Children in Nicaragua after receiving school supplies as part of the UNICEF response to Hurricanes Eta and Iota
Climate change is challenging our status quo as the frequency of extreme weather events keeps increasing. Water scarcity could cost some regions up to 6% of GDP and floods could force hundreds of millions of people from their homes by 2050. At the same time, we’re facing a $15 trillion infrastructure finance gap.
If these challenges weren’t enough, the COVID-19 crisis reminds us that a shift in our economic development paradigm is urgent.
How can we deal with these interlocking challenges in a context of diminishing public resources? How can we make sure our investments to stimulate economies don’t lock us into the present, but enable us to leapfrog to a regenerative economy?
While the answer is simple, its implementation is not. As urged by the Global Commission on Adaptation, we need three revolutions: in understanding, planning, and finance. An effective place to start is to challenge the way we invest and rethink our planning processes.
Local project preparation capacity as major bottleneck
Multiple innovative financing facilities and instruments like green bonds have emerged. The private sector is acknowledging that nature—not governments—has the real license to operate and is willing to invest beyond fence lines. A new generation of impact investors has emerged. Governments and donors have developed blended finance strategies.
As promising all this sounds, we aren’t quite there yet.
First, most efforts are designed to fit our traditional siloed investment models. Financial metrics favor traditional monofunctional, centralized, and grey infrastructure assets—not the adaptive, multifunctional assets we need.
Second is the challenge well-known to PPP practitioners and the closing hymn for most conferences I’ve attended the last five years: “the problem is not available financing, but the lack of well-prepared bankable projects.”
The main bottleneck remains local capacity to structure bankable projects with a clear theory of change, fit for an era marked by uncertainty.
Rethinking deal origination
As promoted by the Task Force on Climate-related Financial Disclosures, the climate impacts caused by investments as well as impacting them need to be considered. As most climate change impacts will be channeled through the water cycle, to develop future-proof infrastructure we need to start with strategic planning processes that consider the dynamics between infrastructure and ecosystems at the watershed level.
Then how do we generate sustainable, resilient investments while reducing transaction costs? We need a different approach to investment origination.
Yet the reality is, even for old standards, most developing economies have poorly developed strategic planning and project preparation capabilities. This is a challenge, but also a tremendous opportunity for renewal. I’m betting for the latter!
Financing Framework for Water Security
Being from Nicaragua, the second poorest country in Latin America and among the most vulnerable to climate change, I’m passionately committed to make adaptation financially feasible for developing countries like mine.
Inspired by the Netherlands’ expertise on strategic planning, in 2015 I started to develop an alternative approach to investment planning and capacity development: Financing Framework for Water Security. It’s been applied in seven countries in Latin America, Asia, and Europe and supported by the European Commission tailored to nature-based solutions.
I dream to improve the living conditions of millions by setting in motion the development of a transformational pipeline of nexus investment projects.
How? I want to achieve this by offering a decision support tool and training for government and community leaders that empowers them to make autonomous and well-informed choices—not only those they want, but how to achieve them themselves. This grants back their birthright of being the engineers of their own future.
We enable local actors through both system analysis techniques to zoom out and institutional economics and project finance techniques to zoom in to the nitty-gritty contractual design details for successful, cost-efficient implementation.
The first set of techniques enables them to embrace complexity, deal proactively with uncertainty, and develop a sound rationale for investments to convince higher levels of governments and attract the interest of climate funds, donors, and impact investors. A systemic understanding of costs and benefits is the base for developing a blended finance strategy.
The second set of project preparation techniques guides them in the design of fit-for-purpose implementation arrangements, while collecting evidence to make a business case of project clusters or deals prioritized for implementation in the short term.
This enables decision makers to choose project delivery and finance mechanisms not by dogma, political orientation, or chance—but by autonomously choosing from a large range of options, including 100 percent publicly funded and financed implementation arrangements to fully private initiatives. Choosing what best fits the transaction characteristics and the service level they need over time, is viable in their institutional setting, and is most effective in ensuring long-term financial, institutional, and service sustainability. Early private sector engagement and transdisciplinary collaboration catalyzes financial innovation.
Working together in a transformational recovery
If we want to ensure a transformational recovery, we must work together to strengthen local capacities and translate the inspiring yet often myopic narratives of a blue, green, or digital recovery into sound, contextualized investment pipelines.
We need coordination between global and local actors to develop a level playing field for private engagement at scale in a new generation of nexus investments that embrace a regenerative value creation logic. Scarce concessional resources should be used catalytically to reduce transition risks and transaction costs.
Disruptive technologies such as blockchain and digital twins can also reduce costs and enable more trustworthy exchange mechanisms and governance structures for collective investments in adaptation.
In an era of uncertainty, the message is clear: we need to empower local actors to engineer their own future. Do you agree? And if so, what are your thoughts and experiences? I’d love to read them in the comments section.
“This piece was originally published on the World Bank’s Getting Infrastructure Right Blog.”
Disclaimer: The content of this blog does not necessarily reflect the views of the World Bank Group, its Board of Executive Directors, staff or the governments it represents. The World Bank Group does not guarantee the accuracy of the data, findings, or analysis in this post.