According to a new report from the IFC, the climate targets promised in the landmark Paris Agreement could be met by catalyzing trillions of dollars in private investments - with water highlighted as one of seven sectors that can make a crucial difference.

Investments in water supply and sanitation could exceed $13 trillion cumulative by 2030, the report from the IFC, a member of the World Bank Group, says.  For this governments would need to establish water pricing at predictable and sustainable levels to increase the creditworthiness of utilities while entering into public-private partnerships and adopting performance-based contracts.

More than $1 trillion in investments are already flowing into climate-related projects in the seven areas. However, trillions more could be triggered by creating the right business conditions in emerging markets, the report found.  

The report says water and wastewater infrastructure demand in cities is large and growing due to rapid urbanization, with urban water infrastructure critical for climate mitigation and adaptation.

The OECD estimates that the required investment for water supply and sanitation could be more than $13 trillion between 2016 and 2030. The Asian Development Bank (2017) estimates an investment need of almost $8 trillion in the AsiaPacific region alone during the same period.

According to the IFC, governments are increasingly looking to the private sector to invest in climate-friendly water supply and treatment technologies. Historically, the share of investment from commercial sources has been low. Given the investment required, however, governments are expected to source a larger share of commercial financing.

Commercial finance in the water sector faces challenges and risks

However, the report cautions that commercial finance in the water sector faces challenges and risks. Investments in water efficiency (including in waste-to-resource or desalination systems) should be available and attractive to all water service providers, irrespective of ownership.

 To attract commercial finance, governments can provide predictable regulatory frameworks and help foster innovative business models. Water pricing at predictable and sustainable levels can enhance cost recovery and increase the creditworthiness of utilities.

Market snapshot and growth potential – technology trends and market opportunities 

The report says water infrastructure investment will need to grow rapidly to meet demand. Planned global investment in water infrastructure is $10 trillion by 2030. “This will need to grow substantially to ensure adequate and sanitary water supply in line with countries’ growth ambitions and the effects of climate change.”

The IFC is warning that water is becoming increasingly scarce and that based on trends in population, climate, and urbanization, water demand could exceed supply by 40 percent in 2030.

Public financing is unlikely to be available at the scale necessary to meet these needs, creating an opportunity for private investment, the report says.

The private sector could provide up to half of the investment required for water supply. Water equipment and technology suppliers are growing, especially in large emerging markets. All major segments of the supply chain are expected to grow by more than 2 percent per year globally, with annual growth rates potentially reaching up to 25 percent in emerging markets such as China and India.

Wastewater offers strong opportunities for private sector investment

According to the report, wastewater offers strong opportunities for private sector investment. The water recycling and reuse market has recently doubled, and this is set to continue. Estimated size of the global market for water recycling technologies reached $23 billion in 2013, more than double the 2012 market size, while undustrial water reuse and desalination technologies are expected to reach a total market value of $12 billion by 2025.

The report also flags up improving water efficiency through new technologies as an $8 billion market which is growing—the 2017 Global Opportunity Report ranked smart water technologies, such as smart meters and pipes, as the top innovative business opportunity.

With up to 40 percent of potable water estimated to be lost in existing water systems, the need for water-efficient infrastructure is also growing and offers “a significant opportunity for private investment with quick payback rates.”

Improved renewable desalination offers climate-friendly water supply

Desalination technologies are also identified  as offering potential business opportunities  - desalination is a rapidly growing market in the Middle East and China. China is estimated to have spent more than $4 billion on desalination technologies between 2013 and 2015.

The market for renewable-powered desalinated water is small but growing. In 2012, IRENA estimated that, globally, just 1 percent of desalinated water came from renewable sources. The falling cost of both renewable energy and desalination technologies is expected to see this share increase substantially, the report says. The cost of desalination has decreased significantly over the last 30 years, from about $2.50 per cubic meter in 1972 to $0.65 per cubic meter in 2010.

Renewable desalination systems are already cost-competitive with conventional technologies in many regions due to the rapidly dropping costs of renewable energy. The world’s largest solar-powered desalination plant is due to be constructed in the Saudi Arabian city of Al Khafji. The plant is estimated to cost $130 million and provide 60,000 cubic meters of water daily.

Creating markets for water investment will require major sector reforms in most countries

The market for water-smart technologies is expected to grow from more than $8 billion in 2016 to over $20 billion in 2021. However, the report says country-specific challenges and risks need to be addressed to attract commercial finance in water and highlights the need for a nuanced, locally tailored approach to attract water sector investment, supported by strong and sustained political support.

According to the IFC, major sector reforms will be needed in most countries and it will important to secure “sustained political support” for water sector reforms that may be needed, including a gradual transition to sustainable water tariffs.

Appropriate water prices create reliable revenue stream and attracts private investment

The IFC says that cost-reflective water pricing is critical to recover costs and stimulate private investment and an optimal water price should recoup the full costs of supply and reflect water scarcity. However, most water tariffs in developing countries only recoup about 20 percent of their full cost.

Appropriate water prices would create a reliable revenue stream and change the underlying economics of water projects, which attracts private investment.

Nevertheless, the report warns that even most water pricing instruments used in developed countries are “insufficient and inequitable.” Ways to successfully address the politics of water pricing suggested in the report include:

• sustainable water tariffs phased in over time to allow communities to adjust
• rising block tariffs can ensure that vulnerable users are not priced out of the market while providing a reliable revenue stream for private investors
• subsidy use can make water pricing feasible and socially acceptable and help lessen the burden of higher water prices on low-income households

The report also makes the point that it is important to avoid public funding crowding out commercial finance, commenting:

“Effective mobilization and allocation of public finance, through taxes, tariffs, and subsidies, is crucial for the sector. But this funding should be used prudently in a manner that does not crowd out opportunities for commercial finance.”

IFC CEO Philippe Le Houérou  said:

“The private sector holds the key to fighting climate change,” said. “The private sector has the innovation, the financing, and the tools. We can help unlock more private sector investment, but this also requires government reforms as well as innovative business models—which together will create new markets and attract the necessary investment. This can fulfill the promise of Paris.”

Click here to download the full IFC report Creating Markets for Climate Business