Building a Water Investment Rationale

There are number of different features of water as a resource that need to be considered as part of building a rationale for investing in it:      

• Water is a renewable, common-pool resource: subject to congestion, overuse, and degradation. The analysis of renewable resources requires a focus on the sustainable use of the resource over time, aligning the of usage with the resource’s natural capacity, and its timeframe for regeneration. 
• The physical nature of water makes it difficult and costly to transport: water-related projects are more appropriate to be considered from a local perspective. In some cases, it is more rational to access “virtual water” (Tool C5.03) (importing water embedded in products from countries where the resource is abundant, e.g., wheat) than embarking in pharaonic infrastructure projects to move water from long distances.  
• Water sources do not consider political and administrative boundaries: project design should incorporate transboundary governance arrangements to reduce uncertainty about economic, social, and environmental benefits upstream and downstream. 
• Water is not a commodity: it has social and environmental significance for societies which cannot be captured in economic analysis. Therefore, project prioritisation should consider these qualitative characteristics to achieve legitimacy among stakeholders and long-term financial sustainability.   

On the other hand, accruing the costs and benefits of water related investments to economic growth and wellbeing is difficult (GWP & OECD, 2015): 

•  Water-related investments can increase human well-being without increasing national income or economic growth as conventionally measured (e.g., impact on health, education, or environment).  
• Not all water-related investments will be beneficial. Investments may be excessively costly, may not lead to the intended benefits, may result in harmful and perhaps unintended impacts upon people and the environment, or may close off more beneficial future investment opportunities. 
• Water-related investments can increase economic productivity and growth, and economic growth can provide the resources to finance capital-intensive investments in water-related infrastructure. 

Based on these considerations, the economic analysis of water-related projects should incorporate an understanding of the full range of potential water uses to assess the economic benefits and costs of investments in water security so that it might compete in better conditions with other priorities in scenarios of limited financial resources. Additionally, as projects are dependent on the context and tradeoffs among financial returns on investments and impacts on economic, environmental, and social values, it becomes essential to think about the sequencing of investments in ways that maximise returns over time (OECD, 2018). 

After considering all these factors within the economic analysis of water-related projects, it will be useful to classify investments and screen their benefits using the WASH value chain model (OECD, 2011) (Fig. 1). This analytical framework highlights the importance of investments upstream, to secure access to water resources, and downstream, to mitigate the impact on other users and the environment. In such way, WASH will be provided sustainably, positioning water governance as enabling factor to reach a societal agreement on which investments will better fit a countries’ long-term sustainable development goals.   

Moreover, discussions of investment for water tend to be biased towards the physical infrastructure involved in the provision of WASH, which are visible, socially, and politically sensitive. Also, these have a greater potential for generating revenues, compared with water resource conservation, environmental protection, and other aspects of water stewardship (upstream investments). Many of the latter are public goods dependent on public initiatives and public budgets for most or all their funding. Some types of public goods have major financial costs (strategic storage dams and reservoirs, flood control structures, multi-purpose storage schemes, wastewater treatment plants, bulk water conveyances). Adopting an integrated water resource management (IWRM) strategy would help to overcome this problem. IWRM does not significantly amplify the traditional needs for water investments, instead it boosts investment efficiency made in this sector. The IWRM vision for investment structures is to focus on the elements of sustainable financing for water while enhancing the overall financial coordination in ways that will ultimately minimise misallocation and investment failures. 

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Figure 1. WASH Value Chain Model. Source: OECD (2011).  

The UN Sustainable Development Goals can be used to measure the efficiency and effectiveness of water sector investments and thus can be used as a narrative framework for developing an investment rationale for water. SDG 6 “Ensure water access and sanitation for all” is divided into six targets (Fig. 2): Targets 6.1 and 6.2 are directly related to WASH and cover what is defined as Household Water Security and Urban Water Security; Targets 6.3 to 6.6 are directed to work with water-users upstream and downstream of the value chain, covering Economic Water Security, Environmental Water Security, and Resilience to Water Related Disasters; and Targets 6A and 6B are determinant to find governance arrangements among water projects stakeholders.    

Applying these frameworks when advocating for investments in the water sector, has several benefits: 

• It helps aligning water sector goals with national sustainable development strategies, giving discourse coherence to investments when approaching international donors and potential private investors. 
• Coherence among projects and national sustainable development goals simplifies the design of national financing strategies through methodologies such as Integrated National Financing Frameworks (Tool D2.01) and Strategic Financial Planning (Tool D2.02). 
• It lays the groundwork to think about funding and financing at project level, highlighting economic, political, and social constraints (e.g., political feasibility of setting a tariff to protect a watershed). 

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Figure 2. Using SDG 6 targets as a benchmark of water project efficiency and efficacy. Source: OECD (2011). 

The Tools in this Sub-Section provide practical insights on how to build a rationale towards water investments. Tool D1.01. discusses how to perform various economic methods to calculate the cost and benefits associated to water projects and policies. Tool D1.02 then explores how to evaluate total economic value of water with the help of shadow pricing and convert non-monetary benefit into dollar figures. Business canvas modelling approaches are laid out in D1.03. Tool D1.04 highlights the way in which disclosing water-related risks can incentivise companies to invest more in water resources management. Finally, Tool D1.05 discussed the support that impact investment frameworks can provide to making a case for water sector investments.