EXECUTIVE INSIGHT: PLUGGING THE GAP: HOW THE PRIVATE SECTOR CAN HELP STRENGTHEN WATER SECURITY IN MENA AND EMERGING ECONOMIES AROUND THE GLOBE

EXECUTIVE INSIGHT

PLUGGING THE GAP: HOW THE PRIVATE SECTOR CAN HELP STRENGTHEN WATER SECURITY IN MENA AND EMERGING ECONOMIES AROUND THE GLOBE

By Julie Carles and Tiziana Smith

The most water scarce region in the world, the Middle East and North Africa (MENA) is no stranger to innovation in water sector infrastructure. Water management in the region is critical not only for local human and economic well-being, but also for regional stability, since many water sources are shared across boundaries. As such, MENA has pioneered advanced water productivity and water supply technology, including desalination and wastewater reuse.

However, the region continues to face major water security challenges that will require substantial investments in demand management and in water supply and sanitation infrastructure, including desalination and wastewater reuse. Financing this infrastructure in the context of the increasingly constrained public budgets faced by MENA emerging economies will be a major challenge. With appropriate business environment and well-structured projects, the private sector could play a key role in plugging the gap.

Over 60% of the population and over 70% of the Gross Domestic Product (GDP) of the MENA region are exposed to high or very high water stress compared to only 35% of the global population and 22% of the global GDP. Many of the surface water and groundwater sources are already overexploited, and their yields will be affected by changing rainfall and temperature patterns due to climate change1. MENA countries have to continue to learn to do more with less by managing demand while ensuring sufficient, reliable supply.

For countries facing water scarcity, augmenting water supply through desalination and wastewater reuse offers a sustainable solution.

For countries facing water scarcity, augmenting water supply through desalination and wastewater reuse offers a sustainable solution. Advanced desalination and wastewater treatment and reuse technology are well established and continuously advancing. Under the right circumstances, wastewater reuse can now deliver water less expensively, with lower hydrological risks and environmental impacts, and more long-term price certainty than large water transfer schemes. Water can be treated to the necessary levels for the specified use, such as irrigation, industry, or potentially potable water.

While wastewater reuse has been very successful in countries like Singapore, many countries have struggled to develop wastewater treatment and reuse facilities, because of limited institutional capacity at subnational level, high project

preparation and transaction costs, and concerns about affordability. MENA emerging economies have mostly relied on public financing as well as on Overseas Development Assistance (with these countries being the largest recipient per capita for decades) for water infrastructure2. However, mirroring global trends, these countries’ public sector debt has reached record levels and public finance is constrained,3 making financially sustainable water-infrastructure development models essential.

The potential to mobilize private sector finance in wastewater reuse and the water sector more broadly could be exploited by tackling two common issues: low cost recovery in the water sector and the lack of well-structured projects.

Investing in water supply infrastructure, including desalination and wastewater reuse infrastructure, will require countries to mobilize massive financing from a variety of sources including increased Tariffs, Taxes, and Transfers (3Ts); savings from reductions in costs via efficiency gains; and crowding in private sector financing. Private finance has already been successfully deployed in the water sector in MENA with 31 transactions closed in the last decade, representing over 25 percent of the deals closed globally and the largest number of any region. However, only four of these projects were in emerging markets.4

The potential to mobilize private sector finance in wastewater reuse and the water sector more broadly could be exploited by tackling two common issues: low cost recovery in the water sector and the lack of well-structured projects. In some countries, improving the financial sustainability and creditworthiness of water management institutions will require time and substantial policy reform. However, private sector financing can still be mobilized during the transition from low tariffs to cost recovery through hybrid financing structures blending public and private finance together with grants. This will help bring down capital costs and/or concessional finance and divide the financial burden of investments between the private and public sectors.

To tackle the lack of well-designed projects, IFC is developing a new initiative called “Scaling Rewater” in wastewater reuse, which will support governments, utilities, and project developers and investors in rapidly implementing privately funded wastewater reuse projects at competitive and transparent tariffs. The initiative will support the development (i.e., feasibility, assessment, structuring, procurement and financing) of projects and will be applicable to emerging economies around the globe, including in MENA.

The MENA region has already shown that desalination and wastewater reuse technology can be an important tool to combat water scarcity. With appropriate business environments and well-structured projects, the private sector can play a pivotal role in boosting the use of such technology in its emerging economies. The advisory and investment teams of IFC look forward to working with governments, private sector developers and investors and the IDA community to build a water-secure future for the people and economies of the MENA region.

1| “World Bank. 2018. Beyond Scarcity : Water Security in the Middle East and North Africa. MENA Development Report;. Washington, DC: World Bank. © World Bank. https://openknowledge.worldbank.org/ handle/10986/27659 License: CC BY 3.0 IGO.” 2| World Bank Data. https://data.worldbank.org/indicator/DT.ODA.ODAT. PC.ZS. Accessed January 21, 2021. 3| World Bank 2019. Developing Public-Private Partnership Initiatives in the Middle East and North Africa: From Public Debt to Maximizing Finance for Development. Policy Reasearch Working Paper 8863. Washington, DC: World Bank. https://openknowledge.worldbank.org/ bitstream/handle/10986/31745/WPS8863.pdf?sequence=4 4| IJGlobal Project Finance and Infrastructure Journal Transaction Data. https://ijglobal.com/data/search-transactions. Accessed January 16, 2021.

About the Authors

Julie Carles. Principal Investment Officer, IFC - MENA.

Julie holds a Master in Development and Economics from a French University in Paris (Paris Dauphine) and she is also graduated in International Economics from Sciences Po Paris. She holds an Executive MBA from London Business School and Columbia University. After spending several years working for power utilities in Europe in charge mergers and acquisitions and cross border investments, she joined IFC in 2012 as an investment officer in the infrastructure department in MENA. She has been working on the financing of many transactions across the region, including in fragile and conflict states. Over the past years, she has been leading business development efforts for IFC in the water sector across MENA and Horn of Africa and worked primarily on water transactions in the region.

Tiziana Smith. Water Specialist, International Finance Corporation.

Tiziana is passionate about sustainability and equity in water management. At the International Finance Corporation, she works on Scaling ReWater, an initiative to facilitate private sector participation in wastewater reuse. In previous roles at the World Bank, she worked with the governments of Vietnam and India on irrigation and water management projects. Tiziana holds a PhD in Water Resources Management from the Massachusetts Institute of Technology and is currently a part of the World Bank Group’s Young Professionals Program. She is fluent in Spanish and conversational in French and Portuguese.

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