How can public and private finance contribute to sustainable water investments? This is an increasingly relevant question given the pressures on water resources posed by population growth, climate change and changing lifestyles. This question is even more relevant in the Arab region, where water resources are scarce, public finances stretched and unemployment high. The Arab region is a global hotspot of unsustainable water use, with at least 30 percent of current water consumption exceeding sustainability limits. Fiscal challenges have also arisen, with overall fiscal balances (tax revenue and proceeds from assets sold minus spending) having deteriorated in the region since 2008. Finally, large and persistent levels of youth unemployment – hovering at about 25% for the past 25 years - present an urgent challenge for most Arab countries.
The water financing challenge is daunting. Despite enormous efforts, most Arab countries are not spending enough in water. And the issue is not just with the quantity of spending, but also with its quality. To address this shortfall, private capital and know-how need to be mobilized at an unprecedented scale. This is true for water, but also for other sectors. The region needs trillions of USD in quality investments of all kind to progress towards the Sustainable Development Goals.
Private finance is already playing an increasing role in responding to global environmental change. Through green bonds, for example, investors around the world are directing more and more resources to finance projects focused on climate resilience and environmental sustainability. The green bond market has seen an exponential growth in the last years, reaching $180 billion in 2019.
Ongoing innovation processes in financial products – tying them to environmental performance - seem to hold promise for improving the quantity and quality of water investments in the Arab region. In the last two years, sustainability-linked loans have emerged as a new instrument of sustainable finance. Contrary to green bonds, which tie funds to investments specifically targeted at climate resilience and sustainability, these loans tie interest rates to sustainability performance targets, including water conservation. Hence, an improvement in the borrower’s environmental performance as measured by specific performance indicators translates into lower borrowing costs. These mechanisms hold great potential, and are being adopted by large corporations, including water technology giant Xylem. Nonetheless, their scope and depth differ considerably, meaning that their application can be challenging in practice. Development finance is also increasingly used to support low-emission, climate resilient projects, however, the pool of climate finance available for water projects remains smalls compared to other flows of development-relevant finance. More can be done to mobilize financing for water-centered adaptation on the grounds that these investments build resilience while abating emissions, for instance through improved efficiency in water and energy use in irrigation.
While financial innovations can help harness private investment for sustainable development and food security, the benefits will only be reaped if the enabling policies are in place. This is the key message of “Towards a new generation of polices and investments in agricultural water in the Arab region: fertile ground for innovation”, a report we presented at the League of Arab States earlier this year. Prepared for the high-level ministerial meeting on agricultural water policies held on April 4th in Cairo, the report highlights four fundamental policy priorities that need to be pursued to leverage private and public finance and innovation for water sustainability. Unless these priorities are pursued, it will be difficult to build the necessary foundations for successful financing.
The first priority is to value water. Valuing water means protecting its quantity and quality, so that it can be allocated to the areas of highest social, environmental and economic value. Unless water’s value is properly recognized, we won’t be able to protect the human right to water, nor harness water’s productive potential to support the right to food. Cost recovery for irrigation is one way to value water, with several Arab countries having recently introduced water pricing in public irrigation schemes. Taking into consideration the lessons for past initiatives and new available technologies, further attempts can be made at involving the private sector in development, operations and maintenance of irrigation and drainage infrastructure. Measurement underpins valuation, so policies are needed to close the data gap, in particular, to enhance water accounting and modelling capabilities. With the global Valuing Water Initiative officially launched in 2019, now it’s the time to bring systemic change to the way water is valued.
Second, policy needs to accelerate the food system transformation. Water is at the heart of this transformation, with more reliable, transparent and sustainable management of this key resource required for agrifood sector development and higher value agriculture. Policies should aim at promoting climate-resilient agrifood value chains, reducing food loss and waste, building capacity, and fostering market competitiveness. This will help increase the productivity of competitive staple crops and crops with export potential. Technology has a key role to play here. Water saving agricultural technologies such as hydroponics can improve well-being, including nutritional status, for farmers and groups of people that are less integrated into the labor market, especially refugees. Achieving this transformation also means reassessing support policies for specific crops for which the region has no comparative advantage. Unless policy instruments that distort agricultural markets are replaced with more market-friendly support measures, it will not be possible to create supportive business environments for investment in modern, high value-added agriculture. Finally, the food system transformation hinges on improved governance of water resources, notably of groundwater, to address equity and sustainability issues between uses and users. This is perhaps the most challenging task, as existing state-centred groundwater governance models have not halted depletion, and successful cases of participatory and community-centred governance are rare too.
Third, digital technologies need to be put at the centre of agricultural water management. Digital is not just about IT infrastructure or mobile phones. It is rather an integrated set of opportunities leveraging technologies ranging from remote sensing to monitor evapotranspiration, the Internet of Things, and advanced analytics, through to farmer-centric services to guide irrigation applications and other water management. In the Gezira Irrigation Scheme in Sudan, geospatial analytics using remote sensing monitor crop water requirements and advise farmers through SMS on plant health and water needs. This led to yield increases of as much as 200% to 250%.
Finally, decisive action is needed to better target social protection measures. Cash transfers and social safety nets are instrumental to the region’s social cohesion and progress. Our report highlights that current policies focused on lowering consumer prices for specific food products have not contributed to the region’s agriculture competitiveness, and they have not helped tackling the region’s high rates of malnutrition and obesity. Targeted measures such as cash transfers, on the other hand, can empower individuals and reinforce social protection policies, while contributing to positive food security outcomes. As evaluations of Egypt’s first cash transfer program, Takaful and Karama, show, better targeting can make a positive difference in the lives of poor beneficiaries exposed to food price fluctuation.
Towards sustainable Arab agrifood systems
Since the earliest times, the Arab region’s spirit of agricultural enterprise has helped societies to thrive despite challenging environments. From the seventh to the eleventh century, this spirit radically transformed water management practices in a vast area, spanning present-day India all the way to Spain. This process not only affected agricultural production and incomes, but also urban growth, job markets and other spheres of life.
If the region’s spirit of agricultural enterprise is to survive and respond to today’s challenges, then local and global players must be willing to transform water management in food systems. This starts from sound policies, which will help mobilize much needed private finance and reduce existing inequalities and imbalances in access to water. This will help achieve the transformation of our food systems, the central theme of the recently announced UN Food Systems Summit in 2021, needed to achieve the Sustainable Development Goals.