Revisiting Perspectives On 'Water For Development': Keys To Project Development And Financing
By Julie King
A Q&A with Xavier Leflaive, Water Team Lead, Organisation for Economic Co-operation and Development (OECD) Environment Directorate
During 2022 Stockholm World Water Week in late August, I revisited the interview I did with Xavier Leflaive at the conference in 2015 on what has or has not changed in the past seven years. Revisiting the topic of project development, it was clear finance and policies remain unaligned with environmental and climate mitigation objectives of funded projects. The sobering fact, as laid bare in the latest Intergovernmental Panel on Climate Change,1 is that 99% of projects financed, including water infrastructure, have actually added to global greenhouse gas emissions.
There is the idea now to develop “bankable projects”, and these projects allegedly meet criteria to achieve environmental and climate objectives and that there is a dearth of these projects for investors. What are your thoughts on the creation of bankable projects and its use as a format/idea to drive project development and financing?
I am ambivalent about the notion of “bankable projects”. There are structures in place that do this, such as the project development facilities from ADB, EBRD, IaDB,2 and others. The Urban Water Catalyst Initiative3 by the German and Dutch governments is another facility that supports project development and helps projects gradually transition towards market-based finance. For example, a project can apply for technical assistance for a few years. This helps to develop projects for quick wins; once utilities have the technical capacity, they can access an investment window for further series of instruments, such as low-interest loans and then towards market instruments. This is a transition space to get access to different financial tools. Support for the development of bankable projects is a flourishing area with project facilities attached to financial institutions.
The problem with “bankability” is that it distracts from the attention on things that can benefit communities. There needs to be more emphasis on the benefit of the projects after becoming bankable. For example, desalination. There is no shortage of projects or financing. Many projects are being financed because they are “bankable”, not necessarily because they are beneficial. Alternative options to address water scarcity may be more valuable but not readily bankable. As a consequence, they struggle to get finance. This emphasis on a project being ‘bankable’ as the sole determination for finance loses the benefits objective.
Moreover, at what cost should a project become bankable? Bankable should mean balancing risk and revenue. But with the emphasis on bankability, risk is often transferred to the public sector, while revenues accrue to a private party. This isn’t what we want from a policy perspective. One can make a project bankable, but that does not mean fair allocation of risk by putting it onto the public while private finance takes the revenue. Too much emphasis on “bankable” distorts the balance between risk and revenue.
Also, the emphasis on developing bankable projects means too much project development but not enough attention to enabling conditions. The OECD is now clarifying and better characterizing the conditions required to attract private finance for water-related projects. For example, water policies. A correct framework is required to make pollution costly and to create value from clean processes or practices. In most jurisdictions, pricing policies would need to be in place to generate a revenue and attract finance.
Enabling conditions include financial regulations as well, on the types of risk that finance can take on and to generate private financing. These enabling conditions deal with things that “go beyond” water, for regulation, governance, and financial markets. We need a better enabling environment than what there is right now.
The OECD has developed a Score Card that will be available in the coming months. Governments (national and hopefully local) can use the Score Card to assess if enabling conditions are in place. It is a type of SWOT Analysis4 that will allow governments to identify their strengths and weaknesses and room for improvement. It will help them better understand the need for enabling conditions and what they are, which will allow them to be more strategic in where to focus attention for reform. For example, what if any changes are required to better attract private finance to water projects? The Score Card provides a framework for policy and institutional assessment.
We intend to pilot test the Score Card after September in different countries.
In our prior interview in 2015, you described the Strategic Investment Pathways for project finance whereby a project to be financed should take into consideration other projects that have already been financed and implemented. This was designed to synchronize momentum and outcomes of the portfolio of projects receiving money. What is the status of this now, the progress made?
The notion of Strategic Investment Pathways is still new… and challenging. The discussion has since been tied to landscape finance or catchment finance. This has a similar line of reasoning: the idea is that projects in the same catchment or landscape potentially create more value — and are more likely to attract finance — if they are adequately sequenced along strategic investment pathways. The benefits created by one project may contribute to making other projects in the sequence more valuable, etc. Sequencing projects along Strategic Investment Pathways can create more “bang for the buck”, scale, and help consider investing at a more aggressive level because you can see synergies as a project package.
The main challenge has been in how to document the decisions and design of Strategic Investment Pathways. An OECD working paper is about to be released by Casey Brown and Fred Boltz about this.5 Casey is with the University of Massachusetts and Fred Boltz with Resolute Development Solutions. Another challenge that has confronted us was either there was no data available or there was only poor data. The working paper is a systematic review and a data-heavy approach. Now we need shortcuts. We have the best practice, but we need to know what the proxies are.
Companies and utilities guard their water data very closely, especially environmental and for water and wastewater treatment. How are you able to access the data required?
The public policy challenge of data ownership is a big one. Some data should be public domain. Without this, it creates asymmetry in information. It makes it very difficult to regulate a sector. There needs to be regulation in how data is produced, shared, and used.
For example, Estonia wanted more transparency from utilities to monitor and report their performance. The utilities initially said “no” — that this would disclose commercial trade information. But how is this the case if the utility is a monopoly? One role for the economic regulator is to collect and make data available, with a view to protect users’ or customers’ interest.
Are there any emerging trends that you think should be highlighted?
What is interesting is the role of the judiciary for climate change accountability. There are groups now taking companies and governments to court when the political ambition or results produced by companies are not aligned with the Paris Agreement. The OECD as a policy organization endeavors to drive change via incentivizing and policy guidance. The emerging role of the judiciary and accountability possibly create a new line for action for civil society. One challenge for the water community is that there is no general agreement — such as the Paris agreement on climate change — for water. Could SDG 66 be used as such a reference?
Another emerging topic is on water and financial materiality. This is potentially a game-changer if we manage to alert financial regulators, like the IMF [International Monetary Fund], central banks, or financial market authorities that water will fundamentally affect global financial stability, that water risks can generate systemic financial risk. If we can make the case for this, it will shift perspectives. Right now, the focus is on ensuring that individual banks are not exposed to water risks. But this is pre-2008 thinking. Options to outsource (securitize) or hedge this risk by individual banks do not eliminate the risk for the economy. To conserve financial stability — the mandate of financial regulators — we must shift focus from exposure of individual banks towards the entire financial system and discourage finance that increases exposure and vulnerability to water risks.
Right now, 99% of financing is going in the wrong direction.7 Investments are increasing climate risks. And we keep building. While the attention is about channeling more money to finance investments that contribute to water security, financing needs would be considerably lower if we stopped building future liabilities. If we’re serious about climate action and water security, we must redirect and change how the 99% of investments are allocated so they actually mitigate climate change, support adaptation to a changing climate, restore hydrological cycles, and minimize exposure and vulnerability to water-related risks.
For 25 years, Xavier Leflaive has been facilitating policy reforms for sustainable development, with a focus on environment and water and more recently on resilience and adaptation to a changing climate. He works with governments, the private sector and civil society organizations to adapt policies to current and future challenges. Xavier leads a team of dedicated experts at OECD Environment Directorate who focus on resilience, adaptation to climate change and water, including new contaminants in freshwater; financing water management, infrastructure, and services; nature-based solutions; the management of coastal zones; and resilient infrastructure. His interest is in catalyzing reform, looking closely at the political economy of reforms, the role of the private sector and civil society, and accompanying measures. Xavier also pursues academic research at Paris School of International Affairs on critical social science, with a focus on organization theory and (public and private) management. Critical Management Studies (CMS) question management practices in the firm, the role of business in society, and modes of government. He holds a PhD in International Affairs from Cambridge University.
Julie King, is a senior consultant in digital water technologies and is an experienced organizer, developer, and coordinator of international commercial projects with business, academic, NGOs, new tech, and international organization partners. She is a long-time contributor to Water Online in the water, environmental, tech, and international development and financing space.