By Helen Laubenstein, Environmental Economist at the Organisation for Economic Co-operation and Development (OECD)
This summer is drying our rivers, forests and lakes. Wildfires are soaring on various continents, countries in the horn of Africa are experiencing the worst droughts in decades, some European member states have declared water emergency. The lack of water creates challenges in numerous ways: thirst and hunger for communities in some areas, lost harvests for farmers, burnt homes for house owners. Curtailed energy generation due to limited cooling water. Reduced production in various industries, e.g. semi-conductors, supply chain disruptions. Disturbed navigation and ship transport. The list could continue.
Water is hence not only a sector, it is an enabler and connector for all elements of human activity, and essential for ecosystem functioning - and as such, it should be financed.
When water security is a prerequisite for food and energy security, health and well-being, climate adaptation and the activities of all sectors, then all those domains and sectors should contribute to financing it. In practice, planning and investment decisions are often taken in silos and fail to take account of the benefits and damages that arise to another sector or policy domain. For example, when building a dam for hydropower production, this might increase energy security, but can also reduce water availability downstream and undermine irrigation possibilities and food security.
Innovative planning and financing approaches can help create synergies across various sectors and policy domains and thus attract finance from a variety of stakeholders.
Numerous financing examples exist on how to achieve water security and other objectives simultaneously, discussed and collected at the OECD’s Roundtable on Financing Water. Examples include:
Water security and climate mitigation
Mangroves can provide flood protection and thus water security – and simultaneously serve as carbon sinks, contributing to climate change mitigation. Capturing these benefits with a price, e.g. via offset markets, can render mangrove afforestation into viable projects. Tahiry Honko in Madagascar is an example of the largest community-led mangrove conservation project, helping to build flood protection and contributing to climate mitigation. Started in 2018, the project conserves and restores 1200 ha of mangrove forests, generating 1300 carbon credits per year which generate USD 27 000 of revenue annually over the next 20 years. (OECD, 2021)
Water security and climate adaptation
The Adaptation Fund is an international financing facility that supports ‘developing’ countries in their adaptation strategies. Since water security is a key element for adaptation and crucial for resilience to climate change, water-related projects can tap into these funds. For example, the Adaptation Fund-supported project in Uruguay and Argentina aims at building resilience in vulnerable coastal cities and ecosystems of the Uruguay River. The 6-year project includes the implementation of sustainable infrastructure adapted to the adverse effects of climate change, community- and ecosystem-based adaptation measures, as well as the implementation of integrated climate risk management and early warning systems. From the total grant of approximately USD 14 million, USD 2.8 million have already been transferred since project approval in July 2019. (OECD, 2021)
Water security and irrigation & rural livelihoods
In Chile, the government has set up a Public-Private-Partnership arrangement for dam construction, which can secure irrigation for agriculture. Since 2005, the Chilean government launched the construction of two large dams, which together allow increased irrigation security for 67 000 ha land with capacities to supply irrigation needs of over 290 million cubic metres. The first dam was developed as a pilot project with a cost-share mechanism: the state financed a part of the total cost, private investors built, exploit and maintain the dam, and the end users (notably farmers) pay the license holder for water stored. For the 2021 – 2025 period, three additional dams are in a planning stage. (OECD, 2022)
Water security and industry
The car manufacturer Volkswagen de México identified increased business risk due to drought at production locations in Puebla-Tlaxcala valley. To mitigate this risk, the corporate partnered with the National Commission of Natural Protected areas and invested USD 3 million over the 2013-2022 period to replant 300 ha nearby deforested volcanic slopes. This measure aims at restoring the functionality of ecosystems and groundwater replenishment in the valley, which enhances resilience against drought for both Volkswagen’s own business operations as well as for the nearby city of Puebla. (OECD, 2021)
Water security and reduced risks for wildfires
The NGO Blue Forest Conservation partnered with the World Resource Institute (WRI) to develop a Forest Resilience Bond to raise private capital for forest restauration and risk reduction from wildfires. The project promotes the sustainable management of the North Yuba River watershed, e.g. through tree thinning and meadow restoration, which reduces the risk of severe fire, improves watershed health and protects water resources. Private capital from investors fund the upfront costs of the USD 4.6 million project to protect over 6 000 ha of forestland. Multiple beneficiaries, including local utilities and the local government, share the costs of reimbursing investors over time, based on economic analyses of the services provided by the ecosystem. The utility provider Yuba Water Agency, for example, committed USD 1.5 million for reimbursement over five years, recognizing the projects’ benefits to local water and power resources. The state of California committed another USD 2.6 million in grant funding coming from their Climate Change Investment program. For investors the bond provides diversification and good returns and for the investor CSAA Insurance Group, it additionally reduces the risks of the Group’s policyholders in that region. (OECD, 2022)
Such integrated financing approaches are vital to achieve resilience and sustainable solutions and can help mobilise additional sources of finance for water security. These approaches can serve as inspiration to finance water security in connection with other policy domains. Further examples, as well as challenges and the enabling conditions required to overcome them, are discussed in the OECD’s flagship report Financing a Water Secure Future. The summary of these findings is available in the attached Policy Highlights in English and French.
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This blog post is part of the learning journey on Innovative Financing for Water Security through an IWRM approach. The learning journey takes place on the SDG 6 IWRM Community of Practice and will last until October 2022. Interested IWRM practitioners can participate in the learning journey by creating a profile on the GWP Toolbox and then joining the SDG 6 IWRM Community of Practice.
Photo credits: Beautiful Soca River in Slovenia europe. Aerial Shot of the Valley. Nuria Kreuser/ Shutterstock.com
