, Environment, Agriculture, Urban, and other Global Practices (GPs). The Framework applies to the entire water sector – “water writ large” – in keeping with the WB’s vision of a “Water-Secure World for All.” The Water GP Strategic BOX 1.3: Private Financing, Control, Action Plan (2019) recognizes the water-climate-food- and Risk energy nexus and delivery of the vision through three inter-related pillars: (1) sustaining water resources, Private sector involvement in the water in light of various and often competing economic sector can involve private financing, transfer and social activities, (2) delivering services (water of management/control, and transfer of risk, supply and sanitation, and irrigation), and (3) building examples of the latter being through bond resilience to climate change and water-related risks. issuances (including catastrophe bonds) The development objectives of Water GP operations and insurance. The appropriate form of private generally target improvements in one or more of these sector involvement will depend on the country strategic areas. The water sub-sectors have very and sector context. It is important to note that different institutional and economic characteristics transferring risk and/or control or mobilizing which shape the types of reforms and interventions finance from the private sector is not an end in itself and should be pursued when it contributes and their potential for the mobilization of private to development objectives. Thus, the approach capital. However, the design and enforcement of public under the Framework to these issues is as follows: policies and regulatory instruments, the improvement of governance and institutional arrangements to strengthen • Risk should be transferred to the party best investment planning, monitoring and execution, and placed to manage the risk; the development of public sector skills and capacities, • Control could be transferred to the private rank among the priority functions needed to mobilize sector when this improves technical, operating, private investment and financing across all water sub- and financial efficiency; and sectors. The Framework assumes a systems approach • Private finance should be employed when it to engaging the private sector across the water value minimizes life-cycle costs and when the cost of chain, as outlined in Figure 1.2. capital justifies such financing. 6 FIGURE 1.2: A Systems Approach to Private Sector Participation across the Water Cycle PRIVATE SECTOR EXPERTISE PRIVATE CAPITAL MOBILIZATION MOBILIZATION Hydraulic Engineering Projects Management • Extreme weather • Payment for Torrential Flood forecasting ecosystem services Disaster Monitoring • Flood modeling • Catchment Hydraulic Engineering management Facilities Monitoring services • Forest management WATER • Green bonds RESERVOIR WATER Smart WATER SUPPLY Water Finance for CAPEX Water Purification Water Intake SYSTEM Plants City-level Supply Plants • Municipal loans & bonds Water Supply Area Water Supply • Climate bonds Pipelines Utility-level • Commercial banks • Blended finance Water Supply • Output based aid Users Tank Underground Water • PPP: Concession, BOT Underflow Water Flood Prevention PPPs for operations Finance for OPEX: tariffs (lease, service, management, Water Ecological Used Water Treatment Plants Environment performance-based Utility-level contracts) • Climate/ sustainability bonds and loans Drainage Pipeline • Energy generation PPPs for urban river at wastewater restoration treatment plant Project-level • Nature-based Pump solutions/sponge Stations RIVERS cities Outflow Rain Water Outflow Rain Water • Property development SEA 7 PRIVATE PRIVATE CAPITAL SECTOR EXPERTISE MOBILIZATION MOBILIZATION Water quality monitoring and management Soil and Water Conservation • PPPs for irrigation PPPs for irrigation • Rural WSS Water Resource Management Hydraulic Forecasting Water Quality Management Country-side Hydraulic Facilities Urban Drainage and • Disaster risk finance Flood Prevention • Insurance Digital Management • CAT bonds RESIDENTIAL USED WATER • Green/Sustainability- linked loans/bonds Private water/wastewater (sovereign, sub-sovereign, treatment for new corporate) residential mixed-use • Infra finance developments, industrial e.g,. River basin zones, and large-user endowment fund contract operations • Limited recourse finance INDUSTRIAL USED WATER 8 18. There is an emerging consensus on developing 19. The design and implementation of public a holistic approach towards the water sector, policies, investment preparation, and the synchronizing the various sub-sectors. This is development of skills and capacities rank among motivated by various integrative frameworks that have the priority functions needed to mobilize finance emerged in the last few decades, such as Integrated across all water sub-sectors. At the same time, each Water Resource Management (IWRM), water-food- traditional sub-sector (water resources management, agriculture nexus, Water in Circular Economy and hydropower, irrigation for agriculture, water supply Resilience (WICER), and the water security approach. and sanitation, and flood and drought prevention) These frameworks recognize the complementarities typically supports ad hoc but closely interrelated water and trade-offs across sub-sectors and the need for infrastructure and other investments. Examples include a cohesive institutional and policy framework for the dams and reservoirs; desalination and recycled water sector as a whole, considering the critical distinction (i.e. unconventional water resources); nature-based between water as a natural resource and as a service, solutions for water production, wastewater treatment and the essential link between them. While many and flood and drought prevention; irrigation facilities governments have made solid progress in IWRM to for off-farm and on-farm development; water treatment advance water security, this has largely been achieved for human consumption; wastewater treatment and without structured private sector participation. This is reuse plants; water distribution and sewage networks; becoming even more important now in the context of and off-grid decentralized facilities for water supply and climate change and the central role of water in climate sanitation. However, in most countries the water sector adaptation and mitigation strategies. Water is also a is fragmented across ministries, departments, agencies, significant factor of production for the wider economy. and service providers at the national and subnational Therefore, investments in energy production and urban levels. These entities often have overlapping mandates, development, among other areas, can have significant functions, and functionaries, thus affecting the efficiency consequences for water availability and demand, and of water use planning, as well as the allocation of exposure and vulnerability to water risks. finances among competing sub-sectoral priorities. FIGURE 1.3: Financing Solutions for Water Resources Management, Storage, Floods, and Drought Resilience WATER RESOURCES STORAGE, FLOOD AND DISASTER RISK MANAGEMENT DROUGHT RESILIENCE MANAGEMENT • Public-private partnerships for • Public-private partnerships • Catastrophe bonds hydropower, desalination, reuse, for grey and green capital • Parametric insurance and multipurpose projects investments in flood risk management • Pooled risk facility (e.g., • Blended finance (e.g., Pamir Caribbean Catastrophic Risk energy project in Tajikistan, with • Blue assets for green bond market Insurance Facility) for hurricane, IFC equity stake) • Financing based on revenue excess rainfall, earthquake • Catchment investments by streams and land value capture insurance downstream commercial or • Asset-based instruments • Regional risk facilities for industrial water users (e.g., countries with similar risks food and beverage companies, • Flood risk insurance facilities for finance and insurance companies, flood disaster risk pool private water utilities, and energy • Pooled investment facilities generation firms) • Payment for ecosystem services and nature-based solutions (e.g., Banten, Indonesia) 9 20. Hence, each sub-sector differs in terms of the by the strategic directions, which are applicable to critical functions needed to facilitate funding and all. The main priorities and opportunities to mobilize financing due to their distinctive risk-return profiles additional public and private financing for water- and relative maturity in terms of the track record in related investments are outlined in Figures 1.3–1.5 accessing finance. WSS utilities are the most mature and described in more detail in appendix A. Overall, sub-sector in terms of access to finance, but still face PCM is well established in the WSS sub-sector through deeply rooted misperceptions that deter investors and multiple channels, including domestic commercial debt require strong efforts of business promotion. In contrast, and equity, and PPP models. There is comparatively small-scale service providers, nature-based solutions, less global experience in PCM in the water resource and farmers require a different kind of support, notably, management, flood management, and irrigation conducive policies and regulation, coordination among modernization sub-sectors, except for desalination and multiple local stakeholders, and new types of innovative reuse projects, which are typically developed through partnerships. Design-Build-Operate (DBO) or Build-Operate-Transfer (BOT) schemes. But there is considerable untapped 21. The implementation of the Scaling up Finance potential in catchment management, water storage, for Water Strategic Framework will require different unconventional water source development, urban approaches for the various water sub-sectors stormwater management, flood risk insurance, and depending on country-level needs and demand, guided irrigation efficiency projects. FIGURE 1.4: Financing Solutions for the Irrigation Sector OPERATION & SYSTEM ON-FARM MAINTENANCE MODERNIZATION MODERNIZATION & WORKING CAPITAL Traditional Financing: Traditional Financing: Basin-Level • Governments and international • Subsidized financing in Investments finance institutions irrigation programs (e.g., & Major New Solutions: Rwanda SSIT) Headworks • Public-private partnerships for dam New Solutions: construction/operation (e.g., Chile), • Design of financial desalination, and reuse incentives for smallholders to use efficient irrigation (e.g., Morocco’s Plan Traditional Financing: Traditional Financing: Maroc Vert) • Governments and international • Public schemes with • Farmer-led irrigation Development finance institutions, with low capital high subsidies and low and development for access to cost recovery cost recovery finance, technology, and Modernization New Solutions: New Solutions: markets of Large-Scale • Recovery of investment costs (e.g., • Public-private • Private sector solutions Irrigation Turkey) partnerships for (e.g., India JOHAR) with Schemes • Public-private partnerships to irrigation management, matching grants (e.g., leverage private capital and reducing public subsidies Punjab) management (e.g., Peru, Karnataka) (e.g., West Bengal and • Access to finance by • Green bond issuance (e.g., Brazil and Gabiro agribusiness hub) intermediaries (e.g., MFIs, Turkey) rural banks), including blended finance (e.g., Philippines) and with third Traditional Financing: High level of public party guarantees (e.g., Groundwater • Largely farmer-led or public financing subsidies for energy, Tanzania) Systems; (e.g. Morocco, Yemen, Afghanistan, usually farmer financed • Agri-tech service provider Small-Scale etc.) models (e.g., rentals, Collective or New Solutions: leasing, pay-per-use in Individual • Community or individual investments India) Systems through cost-sharing (e.g., Chile) • Value chain finance (e.g., • Public-private partnerships using consumer credit in India; blended finance (e.g. Karnataka) supplier credit in Nigeria; • Establishment of private institutions outgrower contracts in for financing through public support Kenya) (e.g. Niger) 10 FIGURE 1.5: Financing Solutions for Water Supply and Sanitation WATER TREATMENT & WASTEWATER COLLECTION ONSITE SANITATION AT THE DISTRIBUTION & TREATMENT HOUSEHOLD LEVEL Traditional Financing: Traditional Financing: Traditional Financing: • Governments; Design-Build-Operate • Governments; Design-Build- • Households arrangements Operate arrangements New Solutions: New Solutions: New Solution: • Commercial debt for corporatized • Public-private partnerships • Microfinance for extension of utilities with creditworthiness (e.g., for water reuse, particularly access by micros, small, and Uganda; Indonesia) to industrial users (e.g., WB medium-sized enterprises • Equity finance for high-performing ReWater initiative) (e.g., donor and philanthropic utilities through IPOs and partial • Hybrid annuity model for contributions in Sub-Saharan divestiture (e.g., SABESP) wastewater treatment and Africa and Asia) • Loan financing for small-piped water reuse (e.g., Ganga) systems (e.g., Kenya) • Revolving funds for rural • PPPs for desalination and solutions concessions in cities with end-user • Off-grid (non-utility) tariffs (e.g., Brazil) services and delivery by • Component-based financing for microenterprises energy efficiency improvements 22. Countries are responding to increased water scarcity with greater efforts to mobilize unconventional water resources. According to Global Water Intelligence, between 2000 and 2016, there has been a threefold increase in the global installed desalination capacity and, since 2009, the annual BOX 1.4: Water Supply – Supplementary incremental contracted reuse capacity has systematically (Non-Utility) Service Providers exceeded desalination incremental contracted capacity. This recent global growth in desalination and reuse SSPs cover the full range of services, from standposts installed capacity is driven primarily by investment to piped networks. They may be independent or programs launched, for example, in the Middle East and contracted by the utility or local government, and are North Africa. This momentum will drastically transform either regulated or unregulated. Based on several the water resources mix in many countries of the region, case studies, WB research highlights challenges such as Egypt, Tunisia, and Gaza, where seawater and significant opportunities (including private sector desalination has passed from constituting a negligible financing) for SSPs: share of the mix in the last decade to representing the • Access to finance to scale-up services (e.g., access equivalent to 12, 71, and 50 percent of today’s municipal to credit); freshwater withdrawals.29 • Reforms that allow SSPs to have a formalized role, achieve cost recovery, etc; 23. Recent WB research30 provides insights on how • Development of new models for SSPs to deliver safely managed supplementary (non-utility) service services cost-effectively and professionally; and providers (SSPs) can contribute to attaining the • Operationalization of such models for subsequent ambitious SDG 6.1 universal coverage target (see replication at scale. Box 1.4). Hundreds of millions of households globally receive water supply services from SSPs (mostly Formalizing the role of SSPs in the provision of water microenterprises), and it is estimated that the number supply services can lower costs, expand coverage, will increase to 1 billion by 2030 due to the inability of and improve water quality. The development of practical and scalable models would enable greater utilities to keep up with rapid urban growth. Most of these access to finance for improving services by SSPs. people will live in Asian and African cities, including peri- urban areas. 11 12 2| LESSONS LEARNED 24. There is a mixed tracked record of private 25. This section highlights key lessons learned from sector engagement in water in developing countries past efforts to mobilize private sector involvement in over the last few decades. A renewed effort by the the water sector to provide a strong foundation for the WB to draw private capital into the water sector must Framework. Key constraints identified relate to the take account of the lessons learned. While there undervaluation of water; the lack of financially viable are examples of successful projects and programs service providers; the absence of enabling conditions; delivering improvements to service access and quality civil society skepticism about PSP; and multiple risks and generating appropriate returns for the private party in PPP structuring (see Figure 2.1). These are each (see appendix C on country-level case studies), these discussed in turn. successes have rarely been scaled up to the national level or adapted and replicated in other jurisdictions.  Gap between the Price and Value of Water: The Furthermore, these positive stories of private sector merit good characteristics of water and sanitation participation (PSP) remain less widely known to the services and the status of water as a scarce natural public than the small number of high-profile concession resource imply an important role for government failures, mostly dating back to the 1990s, and cases in setting prices which reflect water’s true value. of “re-municipalization,” contributing to continued However, in most countries, the price of water neither skepticism about the value of private sector involvement. reflects its economic value or broader values, nor FIGURE 2.1: Binding constraints to Private Sector Participation 1 • Price of water does not reflect its economic value or broader values, nor the cost of Undervaluation of provision water • Alignment of prices, taxes, subsidies, and transfers is critical to drive efficiency 2 Lack of financially viable • Limited creditworthy water entities and financially viable projects service providers • Revenue leakages through technical and financial inefficiency 3 Absence of enabling • Low incentives to reduce costs and increase revenues conditions • Political influence and lack of cost-reflective tariffs undermine bankability 4 • Continued backlash against PSP and PPPs, building on various contractual Skepticism by civil society terminations in the 1990s about PSP • Result of poor allocation of risks between public and private parties, weak enabling environments, lack of contractual clarity, and lack of stakeholder engagement 5 Multiple risks in PPP • High transaction costs for PPPs and limited and weak capacity in counterparty structuring • Poor design, low-quality pre-feasibility assessments, inadequate structuring of projects 13 the cost of service provision. Water as a resource is are, therefore, unable to cover the asset investment, commonly taken for granted and regularly wasted, operating and maintenance costs, leading to an and subsidized tariffs are often ineffective in helping inability to demonstrate stable and strong cash the poorest and most vulnerable communities. In flows. These challenges are often exacerbated in WSS and irrigation services, poor cost recovery cases where the owner of the utilities and service from user tariffs by water service providers has been providers is the government, which can politicize a major barrier to financial sustainability and PSP decision-making and distort corporate governance in past decades. The alignment of prices, taxes, practices. Water sector operations and financials subsidies, and transfers will be critical for realizing often lack transparency. As a result, investors often the value of water and improving efficiency while perceive the water sector as riskier than other maintaining equitable service delivery (see Box 2.1). infrastructure sectors. This has led to a downward spiral in service quality and operating and financial  Lack of Financially Viable Service Providers: performance (see Figure 2.2). Weak incentives have The political economy of the sector has undermined resulted in inflated operating costs and revenues the financial viability of service providers. Prevailing have been suppressed as a result of a range of governance arrangements for water supply imply issues, including incomplete metering, meter- weak or absent incentives for technical and operating tampering, illegal connections, water wastage, efficiency, further undermining creditworthiness. inadequate billing and collection mechanisms, and Water distribution networks tend to be natural water losses in distribution and transmission. This monopolies with high fixed costs and long-life has locked utilities and service providers out of assets. In many places, tariffs are suppressed for financial markets and impeded access to finance for political and social reasons, and service providers water-related project finance vehicles. BOX 2.1: Valuing Water The United Nation’s 2021 World use stems from the fact that water and incorporated into systematic Water Development Report argues is all too often thought of exclusively and inclusive planning and decision- that the inability to recognize the in terms of its cost or price, without making processes. The report value of water is the main cause realizing its tremendous value, which presents current methodologies and of water waste and misuse. The is impossible to price or could be approaches to the valuation of water report maintains that, despite the incalculable and limitless (since life from five interrelated perspectives: difficulty of attributing an objective cannot exist without it and it cannot valuing water sources (in situ and indisputable value to a be replaced). This is especially true water resources and ecosystems); resource which is fundamental to in times of growing scarcity and valuing water infrastructure life, recognizing, measuring, and against the backdrop of population for water storage, use, reuse, or expressing water’s worth, and growth and climate change. supply augmentation; valuing water incorporating it into decision-making services, mainly drinking water, (e.g., investment and pricing), is The report maintains that in the case sanitation, and related human health fundamental to achieving sustainable of water, there is no clear relationship aspects; valuing water as an input and equitable water resources between its price and its value. Where to production and socioeconomic management and the SDGs. All water is priced (meaning consumers activity, such as food and too often, the value of water, or its are charged for using it), the price agriculture, energy and industry, full suite of multiple values, is not often reflects attempts at cost and business and employment; prominent in decision-making at all. recovery and not value delivered. and other sociocultural values of Especially in water, the concepts of Nevertheless, the different values of water, including recreational, cultural “price”, “cost”, and “value” should not water need to be reconciled, and the and spiritual attributes. be confused. Waste and careless trade-offs between them resolved 14  Absence of Enabling Conditions: PIR reform is lingering repercussion of the earlier contractual a lengthy process frequently beset by inertia and terminations, requiring strong engagement with civil backsliding. High-level political commitment to society to secure a social mandate for PSP and clear improving water resource management, access, and messages from all stakeholders to communicate the service quality is necessary, together with sustained benefits that PSP is expected to bring. support from the WB, sometimes over decades. When these conditions are met, the impact of PIR  Multiple risks and high transaction costs of reform has been transformative, as the cases of PPPs: PPP models for infrastructure development Indonesia and Uruguay show. In Uruguay, reforms face particular challenges when applied to the led to the transformation of the national water utility, water sector. The traditional special purpose vehicle Administracion de las Obras Sanitarias del Estado, structure with limited recourse requires strong from an inefficient, financially unsustainable entity to reliance on cash flows, calling for a specific capital a successful public water utility able to issue bonds structure, usually higher debt-to-equity ratios, longer on local capital markets. tenures, heavy collateralization, and engagement with a large cohort of lenders, insurers, guarantors,  Civil Society Skepticism about PSP: The large and advisors, all leading to high transaction costs. wave of private investments in water infrastructure The costs of PPP project preparation, including in emerging markets during the 1990s ended with legal, technical, financial, and other costs, tend to a strong backlash from civil society, the result be much higher than traditional public procurement. of poor allocation of risks between public and Additional sector dynamics – such as price sensitivity private parties, weak enabling environments, and affordability considerations – and country lack of contractual clarity, and lack of stakeholder debt dynamics, combined with macro and market engagement. Continued resistance to PSP is a challenges, and tight indexing, usually require a FIGURE 2.2: Downward and Upward Operational and Financial Performance Spirals in Water Services Unsustainable Trajectory Sustainable Water Sector Private finance mobilized to increase Consumers use investment capacity Investment in new water efficiently access expands Low tariffs, low collection Subsidies for new revenue base access provided Delayed investment in transparent and System assets and maintenance targeted manner adequately High usage and system losses drive maintained up costs Service providers fully Consumers are cover operating costs Consumers ever less willing use water more to pay Service provider lives off state efficiently Tariffs increased to subsidies cover greater portion Managers lose More satisfied autonomy and of efficient cost Continuous customers = more incentives willing to pay deterioration of efficiency Service quality Subsidies often fail improves Reduced losses: to materialize Service provider can’t reduced costs pay wages, recurrent costs or maintain/ Technical efficiency Motivation and extend system improves Staff motivation service deteriorates System assets go improves further ‘down the drain’ Staff and managers rewarded for improved performance Source: World Bank, Reform and Finance for the Urban Water Supply and Sanitation Sector (2019). 15 suite of solutions, including viability gap funding, payments to the private sector, PPPs can offer de-risking, and credit enhancement. The resulting significant benefits over public procurement. arrangement requires careful management and close monitoring to ensure sustainability of long- 26. The constraints on private sector participation term contracts. This is exacerbated by the often will require differentiated approaches tailored to the limited and weak capacity in the PPP counterparty size and income level of countries (e.g., middle-income in the public sector to originate, procure, structure, countries vs low-income countries), as well as the level and implement PPP contracts. Water projects are of banking sector and capital market development. often not well prepared – pre-feasibility and design While the largest source of finance for water investments studies are weak, and identification and structuring is likely to remain public and concessional financing, of projects is inadequate – resulting in bottlenecks in the mobilization of private capital, especially domestic the project pipeline. Furthermore, water investments private or commercial finance, offers tremendous are context-specific, making it difficult to scale up potential. These lessons are reflected in the strategic financing models or to replicate previous projects, directions which guide the WB’s approach to scaling up adding to transaction costs. Nonetheless, when finance for water. structured well to ensure performance-linked 16 3 | STRATEGIC DIRECTIONS The Strategic Framework assesses the wide range of PSP solutions and enabling conditions already in use across different regions and the associated financing instruments, with the aim of identifying solutions with the potential for broad scale-up and replication to fill the large financing gaps at the regional and country levels. Four strategic directions have been identified, as outlined in Figure 3.1. FIGURE 3.1: Key Strategic Directions 4 1 Establish the enabling conditions for financial sustainability, creditworthiness, and access to financing Cross-Cutting Theme: 2 Mobilize private sector expertise to improve operational efficiency and address climate impacts Advance climate 3 Diversify and expand the spectrum of finance solutions outcomes 3.1 ESTABLISH THE ENABLING  Policy and regulatory incentives for service CONDITIONS providers and farmers to achieve cost recovery and raise financial and technical efficiency. For 27. Support the Enabling Conditions for Financial example, increasing collections, reducing non- Sustainability, Creditworthiness, and Access to revenue water, extending coverage, and improving Financing. Sound PIR reforms and incentives for service quality. Such interventions include sector sector entities to improve their technical and financial benchmarking tools, monitoring and evaluation, efficiency are the foundations for scaling up finance and linking access to public funds to improved in the water sector. Governments have a leading role performance through results-based financing. In to play in undertaking these actions and reforms, some countries, legal and institutional reforms are supported by the WB and others. Depending on the necessary to allow service providers, municipalities, level of economic, financial market, and water sector and financial institutions to use financial incentives development in the country, the starting point for these and employ commercial finance and expertise in reforms may be the following (see also Figure 3.2): water projects, such as those implemented in Nigeria and Indonesia.  Broad water sector restructuring to improve efficiency and accountability of service  Consistency of economic regulation and tariff- providers. For example, corporatization of water setting procedures with cost recovery by service service providers; consolidation or aggregation of providers, along with affordability, considering entities; and/or shadow credit-rating programs (e.g., the availability of public and concessional funds Angola, Columbia, Kenya, Mexico, Mozambique, to achieve social inclusion goals and protection Peru, and Turkey). of vulnerable groups through appropriate subsidy schemes. Ensuring the price of water is closer to its 17 economic value is critical in incentivizing sustainable together with regulations related to water rights and use of the resource. This needs to be coupled with water allocation. By recognizing that water security incentives for the efficient use of water by consumers is a public good that must be collectively paid for, through volumetric water pricing and other economic appropriate pricing strategies can finance resilience instruments. Multi-pronged strategies may be initiatives (e.g., guaranteeing the existence of used by policymakers to achieve sector financial buffer resources for drought events, allowing for sustainability, combining the increase in overall the recovery of depleted aquifers, and reducing the revenues from tariffs, differentiated by type of user, demand for water).31 with willingness and capacity to pay through the use of smart subsidy programs to protect vulnerable  Development of policy, institutional and groups. regulatory frameworks to adapt to the greater weight of desalination and reuse in the water  Structured incentives and capacity-building resources mix, where needed. Such unconventional initiatives at the service provider and farmer sources of water may not have an evident fit in water level to improve operating and financial rights laws and regulations currently enforced, even performance. These can include regulatory in countries where they represent a significant share diagnostics (e.g., for irrigation service providers), of the water mix (e.g., there is a lack of clarity on development of performance turnaround strategies the rights to abstract seawater and the property and performance improvement plans, providing and/or user rights on desalinated water and treated support for capacity building and overarching sector wastewater effluent). Countries willing to mainstream financing frameworks, and improving the overall the use of unconventional water resources may financial planning and management. Incentives also need to revisit the policies and regulations of can be provided through results-based financing associated sectors, such as wastewater-effluent mechanisms and matching grants designed at a discharge permit schemes, drinking water supply national or regional level. Both are aimed at helping services, and energy, as well as specific regulations entities across the water sector improve performance on agricultural activities, health, and environmental and investment execution levels, and ultimately aspects (e.g., authorized uses, effluent quality achieve financial sustainability and creditworthiness, standards for wastewater reuse, seawater intake with potential for replication and scaling up. conditions, and brine discharge standards for Collectively, such interventions support access to desalination projects). This may eventually require commercial finance, as demonstrated in Brazil, considering not just the specificities of the local Indonesia, Kenya, and Uruguay, allowing public context but also reuse standards applicable in budgets and concessional financing to be directed importing markets of agricultural crops produced most effectively to meet SDGs. Results-based in the region to prevent the creation of undesirable financing at the country level has proven helpful to trade barriers (e.g., the European Union in the case create the necessary incentives for performance of Morocco and Tunisia). Lastly, existing institutional improvement. In irrigation, opportunities exist to structures and management models may have to engage the private sector in designing financial be adapted to ensure the efficient management of incentives for smallholder farmers to use efficient these new resources. These institutions may have irrigation. Such systems contribute to long-term to develop new capacities to take over these roles or water sustainability, climate change adaptation, and delegate desalination and reuse development and/ food security outcomes (e.g., Morocco’s Plan Maroc or operational activities to a private partner. Vert and India’s subsidy support for micro irrigation).  Coordination of public and private sector  Pricing mechanisms as economic incentives approaches across water sub-sectors. Greater for water security. Pricing systems should also coordination between the public and the private increasingly move towards internalizing resource sector is needed to ensure that competition between costs in water prices, with long-term considerations public and private financing models does not occur of water security at a basin level for different users (e.g., between government subsidies and donor (such as cities, industries, and the irrigation and grants for irrigation equipment, on the one hand, and energy sectors). Water scarcity is compounded by loans from financial institutions, on the other). trends of increased exposure to droughts in many regions, creating the need to redesign prices to go beyond financial discussions on cost recovery. Prices, designed as economic incentives, can send the necessary signals for efficient water use, 18 FIGURE 3.2: Strategic Direction on Establishing the Enabling Environment FOCUS AREAS EXAMPLES Broad water sector reforms to improve efficiency and accountability Angola, Colombia, Kenya, Mexico, Corporatization of water service providers, Mozambique, Peru, Turkey consolidation/aggregation/shadow credit-rating programs Policy and regulatory incentives for service Transformation of national water utility in PIR and providers to achieve cost recovery and improve Uruguay, enabling it to issue bonds technical their financial and technical efficiency and financial efficiency Economic regulation and tariff-setting Reforms to employ commercial finance procedures consistent with cost recovery and and expertise in water projects in Brazil, legal and institutional reforms Indonesia, and Nigeria Structured incentives and capacity building of service providers to improve operating and Albania, Colombia, and Portugal for financial performance strategic financial planning 28. Economic regulation – entailing the setting, by municipalities or the community. All these forms of monitoring, and enforcement of tariffs, service regulation share certain high-level objectives: cost- standards, and incentives for service providers effectiveness, transparency, predictability, fairness, – is a critical part of the PIR context needed to autonomy, alignment with the political, social, and scale up finance for water services. Regulation in institutional context, and participation of stakeholders. the water sector takes many forms, such as through Various forms of regulation are outlined in Box 3.1. independent agencies, contracts, or self-regulation BOX 3.1: Forms of Regulation in the Water Sector Among the forms of regulation found in the water sector in low-income countries, regulation by agency and regulation by contract are the ones most often discussed, but self-regulation and municipal regulation are more prevalent. Self- regulation refers to cases in which the utility, municipality, or community providing the service also performs regulatory functions of setting tariffs and incentives and monitoring performance. Municipal regulation refers to cases in which the municipal government provides oversight of the utility. While this model is widespread across regions and offers some advantages in terms of jurisdictional consistency and coherence between policy and regulation, it also faces challenges in terms of transparency and expertise. In order to achieve regulatory objectives, the form of regulation adopted needs to fit with the local political economy and institutional conditions. Economic regulation is a critical part of the overall PIR context and the design of any regulatory system has to be considered as part of a package. Any regulatory model must be fit for purpose and designed for the context at hand, while drawing on good practices and global experiences but not blindly adopting them. This means designing regulatory frameworks embedded within political economy and governance structures, aligned with policy and institutional frameworks, and capable of adapting over time as capacity develops. 19 29. While looking at PCM, it is important to recognize PSP models can be less politically sensitive and more that public funding and concessional finance will financially viable than other contract types. Examples continue to play a key role in financing water- include operating and management contracts and related investments in most developing countries. affermage contracts in which responsibility for Governments need to plan, budget, and allocate public management is transferred to the private party with resources more efficiently, rather than only increasing limited or no responsibility for financing. Although spending, for projects that contribute most to achieving these “capital-light” models do not always directly policy objectives. Governments also need to ensure that mobilize private finance, they can allow the public public expenditure crowds in rather than crowds out the counterpart to move towards financial sustainability private sector. Governments and other stakeholders and creditworthiness and thus unlock access to need to work on full execution of budgets allocated, as the commercial finance by: water sector faces a 70 percent annual under-execution rate due to capacity weaknesses across the project cycle  Introducing technical know-how and new (design, procurement, contract management, etc).32 technologies to improve infrastructure maintenance The assessment of the enabling conditions requires and service quality; an understanding of the overall investment climate in  Enhancing operational efficiency (water losses the country and the level of financial market maturity to reduction, and efficiency in water and energy use), assess and strengthen the landscape for private sector with climate change adaptation and mitigation participation. impacts;  Lowering operating costs and raising revenues (though billing and collection efficiency); 3.2 MOBILIZE PRIVATE SECTOR  Conserving and recovering scarce water resources; EXPERTISE and  Increasing resilience to climate risks. 30. Private sector innovation, know-how, and expertise contribute to technical and operating 31. Engaging with the private sector under any efficiency, opening up access to private finance, contract modality requires the public sector to and contributing to water and climate policy goals support robust models of collaboration that provide (see Figure 3.3). In many developing country contexts, effective governance, regulatory oversight, and FIGURE 3.3: Strategic Direction on Mobilizing Private Sector Expertise FOCUS AREAS Introducing technical know-how and new technologies EXAMPLES Enhancing efficiency (e.g., energy Middle East and Africa (e.g., Algeria, efficiency, water loss reduction) Oman, Saudi Arabia, Tunisia) Potential Performance- PSP and output- Latin America (e.g., Brazil, outcomes Lowering operating costs and raising revenues based Honduras) contracts Conserving and recovering scarce resources Asia (e.g., Armenia, Philippines, Vietnam) Increasing resilience to climate risks Role of the government Effective governance, regulatory oversight, adequate project preparation, address affordability 20 adequate project preparation; address affordability; range from raising new funds through increasing and ensure that efficiency gains from private sector revenues from tariffs and other service fees; participation result in greater investments and/or lower reducing costs through efficiency improvements; costs for the sector.33 increasing fiscal budget allocations; increasing efforts to access grants from available trust fund resources supporting achievement of climate goals 3.3 DIVERSIFY AND EXPAND THE or from the carbon markets reducing costs; issuing SPECTRUM OF FINANCE SOLUTIONS green and/or blue bonds that can be passed on in full or in part to eligible projects; ensuring resilience 32. Stakeholders need to consider the full range of through insurance cover and contingent financing financing options and identify those most suited to that is tailored to the water sector; and providing the context and recipient – national or subnational direct partial guarantees or loan financing that is government fiscal budgets, service provider revenues, concessional or semi-concessional. The sovereign or project-generated resources. Private finance options can take advantage of its creditworthiness and encompass debt (loans from commercial banks, fundraising ability, which is typically better than bonds in the capital markets, microfinance) and equity most subnationals in the home market, and it can instruments (PPPs, initial public offerings, and partial access various kinds of financing on favorable terms divestiture). Sources of private finance span domestic from development finance institutions. This type of and international capital markets, commercial banks, funding can then be part of a package to mobilize institutional and private equity investors, philanthropic private capital through blended finance structures. organizations, and direct investors.  Blended Finance Solutions: Blended finance 33. In some countries and contexts, private finance solutions have potential for broad adoption in the will flow once enabling conditions are in place. water and wastewater sector (see also Box 3.2). Elsewhere, additional financial support and credit They combine commercial finance with grant funds enhancement solutions will be needed from the WB (including climate/sustainability-linked grants) and and others, matched to the type of finance and local concessional debt (including concessional climate needs. These financing and de-risking instruments loans/bonds) from IDA and other MDBs, bilateral do not serve as a substitute for necessary sector and multilateral donors, UN agencies, policy banks, reforms but can help to remove barriers to private and lending by national governments, coupled finance in particular cases. In addition, countries and with de-risking instruments through an existing other stakeholders will need to factor in the prevailing wide range of credit-enhancement products. WB market conditions and their impact on the cost of MDB interventions and products can be used to ensure financing, which has gone up almost five-fold in the past contractually balanced and financially sustainable couple of years. As such, project selectivity is critical projects whose commercial and political risks are to manage the fiscus of countries. The value of credit well mitigated and whose returns to the private enhancement, including WB guarantees, provides a sector reflect the risks borne by the investors critical value proposition in this environment. and can be considered attractive vis-à-vis other investment opportunities within the markets in 34. The WB should take a “tiered” approach to question, exemplified through MIGA’s political risk assessing the right mix of solutions, proceeding guarantees to the AS Samra Wastewater Project from a macro country-level assessment to a water in Jordan. Blended finance can also make PPP sector and sub-sector assessment and finally programs or projects in such markets attractive the entity and/or project-level assessment. This to sponsors and lenders at attractive terms and systematic approach will help to ensure that credit conditions, including the provision of viability gap enhancement and de-risking instruments are tied to funding (VGF) as in India’s Clean Ganga Program meeting policy goals and do not crowd out potential (see appendix C for the Jordan and India case sources of private finance. Opportunities for WB to studies). Governments can also offer temporary support PCM are outlined in Figure 3.4 and described tax exemption or relief, where appropriate. These in more detail below (see also section 4.9). solutions lend themselves well to attracting philanthropic funds, together with private finance.  Greater and More Efficient Deployment of Public Sector Financing: The public sector can use  Domestic and International Debt Capital Markets: various instruments to support the water sector in Domestic debt finance holds great potential and is maximizing the needed financing. This support can already mobilized for the water sector in several 21 BOX 3.2: Blended Finance Blended finance refers to the use successful in water due to potential The perception of risks in blended of development finance to mobilize mismatches in investor interests finance structures varies depending additional funds from private and and project structures. From 2012 on the actor and their motivations commercial sources for sustainable to 2017, only 1.36 percent of total and incentives to act, and this development in developing private finance mobilized was in the perception differs within and across countries. Blended finance should be water sector. Despite this, blended countries. Understanding these considered a structuring approach – finance remains a useful structuring perceptions is important not only for rather than an investment approach, approach to de-risk investments and informing the policy direction, but instrument, or end solution – that attract private sector financing for also for delivering impact at scale. allows organizations with different sustainable development projects in Recent research by the OECD objectives to invest alongside each developing countries. (supported by the GWSP) highlights other while achieving their goals that portfolio-level deployment of (whether financial return, social Blended finance can be applied as concessional capital into a pooled impact, or a blend of both). It enables a structuring instrument to achieve vehicle or special-purpose facility targeted public sector financing to one of two objectives: to reduce (which is then augmented by attract private sector investors who the perceived risk of a project, commercial finance) will increasingly would otherwise not participate relative to its expected return; or be used. The vehicle then deploys due to perceived risks and limited to enhance the expected return of the capital across several projects, financial returns. Blended financing a project, relative to its perceived diversifying risk and lowering the is used in various sectors, such risk. In practice, most blended average transaction cost per project. as energy, financial services, and finance transactions are oriented agriculture, but it has not been as towards the reduction of risk.34 middle-income countries such as Brazil, Indonesia,  PPP Arrangements: Increasing the supply of private and Uruguay. In other countries, the WB can play capital in the water sector under PPP arrangements a role in supporting the development of local is appropriate in some contexts. With sufficient financial markets’ capacity, building on successful knowledge of the water and sanitation sector’s interventions in Kenya and Uganda, among others, unique profile, a suitable risk-reward allocation, and ongoing engagements in Brazil. In addition, and appropriate governance mechanisms and many middle-income countries with sufficient credit preparation, private operators – both traditionally in ratings may access international capital markets for water and non-water sectors – and their financiers funding to channel to the water sector. This may be have shown willingness to invest in commercially differentiated at the sovereign and sub-sovereign viable water sector projects. Areas of the water cycle levels, as some of the subnational borrowers value chain which can offer robust opportunities for such as water utilities may not be financially able PPPs include wastewater and sludge treatment, to directly access international markets. In either storage infrastructure and bulk water supply case, moving forward with debt issuances is highly (including from non-conventional sources, such case specific and depends on the level of market as desalination and wastewater reuse), and development and institutional readiness. However, water services for agriculture, as pioneered in suitable new instruments such as green and Morocco. In many cases, attracting private capital, sustainability-linked loans, and green (and blue) construction and/or operation under PPP structures sustainable and sustainability-linked bonds may will require additional de-risking instruments and be options for both sovereigns and sub-nationals mechanisms, such as guarantees (sovereign and to explore to diversify the investor base, signal sub-sovereign),35 credit enhancement, ring-fencing commitment to the water sector, and potentially of revenues, and viability gap funding from the WB secure more favorable financial terms. or other multilateral agencies. 22  Innovative Solutions such as Catastrophe backstop to the water utility. This can in turn improve Bonds, Asset Recycling, and Hybrid PPPs: financial access, pricing, and overall offerings from Performance-based financing is an innovation that investors. Other pooled funding solutions can also could be suitable to the water sector, in particular, be applied to advance nature-based solutions a loan or bond issued by the utility, or on behalf of and greening of the water cycle (e.g., retrofits of the utility, that has performance metrics for water wastewater treatment plants). management. For example, the Washington DC water utility issued an Environmental Impact Bond in Additional solutions developed by IFC and IPG include 2016 with a coupon step-up and step-down structure asset recycling, which presents viable options to based on mitigating storm water runoff. The utility monetize capital invested in existing infrastructure met the target, resulting in no coupon adjustment. (brownfield assets), and reinvesting the proceeds If it had succeeded in exceeding the ambitious for developing greenfield infrastructure, meeting the targets, it would have received US$3 million from operations and maintenance expenses of existing investors on a US$25 million bond, which is a infrastructure and increasing its climate resilience. substantial discount.36 Another area of innovation Through private sector participation, asset recycling that may support the resilience of the water sector may support (1) optimal asset utilization, such as the is insurance, risk transfer, and catastrophe (CAT) introduction of additional revenue streams to improve bonds, as examples of private capital leveraged the asset value and optimize upfront proceeds, and to absorb risk without associated financing. These (2) risk allocation, particularly de-risking for design, can play an important role in increasing resilience in development, and construction risks, to attract additional the water sector, particularly for climate adaptation investors. Broadly, three types of monetization model and flood and drought risks. Development finance may be employed: (1) direct contractual arrangements, institutions can also provide contingent financing such as brownfield concession agreements, operations to water utilities for such climatic risks. All such and maintenance concession agreements, or long-term insurance-related financing can provide immediate public-private lease agreements; (2) divestment, with financing for rebuilding after damages and funding the sale of an interest in the underlying asset from the alternative structures, but it can also bring added public sector to the private sector; and (3) structured financial comfort to investors that there is a liquidity finance instruments, such as pooled investment FIGURE 3.4: Strategic Direction on Diversifying and Expanding the Spectrum of Finance Greater/Efficient deployment • Raising new funds through bonds of public sector funding • Contingent financing for water sector • Direct partial guarantees • Loan financing (concessional/semi-concessional) • Sovereign borrowing on favorable terms with blending for mobilizing private capital • Tariff revenue ring-fencing and use of tax exemptions • Mobilized in middle-income countries (e.g., Brazil, Indonesia, Uruguay) Domestic debt finance • Supporting local financial markets development (e.g., Kenya, Uganda) • Combine commercial finance with: Blended finance solutions - Grant funds (including climate/sustainability-linked grants) - Concessional debt (including concessional climate loans/bonds) • De-risking and credit-enhancement products • PPPs with blended finance (e.g., Clean Ganga Program) • Private finance under PPPs (e.g., wastewater & sludge treatment, resource recovery, PPPs storage infrastructure, bulk water supply (incl. desalination and wastewater reuse)) • Insurance, risk, transfer, catastrophe bonds Innovative solutions • Pooled funding solutions for nature-based solutions and greening of water value chain • Asset recycling and hybrid PPPs 23 vehicles which allow asset owners to monetize their resilience building. And yet in 2019–2020 the water assets by combining various revenue-generating sector received only US$24 billion in climate finance,40 assets under a single entity via a trust structure. less than 4 percent of the global total (concessional and non-concessional) for that period. Hybrid PPPs are another innovation which may be used, combining concessionary public funding – for 36. Opportunities for climate adaptation projects example, through viability gap funding (VGF) – with in the water sector are present across regions and private financing and operation. Hybrid PPPs may income levels, with estimates of the economic rate of take various forms, such as (1) VGF support through return on investments ranging from 2:1 to 10:1.41 These a capital subsidy, where the government contributes interventions include strengthening early warning public funding to subsidize the capital cost or provides systems for extreme climate and weather events, supporting infrastructure, and (2) VGF through a subsidy making new infrastructure climate resilient, improving towards operating expenditures, or as performance- dryland agriculture for crop production, protecting based revenue payments to subsidize services. mangroves, and fostering a transition to more resilient and robust water resources management practices. The WB’s private sector arm – International Finance Corporation (IFC) – has been active in the water sector in 37. The water sector contributes to greenhouse emerging markets since the mid-90s. IFC’s engagements gas (GHG) emissions, presenting opportunities for in the water sector are outlined in appendix E. mitigation investments. Global Water Intelligence estimates emissions from water supply, wastewater, sludge, and onsite sanitation at 847 million tonnes 3.4 ADVANCE CLIMATE OUTCOMES CO2e/year. Of this, water supply accounts for 38 percent, wastewater and sludge account for 30 percent, 35. Climate change manifests itself primarily and onsite sanitation makes up the remaining 32 through water, exacerbating water security percent, due almost entirely to emissions of methane.42 challenges, with substantial costs to society. This Together, emissions from wastewater and onsite link between water and climate is clearly recognized sanitation account for 10 percent of anthropogenic in the Intergovernmental Panel on Climate Change’s methane emissions.43 Recent analysis suggests a city 6th Assessment Report, which shows the impact of of 1.5 million people in a low- or middle-income country climate change on worsening water insecurity, and could generate over 100,000 tCO2e per year44 from rising drought and flood risks, and draws attention to poorly managed onsite sanitation. This is, therefore, the importance of water-related adaptation actions.37 a top priority in terms of mitigation. Beyond WSS, Global leaders at COP27 emphasized “protecting, irrigation is also a source of emissions. Rice production conserving and restoring water and water-related is particularly carbon-intensive: it accounts for 615–900 ecosystems” and the need for countries to integrate million tonnes CO2e/year, equivalent to approximately water into their adaptation efforts.38 Water is thus a 1.3 percent of total global GHG emissions. key element of many national Country Climate and Development Reports (CCDRs) and adaptation plans.  Opportunities for tapping climate finance:45 There The long life of water assets magnifies the risk of lock- is potential to increase the mobilization of climate in of inappropriate infrastructure and technologies, finance across all water sub-sectors in developing and magnifies the benefits of investing in resilience countries. Climate finance refers to domestic or and adaptive planning. In addition to intensifying international financing provided by any public or competition for water among agriculture, ecosystems, private entity for activities that, in whole or in part, settlements, industry, and energy production, climate mitigate GHG emissions or support adaptation and change affects regional water, energy, and food resilience to climate change. In advanced economies, security. Water availability and quality affect almost all non-concessional green bonds have been launched economic sectors, and water insecurity raises costs, by water service providers in the United States, threatens supply continuity, and can lead to stranded Europe, and the Middle East to finance a range of assets. Droughts lead to long-lasting negative impacts mitigation and resilience-building projects, including on education, wealth, and health,39 as well as energy drought and flood resilience investments, catchment deficits for countries dependent on hydroelectric power, management, renewable energy generation, and while floods cause damage to critical infrastructure, wastewater reuse, demonstrating the application of disrupt social and economic activities, and can commercial climate finance in the sector. In WB client trigger outbreaks of waterborne diseases. Increasing countries, there are select examples of concessional investment in the water sector is therefore central to and semi-concessional climate finance in water, 24 sanitation, and irrigation, including energy and water  Approach to mobilizing climate investments: To efficiency projects in WRM, WSS, and reduction unlock climate finance for water, methodologies for of methane emissions from paddy cultivation, and the assessment of the mitigation and resilience value energy generation from methane at wastewater of water projects need to be developed and refined. treatment plants. The Vietnam emission-reduction There is currently no established method to price clean water bond, launched in 2023, demonstrates the resilience value of reduced land subsidence, the scope for innovation in this area (see Box 3.3). flood risk, and drought risk. In addition, better data Along with scaling up these projects across regions, are required on current and planned investments there is potential to develop innovative projects for in adaptation to track progress in mobilizing both onsite sanitation, floating solar, and hydroelectric public and private finance. Detailed studies should retrofits of storage dams, which offer strong mitigation be undertaken to estimate the emissions from onsite potential. A variety of climate finance instruments are sanitation in order to develop carbon credits from already available from the facilities such as the Global community sanitation and septage management Environment Facility, the Climate Investment Funds, projects. Technical assistance is needed to prepare and the Green Climate Fund. Water projects in investment-ready national adaptation plans and developing countries are eligible for these instruments project pipelines, building on CCDRs and ensuring as well as carbon credits. It is important to note that the centrality of water for such plans, as these offer climate finance and carbon credits are expected to a strategic opportunity to identify, sequence, and complement rather than substitute for other sources prioritize policies and interventions that reduce of private and public finance. GHG emissions and boost resilience; and to reduce costs for private financing through risk mitigation and credit enhancement instruments. Another factor to consider is the minimum scale required by various climate funds, which may be too large for a typical water sector service provider. Mechanisms to effectively aggregate service providers to access such climate financing as a group may need to be BOX 3.3: Vietnam Clean Water Bond considered and developed. Additionally, a regional assessment of the sources of climate finance, eligibility criteria, and a possible screening tool for A US$50 million Emission Reduction-Linked Bond climate finance may support efforts to mobilize such was launched in 2023, providing investors with sources of finance to meet mitigation and adaptation a return linked to the issuance of Verified Carbon goals locally. Units (VCUs) produced by a water project in Vietnam. The bond is an outcome-based financial The climate finance opportunity space is outlined in instrument that mobilizes private capital to support Figure 3.5. the financing of a project to manufacture and install 300,000 water purifiers in about 8,000 schools and institutions in the country. These are expected to increase access to safe water for around 2 million students and reduce GHG emissions by around 3  million tonnes for five years. The WB priced the bond, which has a 100 percent principal protection guarantee. Proceeds will be used to fund WB sustainability initiatives. Investors do not receive an ordinary coupon – instead, an equivalent amount will be given through a hedge transaction with the financial services firm Citi to support the funding of the water purifier project, which is managed by a private developer. The investors will receive semi- annual coupon payments linked to the issuance of VCUs on the Verra Registry. The water purifiers will be free for schools and communities that were unable to access safe water. 25 FIGURE 3.5: Strategic Direction on Advancing Climate Outcomes Sanitation Climate • Finance with an explicit objective of supporting finance climate change mitigation and/or adaptation definition and resilience Irrigated rice How to tap • Methodologies for assessment of mitigation/ Select Floating solar climate resilience value opportunities finance • Better data on adaptation investments in water sector • Data on emissions for water sub-sectors, including sanitation Hydroelectric retrofits • Support for preparation of investment-ready of storage dams national adaptation plans and project pipelines • Cost reduction for private financing through risk distribution and trust-funded grants • Risk mitigation instruments, such as loan Drought and flood guarantees protection projects 26 4| WB ROADMAP 38. The proposed WB Roadmap builds on the lessons and various credit enhancement instruments, proposed learnt from ongoing and past engagements in the to be designed through a collaborative and consultative water sector and the strategic directions outlined process with local stakeholders to ensure complementarity in this document. It provides a joint blueprint for the of efforts. Nonetheless, the fiscal implications of providing International Bank for Reconstruction and Development such risk mitigants may pose challenges for replication. (IBRD), IFC, and MIGA, including the IBRD’s Infrastructure Finance, PPPs, and Guarantees (IPG) and 41. To enable the roll-out of this Roadmap by the Treasury groups. The Roadmap draws on the combined global and regional WB teams, a roster of potential know-how of the three institutions, encompassing their water investments and engagements at the pre- (i) long history of engagement in the water sector and pipeline, pipeline, appraisal, and portfolio stages of set of lessons extracted from experience; (ii) extensive WB operations has been created and will be updated and trusted relationships with the public and private regularly. This tracker could also indicate how Bank sector, and their associated convening power; (iii) operations are contributing to private capital facilitation, complementary expertise to support innovative solutions; including PCE and PCM, and private sector engagement and (iv) diverse set of products that can collectively be towards the achievement of SDG 6 targets and climate deployed to implement solutions. Though the Roadmap outcomes (see Chapter 5 for further details). provides for a comprehensive approach, the rationale is that it can be tailored to support national, subnational, 42. The Roadmap promotes the concept of strategic and utility-level engagements, customized to the specific financial planning by WB teams and client countries context and market conditions. in crowding in public and private sector funding and financing for water sector investments, and taking 39. The Roadmap aims to clearly articulate key advantage of private sector expertise, know-how, and areas of work with WB clients to scale up finance technology for the delivery of water sector infrastructure for water investments and integrate the WB’s and services, and the achievement of water sector goals, corporate commitment around MFD and private with appropriate control and monitoring of results. This capital facilitation into WB water operations. Each WB approach is intended to be demand driven, with the operation would systematically incorporate the scaling various steps developed at the request of and with the up finance approach across the project lifecycle. WB engagement of client governments. operations would assess, as appropriate to the context, how the IBRD/IDA engagement can mobilize financing 43. The proposed Roadmap has 10 key steps, as and ensure financial sustainability for water from the outlined in Figure 4.1. This chapter describes each entire suite of public funding, debt, and equity of the steps through the different phases of the WB financing solutions. Special emphasis will be placed on project preparation cycle, from upstream policy dialogue mobilizing local currency financing and supporting the and analytical and advisory work to the preparation of development of domestic financial institutions and capital CCDRs, Systematic Country Diagnostics (SCDs), and markets, including domestic insurance and pension Country Partnership Frameworks (CPFs), to pipeline funds, in collaboration with WB’s Equitable Growth, operations (concept note and appraisal) and during Finance, and Institutions team. implementation. Step 1 on building capacities and step 10 on developing a coordinated approach with 40. The Roadmap will balance longer-term objectives stakeholders are cross-cutting themes, proposed to be such as creditworthiness and financial viability of undertaken on a ongoing basis. Figure 4.2 illustrates service providers with the shorter-term goals of clients this approach across the operational engagement and partners to mobilize private and commercial cycle. Steps 1–6 of the Roadmap involve work on capital. Such short-term goals may require appropriate the “demand-side” for financing, and steps 8 and 9 financial structuring, for example, the provision of viability specifically look at the “supply-side”, while step 7 on gap funding, guarantees, payment security mechanisms, pipeline development represents the bridge between 27 FIGURE 4.1: WB Roadmap: 10-Step Engagement STEPS OF ENGAGEMENT TOOLS AND INSTRUMENTS Training and Building Capacities to Support the Foundations of Creditworthiness Capacity Building 1 International Benchmarking Network of Water Utilities; Water Utility Creditworthiness e-course; Water Utility Financing e-course; Shadow Credit Ratings; Utility of the Future; Citywide Inclusive Sanitation; Utilities for Climate Cross-Cutting Theme Assessing Macro-Fiscal Conditions, Financial Market Maturity, and Investment Climate 2 Systematic Country Diagnostic; Country Partnership Framework; Country Private Sector Diagnostic; OECD scorecard; InfraSAP Diagnostic for Water Analysis & Diagnostics Aligning Water Security with Climate Goals and Economic Development 3 Country Climate and Development Reports; Climate and Economic Analyses of Resilience in Water; Water Security Diagnostics; Water in Circular Economy and Resilience framework (WICER framework) Designing Supportive Policies, Institutions, and Regulations 4 Water Supply and Sanitation Policies, Institutions, and Regulation: Adapting to a Changing World; Public Expenditure Reviews Integrating Financial Sustainability Analysis in Sector Planning and in the WB Project Cycle Financial Planning 5 Financial modeling; financial viability analysis; analysis of tariffs, taxes, and transfers Turning Around Technical Efficiency and Operational and Financial Performance of Water Service Providers Turnaround Strategies 6 Performance improvement plans (Utility of the Future); performance-based contracts for non-revenue water reduction and improving efficiency; irrigation modernization Developing a Pipeline of Bankable Projects 7 Better data and information; market-making; support for project development; pooling projects to reach economies of scale and reduce viability risks Financing Solutions Creating Markets for Local Currency Financing and Mobilizing Domestic Finance 8 Domestic commercial lending and capital markets development Mobilizing the Full Suite of Funding and Financing Solutions 9 Efficient public spending; blended finance; public-private partnerships; viability gap funding; commercial debt; microfinance; risk retention instruments; payment- and loan guarantees; WB Scaling ReWater Platform Developing a Coordinated Approach with Stakeholders Stakeholder Engagement 10 2030 WRG multistakeholder platforms; principles of engagement with multilateral development banks; donor roundtables; high-level events Cross-Cutting Theme 28 FIGURE 4.2: One WB Approach for Operational Engagements in Water Country Climate and Systematic Country Climate policy Advise, structure, Development Report Diagnostic actions and and implement + + investments InfraSAP Country Partnership + Framework Country Private Sector Diagnostic Identify country’s Identify constraints Identify finance needs, Prepare project development and to scale up private including WB financing Design financial climate priorities sector interventions solutions, and advise package to enable PCE, and investment needs as co-financiers (PCM) on package to address PCM, and minimize (public and private) and project sponsors in constraints to PCE and government liabilities, country (PCE) PCM, including own including credit resources, mobilization enhancement and technical Implement, monitor, assistance report them and step 10 provides a cross-cutting focus to ensure frameworks constrain sector investments. Resolving coordination and collaboration across stakeholders. this will necessarily imply building and strengthening existing external capacities through various WB tools 44. Not all countries will apply each of the steps and instruments, as highlighted in Box 4.1. under the Roadmap, as this will be driven by the government’s leadership and priorities, analytical work 46. Externally, to help clients address these foundational already undertaken, the existing framework of enabling issues and pave the way for applying the scaling conditions, and whether the engagement has a national up finance for water approach, a concerted effort is or subnational focus, among other factors. Hence, different countries and WB teams may agree to work on a subset of the suggested steps. The Roadmap steps may also not necessarily be sequential. The approach aims to support the preparation of programmatic approaches through financial sustainability assessments and BOX 4.1: WB Technical Assistance coordination with public and private financiers. Packages and Tools Each of the steps of the Roadmap is outlined in the • Water Utility Financing e-Learning following sections. • Water Utility Creditworthiness e-Learning • Utility of the Future Program • International Benchmarking Network of Water Utilities - New IBNET 4.1 BUILDING CAPACITIES TO • Water Supply and Sanitation Policies, SUPPORT THE FOUNDATIONS OF Institutions, and Regulation (PIR): Adapting to CREDITWORTHINESS a Changing World • Water Loss Reduction Performance Based 45. Addressing foundational elements related Contract to creditworthiness is at the heart of mobilizing • Citywide Inclusive Sanitation (CWIS) Initiative finance for water investments. As highlighted in • Water in Circular Economy and Resilience the strategic direction on “Establishing the Enabling • WB Scaling ReWater Program Conditions”, poor performance, lack of financial • IFC Utilities for Climate (U4C) Program viability of service providers, and lack of solid PIR 29 needed to deploy existing WB technical assistance planning, and budgeting. While these courses are packages and tools (see Box 4.1) geared at improving designed to help water utilities become creditworthy PIR, monitoring, and benchmarking systems, and and help governments create an environment that supporting utility performance, financial management promotes such creditworthy water utilities, these can and creditworthiness, and circular economy solutions. In also support Bank staff to build their technical capacity addition, benchmarking data from the IBNET and other on utility performance. Moreover, internal capacity and sources, where available, would be incorporated into knowledge on this approach could be enhanced through project design processes to support lending operations. various learning tools, such as webinars and knowledge Shadow credit-rating programs can be supported exchanges through the Water GP Knowledge and for relevant service providers to provide a confidential Learning Team. assessment of their creditworthiness and support pathways to improve the technical and financial viability of these entities to improve their ability to repay debt. 4.2 ASSESSING MACRO-FISCAL CONDITIONS, FINANCIAL MARKET 47. Operationalizing the Framework will also require MATURITY, AND THE INVESTMENT WB staff to have the knowledge and skills on financing CLIMATE to integrate the requisite elements into projects. The capacity of WB staff to deliver the scaling up finance 48. This step of the proposed roadmap consists of for water agenda will be built up through dedicated assessing the overall macro-economic and fiscal training programs on commercial and private financing conditions, financial market maturity, and overall and foundational elements, including the Water Utility investment climate, to identify the feasibility of and the Finance and Creditworthiness courses, focused on pathways to increase both public and private financing for addressing various aspects of the utility business, such water sector investments, including a rapid assessment as governance, financial and operational management, of the binding constraints and the main opportunities. FIGURE 4.3: Market Maturity Assessment UPSTREAM DOWNSTREAM LOW RISK (INVESTMENT GRADE) MEDIUM RISK Support for tapping local capital markets and commercial finance Support for financial sustainability and HIGH RISK de-risking • Structuring credit enhancement in capital markets • Debt and grants for financial sustainability • Bond and loan issuances Support for technical-financial • Structuring public finance to de-risk projects • PPPs viability and PIR reform • Policy reforms through Development Policy • Guarantees Operations • MIGA political risk insurance • Technical assistance for • Results and output-based financing and non-honoring of sovereign technical and financial • Selective guarantees (payment and loan) and SOE obligations efficiency of service providers and PPPs • Grants for policy, regulatory, • Blended finance and institutional frameworks • Risk-sharing facilities • Support to build • WB Treasury’s contingent financing creditworthiness (Deferred Drawdown Option) • Select PPPs and guarantees, • MIGA political risk insurance and selective including MIGA political risk non-honoring of sovereign and SOE insurance obligations 30 This step would help WB teams and governments in identifying the needed actions, support, and financing BOX 4.2: WaterSAP packages that could be offered to countries to facilitate the mobilization of finance based on the level of maturity of the country or water service provider (if the Building on the InfraSAP, the WaterSAP would focus is at subnational/SOE level) and also identify the address policy questions on water infrastructure inherent risks, as outlined in Figure 4.3. As defined by and water services constraints through the lens of the OECD Policy framework for Investment, “a good connectivity, finance, and governance, such as investment climate is one which provides opportunities the following: for all investors: public and private, large and small, and foreign and domestic”. 1. How water contributes to development (in terms of macroeconomic objectives: jobs, growth, and 49. The analysis could be done by WB teams in exports). collaboration with client governments through the 2. How and where the key sectors of the economy and policy goals (social, environmental, climate existing Infrastructure Sector Assessment Program change mitigation and adaptation) are dependent (InfraSAP)46 methodology, adjusted as needed to on or jeopardized by water infrastructure and be tailored to the water sector47 in the form of a new deficiencies. “WaterSAP” to be developed by the Water GP and 3. Where water infrastructure and services IPG in collaboration with others as a module of the performance fall short and why, across the three core InfraSAP tool (see Box 4.2 for a description of pillars of connectivity/performance, finance, the potential expanded scope of the tool). This new and governance. Specifically, under the finance WaterSAP tool is expected to facilitate several other pillar, it can address questions such as whether steps of the proposed WB roadmap, both on demand- water infrastructure is appropriately funded, and supply-side assessments and proposed solutions whether public expenditure on water is adequate (see appendix B). and efficient, and what constrains domestic and international private finance for water investments. 50. For this specific roadmap step, the InfraSAP Standardized Analysis scope48 covers the main items to be analyzed, including macro-level fiscal indicators – for example, country debt ceiling and debt sustainability profile; credit rating; country risk profile; cost of capital; assessment of local financial markets maturity; regulatory and policy goals in a country, and the impacts of climate frameworks for PPPs; and procurement practices. The change risks on social growth and development; and 2) World Bank’s Systematic Country Diagnostic (SCD) the most realistic opportunities to mobilize expertise and and Country Partnership Framework (CPF) and financing for these investments, both public and private, IFC’s Country Private Sector Diagnostics (CPSDs) including equity and debt. The analysis will be based would also be used to assess the overall environment on information gained from various existing diagnostic for private sector investment and activities, beyond the tools and recent trends on private sector investment; water sector. from consultations with government, the domestic banking sector, and private financiers and investors on 51. Of relevance in the context of the WB’s new Private their priorities, strategic development, and investment Capital Enabling (PCE) methodology, this step could plans; and from available national Climate Change help identify actions required at the broader macro-fiscal Adaptation and Mitigation Strategies and nationally level to advance investment and improve corporate determined contributions. Depending on the client’s and public governance, along with actions for business needs, the scope of this step might change or be more conduct, decentralization, and procurement. narrowly focused on a pre-identified investment. 53. The WB’s Climate Change Action Plan49 introduced 4.3 ALIGNING WATER SECURITY WITH the CCDRs as a new core diagnostic tool to help countries CLIMATE GOALS AND ECONOMIC prioritize climate actions and capture synergies between DEVELOPMENT climate commitments and development objectives. Given the centrality of water in climate change, the 52. This step will look at the in-country characteristics Climate and Economic Analyses of Resilience in of the entire water sector value chain and the different Water introduces a standardized framework for Water- water sub-sectors. It will consider: 1) the role of water CCDR analyses to offer a comprehensive coverage on in economic, social, and environmental development water-development interlinkages, which could serve 31 as a good basis to identify infrastructure and service the feasibility of addressing these constraints through gaps. The World Bank’s Climate Change Action Plan existing reform programs, capacity building, and other also mandates alignment of all new WB operations initiatives. This can then be compared against the scale and 85% of IFC and MIGA operations with the of investment that could be unlocked in each sub-sector Paris Agreement from July 1, 2023, moving to 100% to come up with a prioritization list across the impact and alignment from July 1, 2025. This effort is supported by feasibility axes. the Bank’s GHG accounting system and the requirement that all Task Teams developing projects conduct climate 57. There is considerable evidence that country-level impact assessments, which analyze a project’s GHG and city-level PIR reforms can transform operational emissions against a “no project” or defined alternative. and financial performance.51 Moreover, regulation Findings from the climate impact assessment are used has a central role to play in enhancing financial to inform final project design choices and investment sustainability and supporting an appropriate decisions. In addition, the Water Security Diagnostics investment climate to attract the necessary and the WICER framework provide comprehensive investments through designing and implementing approaches to water resources management and the tariffs and subsidies in a manner that is transparent nexus of water with other sectors. and predictable and incentivizes efficiency. Policy and regulatory tools to improve financial sustainability 54. Ongoing research by the Water GP on emerging include tariff setting; mandatory financial modeling opportunities to leverage climate finance for water and regulations on financial management and infrastructure investment highlights that interventions reporting by service providers; targeted programs in sanitation, irrigated rice, floating solar, and bridging the gap between service providers (demand) hydroelectric retrofits of storage dams show the and domestic banking sector/local capital markets greatest potential for achieving unrealized levels of (supply), while increasing knowledge on both sides to mitigation outcomes.50 In addition, energy efficiency allow for the mobilization of local commercial finance and renewable energy interventions (solar photovoltaic in the water sector; assessment of creditworthiness; systems) are relatively straightforward investments that capacity building for financial analysis in the sector; can get water supply and sanitation utilities their first and the provision of efficiency incentives to sector experiences with pursuing specific climate mitigation players, thereby improving cost recovery through outcomes, while also improving their financial outlook. controlling costs. In addition, the accountability and Climate finance levers, such as results-based financing efficiency of water service providers could be improved for emissions reductions, grants, private sector loans and through sector restructuring and reforms. Box 4.3 investments, loans from public and multilateral lenders, provides additional detail on PIR reforms. and philanthropic support are all viable sources of climate finance that can help to incentivize such investments. 4.5 INTEGRATING FINANCIAL SUSTAINABILITY ANALYSIS IN SECTOR 4.4 DESIGNING WATER POLICIES, PLANNING AND THE WB PROJECT INSTITUTIONS, AND REGULATIONS CYCLE 55. This step looks at specific water sector policies, 58. This step would deepen the analysis of public institutions, and regulations (PIR) to identify gaps and spending frameworks through an assessment of binding constraints for optimal sector funding and existing and additional assets’ capital expenditure financing, and formulate recommendations to optimize (CAPEX) and operating expenditure (OPEX) public spending in water, building on those under requirements to estimate financing needs. step 2, which govern the financial sector and capital Comparing CAPEX and OPEX needs with current markets. This assessment would include data from PIR revenues from tariffs, annual budgets, and retained diagnostics, Public Expenditure Reviews in Water, earnings from SOEs, plus available grant funding (3Ts and/or other studies of a similar nature that may exist in – tariffs, transfers, and taxes) provides an analysis of the country. the fiscal gap and financing needs. The scope for this exercise could ideally be the national level in order to 56. For the most promising sub-sectors identified in step introduce strategic financial planning to achieve national 3, this step would include a preliminary review of: (1) water security goals, though it could also be done at the binding constraints to increased private investment the subnational and utility level. At any rate, it should – e.g., legal, market structure, tariffs, access to finance, include an assessment of the corporate governance creditworthiness, governance, policy, institutional, and financial performance of selected water utilities, and environmental and social requirements; and (2) as this would help to guide the analysis of constraints 32 BOX 4.3: PIR Reforms The mobilization of commercial institutional capacity and well- operational and capital efficiency. finance requires reforms that trained staff are required for the For example, performance- advance efficiency gains, cost absorption of existing budget based financing mechanisms and reduction, and cost recovery, along allocations and the execution of incentives that link the provision with balance of taxes and tariffs additional funds. of capital with adherence to as sources of finance. Certain • Transparency in Technical specific performance standards key aspects of PIR need to be Operations and Financials: and robust governance can considered under any country Details on technical operational lead to higher cost recovery and engagement process: data (e.g., assets available, level capital efficiency. The resultant and quality of coverage, and improvements in service delivery • Efficiency in the Use of Public losses) and sector/sub-sector may trigger higher tariffs and Resources: This requires the revenues and expenditures transfers from stakeholders. development of robust financial should be transparent and • Supportive Policies to Leverage planning and management available. The financials Commercial Finance: The of public resources, which is require clarity on the level and policy and regulatory framework collectively agreed, consistently composition of the sources of should encourage, rather than applied, and efficiently allocated funding, and coverage not only inhibit, private investment. For to the most productive uses. Any of capital expenditure, but also of example, in some countries, subsidies should be well-targeted, equipment, and operations and service providers are restricted transparent, and quantifiable, tied maintenance costs. from issuing corporate bonds. to identified policy objectives, • Governance Improvements Effective regulation to ensure and avoid unintended outcomes, and Incentives for Service predictability and sufficiency such as crowding out commercial Providers and Farmers: of revenue streams may boost investments. Creation of the right governance investor confidence. • Institutional Capacity Creation structures and incentives and Strengthening: Adequate can support improvements to and recommendations for priority focus areas. Where to identify financing for water infrastructure and services data availability and resources allow, the analysis could development, and offer the potential for diversifying include a cost-curve assessment to identify highest financing sources (such as municipal and climate finance) return investments and facilitate a cost-benefit analysis and accessing local currency debt and equity markets. of alternative solutions to achieve water supply and water security goals. 60. Financial viability analysis will also help assess the “bankability” of specific investments and 59. This step proposes to mainstream financial projects to support PPPs, portfolio investment viability and sustainability analysis in sector planning approaches, and pooled financing mechanisms (see and in all IBRD/IDA water operations. Financial step 8, in section 4.8). Since all projects carry a degree analysis should be mandatory (similar to economic of economic, social, financial, technical, environmental, analysis) to assess the financial viability of service and operational risk, a “bankable” project can be providers and improve their financial sustainability and characterized as one where these risks are allocated in creditworthiness to increase the possibility of attracting a sufficiently optimal way to give a lender or investor commercial and private financing. This should also be the confidence to finance the project. The analysis mirrored in WB operations to incorporate the principles should include economic cost-benefit analysis, the use of financial sustainability. In addition, financial modeling of competitive bidding whenever possible to determine should be mainstreamed to support sector planning the size of needed subsidies to make the project and the design of water investments and service delivery. financing viable, and fully transparent assessments of This would be the basis for coordination between the elements such as subsidy size, policy objectives, types government and financiers, including private financiers, of beneficiaries, and payment mechanisms.52 IFIs, MDBs, bilateral donors, and the finance community, 33 4.6 TURNING AROUND THE TECHNICAL 64. Improved efficiency is also an untapped source EFFICIENCY AND OPERATIONAL AND of funding for water investments, as inefficiency is FINANCIAL PERFORMANCE OF WATER an opportunity cost for governments and service SERVICE PROVIDERS providers. Improved efficiencies and performance enable service providers to offer better services at 61. Private sector expertise and innovation can play lower costs, freeing up resources that can be invested a central role in turning around the technical and in improving or expanding services. Service providers’ operating efficiency of water service providers. This step performance can be improved through more efficient is particularly relevant for WSS Utilities and WB teams upstream choices regarding capital expenditure; supporting them (whether directly or through broader achievement of short-term operational efficiency government programs targeting utility performance gains; and aiming for financial sustainability and improvement), though achieving greater technical and creditworthiness as strategic objectives. operational efficiencies towards financial sustainability is a priority across the various water services, including for irrigation operators and farmers. However, these two sub-sectors deserve separate analyses, approaches, and tools to do this. BOX 4.4: The Utility of the Future Methodology to Ignite Transformation Water and Sanitation in Water and Sanitation Utilities 62. For WSS Utilities, operational and financial performance is key to achieving the creditworthiness The Utility of the Future program guides utilities in required to access commercial finance. If a provider is initiating and maintaining transformation efforts. creditworthy, then by default it is operating in a way that The goal is to become a future-focused utility that is sufficiently efficient and financially credible and with provides reliable, safe, inclusive, transparent, an acceptable level of oversight. Access to commercial and responsive WSS services through best-fit finance in turn increases incentives for efficiency practices in an efficient, resilient, and sustainable and further helps to disrupt the status quo. Technical manner. This clearly depends on technical and and financial efficiency, coupled with transparent commercial operations, though not exclusively so. Other elements of sound utility management governance and regulation, are the building blocks of are organization and strategy, human resource creditworthiness. While research shows that there is no management, and financial management. one-size-fits-all solution for a turnaround program, key Together, these elements promote effective and success factors include strong management and a clear efficient commercial and technical operations, while customer-oriented vision. A second key conclusion is the legal framework and governance in which the that a successful turnaround program will be a gradual utility operates shape its enabling environment. series of improvements using the existing resources of the utility. Finally, there are a few key conditions for The Utility of the Future methodology works in a successful performance turnaround: a competent parallel on two dimensions to improve performance and incentivized management with a minimal level and ignite transformation in water and sanitation of managerial autonomy and government leadership utilities: management and operations (a “hard” to make the changes needed and promote the right dimension that focuses mainly on processes and practices) and change management (a incentives. “soft” dimension that focuses on leveraging staff engagement, empowerment, and team building). 63. The WB, through technical assistance and operational engagements (e.g., Program for Results instruments), can help (1) governments to design and implement programs at the national or regional level that put in place the right incentives for institutional change through new regulations, results-based financing, improved monitoring, and benchmarking; and (2) client utilities to design and finance turnaround strategies and performance improvement plans. Tools such as the Utility of the Future (see Box 4.4) can help Task Teams and clients to build capacities around these efforts. 34 Irrigation Services non-optimized design; and ii) the lack of financial assessments of service providers, increasing the 65. Irrigation modernization has implied a growing creditworthiness risk perceived by investors. trend towards more entrepreneurial and market- 3. The provision of relevant financial tools to oriented approaches, with smaller and better- enhance the viability and attractiveness of targeted public sector intervention in the provision projects. This involves providing a financing of services. In parallel, purely private irrigation framework and financial incentives and tools to has expanded enormously, notably with the rapid address the current low leveraging of technologies development of groundwater. Groundwater development and practical know-how which could be embedded in has vastly increased irrigated output and, through the project design. These elements include: i) working precision irrigation, boosted water productivity, though to improve the efficiency of the local capital markets; it has been accompanied by significant depletion and ii) designing adequate blended finance approaches; deterioration of the resource. The push to modernize iii) using standard financial tools reducing lenders’ irrigation is helped by the abundance of new technology risk and borrowers’ constraints (e.g., the NUWAS that can boost irrigation efficiency, both in terms of project in Indonesia); and iv) developing a common conveyance and on-farm application of water, and reduce understanding of investment strategies and criteria. the costs of irrigation service. Performance-based contracts can support the involvement of the private sector to advance key metrics of efficiency, access, and 4.8 CREATING MARKETS FOR resource sustainability. The use of automated systems, LOCAL CURRENCY FINANCING AND corporatization of service providers, and integrated water MOBILIZING DOMESTIC FINANCE management from the water source to the farm level can support better water management in the irrigation chain. 68. The goal of this step is to encourage local currency financing and domestic resources mobilization for water sector projects and 4.7 DEVELOPING A PIPELINE OF investments in developing countries. In general, BANKABLE PROJECTS in order to avoid currency risks, as far as possible, funding should first be sourced in the domestic market, 66. This step focuses on supporting clients on to avoid exchange rate risks and limit transaction costs. the identification and active promotion of water- This includes mostly debt instruments, though this related investments for which private financing requires issuers to be creditworthy and manageable, (including commercial finance) can be mobilized. as highlighted in previous steps. However, the level The risk-return profile, and thus the attractiveness of of development of local capital markets can constrain any investment, depends crucially on the financiers’ the issuance of domestic debt securities, with limited ability to assess investment and operation risks. local savings pools due to underdeveloped pension funds and asset management industries. Sustainable 67. This section of the roadmap can focus on helping financial instruments like green, blue, or sustainability- the WB address three key areas through technical linked bonds may be suitable for governments or assistance and operational engagements: utilities seeking to fund water-related investments, with more advanced middle-income countries having 1. The promotion of a stable and attractive relatively well-developed institutional investors and business environment in the country and its deep capital markets. Appendix B provides further water sector.53 This would be to address existing detail on fostering greater local currency financing and bottlenecks focused on reducing the misperceptions domestic finance. on investments in water-related projects and the risk perception of investors, which may be built upon low 69. National development banks can play a crucial or unpredictable tariff revenues and low-performance role in providing long-term financing to small and issues. It is also crucial to ensure that opportunities medium-sized entities that are unable to access are visible and known by potential investors. commercial financing. In addition to financing, 2. The preparation of robust investment national development banks can provide technical opportunities and an attractive pipeline of assistance to service providers for project preparation, opportunities.54 This area would address two key and for structuring project finance, as well as advisory bottlenecks: i) the high transaction costs of water support for building financial and technical capacity. projects, limiting efforts and resources placed in Overall, such banks offer a valuable source of funding project preparation phase, which could result in and support for mid-sized entities looking to expand 35 their operations while promoting sustainable growth in 4.9 MOBILIZING THE FULL SUITE OF the sector. FUNDING AND FINANCING SOLUTIONS 70. The mobilization of local currency financing 71. The key output of this step is a set of recommendations for subnational governments and SOEs for water on financing options for governments, the WB, and other investments can be supported by national or regional development partners tailored to the scope and priorities water financing facilities. These facilities would serve identified in the previous steps, with relevant actions for multiple roles, including centralizing performance all parties involved that are time-bound, action-oriented, monitoring and incentives for service providers, and achievable within the short to medium term. directing public funds to underserved populations and SDG priority projects, providing technical assistance 72. This step suggests a review of options for client for project preparation and management, mobilizing countries, the WB, and others to put in place financial private finance by presenting more and better water structuring and innovative financing solutions, building projects, and helping to build capacity for banks to lend on the priorities identified under the previous steps and to different types of projects. The facilities could also using a blended finance approach, to finance technical pool smaller projects under special purpose vehicles assistance and investments geared towards achieving to leverage additional funding. A national or regional water security, water SDGs, and climate goals, as financing facility could be structured based on the size described in Strategic Direction 3 of the Framework. A of the market and regulatory characteristics. A national starting point might be to match potential water project facility may be suitable for a large market while a structures with investor interests, as often the needs regional facility is appropriate for smaller countries with for water sector investments are of a smaller scale with similar regulations. Economies of scale in financing, lower return profiles than what investors seek. Figure 4.4 pooling of risk, and sharing administrative costs can be shows a mapping of such water projects and investor achieved with a multi-country facility. Fund managers interest to illustrate this point. can learn from feedback in multiple projects and streamline the preparation of further projects. The fund 73. A key area of focus under this step is to identify can be managed by a Fund Manager or an organization potential blended financing solutions which can already operational in the country or region. The facility be supported by WB and others’ products to lends to service providers, who repay the loan from secure the required financing for priority water retained earnings, and the fund can be structured as investments. These factors differ by country, province, a revolving fund where repayments are lent again to and municipality, and some barriers are higher than other projects. However, foreign exchange risks may others. The critical element is to thoroughly review the require hedging in the case of multiple currencies. context, institutions, market conditions, and proposed Box 4.5 provides examples of financing models across investments (Steps 1–6), the pipeline of projects (Step countries. 7), and the availability of concessional financing and investor appetite, to design the blended finance facility in a tailored way to ensure success (Steps 8 and 9), while coordinating closely with other stakeholders and partners (Step 10). 74. Given the limited budget and the high cost of capital in developing countries, the WB can play BOX 4.5: Examples of Country-Level an important role in de-risking investments and Financing Models providing credit enhancement, as well as providing grant and concessional funds, investment, and Many advanced economies, including the United lending needed for water projects, applying a States and EU, have implemented financing models blended finance approach. The use of public, grant, to support investment in the water sector, such as the and concessional sources of finance and investment Clean Water Revolving Fund and Cohesion Funds from host governments, the WB, and IFC to attract to provide grant funding for countries to meet EU private capital can be done in several ways based directives on water, while the European Investment on the needs and circumstances of specific projects. Bank provides technical assistance for strategy and Guarantees and credit enhancement (potentially planning, project development, and project appraisal supported by the use of IDA Private Sector Window/ for infrastructure projects under the JASPERS facility. MIGA Guarantee Facility) can promote blended finance projects and facilitate private investment in the water 36 FIGURE 4.4: Map of Water Projects and Investor Interest 1A Industry-linked ‘big water’ More commercial Industrial Estate Hydropower wastewater irrigation reservoir risk return treatment ratio Municipal ‘big water’ Multi-purpose dams Small-scale WASH solutions 1B Wastewater reuse Desalination 2 Bulk water supplies (eg. City water Rural water Smallholder reservoirs) supply & waste supply irrigation water treatment Ability to return capital Flood defenses Rural sanitation 1m 10m 100m 1b Transaction size (US$) Catchment restoration, regenerative 3 Nature-based solutions agriculture etc. More concessional 4 Water governance capital Source: Blended Finance Task Force, Mobilizing Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets (2022). Wastewater reuse and desalination have been added by authors as a set of water projects with growing investor interest. TABLE 4.1: Blended Finance Structures APPROACH DESCRIPTION APPLICATION Grants Private capital (equity and debt), with grant funds from the host For non-creditworthy projects or water government, WB/MDBs, UN agencies, bilateral and multilateral donors utilities, and/or support in the early (e.g., to lower costs and bring a project to bankability, including support preparation) stages of a project. through technical assistance during the project preparation stage. Concessional Private capital (equity and debt) with concessional funds on below- For non-creditworthy projects or water Funds market terms from WB/MDBs, development finance institutions, and utilities. policy banks to lower the overall cost of capital and strengthen a project’s commercial viability. Guarantees Guarantees, with potential use of Private Sector Window/MIGA For developing countries, including high- Guarantee Facility or other guarantee facilities, to cover equity and risk countries and projects; for non-/ debt against political risks, including a government’s (or water utility’s) low-creditworthy water utilities/water failure to meet specific obligations to the project under a water off-takers. purchase agreement and/or government guarantee. These provide credit enhancement, bring down borrowing costs, and facilitate private investment in the water sector. Insurance A practice by which an entity provides a guarantee of compensation For projects facing high political and (demand guarantee or corporate guarantee) in case of an adverse credit/commercial risks. event. Depending on the circumstances, political risk and/or credit/ commercial risk insurance may be appropriate. Other forms Support from the government through subsidies by temporary tax For non-/low-creditworthy projects or of support exemption or relief; subsidies provided conditional on the service water utilities; low tariffs; upfront capital delivery and quality; upfront project capital input; and public funds used required; and where private financing to hedge currency and/or interest rate risks. is in hard currency and/or on floating interest rate terms. 37 sector including in high-risk countries. It ensures that to water security investments. The chosen set of the investors and lenders will be repaid in case of a financing solutions may include additional innovations default event by the government or water utilities. such as asset recycling, aimed at monetizing invested Table 4.1 outlines typical blended finance structures. capital in brownfield assets for the development of new Figure 4.5 covers a possible set of financing options in infrastructure solutions, as well as hybrid PPPs, which the water sector, leveraging concessional resources. combine concessional funding with private operation Appendix B provides further detail on each of the and financing. listed financing solutions and how they could apply FIGURE 4.5: Financing Options LEVERAGING CONCESSIONAL RESOURCES Private sector mobilization SOE/Public program Risk mitigation and/or No or limited recourse project financing platforms sharing facilities finance Corporate or structured finance Financial intermediaries • Individual projects • Alongside reforms, access new • For small individual projects requiring • Serves transformational financing sources e.g., ESG, aggregation investment needs institutional investors • Serves investment needs at national • Take SOEs and sub-nationals to level through existing or new financial international markets through asset intermediaries recycling • Free up fiscal space • Domestic/international debt finance … and explore structures to blend various sources of capital for climate-smart projects World Bank Trust funds, including International investors Local investors for climate • Loans • Loans • Commercial banks • Commercial banks • Guarantees • Grants • Emerging market Eurobond • Institutional investors • Guarantees investors • Domestic development • Reinsurance companies finance institutions • ESG investors • Institutional investors • International development finance institutions 38 4.10 DEVELOPING A COORDINATED 77. In this context, developing country platforms for APPROACH WITH STAKEHOLDERS financing, with participation of relevant actors, can serve to align stakeholder interests and support solutions 75. Given the need for collaboration and coordination to meet the financing needs of the sector. MSPs are among stakeholders on the financing agenda for country-level dialogue and decision-making platforms the country, this step would encompass stakeholder which bring together high-level representatives of engagement, which may develop into a formal multi- government, public agencies, the WB, development stakeholder platform (MSP) for financing over time. partners, the private sector, civil society, and academia. Bringing multiple stakeholders into dialogue with one The concept of country platforms for financing another early in the reform process and continuing was endorsed by the G20 in February 2020 through this engagement over the long term is essential to the “G20 Reference Framework for Effective Country implementing successful and lasting water sector Platforms”, proposed as vehicles for more collaborative reforms. In the past, instruments to support flows of and scalable solutions for catalyzing financing and private finance to creditworthy entities in the sector enabling private sector investments. The Framework have on occasion been undermined by weak demand, aims to build on this approach and on the experience resulting from the availability of concessional finance. of the World Bank’s 2030 WRG to create convergence Regular dialogue among development partners and around national-level priorities linked to water and financiers in an MSP would help to reinforce a common accelerate financing for the water sector. MSPs can commitment to crowding in commercial finance, serve multiple functions, as outlined in Figure 4.6. wherever possible, and directing concessional funds where they are most needed in the sector. Moreover, participation of the ministries of planning, economy, and finance in the water agenda is critical to improve national water investment planning and policy making. 76. This step will involve close collaboration and policy dialogue with government counterparts and other stakeholders, structured to:  Operationalize high MFD-potential programs and transformative engagements, sub-sectors, and regions.  Outline specific investment priorities and private sector engagement opportunities across the above high-potential areas, along with priority actions to diversify and scale up existing sources of finance to meet such investment opportunities.  Outline specific instruments from the WB and other development partners that may help address some of the constraints identified (covering technical assistance, capacity building, and/or financing needs). It is important to note that these would cover not only WB instruments but other financing instruments that might be available to governments from other development partners and would cover the entire suite of financing solutions from bonds and loans, to PPPs, microfinance, and other PSP options. 39 FIGURE 4.6: Multi-Stakeholder Platforms for Financing Water Understand funding and Exchange knowledge on Identify upstream reforms financing needs for water scalable solutions and enabling conditions and climate goals for PSP Deliver a financing framework Identify financial tools to reduce Design blended finance lender’s risks and borrower’s approaches constraints Match demand and supply for Develop investment strategies Identify concrete programs and climate finance and outcomes for project design and viability projects to advance MSP goals 40 5| IMPLEMENTATION ARRANGEMENTS This chapter covers key considerations for implementation arrangements to roll out the Roadmap, including on resources, pipeline development, and incentives to ensure alignment of the Strategic Framework internally and externally. 5.1 ONE WB APPROACH FOR WATER and Scaling Solar I. More generally, the WB will reinforce internal collaboration through the establishment of a 78. The proposed WB Roadmap for Scaling up high-level PCE/PCM Steering Committee and continue Finance for Water is aligned with the World Bank’s to track the impact of the WB ecosystem of engagements ongoing corporate efforts to facilitate private capital with private investors discussed above. investments, as outlined in the draft WB Evolution Roadmap under development. The WB Evolution 80. The proposed Roadmap will also require Roadmap outlines how the WB intends to use its global extensive collaboration across WB institutions, multisectoral knowledge and existing instruments as onsite data collection, interviews with stakeholders, and well as innovative, replicable, and scalable approaches strong analytics. The various “steps” are proposed to to enable and mobilize more private capital. The idea is be supported by multidisciplinary, collaborative teams, to achieve this using comprehensive solutions delivered with focal points appointed from Global and Regional coherently across the WB that (1) prioritize activities by Units from the Water GP, Equitable Growth, Finance and sector, geographic and other needs, such as policy work Institutions (EFI), Macro, Trade, and Investment (MTI), to facilitate private sector engagement; (2) enable private the Infrastructure unit, Treasury, IFC, and MIGA, as capital flows (including by defining and tracking PCE well as IPG specialists and economists from the Chief projects); (3) build robust pipelines for PCE and PCM Economist Office, with a combination of funding from in addressable markets through important work such WB country management units coupled with existing WB as project preparation; (4) create efficiencies through managed trust funds. Possible allocation of roles and scale and replicability; and (5) ensure measurable responsibilities across the WB is illustrated in Figure 5.1. financial results and development outcomes. This is intended to be applied across different geographies and sectors, including climate action, energy access, digital 81. It is proposed that a new Water GP Global transformation, capital markets development, and SOE Solutions Group on Water and Finance support utility reform. the operationalization of the Framework at the country level, revamping the existing Financial 79. The WB intends to reinforce collaboration Innovation Team (FIT). The FIT team, in collaboration across the Group, combining the strengths of each with colleagues from IPG, IFC, and MIGA, has been institution in a One-WB approach to increase PCE providing operational support, knowledge sharing, and and PCM across sectors. It will systematize the use systemic support to Private Capital Facilitation (PCF) in of CCDRs, the InfraSAP, CPSDs, Country Economic water since 2018. Currently, the FIT team is coordinated Memorandums, and IFC’s upstream work to identify as a community of practice under the Water GP, which policy constraints and engage early at the country level. involves water finance experts in regional and global To develop a strong project pipeline, the WB will leverage units of the Water GP and IPG from the WB, IFC, MIGA, existing analytics and project preparation facilities, and other trust-funded programs, such as 2030 WRG. such as the Energy Sector Management Assistance Under this strategic framework, the FIT community of Program, the Public-Private Infrastructure Advisory practice will be restructured into a Water and Finance Facility (PPIAF), the Global Infrastructure Facility, and Global Solutions Group to support the delivery of PCM IFC upstream capacity. The WB will also continue to solutions across countries. In addition, 2030 WRG develop and implement replicable, scalable “joint WB would support the development of the ecosystem for solutions and approaches”, such as the J-Cap program public-private collaboration at the country level by 41 FIGURE 5.1: Roles and Responsibilities in Delivery of the WB Roadmap for Scaling Finance for Water 2030 WRG and Water and Finance GSG support for upstream enabling reforms and public-private collaboration DEMAND-SIDE ASSESSMENT SUPPLY-SIDE ASSESSMENT IPG: Utility governance and creditworthiness IPG: Procurement and origination support, support, InfraSAP for Water, Value financial structuring, risk allocation, Enabling guarantee products for Money analysis, analyses of fiscal Conditions commitments and contingent liabilities + Financial PIR Governance Structuring WB Treasury: Innovative financing + + IFC: Bankability and financial solutions, including climate finance, Service Provider Innovative sustainability assessment CAT bonds etc. Performance & Financing Creditworthiness Solutions Water GP: Project design, lending, and Water GP: PIR reform, existing funding/ technical assistance financing for sector, revenue sources, efficiency levels, capacity building on performance turnaround, utility IFC: Project support, transaction advisory, financing and creditworthiness etc. project-level financial structuring, lending, and technical assistance MIGA: Macro screening, creditworthiness MIGA: Guarantee products, political risk assessment insurance, blended finance solutions etc. Combination of upstream reforms, midstream interventions, and downstream project implementation providing leadership on stakeholder engagement, affordable, particularly for lower-income countries. fostering collaboration through existing networks, and This would include new mechanisms and scaling up supporting the implementation of a well-established of support for microfinance for microenterprises and country platform approach (see section 5.2). households to invest in water-related assets, and vendor and supplier finance to assist domestic firms. 82. An important and sustained commitment on the part of the WB and other donors is needed to support implementation. In particular, the WB will need 5.2 2030 WRG UPSTREAM to provide long-term technical assistance to design and ENGAGEMENT AND STAKEHOLDER implement the enabling environment reforms and other COORDINATION upstream work. Support of the WB and other donors will be needed to build the pipeline of commercially viable 84. For the implementation of this strategic framework water projects. Dedicated resources and expertise for deliverable, 2030 WRG, a partnership platform project preparation could be coordinated by the Water housed in the Water GP of the WB, would support and Finance Global Solutions Group or directed through the enabling environment for reform, public-private national-level project preparation facilities where entities collaboration, and stakeholder engagement through its of this kind are already functioning. role as a catalyst and convenor. 83. Additional resources should also be committed 85. 2030 WRG’s role would focus on the creation to continued innovation and development of tools of supportive policies, institutional arrangements, and instruments to make commercial finance more and regulations in the sector, aimed at maximizing 42 finance for development through a combination of engagement with each client government, articulating blended financing, PPPs, and other instruments. In the case for scaling up investments for the water sector, addition, 2030 WRG would explore opportunities for potentially through the following: tapping climate finance for country engagements. In view of its upstream role, 2030 WRG would not prepare  Current and Projected Gaps in Meeting the SDGs: investments or provide financing for the implementation The gap in achieving various SDGs that directly or of solutions. However, it would work with MDBs indirectly rely on water at the country level – including (particularly the WB), financial institutions, and others access to WSS, food security, energy security, public to catalyze financing for the sector. For example, in health outcomes, climate goals, and jobs and labor India, 2030 WRG has initiated an engagement with the market outcomes – could be highlighted to indicate Climate Finance Leadership Initiative, and various other the urgency of expanding the pool of funding and global and local financial institutions, project developers financing for the sector. and implementers, to develop financing mechanisms and catalyze climate finance for water and wastewater  Costs of Inaction and Insufficient Action on Water reuse infrastructure, including reforms to the policy and Resilience and Climate Adaptation: The lack of regulatory environment to enable the flow of private adequate investments for climate adaptation and capital and upstream pipeline development. drought-related resilience threatens sustainability at the country level. The negative impact of floods and 86. 2030 WRG would use its convening and droughts on economic growth are very significant coordination role to support the implementation but not always fully appreciated by governments: of more innovative instruments to finance water a drought can reduce a city’s economic growth by sector investments (e.g., impact bonds, green/blue/ 12 percent and in some regions, notably the Middle sustainability-linked financing, microfinance, climate East and the Sahel, pursuing business-as-usual finance, and “debt for water” swaps), in collaboration water policy and investment could lead to sustained with the WB, financial institutions, international negative growth in the context of climate change.55 organizations, and local government counterparts. The recent 2022 Global Assessment Report on For example, in Kenya, 2030 WRG support includes Disaster Risk Reduction, which looks at all types developing a national sanitation services market sizing of disasters, from rapid onset events like typhoons, assessment, structuring PPP contracts between public floods, and earthquakes to other events like droughts, water service providers and private operators, and saltwater intrusion, and air pollution, finds that poorer providing technical advisory support to water service countries lose on average 0.8–1 percent of their GDP providers on the design of technical, financial, and legal per capita growth to disasters per year, compared structures of performance-based contracts for non- to 0.1–0.3 percent in higher-income countries.56 In revenue water reduction. It is also providing advisory this context, policies and investments to manage support to improve the policy, legal, and regulatory water resources yield high returns. For example, environment for private capital mobilization in the WSS groundwater acts as a buffer against droughts. value chain in Kenya, jointly with the public sector and Interventions to prevent the over-exploitation of private financial institutions, among others. aquifers could prevent up to half of the global losses in economic growth caused by drought.57 The magnitude of the losses provides a direct impetus to the case 5.3 DRIVERS FOR CHANGE FOR for improving water sector investments and securing EXTERNAL STAKEHOLDERS financing, and needs to be continually communicated to governments. 87. Implementation of the Strategic Framework across countries requires the creation of appropriate  Knowledge Exchange on Reform Processes incentives. This section describes potential drivers for in Other Countries: Countries such as Brazil and change for governments; MDBs; financing institutions; Indonesia have embarked on enabling environment and donors. reforms to support private sector participation, linked to the achievement of specific goals, such 88. Incentives for Governments: Client governments as universal access targets. For example, since would need to be incentivized to improve the planning, the passage of the 2020 Sanamento Law in mobilization, and efficiency of funding and financing Brazil, 17 PPP and concession contracts have for water sector investments, and to support a move been awarded with a total investment value of towards sustainable private sector investments and US$9.8 billion, and more than US$5.4 billion of solutions, complementing public resources. Creating concession payments have been received by this systemic shift in the sector would require dedicated government, freeing up the public budget for 43 additional infrastructure investments. At least 27 for the Economics of Water, the Roundtable for more PPP tenders are in the pipeline, amounting Financing Water, the Water Finance Coalition, Blue to US$3.4 billion of additional investment to extend Peace Financing, and the WASH Finance strategies coverage to 15.1 million people. Sharing knowledge on led by UNICEF,58 are closely aligned with the goal the impact of reforms in such countries could provide of this Framework to scale up finance for water. an impetus for similar reforms elsewhere. Frequent and streamlined interactions across such fora could ensure the implementation of a common  Use of WB Financing and Other Concessional set of principles in the water sector to establish a Resources to Drive Reforms: Concessional collective agenda for MDBs to crowd in private sector resources can be used to facilitate needed reforms in investments, innovation, and expertise to achieve the sector and to crowd in private capital. development objectives, where appropriate, and reserve scarce public finance for areas where private 89. Incentives for MDBs, Financing Institutions, and sector engagement is not optimal. Donors: The WB can play a valuable role in coordinating donors around the scaling up finance agenda, which will  Aligning incentives of private investors with the be essential to crowding in the private sector. Currently, water SDGs and the goal of climate resilience. international financial institutions (IFIs) and MDBs have Financial institutions have an important role to play strong incentives to lend to higher performing service in influencing and incentivizing economic sectors to providers, although these entities are best placed to recognize and price in the value of water and the full access commercial financing. IFIs and MDBs, therefore, costs of water insecurity on their balance sheets, to need to agree on a set of common principles consistent encourage water stewardship in productive sectors with MFD to shift concessional lending away from and to direct private finance away from investments creditworthy entities (or only provide targeted financing that exacerbate water risks. The WB can support that covers necessary risks to mobilize private financing) this through ongoing efforts of governments and towards improving the performance of the next rung of international organizations including the High-Level service providers and strengthening the sub-sectors Panel on Water Investments for Africa, the “Catalyzing which have clear potential revenue streams, like urban the Water Action Agenda for Finance” initiative and water services. This will allow concessional lending and the Roundtable on Financing Water. grants to be directed towards sub-sectors where social and economic benefits are high but potential revenue streams are more limited.  Clear metrics and transparent monitoring mechanisms. Incentive mechanisms will rely on the availability of comprehensive and up-to-date information on actual flows of private finance to the water sector. A set of metrics and a system to gather and validate information will need to be established. The PPI database covers only financial flows under official PPP contracts and, as such, provides only a very partial picture of private finance in water. This task of mapping and measuring the full range of private finance flows would require considerable resources and could be undertaken by a consortium of international institutions and private entities committed to the scaling up finance agenda. A number of existing initiatives could be used (such as IBNET and the OECD’s Observatory).  Strengthening international collaboration between the development community (comprising the United Nations, G7, G20, OECD countries, ODA donors, IFIs, MDBs, and development finance institutions), emerging and developing economies (EMDEs), and the private sector. Several ongoing initiatives, such as the 2030 WRG, the Global Commission 44 APPENDIX A: SUB-SECTOR OPPORTUNITIES FOR MFD 1. WATER RESOURCE MANAGEMENT, private sector and the social objectives of keeping the STORAGE, AND “UNCONVENTIONAL” electricity tariffs as low as possible. The project attracted WATER SOURCES a significant private investment of US$26 million in a Concerns about water security and climate change country and region that found it difficult to attract private have shown the need to mainstream water resource investors. Joint WB involvement was also critical in management into sectoral concerns. The new World mobilizing financing from the Swiss Government for the Bank report What the Future Has in Store: A New Government of Tajikistan to meet its social protection Paradigm for Water Storage places freshwater storage obligations towards the project, since a considerable at the center of priorities in terms of water resources proportion of the residential consumers would be unable management to achieve planetary water security. The to pay even the US2.12 cents/kWh tariffs. A Swiss grant report shows how as demand for freshwater rises, more (WB-administered trust fund) provided funding upon water storage is needed than is available in many places. delivery of electricity services to targeted beneficiaries. The report offers a framework to maximize benefits from all forms of water storage: natural, hard infrastructure, Private finance has also been mobilized effectively and a combination of both, using a watershed approach. for nature-based solutions in the water sector, Increasing storage capacity requires significant with notable examples of catchment management investment and financing at local, national, and supra- projects developed and operated by private entities. national levels. Freshwater storage is also at the heart Catchment management investments developed and of adapting to climate change, most obviously by saving financed by downstream commercial or industrial water water for drier times and reducing the impact of floods. users were estimated at US$15.4 million in 2015.59 In the future, water storage for climate change mitigation Companies driving these projects were mainly food and is expected to increase through hydropower, which, beverage companies, finance and insurance companies, besides generating electricity, can provide energy private water utilities, and energy generation firms. storage and grid-balancing services key to scaling up Private finance for watershed management may also other more variable renewable energy. be channeled to riverine communities through Payment for Ecosystem Services (PES) arrangements. An Mobilization of private financing related to water example is the PES scheme in the Cidanau watershed resources management and storage has traditionally in Banten, Indonesia, where upstream farmers receive been linked with the development of hydropower, payments for adopting sustainable agricultural practices irrigation, and multipurpose projects through PPP from the downstream water supply company. Although modalities. In terms of attracting private investment, the benefits to downstream users of watershed hydropower projects typically rank above irrigation management in terms of improved quality of water and projects, as they generally offer better and more reliable reduced flood risk can exceed the costs of payments, revenue flows. Blended finance is also increasingly designing suitable governance arrangements for these being used. A good example is the Pamir Energy Project schemes has proved challenging and has held back in Tajikistan, supported by IFC and the International their replication. Development Association (IDA). The Pamir Energy Company was formed through a PPP with Government Considering the vulnerability of rivers and aquifers of Tajikistan acting as regulator, and the Aga Khan in numerous areas of the planet, it has become Fund for Economic Development, a nongovernmental increasingly necessary to resort to other water organization, which has a controlling 70 percent share of sources. Non-conventional sources (in the sense the company. IFC, whose debt was converted into equity of being complementary to the two basic sources of in 2007, has a 30 percent share. The Pamir Energy freshwater previously mentioned), such as “reclaimed” Company has a 25-year concession agreement, which water reuse, desalination of brackish and saltwater, and was signed at project appraisal. IDA’s involvement was rainwater harvesting, can play a crucial role in providing designed to reconcile the commercial objectives of the additional resources based on the hydrological balance 45 of each territory. As part of efforts to diversify water 2. INCREASING FINANCE FOR supply sources, wastewater reuse, sometimes restricted IRRIGATION MODERNIZATION AND GHG to certain uses, has reached a high level of development EMISSION REDUCTION in countries subject to greater water stress, such as Irrigation modernization is a must. There is a growing Australia, China, Cyprus, Greece, Israel, Italy, Japan, need for agriculture to produce more to feed a fast- Malta, Singapore, Spain, the United States. Likewise, rising population, increase resilience to climate shocks, desalination contributes to making additional water and allocate more water for the environment and other resources available in coastal areas with fewer available uses. Irrigation modernization is essential to responding conventional resources (such as Australia, China, to these imperatives. It can produce more food and Israel, Saudi Arabia, Spain, and the western US). Lastly, fiber with less water. And it can boost farmer incomes rainwater harvesting stands out in countries where there and GDP. Historically, public finance and international is high variability in rainfall patterns, such as Indonesia, transfers have predominated in the sector, but there Japan, Malaysia, Thailand, and the US. have been significant weaknesses as a result. Similar to the evolution in developed countries, the role of Unconventional bulk water supply sources have government needs to change to invest principally in experienced quite a remarkable expansion over public goods and basin-level infrastructure and in the last few years and the development of related supporting the viability of farming systems in line with infrastructure (wastewater treatment and reuse specific (targeted) economic and social objectives, while plants and desalination plants) lend themselves facilitating participation of the private sector and farmers well to development through PPP schemes. Industry to invest in irrigation infrastructure and its operation. has developed several well-established procurement methods for desalination and wastewater reuse projects. One is the Design-Build-Operate (DBO) Modernization of irrigation will require additional model, where at least a part of the financing for the investment and access to private financing, through project is provided by the public sector, and the private a repurposed use of public financing. On the supply sector supplies design and construction services for a side, this requires developing financial markets adapted lump-sum payment, but in addition the private contractor to the whole range of needs at a major system level, and provides operating services for the facility. Another is at the level of larger individual farmers and smallholders. the Build-Operate-Transfer (BOT) model, whereby a On the demand side, farmers need access to knowledge private sector single purpose company (SPC) is granted to prepare “bankable” proposals for accessing financing. a concession to build, operate, and finance the facility, Mechanisms such as access to credit and subsidies can for a fixed concession period, at the end of which the help to close the affordability gap. facility is transferred to a public authority. The SPC sources financing for the project and the land may be Private finance for irrigation and modernization has provided by the public authority. grown in recent years. New instruments have emerged, such as low entry cost models – rentals, leasing, pay- Benefiting communities may have a role to play per-use – and forms of consumer credit. Guarantees and in the management of desalination and reuse insurance are also being used to underwrite finance for facilities in remote arid regions. As relatively costly modernization. Models that leverage private finance like and technology-intensive solutions, desalination and PPPs and blended finance are becoming more workable. reuse are usually viewed as viable just for utility- New sources of finance include water investment funds, managed urban drinking water distribution and ecosystem support financing, and green bonds. wastewater collection and treatment systems, or for self-supply systems feeding high-value-added industrial Governments can ensure a supportive enabling and commercial activities. However, in many cases, environment, along with targeted and predictable brackish water, seawater, and desalinated water are patterns of public investment, to develop a the only sources of water available to serve small strategic financing approach, in partnership with all island communities and rural populations located in stakeholders. To this end, governments need to work remote arid regions that the state system does not with financial institutions, trade bodies, and farmers to reach. In these contexts, desalination and reuse develop sustainable and accessible private financial technologies and management models may have to markets and products, bringing in new providers, new be adapted to allow local communities to play a role in instruments, and new sources. A vital new tool is financial the operation of the facilities to bring down costs and technology (Fintech) which uses digital technologies to ensure their sustainability. The role of communities in improve financial services. Governments may need to the management of desalination and reuse may be even use targeted and time-bound subsidies to foster the initial more critical in a context of fragility. development of these markets, with collaboration of all 46 key stakeholders – governments, financial institutions, Irrigation Project is investing in the modernization of development agencies, trade organizations, and the the 400,000-hectare Damodar Irrigation System. A key farming community. innovation that the project is introducing to improve the quality of irrigation service delivery is the outsourcing Government remains by far the biggest source of of performance-based operation and maintenance of financing for modernization of off-farm infrastructure canals to private irrigation service providers. These and large-scale schemes. Thus, even where providers will also promote the installation of pressurized government remains the principal (or sole) investor, micro-irrigation systems. new cost recovery measures – through collection of irrigation service fees or tariffs – increase accountability Public support for small-scale collective and of irrigation and drainage schemes’ operators and end- individual irrigation. Public investment in several water users while reducing the fiscal burden. One such countries has specifically supported the modernization example is in Turkey, where the law requires farmers of small-scale collective and individual irrigation. A and their water user associations to repay the cost of notable example of public support to very small-scale modernization over the long term. individual and communal irrigation was the Niger Private Irrigation Promotion Project. The project successfully Over the last few years, the number of initiatives used matching grants to support the modernization of of PPPs in irrigation have increased significantly. thousands of smallholder irrigation operations and built Under an infrastructure concession, a private operator sustainable institutions for further development and is engaged to raise commercial finance for infrastructure financing of irrigation modernization. development and then construct, manage, operate, and maintain the infrastructure and charge for irrigation Farmer-led irrigation development (FLID) for services (e.g., the Peru Chavimochic Irrigation Project). financing of small-scale and individual private irrigation PPPs have also been used to invest in basin-level is particularly relevant to smallholders and extremely infrastructure (e.g., Chile) over the last decade to finance resource-poor farmers whose only route out of poverty the construction of dams for irrigation. Government is to improve water management in their farming provided part of the financing, private partners mobilized operations but who lack access to the knowledge, the balance, and then constructed and operated the markets, and finance to bring about these changes. dam, and irrigators paid a water fee for the water An example of farmer-led irrigation development can stored. As experience with irrigation PPP is gained, be found in Uganda. The Uganda Inter-governmental new formulations and different incentives and risk- Fiscal Transfer Program is a local government-run sharing mechanisms are being devised. For example, program to facilitate smallholder farmers’ access to an innovative PPP contract for drip irrigation developed partial subsidies for micro-scale irrigation equipment. by 2030 WRG on 24,000 hectares in India (Ramthal This program is coupled with extensive outreach and Drip Irrigation Project in Karnataka) provided results- sensitization of local financing institutions to facilitate based incentives for the turnkey contractors who not access to loans to cover the farmers’ co-payment. A digital only developed the scheme and mobilized finance but app (IrriTrack App) for the program provides financial also managed it. On the other hand, innovative PPP and technical information (e.g., price estimates) to partnerships such as the Gabiro Agribusiness hub, enable decision making at the individual farmer’s level. a collaboration between the Rwandan government and FLID diagnostics can ensure that bulk water systems Netafim, which delivers a pressurized source of water to are integrated effectively in irrigation systems installed the field, have demonstrated the challenges of large PPP by farmers. A systematic approach to supporting this schemes (such as the length of time required to clarify sector through FLID can deliver benefits that surpass land rights and enable the consolidation of land in a just those currently delivered by public large-scale irrigation manner). But such partnerships have also demonstrated schemes. These benefits include food security (SDG2), the benefits, such as the large-scale development generating employment and contributing to economic of highly productive irrigated land for commercial growth (SDG8), addressing impacts of climate change crop production. These PPP models should be scaled (SDG13), and ensuring sustainable management of wherever conditions allow. water resources (SDG6). FLID may also be used as a tool for the private sector to connect with farmers Management, operation, and maintenance contracts to contribute to economic growth and other benefits, have also been used, whereby the private operator is and could also be used by farmers to connect with engaged to provide services in return for a fee. These equipment suppliers and possibly financiers to amplify contracts are being structured in the West Bengal productivity and the impact of irrigation. Major Irrigation Project to share risks but also to provide performance incentives. The West Bengal Major 47 Green bonds have been used to support irrigation both water and sewerage services. However, there is modernization efforts. Globally, green bonds are now considerable variation across countries in the allocation mobilizing US$270 billion a year, with China and India – of responsibility for services in informal and peri-urban and the WB – among the leaders. The funds raised by areas, where residents often rely on off-grid services and the WB through green bonds have been used to support delivery by microenterprises, self-provisioning or shared 111 projects around the world, largely in renewable public water supply and sanitation facilities. Household- energy and efficiency (33 percent), clean transportation level sanitation solutions and septage management are (27 percent), and agriculture and land use (15 percent). often provided by under-regulated small-scale private In irrigation modernization, for example, green bonds providers – or not provided at all. This sub-sector has helped finance the 2020 Turkey Irrigation Modernization a clear revenue stream from water and wastewater Project, as well as irrigation efficiency and water tariffs and there is a long track record of private sector resources management within the 2018 Brazil Sergipe management and finance in some developing countries. Water Project. Nonetheless, there is considerable political and social resistance to private sector involvement in water services Rice is the largest GHG-emitting crop, generating in certain countries and perceptions of high political and 48 percent of total crop emissions, and is the most regulatory risks on the part of private investors. water-intensive grain crop. Minimizing methane emissions from rice cultivation is important to Mobilization of private sector finance and expertise for climate change mitigation globally, creating an corporatized water and wastewater utilities has been opportunity to mobilize climate finance for irrigation tested in many countries and can be achieved through efficiency projects. Water-saving technologies such multiple channels. In countries with relatively more as Alternate Wetting and Drying are able to reduce mature capital markets, service providers which have methane emissions by 50 percent and water use by achieved or are moving towards creditworthiness can 30 percent without reducing yields, contributing to a access commercial debt from domestic banks and country’s NDC goals and benefiting individual farmers access domestic bond markets. The WB has supported who could sell credits on voluntary carbon markets. the development of domestic commercial lending to In addition, research and piloting have shown that water utilities through sustained technical assistance “package solutions” are the most cost-effective way to improve creditworthiness and de-risking of reducing GHG emissions from rice production. instruments for local banks. This is demonstrated in the Other solutions supporting low-carbon rice production WB’s long engagement with Uganda’s National Water include rice paddy methane emission reduction, and Sewerage Corporation (NWSC), which began in fertilizer reduction, water use efficiency improvements, 1984. With the World Bank’s and other donors’ technical livestock GHG emissions reduction, aquaculture GHG assistance, the Government initiated reforms via a emissions reduction, agricultural machinery energy series of performance contracts with NWSC beginning saving, farmland carbon sequestration, integrated straw in 2001, which led to improving technical and financial management, and renewable energy development and performance, and finally a creditworthy utility. NWSC utilization. Countries like China are prioritizing these received an AA national credit rating in 2018. By 2022, solutions, with reduction of methane emissions from rice NWSC has raised an aggregate of UGX145 billion paddies heading the list. From the farmers’ perspective, (US$40 million) in domestic borrowing from three local however, there are challenges to adopting the package banks. The National Urban Water Supply (NUWAS) solutions, especially the water-saving technologies, program in Indonesia shows how a national program given lack of capacity, lack of incentives, and system to mobilize commercial finance can be structured to constraints (such as flexible and well-functioning provide incentives for utilities at different stages on the irrigation systems). journey to creditworthiness to move towards commercial financing (see appendix C). 3. WATER SUPPLY AND SANITATION High-performing government-owned utilities can raise WSS services cover centralized and decentralized equity finance through partial divestiture. This water treatment and distribution; wastewater includes utilities owned by national, regional, and collection and treatment; sludge and septage municipal governments. SABESP, the São Paulo water treatment and disposal; onsite sanitation at the utility, is an example of a high-performing listed public household level; customer management; and billing. utility, with replication of the model by many other While in most countries WSS is the responsibility of utilities, particularly in Latin America and Asia. The municipal governments, and services are delivered by WB has supported a number of utility transformation city-level public utilities, some countries have regional programs which have led to successful initial public or national utilities. Utilities often have responsibility for offerings and partial divestitures. These domestic 48 finance options require a strong enabling environment, PPP contracts incorporating private financing have a mature local capital market, and are open to utilities been employed for developing country WSS with varying which are at or close to achieving creditworthiness. degrees of success. One model which has proven attractive and financially sustainable in a wide range At a different scale, microfinance directed to water of contexts is the BOT-type contract for standalone service microenterprises and households to install water and wastewater treatment, including water reuse sanitary equipment can play an important role in and desalination. While these contracts are often for supporting the extension of access, particularly in greenfield assets, they have also been successfully informal and rural areas in lower-income countries. adapted to rehabilitation and extension of existing Donors and philanthropic associations have successfully assets. These have considerable potential for replication supported microfinance schemes with a water focus in in countries at different levels of development. Contracts Sub-Saharan Africa and South Asia, among other areas, in which recycled municipal wastewater is sold to and there is potential for further scale-up. The WB has industrial customers have a robust revenue stream and a role in supporting pilot programs and blended finance are particularly suitable for replication in locations with arrangements. One example is the support provided by high industrial demand and where direct abstraction of the WB to K-Rep Bank, a Kenyan microfinance bank, surface or groundwater by industry is restricted. The WB to help rural and peri-urban communities access loan has provided support in the development of numerous financing for improving and expanding small-piped water individual reuse projects and is providing systematic systems. Technical assistance was provided to develop support through the ReWater initiative. bankable loan applications and supervise project implementation. In 2010, the program was scaled Concession contracts, in which the private party takes up with support from the EU. There is considerable on responsibility for most or all of the capital investment potential to ramp up microfinance in the water sector program, are suitable for large cities where end-user with increasing awareness and understanding on the tariffs allow for full cost recovery and local currency part of microfinance and water professionals. financing is available at affordable pricing and tenure, based on appropriate risk allocation framework and Private sector participation (PSP) in water and credit enhancement. This model remains attractive wastewater services is well established and a wide to governments and private parties, as the successful range of PSP models have been developed which can award of large concession in Brazil in recent years be matched to local objectives and conditions. PSP demonstrates. contracts for WSS can be broadly classified along two axes: whether the private party provides financing or PPPs for rural water supply are less common generally not; and the scope of the private party’s involvement, due to the small scale and low customer density of rural from managing the entire utility service chain down to systems. In some cases, these can be overcome by managing a particular service or asset. bundling several small systems under a single contract and using a blend of public and private finance to extend “Capital-light” models of PSP (those in which the sanitation coverage or meet other social objectives. The private party does not provide finance) mobilize private WB-supported Sichuan WSS PPP project in Jingyang, sector management expertise and technologies and Sichuan, China, provides an example of a rural PPP can help to improve the utility’s operating and financial which provides a point of reference for other projects performance. Non-revenue water (NRW)-reduction covering rural areas. contracts are particularly promising and the WB has developed a model performance-based NRW reduction The potential for private capital mobilization for WSS is contract which is being employed in several countries. evident when the enabling environment exists. However, Capital-light contracts are suitable for utilities of different it is important to note that the process of creating the right scales and levels of creditworthiness, where the priority conditions may take decades of sustained engagement is to increase operating and technical efficiency. by the WB and other parties, but transforms access, However, in order to maximize the impact of these service quality, and sustainability when it is achieved. contracts on utility performance, they should form part of Nevertheless, there may be other benefits obtained a robust long-term strategy of the utility to reduce NRW in the journey towards creditworthiness and PCM. throughout the entire network (not restricted to a pilot Improvements in technical and financial performance are or demonstration area) and be accompanied by a plan often accompanied by improved services to customers, to sustain improvements. The WB can provide technical leading to better revenue collection, and improved assistance in project design and development and de- operational efficiency leading to lower costs, resulting in risking instruments. a lower fiscal burden. 49 4. BUILDING RESILIENCE TO FLOODS At the national scale, financial instruments to AND DROUGHTS AND REDUCTION OF address disaster risk – such as catastrophe bonds, GHG EMISSIONS parametric insurance, and state risk pooling Sound water resource management, including – provide critical access to finance to recover sufficient water storage, is essential for countries to and rebuild rapidly after flood and storm events. cope with the mounting risks of flood and drought. Parametric insurance policies, which pay out as soon Freshwater is stored in natural water bodies above as specific trigger events occur, rather than requiring and below ground and in dams, retention ponds, and an evaluation of the precise cost of the damage, have other built infrastructure. Traditional reliance on grey become accessible in developing countries since the infrastructure will not be adequate to meet the challenges 2000s. Inter-state risk pooling arrangements provide of increased water demand and greater variability in participating states with better access to insurance rainfall. As a result, integrated approaches to managing markets, lower risk premia, and lower transaction storage in the watershed which combine green and costs in seeking and negotiating coverage in insurance grey infrastructure are starting to be adopted. The markets. The WB supported the development of a community-led groundwater management program Atul pooled risk facility for Caribbean states, the Caribbean Bhujal Yojana in India, supported by the WB, provides Catastrophic Risk Insurance Facility, which launched an example of how natural groundwater storage can be in 2007 and offers hurricane, excess rainfall, and collectively managed to prevent over-exploitation and earthquake insurance. Pooled insurance has potential raise resilience to climatic variability. for adoption among other groups of countries facing similar but independent disaster risks. PPPs and green bonds mobilize additional financing streams and provide efficiency incentives for grey and green capital investments in urban flood risk management projects and have the potential to be replicated and scaled up. The appropriate financing mix depends on the affordability and collectability of associated revenue streams from direct and indirect beneficiaries and land value capture. These options include establishing special project vehicles that can issue dedicated bonds marketed to institutional investors, pooling investments across project beneficiaries and promoting new asset-backed instruments, developing blue assets for the green bond market, and engaging insurance companies in developing appropriate products, along with the establishment of flood risk insurance facilities to develop a nationwide flood disaster risk pool. 50 APPENDIX B: DEMAND AND SUPPLY SIDE ASSESSMENTS AND FINANCING SOLUTIONS 1. DEMAND-SIDE ASSESSMENTS AND FINANCING SOLUTIONS Demand-side assessments should cover performance/connectivity, finance, and governance, as outlined below.  Performance/connectivity assessments are to Data from existing reliable datasets can be used be tailored to the intended scope of the assessment wherever possible. Relevant water sector finance based on data availability (e.g., data on WSS SOE/ indicators are shown in Tables B1 and B2. utility performance; WRM performance; irrigation services (public/farmer-led) performance; and water-  Governance: This assessment would include related disasters and other risk management data). a rapid review of relevant policies and laws; institutions (allocation of authority across  Finance is a core focus of this WB strategic government departments/agencies and between framework. Data for a set of water- and non-water- tiers of government); regulation (economic and sector-specific indicators are gathered and analyzed. environmental); and resilience (risk-based, adaptive TABLE B1: Water Sector Finance Indicators (adapted from InfraSAP2.0 Finance Pillar) FUNDING ISSUES INDICATORS CONSTRAINTS Low revenues • Tariffs below cost recovery By municipality/region/country as appropriate • Subsidy reform potential • Average water tariff in major cities • Low revenue collection • Standardized household bill estimate (based on 20m3/month • Poor revenue mobilization consumption) • High costs • Tariff structure (volumetric, increasing block tariff (IBT) etc., IBT consumption thresholds) • Billing and collection rate (domestic) • Billing and collection rate (non-domestic) • Non-revenue water for major cities • Operating expenditure/m3 • Tariff revenue to operating cost ratio % • Operating cost subsidy • Water expenditure as % of local government expenditure • Local government expenditure: tax revenue ratio • Local government debt ratio Budget • Limited budget execution By municipality/region/country as appropriate expenditure (reflecting capacity constraints and • Infrastructure investment implementation delays, weak public - On budget (US$, as % budget) (central/regional/local investment management; tend to be government) (debt/equity; local currency/forex) worse at subnational level) - Via government-owned service provider (debt/equity; local • Limited budget allocation currency/forex) • Constrained fiscal space - Via PPPs (debt/equity; local currency/forex) • Estimate of investment required • Executed infrastructure spending (% gov expenditure) • Share of OPEX/CAPEX in approved total expenditure • Maintenance expenditure per unit of service provided • Ratio of executed to approved spending 51 TABLE B2: InfraSAP 2.0 Finance Pillar FUNDING ISSUES INDICATORS CONSTRAINTS Low revenues • Tariffs below cost recovery • Subsidies as % of GDP • Subsidy reform potential • Subsidies as % of approved spending • Low revenue collection • Composition of subsidies • Poor revenue mobilization • Government wages as % of GDP/total government spending • High costs • Ratio of tax revenue to GDP • Revenue collection ratio • Tariff revenue to operating cost ratio % Budget • Limited budget execution • Infrastructure investment on budget (US$, as % budget, GDP) expenditure (reflecting capacity constraints and • Infrastructure investment via SOEs implementation delays, weak public • Infrastructure investment via PPPs investment management; tend to be • Infrastructure investment via divestitures worse at subnational level) • Investment required • Limited budget allocation • Executed infra spending (% GDP) • Constrained fiscal space • Spending rigidity index • Public debt to GDP ratio • Share of OPEX/CAPEX in approved total expenditure • Maintenance expenditure per unit • Ratio executed: approved spending/ capital spending FINANCIAL ISSUES INDICATORS CONSTRAINTS International • Country risk finance • Off-taker risk • PPP financing constraints Domestic finance • Banking sector constraints • Capital market constraints policy and planning). The PIR Tool has been developed distributed among on-budget and off-budget vehicles, for WSS and would need to be expanded to include as well as across sub-sectors, functional categories governance of WRM, Water in Agriculture, and (capital versus operations and maintenance), tiers water-related disaster risk management. Qualitative of government (national versus subnational) and data on governance could employ a standardized geographical areas, and how discrepancies arise questionnaire based on the Water GP’s PIR Tool. between budgeted and final expenditures. Patterns of public and private investment in infrastructure will Water and sanitation services and various WRM and be compared. It will assess the potential to improve irrigation competencies and services are devolved creditworthiness of sector entities. This will entail to the sub-sovereign or municipal level in many examining whether tariff levels and structures, subsidy countries, leading to wide within-country variation levels, and subsidy eligibility can be restructured to in performance, finance, and governance. Reliability raise revenues while being consistent with affordability and completeness of data are hence also likely to be and social constraints. It will also consider the scope to major challenges, with respect to the assessment scope improve financial performance through improvements in across various water sub-sectors. Further analysis billing and collection rates and operational efficiency. needed would be recommended to key counterparts depending on the country and local-level needs. Considering the complexities and costs that the due diligence, creditworthiness analysis, and data Similar to InfraSAPs, the demand-side analysis will availability could pose for national-level analysis if seek to identify evident inefficiencies or inequities in undertaken for all water utilities/service providers, the allocation of funds. As much as possible, the analysis idea would be to develop a high-level financial model, will examine how expenditure in the water sector is based on the detailed analysis of selected water utilities 52 or utility clusters representative of individual countries, are manageable, and issuers are creditworthy, debt and extrapolating this to an aggregate national-level instruments may be issued to fund water sector projection (using unit costs and other proxies). A projects and investments. Where possible, funding national-level financial model would aim to cover the should be sourced in the domestic market to avoid points below. currency and exchange rate risks. Debt can be issued in the form of syndicated loans, structured through local  Costs associated with reaching different sector commercial banks and for mid-term tenors, or bonds objectives, including financial costs. This would for longer terms and larger sizes, which may attract include estimated CAPEX as well as annual OPEX. a broader range of investors such as pension funds,  Funding sources (3Ts: Tariffs (or service fees), asset managers, and insurance companies. However, Transfers, and Taxes) and available revenues on the issuance of domestic debt securities is constrained an annual basis to fund both capital and operating by the level of development of the local capital markets. expenditure. In the case of many developing countries, the local  Funding and financing gap. savings pool is limited. Additionally, the sovereign is  Financing sources for water infrastructure often the main, and in many cases, the only issuer and development, including the potential for diversification it drains most of the available liquidity in the market. of financing sources (e.g., municipal finance, climate In either case, moving forward with debt issuances is finance) and access to local currency debt and equity highly case specific, depending on the level of market markets. development and institutional readiness (see Box B1  Efforts towards ensuring financial sustainability on pre-requisite factors). Sustainable finance/ESG and creditworthiness of the sector/project; service investment instruments may be suitable for funding provider (national, regional, or local government- water-related investments. Such instruments may find owned corporatized entities); and/or famer access to favorable investors in more advanced middle-income credit. countries with relatively well-developed institutional  Scope for PPPs, including regulatory framework, investors and deep capital markets. political will, and investor appetite.  Affordability.  Incentive framework and scope for improving 2.2 Debt Instruments – International financial performance through efficiency Capital Markets improvements. In addition, the Assessment includes International capital markets may complement domestic recommendations on engagement strategies for markets as a source of funding to the water sector. In relevant groups of private financiers. some cases, it is the only source of long-dated funding. While the same instruments, loans and bonds are available as in the domestic market, issuing debt in 2. SUPPLY-SIDE FINANCING SOLUTIONS international markets involves considerable costs in The supply-side assessment involves identifying terms of fees for financial advisors and underwriters, financing options and assessing their suitability to local legal teams, and credit-rating agencies. The challenge conditions. Such solutions may include a combination with external financing for the water sector is that of capital markets instruments, contingent financing issuing in hard currency in international capital markets mechanisms, and blended financing and risk transfer results in a mismatch with revenues, which are usually instruments, such as those described under Strategic in local currency, and exposes issuers to exchange Direction 3. rate risks in the event of depreciation. Where currency derivative instruments are available, hedging foreign This section highlights specific WB and other financing currency funding is strongly recommended, but this solutions. Given the limited liquidity and the high cost depends on costs. Green, blue, and sustainability-linked of capital in developing countries, multilateral financial instruments may be suitable for issuance by developing institutions like the WB can play an important role in de- country sovereigns or sub-sovereigns to fund water risking investments and providing backstops, as well sector projects. Assuming the market conditions are as providing the concessional and semi-concessional favorable to such issuances, these thematic bonds financing needed for the public sector components of can support diversification of investors, attract new water projects. investors into the market, and potentially offer slightly better financial terms. However, it should be noted that such instruments also have more elaborate reporting 2.1 Debt Instruments – Domestic Capital requirements, including the requirement for identified Markets eligible projects, inter-governmental coordination, Provided debt levels and macroeconomic conditions and additional compliance costs. The WB provides 53 BOX B1: Framework for Debt Capital Market Financing Options – Thematic Bonds 1. Fiscal Conditions (determinant curve in US$, characteristics of strategy, political commitment to factors): Risk of overall debt previous sovereign issuances the sustainable agenda (such as a distress, risk of external debt (total issued, markets of issuance, sustainable finance strategy). distress, WB non-accrual status, currencies, number of bonds, 6. Focus of the financing needed debt as a percentage of GDP, tenors, whether any thematic (not determinant but informs debt composition as a percentage bond), sovereign investor base the analysis): Whether project- of GDP (domestic and external), (banks, pension funds, asset based (e.g., use of proceeds), external debt composition by managers, ESG funds, others), budget support, or others. type of creditor, current account and secondary market dynamics. 7. Financial instruments of interest balance as a percentage of 4. Government’s capacity (not determinant but informs GDP, government balance as a (determinant factors), as the analysis): Green, social, percentage of GDP, government evidenced by indicators such sustainability, and sustainability- revenues composition (grants and as government effectiveness linked bonds, and green and non-grants). (captures perceptions of the sustainability-linked loans. 2. Domestic Capital Markets quality of the civil service, the 8. Financing features (not (determinant factors): Sovereign quality of policy formulation determinant but informs the access to debt funding in the and implementation, and the analysis): Onshore or offshore domestic market, sovereign government’s commitment to such issuance, local or international curve, characteristics of policies), political stability and currency, needed tenor, pricing, previous sovereign issuances absence of violence/terrorism, eligible targeted investments. (total issued, number of bonds, regulatory quality (ability of the 9. Potential investors (not tenors, whether any thematic government to formulate and determinant but informs the bond), sovereign investor base implement sound policies and analysis): Pension/wealth funds, (banks, pension funds, asset regulations that permit and promote asset managers, ESG funds, debt managers, environmental, social, private sector development), rule funds, central banks. and governance (ESG) funds, of law, and control of corruption, 10. Possible donor support (not others), sovereign secondary all of them published by the World determinant but informs the market dynamics, regulatory Bank’s Worldwide Governance analysis): WB, development environment, financial soundness Indicators project. banks, bilaterals, non- of the market, other issuers in 5. Policy framework (not governmental organizations. the domestic market, investor’s determinant but informs 11. Costs and benefits of interest in sustainable bonds, ESG the analysis): Thematic debt instruments (not determinant issuances by the private sector. framework and applicable but informs the analysis): 3. Access to the international regulations in place, ability to Transaction costs, risks, scalability, capital markets (determinant identify green assets/expenditures complexity, and ability to maximize factors): Sovereign credit ratings (green taxonomy, climate budget financial and other benefits to the (or potential for ratings and tagging), alignment of thematic issuer. pathways to a rating), sovereign bonds to debt management advisory support for such transactions and may be able committed and ringfenced and can only be disbursed to mobilize donor funds to cover costs and potentially if a specified trigger event occurs. This instrument subsidize elements of the issuance for thematic bond can be used to backstop water sector investments issuances both in domestic and international markets. by the private sector – to cover any potential losses agreed upon upfront. The triggers could include sector- 2.3 Risk Retention Instruments – WB specific issues, including unexpected loss of revenues, Investment Project Financing (IPF) with climate impacts (e.g., droughts), and foreign exchange Deferred Drawdown Option (IPF DDO) volatility. The IPF DDO can then provide liquidity to the The World Bank’s IPF DDO instrument is a contingent water utility to cover the related losses. This liquidity financing line that provides immediate liquidity for backstop can provide comfort to investors and lenders earmarked expenditures when a trigger event occurs. and may even enhance the credit quality of the utility. Financing for those earmarked expenditures is The IPF DDO allows for a 100 percent immediate 54 drawdown possible at any time up to five years, based structured to mitigate the debt service default risk of on agreed-upon triggers (up to eight years, if there is the Government of Angola on commercial financing a project renewal, for which no fee would be charged). and acts as a rolling guarantee over the life of the There is no cap on the amount drawn, but partial WB Guaranteed Loan (see appendix C). There are drawdowns are possible and all applicable IPF policies several examples of IFC’s guarantee transactions. apply. The client pays a 50 basis points (bps) standby Among them, the guarantees to the Municipality fee to have the line available (instead of the standard of Guatemala City Project and to the City of 25 bps commitment fee for IPFs), and a tailored Johannesburg are worth highlighting as they involve repayment schedule for each drawdown is possible, supporting these municipalities to access commercial subject to prevailing policy limits. The applicable financing to invest in key infrastructure sectors which lending rate (i.e., reference rate, spread, and maturity include water supply and sanitation. premium level) will be the prevailing one at drawdown. The IPF DDO has been used in several cases so far, most recently to provide a dedicated liquidity backstop 2.5 Development Financing and Blended to the deposit insurance fund of Romania. Financing The WB and other MDBs, bilateral donors and development financial institutions (DFIs) offer 2.4 Payment Guarantees and Loan concessional (e.g., IDA) and semi-concessional (e.g., Guarantees IBRD) financing that can be catalyzed for water sector  Payment Guarantees: These instruments cover projects. WB funding can come in the form of lines of payment obligations to privately owned project credit, contingent financing, guarantees at a project level, companies or special purpose vehicles where the or earmarked budget support to underpin policy and default of such obligations are caused by failure of regulatory reforms at the sector level. Such financing, a public sector contractual counterpart (e.g., utility which is typically highly concessional compared to the or SOE) to meet its contractual payment obligations water utility’s cost of funding, can be applied to cover a related to a project. In India, the WB has provided key risk, such as the construction of a water treatment payment guarantees to backstop the government’s plant, and commercial investors can then come in to payment obligations for several Hybrid Annuity finance the operations and maintenance phase. Model PPP investments in wastewater treatment (see appendix C, First and Second National Ganga As part of a package to catalyze and mobilize private River Basin Project). The WB provided a Partial Risk capital, blended finance has attracted substantial interest Guarantee of US$78 million to the government of in recent years. The blending of funds on commercial Albania to facilitate the privatization of their power and concessional terms can make projects financially distribution system operator in 2009 by enabling the viable that would otherwise not be; support high-impact government and CEZ of the Czech Republic as the transformative projects; and help create new markets. new buyer to implement the privatization agreement Blended finance solutions have potential for broad under the agreed regulatory framework. IFC advised adoption in the water and wastewater sectors given their the Albanian government on the privatization significant investment needs. Such structures can make including on unbundling the company, structuring the water and wastewater projects in developing countries transaction, and executing an open, transparent, and investable at attractive terms, through the provision of competitive bidding process.60 viability gap funding, coupled with de-risking instruments through a wide range of credit-enhancement products.  Loan Guarantees: A loan guarantee is a credit enhancement mechanism for mobilization by a An enabling environment is critical to facilitate the government or an SOE (bonds and loans). It is an access to blended finance in the water sector. Key irrevocable promise to pay principal and/or interest up components of such an environment may include strong to a pre-determined amount. The payment guarantee government interest and ownership, a clear regulatory product allows the guarantor to use its strong credit and legal framework, water sector and tariff reforms, rating to help borrowers diversify their sources of enhancement of creditworthiness of the water utility or funding, extend maturities, and obtain financing in water off-taker, government guarantees and financial the currency of their choice, including local currency. support where required, and availability of risk mitigants The Bita Water Project is the first water project to use and credit enhancement/political risk insurance, such as a WB guarantee product of this type which helped MIGA guarantees, potentially supported by the use of mobilize private commercial financing of around an IDA Private Sector Window/MIGA Guarantee Facility. US$1 billion, while improving the borrowing terms Governments can also offer temporary tax exemption or for the government of Angola. The WB guarantee is relief, where appropriate. These solutions can create a 55 conducive enabling environment and help attract both market rate of return, and since CAT bond returns are concessional funds and private sector investment in the not correlated with global financial market movements. water sector. A CAT bond or insurance-style instrument could be Alternatively, a blended structure can be developed developed in order to raise funds from investors who for grant funding to cover a key portion of risk within are comfortable in taking the risk of a water project a project and the semi-concessional funding can be being impacted by a climatic event. In this case, the blended with commercial financing to cover the larger investor would only suffer a loss in case the project’s portion of the water project. This is in essence the WB performance is compromised due to the occurrence co-investing in projects alongside private investors while of predetermined natural disaster-based events. This taking different risks. For example, the WB would take would insure the water utility against unforeseen shocks on the credit risk of the issuer or borrower, whereby if and assure investors that such shocks are financed the issuer becomes insolvent for reasons not related through pre-arranged instruments. The sovereign could to the project’s performance, the loan or investment provide the cover to the water utility through such an could become subject to a “haircut”, whereas the private issuance or insurance if the conditions or capacities of investor would take on the specific performance risk the utility are not sufficient. of the project, i.e., those investors would be subject to losses only if the project fails to produce the projected amount of revenue in the established timeframe. If, 2.7 Viability Gap Funding for example, a government freezes tariffs which would When project revenues (normally from user fees) are jeopardize the project’s performance, this would impact insufficient to fully recover the costs of a project, including the WB loan, without impacting the investors. However, the costs of finance, the project is said to have a viability if the project construction is delayed or if management gap. Governments may want to provide subsidies to fill fails to prevent leakages or waste, private investors will this gap and ensure that a project, developed through take the resulting associated losses. a PPP or other mechanism, is attractive to private investors. When governments provide these subsidies through up-front cash contributions to the project, they 2.6 Risk Transfer Instruments – are called viability gap payments and the funds set up Catastrophe Bonds and Insurance to provide these payments are called viability gap funds. A catastrophe bond (CAT bond) is an insurance contract with investors. Similar to insurance, the insured party The Government of India has established a viability gap receives a payout when a disaster event meets certain funding scheme with the objective to support PPPs in pre-defined criteria, with no obligation to repay the the infrastructure sector. Wastewater treatment and water payout. supply are among the sub-sectors that are targeted to address bankability issues and lower revenue streams. In a typical CAT bond structure, the entity seeking Under this scheme, the central government will provide insurance enters into an insurance contract with a up to 30 percent of the total project costs as viability special purpose vehicle (SPV) and pays premiums to gap funding and the state governments may provide an the SPV reflecting the risk associated with the insured additional support of up to 30 percent61 (see appendix C, event. The SPV then issues bonds to investors. The First and Second National Ganga River Basin Project). proceeds of these bonds (principal) are invested in The National Infrastructure Fund Trust (FONADIN) set highly rated securities that are held in a collateral trust. up by the government of Mexico is another example Investors receive the return from these investments of a viability gap fund to invest mainly in infrastructure along with the premiums paid by the insured entity as projects including telecommunications, transportation, periodic coupons. water, and tourism. According to a study conducted by the Asian Development Bank in 2016, these viability gap In the case of a WB intermediated CAT bond, there is funds have been effective in mobilizing private capital no SPV, and instead, the WB enters into the insurance investments in eligible sectors. In India, between 2005– contract with the client and issues bonds to investors. 2009, investments in infrastructure increased by more If a catastrophe event is triggered during the life of than 400 percent. Similarly, FONADIN, within the first the bonds, the bondholders lose their principal, and year of its operation, mobilized US$7 of private finance the funds in the trust are transferred as an insurance for every dollar of subsidy and 60 percent of total capital payment to the government. If no catastrophe event costs that received direct subsidies came from private is triggered, the investors get back the principal at the sector investments. expiration of the bond. Some classes of investors are satisfied to take this risk in exchange for a higher than 56 APPENDIX C: COUNTRY-LEVEL CASE STUDIES 1. FIRST AND SECOND NATIONAL to develop an innovative PPP structure tailored to local GANGA RIVER BASIN PROJECT, INDIA conditions, known as the Hybrid Annuity Model. Project Objectives Under the Hybrid Annuity Model, the concessionaire The Namami Gange, a flagship program of the Indian mobilizes 100 percent of the investment, of which government launched in 2015, is an integrated river basin 40 percent is reimbursed during construction and conservation program that aims to reduce river pollution upon commissioning, and the remaining 60 percent by increasing sewage treatment capacity, rejuvenate the of capital expenditure is repaid to the private operator river system through surface water clean-up and river- through annuities over a 15-year period, in addition front development, and restore the Ganga’s ecosystem to performance-based operation and maintenance services through bio-diversity conservation.62 payments. The arrangement constitutes a paradigm shift in India’s water sector, from a construction-oriented Background and Context approach to an outcome-based one. It creates incentives The National Mission for Clean Ganga, under the for private companies to deliver well-constructed Ministry of Water Resources, River Development and sewage treatment plants, develop a financially Ganga Rejuvenation, is overseeing the roll-out of the sustainable operation and management system that Namami Gange, including sewerage treatment and ensures profitable returns, and further motivates the collection infrastructure investment, which is supported development of alternate revenue channels through the by a US$1 billion WB loan approved in 2012 and by a sale of treated wastewater to adjoining municipalities or second loan of US$400 million approved in 2020. As of other stakeholders. the end of 2022, of 408 sanctioned sewage treatment plants and sewerage network projects under the Results Achieved and Private Investment Ganga clean-up, 228 have been completed, 132 are in Mobilized progress, and the remainder are under procurement.63 The government had originally envisaged 15-year One of the key contributors to this success story is the BOT contracts, with payments to be disbursed through sustainable financing model used for the construction, local governments, but private companies deemed maintenance, and operation of new wastewater the engagements as too risky, due to the poor track infrastructure through a Hybrid Annuity PPP model. This record of municipalities in fulfilling off-take agreements. Hybrid Annuity PPP model has been supported by the To overcome this problem, IFC, as PPP transaction two WB loans as well as a WB payment guarantee of advisor in the states of Uttar Pradesh and Uttarakhand, up to $19 million to backstop the government’s payment proposed a model in which payments were made obligations for several of these PPPs. This is the first- directly by the central government. Further, operators ever WB Guarantee for wastewater treatment and the were allowed to supplement their revenue in innovative first in the water sector in India and is expected to help ways, such as through the sale of treated wastewater, free up public resources and attract private investment. biogas generation, or power generated from biogas. For example, a new sewage treatment plant in the PPP Structure city of Mathura, Uttar Pradesh, would provide treated Initially, private sector involvement was not considered wastewater for cooling India Oil Corporation refineries, for the sewage treatment plant and network projects, but generating revenues for the sewage treatment plant, progress through traditional government procurement and reducing tap water consumption by 20 million liters was limited and slow. Realizing the magnitude of of water per day (mld). financial, technical, and operational challenges involved in building and operating the new sewage treatment The new contract terms were successful in attracting plants and the limited technical capacity of the public private sector interest. The first pilot projects in Haridwar sector, the Government of India collaborated with WB, and Varanasi saw six and eight bids respectively, from IFC’s Transaction Advisory Unit, and 2030 WRG experts domestic and international firms (in contrast, government 57 sewage treatment plant projects previously attracted scarcity, coupled with the rising population and the influx two to three bids). of refugees, poses serious challenges for the country. At the same time, the use of untreated wastewater for With successful completion of the first three pilots in irrigation or its discharge into rivers bodies has raised Haridwar, Varanasi, and Mathura, a series of similar environmental and health concerns. Therefore, water PPP projects were approved in more than 30 cities supply and wastewater treatment – including the reuse along the Ganga for greenfield, rehabilitation, and of treated wastewater – is a top priority for Jordan. upgrading of sewage treatment plants and sewerage networks. Financial support from the WB for these MIGA has supported both the existing operations and projects has mobilized an additional US$500 million in expansion of the AS Samra Wastewater Treatment private investment to date.64 Plant to help address the country’s major environmental and health issues and water deficit. This was supported Replication and Scaling through political risk guarantees to cover US$13.1 million The first three projects in Haridwar, Uttarakhand (82 mld, of equity investments for expansion from Suez expected cost: US$18.6 million), Varanasi, Uttar Pradesh Environnement S.A. (Suez), Infilco Degremont Inc. (capacity: 50 mld, expected cost: US$18 million) and (IDI), and Morganti Group Inc (Morganti). The plant is Mathura, Uttar Pradesh (67 mld secondary treatment, the first wastewater treatment facility and the first BOT 20 mld tertiary treatment, 17 km network, capital cost: project in Jordan. US$30.7 million) have been completed successfully and were operating by end-2021. The lead partners in The project’s innovative blended financing approach to the concession vehicles for the three projects are all combine grant funds from donors (USAID for phase I domestic companies. and Millennium Challenge Corporation for phase II of the expansion) and public financing from the Government Following the successful commissioning of the pilots, of Jordan (the GoJ) with equity investments and further projects based on the hybrid annuity model commercial debt from the private sector has been a scheme have been prepared. According to the National key factor for the project’s success. Using an innovative Mission for Clean Ganga, 25 projects had been awarded blended financing approach with introduction of foreign with a value of over US$1 billion as of mid-2022. Overall, investors and donors, the project has also brought in the Hybrid Annuity Model has opened new markets state-of-the-art technologies and high standards for for private investment, ensuring effective and timely wastewater treatment, management, and disposal of outcomes, and delivered environmental and public sludge to ensure environmental and social sustainability. health benefits. PPP Structure Figure C1 shows the project structure and capital flows. 2. AS SAMRA WASTEWATER The investments for the expansion were made by three TREATMENT PROJECT, JORDAN equity investors (Suez of France, IDI, and Morganti), nine local commercial banks (including Arab Bank Plc. Project Objectives as the lead), donors (MCC), and the GoJ, represented The AS Samra Wastewater Treatment Project by the Ministry of Water and Irrigation (MWI). MCC involves the construction, expansion, operation, and committed to assisting the MWI with the expansion maintenance of the existing wastewater treatment plant project by providing transaction advisory services and at AS Samra, around 30 miles northeast of Amman grant financing of US$93 million. The grant lowered by Samra Wastewater Treatment Plant Company Ltd the capital cost of the expansion, thus making the (the Project Company) on an extended 25-year BOT wastewater treatment charge affordable to the users. basis. The existing project was designed to be phase I Also, this proved crucial to securing private financing for of the AS Samra Wastewater Treatment Project, and expansion of the wastewater treatment plant through a phase II of the project was a planned expansion of the PPP. To undertake the project, a few project agreements plant. The Project’s major objectives were to increase were signed among the parties of GoJ represented by the wastewater treatment capacity by 37 percent (from MWI, the Project Company, and project sponsors (Suez, 267,000 m³/d to 365,000 m³/d) to meet the growing needs IDI, Morganti). To support the project, the GoJ through of the population over the period 2015 to 2025, and to the Ministry of Finance (MOF) also issued a sovereign increase the sludge treatment capacity by 80 percent. guarantee to the Project Company. In this project, MIGA provided Breach of Contract coverage to the equity Background and Context investors in relation to these project agreements and Jordan is one of the most water-scarce countries in the government guarantee. world. Water demand significantly exceeds supply. Water Results Achieved and Private Investment 58 FIGURE C1: Project Structure and Capital Flows SUEZ IDI MORGANTI 20% Equity 30% Equity 50% Equity Samra Wastewater MCC Commercial Banks Treatment Plant Co. Loan Grant Funds (Project Company) Project Agreements Guarantee Agreement MWI MOF Funds Mobilized MCC), and the GoJ. Financial support from the donors The Project has achieved strong operational and and the GoJ has mobilized US$205.25 million of total financial performance and development impacts, investment, including US$92.39 million in private including increasing wastewater treatment capacity from investment. The MIGA guarantee of 20 years was 267,000 m³/d to 365,000 m³/d; 100 percent of treated critical in assuring private sponsors to remain in the deal wastewater used for irrigation and agriculture in the structure. The stable equity contribution comforted the Jordan Valley; sludge treatment capacity increased by lenders, facilitating them to offer long-term loans with more than 80 percent; and climate benefits through favorable terms to the project company. Therefore, the production of renewable energy. Now the AS Samra MIGA guarantee was also critical in loan mobilization. Wastewater Treatment Plant can generate around 84 percent of power needed for its operations by using Replication and Scaling the hydraulic potential energy at the inlet and outlet The project sets a useful example in the water and of the plant as well as onsite biogas produced in the wastewater sector in terms of strong demonstration sludge digesters. The treated wastewater is being effects, implementation of innovative practices and used for irrigation and agriculture in the Jordan Valley, generation of climate benefits (including adaptation representing nearly 10 percent of water consumption and mitigation), use of high-quality technical standards, in the country. Besides preventing water pollution and impacts on agriculture and irrigation sectors, and an underground contamination, using treated wastewater innovative blended financing structure. In particular, for irrigation/agriculture can free up to 115 million m³/ the blended finance approach paves the way for other year of freshwater for domestic use for an estimated PPP, BOT, and private sector projects in the water and 2 million people. wastewater sector, as well as other sectors. Examples include BOTs like Disi Amman Water Conveyance The project was implemented successfully in accordance Project and Queen Alia Airport Project in Jordan that with the expected capital structure and financing plan – were signed after this project and followed a similar a blended finance package from equity investors (Suez, structure. There has also been notable global recognition IDI, Morganti), supported by MIGA’s non-commercial of the project’s blended finance approach. risk insurance, nine commercial banks, donors (USAID/ 59 3. BITA WATER PROJECT, ANGOLA historically been less attractive for private capital relative to other types of infrastructure projects. Project Objectives As one of Africa’s fastest growing capitals, Luanda (pop. The Project will address water supply service deficits at ~9 million) suffers from very limited water, sanitation, and scale. The optimized design will have an initial capacity hygiene services, causing a large share of the population to serve approximately 2 million people, with structural to rely on unsafe and expensive private tanker truck readiness for a future potential expansion to serve about service, and resulting in recurring typhoid and cholera 4 million. By addressing service deficits at scale, the outbreaks. The country’s hydraulic infrastructure needs project will have transformational impacts for Greater considerable investment to ensure its long-term reliability, Luanda’s sustainable development, with immediate capacity, and resilience. As a national priority investment, and lasting public health, productivity, affordability, and the project was included in Angola’s 2012 water supply climate benefits. master plan and started project preparation, design, and procurement. However, progress stalled in 2015 due to Background and Context a lack of financing coinciding with the deterioration of The Bita Water Project is a national priority investment Angola’s credit rating and sharp decrease in oil prices. In to extend potable water services to peri-urban areas of 2017, the Government of Angola (GoA) requested credit South Luanda. The proceeds of the IBRD-guaranteed enhancement using an IBRD guarantee and support in commercial loans will be used to finance investments project implementation. that optimize water production, transmission, and distribution systems through the following facilities: The Bita Water Project is the first water project to use the World Bank’s guarantee product. The IBRD guarantee  Water production facilities comprising a water not only helped mobilize private commercial financing to treatment plant near the Bita locality, approximately meet the over US$1.1 billion project cost, it also improved 40 km southeast of Luanda, with a raw water intake the borrowing terms for the Government of Angola. The in the Kwanza River. The production capacity of these Bita project provides a strong demonstration effect in facilities will be 3 m3/sec, ready for expansion to the use of the WB guarantee product to mobilize private 6 m3/sec, increasing and diversifying Luanda’s water capital for water infrastructure projects which have production system and making it more climate resilient. FIGURE C2: Structure of Angola Bita Water Project Independent Auditor Indemnity Agreement D&B Payment Approval (3) MinFin instructs MinFin MinEA Lenders (4) Guarantee D&B Invoice Agreement Loan Approval (2) Agreement GoA – Additional Cash Support (ACS) Resident Loan Repayment (6) Advisors Project Contracts Commercial Payment to Contractors/ D&B Invoice (1) Lenders Consultants (5) EPAL Consultants D&B Contractors Project Agreement 60  The transmission system will include about 82 km than Angola’s cost of borrowing, which helps reduce the of trunk transmission lines and four new distribution financing cost of the project. centers in currently undeveloped peri-urban service areas of South Luanda. The trunk lines will also be Replication and Scaling extended to feed urbanized residential suburbs of The project sets an attractive precedent for future private Luanda, displacing the need for the more expensive, investments in water infrastructure in other countries in less efficient tanker truck service. Africa and the rest of the developing world. The water sector has historically been less attractive for private  The distribution systems will include the installation capital relative to other types of infrastructure due to the of new networks and metered connections across perceived cash flow and operations risks in the water mostly poor peri-urban service areas, as well as the sector. The project sends a clear message about the retrofitting of existing networks and connections. The GoA’s commitment to develop sustainable, large-scale gravity-based distribution systems will allow increased infrastructure projects. efficiency, reduction of non-revenue water, and elimination of thousands of daily tanker truck runs. 4. CATASTROPHE BONDS FOR PUBLIC Guarantee Structure UTILITIES The Guarantee is structured to mitigate the debt service Issuer: Los Angeles Department of Power and Water default risk of the GoA on commercial financing and through Power Protective Re Ltd. (an SPV) acts as a rolling guarantee over the life of the WB Risk/Peril Covered: California wildfires Guaranteed Loan (see Figure C2). Under this structure, Size: US$50 million the guarantee covers payment of debt principal and Coverage Term: 3 years interest until the maximum aggregate guaranteed Date of Issue: December 2020 amount of US$500 million has been paid out. The Coupon: 10.75 percent structure also includes a cash reserve account funded with the WB Guaranteed Loan which acts as a first loss Background cover. Los Angeles Department of Water and Power (LADWP) is the largest municipal utility operating in the United Results Achieved and Private Investment States, serving more than four million residents in the Mobilized Los Angeles region of the state of California. The Luanda Bita Guarantee (the Guarantee) was approved by the IBRD Board in 2019 as a US$500 million Structure IBRD partial loan guarantee in favor of commercial In this transaction, LADWP obtained insurance coverage lenders to enable the GoA to mobilize US$910 million for its infrastructure against wildfires from insurance of sovereign commercial loans (the WB Guaranteed and investment company Aon Securities. A special Loan) for the project, to be carried out by Luanda’s water purpose vehicle named Power Protective Re Ltd, created utility EPAL. Africa Trade Insurance Agency and French specifically for the purposes of this transaction, then export credit agency BPI France Assurance Export issued bonds targeting US$50 million of protection to provided complementary financing products to mobilize investors. This allowed the insurance company to transfer the overall financing requirement of US$1.1 billion. the risk of underwriting the policy to LADWP to the market. Hannover Re also provided reinsurance coverage to Aon, Considering the urgent and sizeable financing and in turn, entered into a retrocessional reinsurance requirement of the project, the WB guarantee instrument agreement with the SPV Power Protective Re Ltd. The was particularly appropriate due to its leveraging effect CAT bond has a stepped-out payout mechanism, paying to mobilize commercial bank financing. out 35 percent, 70 percent, or 100 percent of its principal depending on the severity of the wildfire event. This The commercial banks to provide the WB Guaranteed mechanism is based on risk modeling by EQECAT Inc. Loan were chosen based on an extensive competitive process, involving 25 international commercial banks. Replication and Scaling Three banks were shortlisted after several rounds of In 2021, LADWP issued a second CAT bond of a selection and negotiations. The 15-year tenor of the smaller size (US$30 million) at a coupon of 15 percent. WB Guaranteed Loan is almost double the maturity that Such a mechanism could be used by other utilities in Angola could previously achieve for similar commercial the water sector to obtain insurance coverage for their loans, helping Angola establish a track record for future infrastructure. similar longer-term commercial financings. The pricing of the WB Guaranteed Loan is also significantly lower 61 5. JORDAN’S WATER SECTOR debt accumulation. A large part of the water sector’s fiscal FINANCIAL SUSTAINABILITY ROADMAP deficit is due to the high energy intensity and inefficiency Background and Context of water supply. Efficiency gains therefore form a central Chronic water scarcity is one of the key obstacles to pillar of the roadmap (see Figure C3). Targets in the FSR Jordan’s development. Growing population, expansion include systematically reducing non-revenue water from of the agricultural sector, and underlying water resource 53 percent to 25 percent by 2040, and improving energy scarcity exacerbated by climate change have outweighed efficiency and energy load-shifting. The FSR identifies efforts to address water supply in recent years. tariff increases as a key policy tool in achieving cost recovery and sets out a tariff reform program. Adopting Opportunities to augment water supply – desalination the FSR policy and investment measures would reduce and long-distance transfer and purchasing water from water sector debt by billions of Jordanian dinar by 2040, other countries – are limited and increasingly costly, helping to return the sector to operational cost recovery. posing severe financial sustainability challenges for the The FSR aims to close the sector’s operational deficit by sector. By the end of 2019, the water sector deficit was 2029 and reduce debt accumulation. JOD 310 million (1 percent of GDP) and sector debt was JOD 2,524 million (7 percent of GDP). This deficit and Building on the analysis of the FSR, planned actions the debt accumulation are partly due to rising energy include (1) improving the efficiency of water use in costs and significant capital investments needed to urban areas, energy efficiency investments, and an augment bulk water supply, improve the urban water economically efficient tariff structure that recognizes the supply networks, and expand wastewater treatment. time of use, (2) investing in in-network storage to enable a shift in peak energy demand of the water sector, Solution (3) investing in pumped hydro storage, (4) introducing Recognizing the importance of mobilizing additional “smart” net metering/billing policies that encourage finance for the water sector, the Government of Jordan the use of solar energy by accounting for the time of prepared a Water Sector Financial Sustainability consumption, (5) adopting policies that accelerate Roadmap (FSR) through a consultative process. This the deployment of smart grid infrastructure, and outlines a set of policy and investment measures that will (6) cooperating regionally on energy and water.65 close the sector’s operational deficit by 2029 and reduce FIGURE C3: Financial performance of Jordan’s water sector with/without efficiency gains Debt (MJD) in 2040 with/without efficiency gains Deficit (MJD) in 2040 with/without efficiency gains Without Without efficiency gains 10,382 efficiency gains 634 121 MJD/a BOT 121 MJD/a BOT Lease payment 11,842 Lease payment 746 With With efficiency gains 7,791 efficiency gains 430 121 MJD/a BOT 121 MJD/a BOT 542 Lease payment 9,305 Lease payment Without Without efficiency gains 11,343 efficiency gains 686 196 MJD/a BOT 12,857 196 MJD/a BOT 798 Lease payment Lease payment With With 483 efficiency gains 8,806 efficiency gains 196 MJD/a BOT 10,320 196 MJD/a BOT 595 Lease payment Lease payment 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 0 100 200 300 400 500 600 700 800 900 57 fils/kwh 96 fils/kwh 57 fils/kwh 96 fils/kwh 62 6. THE NATIONAL URBAN WATER the best performing and the fifth being the worst). A SUPPLY PROJECT OF INDONESIA customized support package is provided according to the performance category. The packages are designed to Project Objectives involve both central and local government stakeholders Indonesia’s National Urban Water Supply Project and build on experience from former lending operations (NUWSP), financed by the World Bank, has supported and sector diagnostics. The measures (financial support the creation of an overarching framework for national and capacity building) aim at lifting the service provider urban water supply development and financing, known as to a higher level of performance and towards eligibility NUWAS. NUWAS provides a structured and systematic for the next category of support, leading to gradual way to help local governments and utilities to improve and continuous improvement and ultimately facilitating their water supply service delivery. The project will help access to commercial financing. Indonesia to achieve its ambitious access goals through 1.2 million new connections in at least 40 cities, benefiting The lowest-performing utilities have access to a 6 million people, and aims to support 200 water utilities to stimulant support or seed grants, which is one-time improve financial and operational performance. capital investment support to raise services to meet the minimum service standard. Mid-performing utilities are Structure eligible for performance-based grants linked to specific Under the framework, 400 local governments and objectives of improving efficiency and service expansion water utilities have been classified according to their to the urban poor. Higher performing, “healthy” utilities performance into five categories (the first group being can receive matching grants. These incentivize more FIGURE C4: NUWSP Framework GROUP 1 Gradual and continuous improvement Matching grant GROUP 2 Policy Advisory for To encourage and LGs in selecting the leverage non-public GROUP 3 appropriate type of Matching grant financing service provider To encourage and leverage non-public Matching grant financing To encourage and leverage non-public GROUP 4 financing  Performance-based Performance-based grant grant For improved Performance-based grant For improved performance and performance, increased increased service For improved coverage GROUP 5 service coverage and performance, increased expanded services areas service coverage and expanded services Seed grant areas Seed grant Seed grant To increase service Only to achieve minimum To increase service coverage and improve service standard coverage performance DGCK Bulk Investment DGCK Bulk Investment DGCK Bulk Investment DGCK Bulk Investment DGCK Bulk Investment TA & CB Program TA & CB Program TA & CB Program TA & CB Program TA & CB Program Advance skills and Advance skills and Operation and Operation and Basic skills to improve innovation for further innovation for further management skills to management skills to capacity improvement improvement improve performance and improve performance and project implementation/ project implementation/ management management 63 financially and technically capable entities to obtain reduced the need to increase tariffs. As per the initial private finance in the form of commercial debt from local financial structure conceived, a US$275 million loan from banks or via PPP arrangements (see Figure C4). IBRD would cover 74 percent of the costs of the US$372 million project, while the rest would be financed by the concessionaires themselves as an equity investment. The 7. BLENDED FINANCE: THE METRO WB loan was made to a government financial institution – MANILA WASTEWATER MANAGEMENT the Land Bank of the Philippines (LBP), with a guarantee PROJECT from the Government of the Philippines. The LBP then on-lent it to the two concessionaires. Context The Metropolitan Waterworks and Sewerage System Outcome (MWSS), a government corporation, is the agency At the project’s closing, the project costs had responsible for providing water supply, sewerage and increased from the initial estimated US$372 million to sanitation services in Metro Manila and some cities of US$503 million. The concessionaires financed the Rizal and Cavite provinces in the Philippines. Since additional amount – with MWCI financing US$101.9 1997, service delivery is being handled by two private million and Maynilad financing US$126.1 million. As of concessionaires on behalf of MWSS: Manila Water December 2020, progress in construction was reported Company, Incorporated (MWCI) for the east zone, and at 82.41 percent (MWCI) and 88.8 percent (Maynilad). Maynilad Water Services, Incorporated (Maynilad) for the Despite this, the project exceeded its targets for improving west zone of the concession area. The two Concession the water quality of receiving water bodies (measured as Agreements are set to be in operation up to 2037. Initially, Biological Oxygen demand) and the population served most of the work of the concessionaires was on water by the project. It exceeded or met most of the other supply. However, inadequate wastewater management development goals with an overall satisfactory rating at has led to the build-up of high pollution levels in Metro project completion. Further, the project demonstrated an Manila’s water bodies, including Manila Bay – leading innovative blended financing model, which comprised a to the provision of wastewater management services to mix of public and commercial financing using a financial be declared a national priority. In 2008, the Philippine intermediary to ensure due diligence and credit quality Supreme Court passed a decision mandating concerned throughout the project lifecycle. The presence of the state entities (including MWSS) to clean up, rehabilitate, WB in the project in terms of the environmental, social, and restore the water quality of Manila Bay. The WB- procurement, and financial management safeguards financed Metro Manila Wastewater Management project reassured investors that the project would be done based hence aimed to finance investments in wastewater on best practices and supervised through the lifecycle. services by the two concessionaires – MWCI and The project demonstrated that fully private operations in Maynilad. the sector could work successfully, contribute substantial financing to critical investment projects, and serve as a Solution valuable example of private sector participation in the Blended finance helped to lower the cost of capital, which water sector. TABLE C1: Metro Manila Project Key Dates ORIGINAL CLOSING ACTUAL CLOSING APPROVAL EFFECTIVENESS MID-TERM REVIEW DATE DATE 15-May-12 19-Oct-12 30-Jan-14 30-Jun-17 30-Jun-20 TABLE C2: Financing by Entity INITIAL AMOUNT REVISED AMOUNT FINANCING ENTITY % OF TOTAL % OF TOTAL (in US$ million) (in US$ million) IBRD 275 74.0% 275 54.7% MWCI 55.92 15.0% 101.9 20.3% Maynilad 40.83 11.0% 126.1 25.1% Total 371.75 503 64 8. GUERDANE IRRIGATION PROJECT, The government was responsible for ensuring water MOROCCO security. The demand/payment risk was mitigated by carrying out an initial subscription campaign whereby Background/Objectives farmers paid an initial fee covering the average cost of Recurring and persistent droughts force Moroccan on-farm connection. The concessionaire’s construction farmers to rely heavily on irrigation. In the southern obligation did not begin until subscriptions were part of the country, citrus farmers on the Guerdane received for 80 percent of the water available. The risk perimeter have long been dependent on water from an related to water shortage was allocated among the underground aquifer. But years of intensive agricultural concessionaire (up to a consequential revenue loss practices have seriously diminished groundwater capped at 15 percent), the farmers (via the application levels. The government looked to IFC to attract private of a tariff surcharge in case of drought leading to a investment in an irrigation network that could channel shortage of water, capped at 10 percent of the tariff), and water to the perimeter from a distant dam complex. the government (sustaining the risk of more significant water shortage through a financial compensation to the The perimeter of Guerdane in the Province of Taroudant concessionaire). covers about 10,000 hectares and produces 50 percent of Morocco’s citrus crops. For years, private wells The unique selection criterion was the lowest water tariff, pumping into the Souss underground aquifer were in support of the government’s goal of making surface the only source of irrigation water for some 600 citrus water accessible and affordable to the largest number farmers, but due to overexploitation, the level of of farmers possible. The public subsidy was designed groundwater was decreasing by an average 2.5 meters to maintain water tariffs equivalent to current pumping a year. Citrus farming in the region was becoming costs, making them affordable to farmers. The winning increasingly unsustainable. Between 1995 and 2002, bidder provided a tariff significantly lower than the price the area planted with citrus fruit decreased by 22 percent that citrus farmers in Guerdane had typically paid for as farms were abandoned or put out of production. irrigated groundwater supplies. To alleviate the lack of water in the perimeter, the 1995 IFC Role Watershed Management Plan of Souss-Massa allocated IFC provided the government with advice on structuring an average yearly volume of 45 million cubic meters of and implementing the Guerdane public-private water originating from the Mohamed Mokhtar Soussi- partnership irrigation project to deliver a high-quality, Aoulouz dams, about 40 miles away. The government accountable, financially sound, and environmentally sought a private partner to construct both a 300-kilometer sustainable public service to the farmers. With a grant water irrigation network to transport the water and a from France’s Fonds d’etudes et d’aide au secteur privé, distribution system to deliver it to farmers based on the the IFC team undertook technical, financial, and legal size of their citrus groves. The surface water allocated due diligence to recommend the most commercially and for the project met half of the water needs of the citrus technically viable transaction structure. farms in the perimeter. IFC also conducted a bidding process that would set a Solution/Transaction Structure precedent for future irrigation investments worldwide. The transaction was structured as a 30-year concession Finally, IFC played a leading role in marketing the to build, co-finance, and manage an irrigation network to project, prequalifying potential investors, drafting bidding channel water from the dam complex and distribute it to documents, ensuring a competitive and transparent farmers in Guerdane. At the end of the concession, the bidding process, and selecting the winning bidder. infrastructure would be returned to the government. The total project cost was estimated at $85 million, with the Outcome Moroccan government providing $50 million, half as a The concession – the world’s first public-private grant and half as a subsidized loan. The private partner partnership irrigation project – was awarded in July 2004. provided the balance. A consortium led by Omnium Nord-Africain, a Moroccan industrial conglomerate, won the 30-year concession. The concession granted exclusivity to channel and This meant the creation of Morocco’s first domestic distribute irrigation water in the perimeter while private infrastructure operator for irrigation projects. allocating operational, commercial, and financial risks among the various stakeholders. The construction (time By providing half the water needed by the citrus farmers, and costs) and the collection risk were transferred to the the Guerdane Project reduced the risk of depleting concessionaire. underground water resources and safeguarded an 65 agricultural industry that provides a living for an implementation. IFC worked closely with FONADIN, estimated 100,000 people. Mexico’s national infrastructure trust fund, which provided consultants for technical and legal due The concession leveraged $36.9 million in investments diligence, while IFC hired the environmental and social and $10 million in tax revenues by the concessionaire. specialist to ensure all IFC performance standards would It benefited the government because the technology be included in the PPP contracts. At the request of the transfer was financed by the private sector. It also client, IFC provided support to Los Cabos Municipality benefited the Moroccan economy because the and Water Utility until financial closing. concessionaire used local suppliers whenever possible. Outcome For the NRW project, four consortia formed by national 9. LOS CABOS DESALINATION PROJECT, and international companies bid for the transaction MEXICO (three consortia formed by international and national companies and the current operator of the existing Objectives desalination plant in Los Cabos). The Water Utility of The Municipality of Los Cabos, State of Baja California Los Cabos considered the bidding process a major Sur, Mexico, had a deficit to meet the demand for water success as the economic proposals were 20 percent for domestic, residential, commercial, and industrial and 149 percent lower than the estimated IFC financial uses, since the aquifers of Cabo San Lucas and San model for the new desalination plant and the NRW Jose del Cabo were overexploited and the declining projects, respectively. pumping levels for groundwater were affecting the distribution system. Considering the demographic The projects were awarded in 2021 and reached financial growth in the state due to its touristic demand, the water closure in 2022. The new desalination plant project was supply services in Los Cabos faced two key challenges: awarded to the consortium formed by Acciona Agua 1) the water level distributed by the existing desalination and La Peninsular (a local company with a good track plant in Los Cabos was insufficient to provide water record), while the NRW project was awarded to the service for 24 hours a day and seven days a week, with consortium formed by FCC Aqualia and Aqualia Mexico. some sections located mainly in the northern part of The estimated total capital mobilized from private Cabo San Lucas receiving water at best once a week; sector sources to finance the development of the 2) the distribution system was inefficient and the projects was expected to be US$25 million for NRW and aquifers of Cabo San Lucas and San Jose del Cabo US$50 million for the desalination plant. were overexploited. The project is expected to increase the reliability of the Solution system and the volume of drinking water for 278,000 The IFC Advisory Project team proposed a dual approach inhabitants of Los Cabos at an average tariff of less than to solve the problems by structuring the following two $1 per cubic meter, thanks to the CAPEX subsidy. PPP projects:   1) A Non-Revenue Water (NRW) Project, which aims to improve the technical loses of the network and to supply drinkable water 24 hours a day and seven days a week. 2) A New Desalination Plant project to produce up to 250 liters per second. The two transactions would benefit from a subsidy to cover 49% of CAPEX from Banobras, the Mexican national development bank, to ensure there would be no negative impact on the water tariff from both projects. IFC Role IFC Advisory was hired in 2020 to structure the PPP projects, promote them internationally and conduct competitive tender processes to select and contract reliable and reputable private sector investors for their 66 APPENDIX D: EXPERIENCE WITH THE MULTI-STAKEHOLDER PLATFORM MODEL There have been a number of efforts by development  Assess needed reforms in PIR and the enabling partners to develop multi-stakeholder platforms (MSPs) environment and foster commitment from the involving government, communities, and private government and other partners to implement the sector representatives around water security, land use reforms management, agricultural innovations, climate change  Exchange knowledge on scalable financing solutions  challenges, and disaster risk management. A few notable  Develop blended finance approaches to match local examples include the World Economic Forum-led Water needs Initiative to accelerate private-public partnership in  Mobilize investors and financiers to match the supply water, 2030 WRG managed by the WB, International of capital with the demands of the sector Land Coalition-led platforms for better land governance,  Support a programmatic approach to the mobilization and the European Commission Multi-Stakeholder of financing, in coordination with other multilateral Platform for SDG implementation at the EU level. In agencies, development partners, and financial February 2020, the G20 endorsed the development of institutions such platforms through the “G20 Reference Framework  Identify concrete programs and projects through for Effective Country Platforms”, suggesting the creation strategic financial planning of platforms to promote collaboration in catalyzing  Design appropriate risk mitigation instruments financing and greater private sector investments.  Monitor the implementation of projects and programs and progress towards sector objectives Among the water-focused MSPs, the 2030 WRG stands  Provide visibility to the financing needs of the water out in its scale and scope. This section outlines its track sector, with the mobilization of needed expertise and record and provides brief case studies. resources. MSP TRACK RECORD STRUCTURE The MSP model has been successfully employed by the MSPs are structured around a defined agenda of 2030 WRG, a multi-donor trust fund within the Water success to increase alignment, ensure transparency, Global Practice of the WB. These 2030 WRG-supported and build trust (see Figure D1). They depend on clear platforms have created the upstream conditions for principles of engagement:  PSP in the water sector in several countries, including Bangladesh, Brazil, India, Kenya, Mongolia, and Peru.  Represent a balance of interests across public These engagements have generated lessons for future sector, private sector, and civil society, with no single adaptation and use of this model. stakeholder group having a majority (i.e., each less than 50 percent of seats)  Streamline decision-making, with the PURPOSE AND FUNCTION identification of a high-level chair from the public In the context of the current economic environment, sector, and potentially a co-chair from the private ensuring coordinated and cohesive approaches to sector and/or civil society national priorities on water is critical to meet the  Ensure accountability, transparency, results financing needs of the sector. Against this backdrop, orientation, and inclusivity through the decisions MSPs can support the following critical functions for the of the platform water sector at a national scale:  Create a pre-competitive space, upstream of transactions, to build consensus on PIR reforms  Build a common vision for the water sector and a and enhance the technical and financial viability of shared understanding of the funding and financing water sector organizations needs in the country  Identify core programs and projects to advance 67 the objectives of the platform, following competitive the aim of promoting integrated water resources and transparent procurement processes led by the management.   government    Support cross-sectoral alignment across sectors The client government decides on the size and and stakeholders, comprising water, climate, composition of the MSP, including the identification of agriculture, urban development, finance, rural the chair and co-chairs, in consultation with the WB. development, environment; and intra-sectoral Typically, an MSP has 15–25 members. alignment across various water sub-sectors, with FIGURE D1: Structuring MSPs for Financing  COMPOSITION OF MSPs PRINCIPLES OF MSPs Chaired by government Government Local country ownership Private Co-chair from private sector Sector, including Civil Society and/or civil society Joint decision-making financiers MSP for Inclusivity in composition Financing Pre-competitive space Bilateral and multi-lateral Academia Cross-sectoral, bringing together agencies Accountability and transparency stakeholders from water, climate, agri, Development urban, finance, rural, environment etc. banks and international organizations Balanced participation (no single stakeholder type with majority) Reform and results-oriented 2030 WRG COUNTRY CASE STUDIES AND SUCCESS FACTORS INDIA The MSP brought together various government departments to ensure coordinated public sector involvement, along with a wide spectrum of industrial, urban, and agricultural stakeholders. One of the 2030 WRG innovations in the state of Karnataka focuses on water efficiency through a PPP model for the first large-scale community-driven drip irrigation project, developed through a performance-based payment structure, along with collaborations with 55 agribusiness companies for market linkages, replicated across an additional 100,000 hectares and covering $650 million in investments. Key factors: Political endorsement and stability; local ownership; collaboration by businesses and civil society; shared understanding and consensus on risks, challenges, and policy solutions. 68 PERU The MSP Committee is chaired by a Presidential representative and comprises senior leaders from government, business, and civil society. Peru’s President is a strong supporter of 2030 WRG, which has been key to the platform’s convening power and legitimacy in the country. To ensure a coordinated government response, five key ministries are represented in the platform. Additionally, companies from the energy, mining, agriculture, and food and beverage sectors have been brought together by building a stronger appreciation of the business risk arising from water scarcity. The platform also features strong representation from civil society. Several thematic working groups have been generated to advance a range of water initiatives. For example, a Groundwater Management and Monitoring Tariff (initially for industries and later extended to other sectors) ensured proper tracking and efficient use of groundwater resources. Another innovative scheme is “Taxes for Projects”, which allows companies to use up to 50 percent of what they owe in taxes to implement mutually agreed water infrastructure projects. Key factors: Strong support from central government; strategic network organization and division of responsibilities according to nature of project; innovative financial schemes; and incentives for businesses to participate actively. MONGOLIA In 2012, the President of Mongolia invited 2030 WRG to help cultivate a national MSP to drive improvements in water governance, with a focus on water use efficiency, wastewater treatment, and effective river basin management. To address some major structural problems such as fragmented governance and lack of country-level baseline data, a detailed scientific study of affected areas was undertaken to understand the impact of water stress on communities, the environment, and the economy. Based on the knowledge generated from shared perceptions of risks, challenges, and strategies needed to protect the nation’s water resources, a steering board committee under the chairmanship of the Minister for the Environment was formed. The committee comprised representatives of government ministries, industry, civil society, and academia. 2030 WRG served as platform coordinator, facilitator, and technical advisor. Stakeholders have worked to improve existing guidelines and regulations, mobilize public-private financing, and create incentives to increase the uptake of water efficiency, pollution reduction, and reuse. For example, the MSP developed a new water pollution fee law, which incentivized investments from the private sector into pre-treatment of industrial effluent across eight industrial sectors, with operational expenses for the treatment plants supported through revenues from the pollution fees collected. Key factors: Government initiative, support, and leadership; development of a neutral, independent, transparent platform; collaborative knowledge generation. 69 APPENDIX E: IFC’S ENGAGEMENTS IN WATER Initially, IFC focused on the traditional water supply sector along three verticals: (1) providing investment business, which was dominated by private water and advisory services to subnational utilities through concessions supporting a handful of large global its Utilities for Climate platform; (2) supporting client sponsors primarily in Latin America in the 1990s. In the countries develop PPPs through transaction advisory early 2000s, IFC made a strategic shift to work with local and support via its Scaling ReWater initiative to rapidly and regional sponsors who were better placed to deal develop wastewater treatment and reuse through with local operating conditions and tended to receive less competitive, transparent processes; and (3) supporting political and social pushback. In 2003, IFC developed its private clients that invest in emerging markets (Metito, subnational finance initiative, which unlocked additional DNP Water, Aegea, and others). IFC has committed and investments in the water sector by financing the capital mobilized US$3 billion in water projects globally from needs of municipal service providers operating on a 1995 to 2022. commercial basis. Today, IFC engages in the water 70 Endnotes 1 References to the “water” sector in this report include sanitation China) at US$18 trillion and domestic financial assets around and wastewater management services. US$16 trillion, there are insufficient domestic financial resources 2 Private sector participation (PSP) refers to private sector within developing countries to self-finance the SDGs (GISD involvement in the water sector through private finance, Alliance, Increasing Private Finance Mobilization (2021)). absorption of risk, and/or management. The strategic framework 24 WB, Global Economic Prospects (September 2022). aims to mobilize private capital as well as expertise and 25 WB, Global Economic Prospects (January 2023). technological innovation to achieve key technical and operational 26 This report makes frequent reference to ‘funding,’ ‘finance,’ and efficiency objectives and to address capacity gaps in the sector ‘investments.’ While these terms are often used interchangeably, (which may need to be addressed before private financing can there are differences in their definitions. ‘Funding’ refers to the be mobilized). ultimate source of cash flows (and return on investment) for a 3 World Bank, A Water-Secure World for All (2021). given project, which in the water sector are tariffs, taxes, and 4 World Bank, High and Dry: Climate Change, Water, and the transfers. For long-lived assets, these cash flows are typically Economy (2016). generated over many years, while the capital requirements 5 World Water Council and OECD, Water: Fit to Finance? for a project are front-loaded. ‘Financing’ refers to how this Catalyzing National Growth through Investment in Water gap is bridged, including through structured debt and equity Security (2015). instruments. The term ‘investments’ can refer to this upfront 6 Blended finance refers to the use of development finance to financing but can also be used to describe projects that are mobilize additional funds from private and commercial sources financed. for sustainable development in developing countries. 27 This covers a broad range of service providers across a spectrum 7 World Bank, A Water-Secure World for All (2021). of services, including the provision of water supply, sanitation 8 World Resources Institute, WRI’s Aqueduct initiative; Kressig, services, wastewater treatment, and irrigation services. Byers, Friedrich, Luo, and McCormick, “Water Stress Threatens 28 Recent research facilitated by the OECD and the World Bank Nearly Half the World’s Thermal Power Plant Capacity,” World resulted in the characterization of 46 key functions needed to Resources Institute (2018). facilitate private water investments and financing which can be 9 Food and Agriculture Organization, The State of Food and performed or supported by a variety of existing intermediary Agriculture 2020: Overcoming Water Challenges in Agriculture institutions (De Pazzis and Muret, “The Role of Intermediaries to (2020). Facilitate Water-related Investment” (2021)). 10 Sadoff et al., Securing Water, Sustaining Growth, Report on the 29 Values calculated based on data from the Food and Agriculture GWP-OECD Task Force on Water Security and Sustainable Organization’s Aquastat database and Global Water Growth (2015). Intelligence’s desalination database. 11 CDP, Cleaning Up their Act: Are Companies Responding to the 30 World Bank, City-wide Inclusive Water Supply: Adopting Off- Risks and Opportunities Posed by Water Pollution? (2020). Grid Solutions to Achieve the SDGs (2019). Misra and Kingdom, 12 CERES, “New Analysis Shows Value at Risk from Negative City-wide Inclusive Water Supply: Role of Supplementary Urban Water Impacts in Apparel and Meat Industries,” Press Release, Water Service Providers (2022). World Bank, Supplementary December 8, 2021. (Non-Utility) Water Service Providers (forthcoming). 13 OECD, “The Reform of the International Financial Architecture: 31 Delacámara, “The Value of Water – If Hidden, It Will Be An Opportunity for Scaling Up Finance for Water?” Background Overlooked” (2018). note for the 9th Roundtable on Financing Water, Geneva, 32 Internal WB research. February 7–9, 2023. 33 Leigland, “Public-Private Partnerships in Developing Countries: 14 Alfieri et al., “Global Modeling of Seasonal Mortality Rates from The Emerging Evidence-based Critique,” The World Bank River Floods,” Earth’s Future 8 (9) (2020): e2020EF001541. Research Observer 33 (1) (2018): 103–134. 15 World Bank, High and Dry: Climate Change, Water, and the 34 Convergence, “Blended Finance” (2020). Economy (2016). 35 MIGA’s sub-sovereign Breach of Contract cover for a municipal- 16 Zaveri, Damania, and Engle, “Droughts and Deficits: The Global level PPP in Serbia is an interesting model for sub-sovereign Impact of Droughts on Economic Growth,” Policy Research guarantees which may have potential for replication. Working Paper 10453 (2023). 36 For more information, see https://www.dcwater.com/ 17 Global Commission on Adaptation, Adapt Now: A Global Call for environmental-impact-bond. Leadership on Climate Resilience (2019). 37 Pörtner et al., Climate Change 2022: Impacts, Adaptation and 18 The Paris Agreement recognizes that reaching these goals Vulnerability (2022). depends on “making finance flows consistent with a pathway 38 UNFCCC Decision COP27 Cover Decision. https://unfccc.int/ towards low greenhouse gas emissions (and climate-resilient) sites/default/files/resource/cop27_auv_2_cover%20decision.pdf. development” (Article 2.1c). 39 Damania et al.,  Uncharted Waters: The New Economics of 19 The International High Level Panel on Water Investments Water Scarcity and Variability (2017). for Africa, Africa’s Rising Investment Tide: How Investment 40 Buchner et al., Global Landscape of Climate Finance 2021 Partnerships Will Mobilize USD$30 billion/year to Achieve Water (2021). Security and Sustainable Sanitation in Africa (2023). OECD and 41 Global Commission on Adaptation, Adapt Now: A Global Call for CDP, Finance Water Action Pathway (2023). Leadership on Climate Resilience (2019). 20 Internal World Bank research. 42 Global Water Intelligence, “Mapping Water’s Carbon Footprint: 21 Internal World Bank research. Our Net Zero Future Hinges on Wastewater,” White Paper 22 World Water Council and OECD, Water: Fit to Finance? (2022). Catalyzing National Growth through Investment in Water 43 A recent study demonstrated that more than 50 percent of GHG Security (2015). emissions from Kampala, Uganda, are attributable to septic 23 With aggregate GDP of 145 developing counties (excluding tanks that are not serviced regularly. 71 44 World Bank, Private Participation in Infrastructure (PPI): Annual 56 Zaveri, Damania, and Engle, “Droughts and Deficits: The Global Report 2021 (2021). Impact of Droughts on Economic Growth,” Policy Research 45 Financing for climate mitigation and adaptation is often called Working Paper 10453 (2023). climate finance. 57 Rodella, Zaveri, and Bertone, eds., The Hidden Wealth of 46 InfraSAP is the World Bank’s official extended core diagnostic Nations: The Economics of Groundwater in Times of Climate for infrastructure sectors, aiming to provide regular coverage Change (2023). of the main IBRD and IDA client countries. The methodology 58 2030 WRG, https://2030wrg.org; Global Commission on the is designed to identify investment gaps and policy shortfalls, Economics of Water, https://watercommission.org; Roundtable as well as opportunities for private sector participation. The on Financing Water, https://www.oecd.org/water/roundtable- methodology is rigorous and evidence-based, drawing upon a on-financing-water.htm; Water Finance Coalition, https:// rich global database of infrastructure performance indicators www.waterfinancecoalition.org; WASH Finance Strategy that permit benchmarking and a global infrastructure map that Guide, https://www.unicef.org/documents/how-develop-water- allows spatial visualization. sanitation-and-hygiene-wash-finance-strategy. 47 The idea of a “WaterSAP” as a customized assessment for 59 Bennett and Ruef, Alliances for Green Infrastructure: State of the water sector is being discussed between the Water and Watershed Investment 2016 (2016). Infrastructure Finance, PPPs, and Guarantees GP. 60 IFC, “IFC Helps Privatize Albania’s Electricity Distribution 48 Single-sector InfraSAPs are usually led by the relevant GP Company to Improve Power Supply,” Press Release, March 11, (Global Knowledge and Expertise Units) and include IPG 2009. analysts and economists from the Chief Economist Office. 61 PIB Delhi, “Cabinet Approves Continuation and Revamping of 49 WB, World Bank Climate Change Action Plan 2021–2025: the Scheme for Financial Support to Public Private Partnerships Supporting Green, Resilient, and Inclusive Development (2021). in Infrastructure Viability Gap Funding VGF Scheme,” Press 50 Internal World Bank research. Release, November 11, 2020. 51 Portugal provides an example of holistic, national-level reform 62 NMCG website, https://nmcg.nic.in/NamamiGanga.aspx. combining economic regulation, consolidation, and PSP carried 63 NMCG Project Dashboard, https://gisnmcg.mowr.gov.in/pmt/ out over 25 years, with remarkable performance impacts. More nmcgpmtmain.aspx. recently, reforms in Indonesia under the National Urban Water 64 https://nmcg.nic.in/index.aspx; https://mathurahamstp.in/; Supply Framework, supported by the World Bank, are leading to https://www.varanasihamstp.in/. creditworthiness of utilities across levels of financial health. 65 Adapted from WB, Jordan Country Climate and Development 52 Kingdom, Baeumler, and Guzman, “Capital Subsidies Implicit in Report (2022). Concessional Finance: How to Make Them More Transparent and Better Targeted” (2012). 53 Some examples of actions that could be taken include: i) Characterizing the water business environment within a given territory (e.g., Myanmar Information Management Unit); ii) Providing access to information on the water sector of a given territory and its upcoming evolution (e.g., WASHfunders.org); iii) Positioning governments as public investment brokers and market coordinators (e.g., through dedicated PPP units, e.g. Philippines); iv) Showcasing and advertising the opportunities to invest in the water sector (e.g., ELAN RDC); v) Fostering meeting points for stakeholders interested in financing the water sector within regions (e.g., the “Innovate 4 Water” marketplace events organized by Waterpreneurs at country level). 54 Examples of actions that can be taken in this area include: i) Assessing the financial efficiency of existing programs and service providers and providing information about the creditworthiness and performance of service providers and of projects (e.g. the shadow credit-rating initiative by Kenyan regulator WASREB with support from PPIAF/World Bank, and the Gold Standard for Global Goods for assessing CO2 avoided and economic impacts); ii) Providing financial support for project development (e.g. PPIAF, PIDG Upstream Global Facility, and GWSP); iii) Creating new and promoting existing opportunities in a given territory by consolidating investment opportunities at a territorial level to give perspectives to financiers and show them how engaging in water-related sectors can lead to a variety of opportunities, and by pooling small projects/ service providers to reach a critical scale and mitigate the viability risk (e.g., the Water and Sanitation Pooled Fund in Tamil Nadu); and iv) Ensuring third-party evaluation of investment opportunities, through certifications and rating standards available at national or regional scale, e.g., The Solar Impulse Foundation and certification of 1,000 efficient solutions. 55 Internal World Bank research. 72 References Alfieri, Lorenzo, Franceso Dottori, Peter Salamon, Huan Wu, and Development Community. https://www.gisdalliance.org/sites/ Luc Feyen. 2020. “Global Modeling of Seasonal Mortality Rates default/files/2021-10/GISD%20Position%20Paper%20-%20 from River Floods.” Earth’s Future 8 (9): e2020EF001541. 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