Wishing our readers a Happy New Financial System!
Published January 4th, 2018
The big change in the water sector over the next decade is going to be the change in capital flows. The financial models which have shaped the global water market in the past are evolving, and this year will mark the turning point.
Two big trends are coming together: at the top level, Washington-backed international financial institutions are looking for ways to do more with less. The World Bank was not granted its requested capital increase last year, and as a result it is going to have to change its ways. Other regional multilateral lending institutions are likely to find themselves under similar pressure. At the next level down – the national level – central governments are becoming more reluctant to finance water infrastructure off their own balance sheets.
The solution is likely to be the growth of new financial alternatives involving international concessionary lending and bond-financed national government infrastructure programmes. It matters to everyone in the water industry, because form follows finance. The structure of finance ultimately defines the procurement system, which in turn defines what gets sold to whom.
The World Bank, for example, has a huge commitment to transparency in finance, which favours contractors from the developed world who can win bids on the basis of lowest lifecycle cost. Central government grant finance tends to favour politically connected domestic contractors with less interest in using technology to deliver the most efficient long-term solution.
What is going to change?
From the point of view of the international financial institutions, I think we are going to see a switch of emphasis from direct dollar lending to individual projects to financial support of local currency pooled funds. This approach could deliver the best of both worlds. It could dramatically open out the market for water infrastructure finance, because without the restriction of repaying in dollars, many more municipal utilities might be interested in borrowing. It could also ensure that transparency in procurement spreads beyond the kind of national flagship projects that the likes of the World Bank currently backs. It could also lead to the worst of both worlds. A retreat from direct project lending might mean that the international financial institutions become less involved in capacity-building to help potential clients improve their bankability, and it could also mean that there is less support for transparency.
In terms of the retreat of governments from grant funding, this is going to have a much more varied impact on the water market. In the US, for example, the main grant funding that still exists either goes through the rural water programme to support small utilities or it goes to top up the state revolving funds. As this funding is withdrawn, consolidation of the utility sector becomes inevitable. In China, as central government funding has retreated, the main beneficiaries have been state-owned enterprises pursuing public-private partnerships. In India, the promise of central government finance remains, but it is being held back by the weakness of local government finance. In other parts of Asia, Latin America, and the Middle East, the retreat of central government finance is an opportunity for private finance.
The important point is that the transformation of the financial model is going to create opportunities for market entrants – whether contractors, technology suppliers or investors – who know how to play the evolving new system to outmanoeuvre those whose current strength is based on their ability to work the existing system.
So what is GWI doing about this? First, our research team is working on a new report, Financing Water to 2030. The idea is to get a better understanding of where the money is coming from and where it is going to, in order to help our readers position themselves in a changing world. Second, we are hosting a workshop on Blended Finance – supported by the World Bank – at the Global Water Summit in April. It is going to be the best opportunity you will have this year to understand the new realities of water finance.