Bluefield Research had the pleasure of attending the recent Roundtable on Financing Water organized by the UN and the Organisation for Economic Co-operation and Development (OECD) in Geneva, Switzerland. As a previous participant in the United Nations Economic Commission for Europe’s Working Party on Public-Private Partnerships (PPPs), the event promised high-level thinking on how to optimize financial institutions’ approach to water sector investment. With hard-hit government coffers coming out of a pandemic, and initiatives to build better and greener coming from the U.S. and the EU, we anticipated discussion of more new initiatives stimulating private sector investment in water.
One does not sense a new golden age for water sector PPPs, nor much change at all around governments’ conception of water investment. Several panelists addressed that very fact—that policy inertia continues to plague the industry. There were very few, if any, large commercial lenders on hand to weigh in. However, the financial sector and corporations with a significant water footprint should step up, underlined by a push for greater water use disclosure. As a result, this roundtable was more of an exercise in message-honing in the run-up to the UN 2023 Water Conference. Here are some key takeaways from the roundtable:
Financing of public water infrastructure has a scale issue. Public US$100 million CAPEX projects require high quality enabling environments with strong investment guarantees, PPP laws, and proven contract models that are difficult to come by and take years, if not decades, to create. Yet smaller projects (<US$10 million) are too small to attract institutional finance and require bundling multiple projects together or packaging with non-water projects (e.g., the UNCDF’s Blue Peace Bond for energy and smaller water projects in The Gambia, West Africa).
Industrial water infrastructure poised as a potential sweet spot for investment. Recent ESG initiatives from major corporations, rising energy costs, and emerging regulations point to industrial water infrastructure as a key target market for private players. These are not development finance-dependent projects and are often driven by underlying economic drivers or operational risks (e.g., insecure process water supplies) rather than waiting for regulation to unlock investment. Major solutions providers such as Xylem are pivoting towards industrial water via M&A in acknowledgement of this dynamic.
Project origination capability is the key differentiator for private finance players. In looking within that sweet spot, water infrastructure does not mirror the power sector in terms of project development or finance. Permitting, financing, and building a public water supply pipeline is a much longer, more political, more locally variable enterprise than, say, authorizing a 20 MW wind farm. Industrial water projects are often financed in-house via bond issuances or other forms of commercial debt. Finding projects requiring alternative sources of finance are not easy to come by, and to identify them, one must leverage strong local sector knowledge to target companies and sites.
Many reports, several overlapping, will be published in the coming weeks setting out policy agendas, pathways, guidelines, and frameworks for governments and public entities to address water challenges. A UN Conference will not solve any bottlenecks related to financing water projects. But it can set the table for high level consensus-building and garner more attention for a sorely underinvested infrastructure sector in the public sphere. Meanwhile, industries will continue to push forward in response to these challenges.