Offerings like Water-as-a-Service® and plant leasing can reduce the risk of infrastructure projects in developing economies
Delivering water and sanitation infrastructure comes with challenges, particularly in developing economies. They include cost, monetisation, currency risk, and governance issues, and sometimes they are serious enough to subdue investment in the sector. A new report from WaterAid and the Blended Finance Taskforce urges blended finance as a solution to meet these challenges.
Blended finance is an optimized use of development finance and philanthropic funds to draw private capital into emerging markets in low- and middle-income countries (LMICs). The resulting synergy benefits both investors and communities, and experience shows that a blend of capital with different risk-return requirements can grow the overall capital available for investment in water infrastructure. Such blended finance structures include first-loss equity, guarantees, insurance, currency hedging, and targeted technical assistance, as well as public-private partnerships (P3s).
Significant Investment Opportunities
The need for investment in water and sanitation service gaps is critical globally and will only grow with the climate crisis. Around the world, 26% of the population lacks access to safely managed drinking water and 46% has no access to safely managed sanitation.
In 2020, more than 97 million people were impacted by water disasters, and at least 8,400 lost their lives. Damages reached $152 billion. Inadequate drinking water services may be responsible for 10% of disease. By 2030, with no change, demand for water could rise to 40% above supply. Investment should, therefore, focus on increasing the volume, quality, and accessability of fresh water, or address drought and flood risk.
Today service gaps are damaging human health and economies at approximately $500 billion anually. The capital investment necessary to achieve 2030 water, sanitation, and hygiene (WASH) goals in LMICs is estimated at $200-400 billion anually, three times the current level. When all water infrastructure is included, this figure climbs much higher.
While the $200 billion annual financing gap for water and sanitation is growing, the sector is starting to attract more attention from public, private, and philanthropic investors despite a continuing disparity in investment. The private sector provides just 9% of investment in water sector assets and services in the developing world, compared to 87% of investment in telecommunications and 45% in the power sector.
While the disparity represents an opportunity, all financial players will need to cooperate differently to accelerate, scale, and optimise investment in the water sector.
Blended Finance Recommendations
The report outlines a number of strategies for governmental bodies, financial institutions, philanthropies, and corporations for “big water” infrastructure, small-scale WASH solutions, nature-based solutions, and water policy and governance.
Among the financing models promoted are P3s that include operations and maintenance (O&M). Seven Seas Water Group’s Water-as-a-Service® (WaaS®) offers BOO and BOOT arrangements for both P3 projects and the private sector.
WaaS® contracts include long-term O&M that addresses many of the challenges cited by the report. For instance, unrealistic water pricing influenced by political concerns can be addressed with performance-based contracts that establish rational pricing upfront. With long-term O&M included, WaaS® also can avoid the infrastructure “build-neglect-rebuild” cycle, which ultimately costs ratepayers far more.
According to the report, cost-related investment challenges are associated with long amortizations for big water projects and high transaction costs for small, decentralized solutions. With the backing of Morgan Stanley Infrastructure Partners, WaaS® can deliver infrastructure on any scale with little or no upfront investment. Frequently, WaaS® not only slashes short-term costs but cuts long-term costs and addresses the report’s concern that high transaction costs diminish investment in small-scale decentralized projects.
Another of the report’s main concerns is the de-risking of investment. WaaS® allows clients to offload risk while optimizing capital. Other Seven Seas offerings that can lower client risk include its lease plant program and plant-acquisition.
While the report notes that, “There is no standardized ‘playbook’ to design and develop blended finance structures for water and sanitation projects,” Seven Seas has the experience, knowledge, and relationships to make infrastructure happen across sectors and across the globe. Contact Seven Seas. Our experts are here to discuss the possibilities.
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