Let’s deepen the climate bonds market

Rana Kapoor | Updated on January 16, 2018

Water, water everywhere: But of what avail? - Photo: Shaju john   -  BusinessLine

Bonds that address issues concerning water management and infrastructure are the need of the hour

The year 2016 has been a significant watershed for the global climate finance market. ‘Blue Bond’ issuances (bonds issued to specifically finance water infrastructure) have crossed $10 billion globally. Though a majority of the 52 bond issuances were in the US market, there is a rising trend of utilising the bond mechanism for developing sustainable, climate-resilient water infrastructure globally.

There is enormous strain on the environment, arising from increasing demand due to an explosion in global population, increased urbanisation and rapid industrialisation, and dwindling supply owing to exacerbating climate change risks and increasing pollution.

Against this backdrop, effective development and management of water resources has become critical, necessitating the need for putting in place adequate infrastructure urgently.

It is estimated that over $10 trillion needs to be mobilised by 2030 to enable effective water infrastructure management and augmentation.

The buck stops here

For India, a country that has only 4 per cent of the world’s fresh water share but supports 18 per cent of the global population, managing and securing water resources has become a critical concern to meet its socio-economic developmental goals.

Against the global average of 6,400 cubic metres of per capita freshwater availability, India’s per capita availability has been falling consistently, with current figures hovering around 1,130 cubic metres, and by 2025, studies indicate that India may even become a water scarce country.

Hence, to achieve the sixth Sustainable Development Goal, ‘Ensure access to water and sanitation for all’ in India, a report supported by United Nations Development Programme and Ministry of Environment estimates that ₹13 lakh crore (close to $200 billion) would be required by 2030, out of which a major portion would be for financing water supply projects.

This boils down to a requirement of about ₹87,000 crore (about $13 billion) per year which is much higher than the current year’s Budget allocated for water, which is at around ₹12,000 crore (about $2 billion). Thus, the role of private investment would be crucial to augment public finances to support a climate-resilient and efficient water infrastructure.

Given the steady growth of green bonds in India in the past one year, blue bonds have the potential to bridge this financing gap. However, there are several challenges that need to be addressed for a blue bond market to thrive in India.

First, though India has been seeing increasing private sector participation in the water sector, it is considerably constrained due to lack of viable and bankable projects (owing to pricing issues that do not reflect the true value of water), inadequate infrastructure (such as inefficient metering that hinders proper estimates), as well as, limited reliability and hence, creditworthiness of urban local bodies.

Thus, despite new initiatives such as the National Water Policy, Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and Urban Infrastructure Development Scheme for Small and Medium Towns (UIDSSMT), financiers remain sceptical about investing in the sector.

Second, at a broader level, as the bond market in India (including green bonds) is not as developed in comparison to economies such as the US, Japan or even China, a huge potential for mobilising private finance still remains untapped.

Specific to green bonds, since YES Bank’s issuance of India’s first green infrastructure bonds in February 2015, approximately $2.7 billion worth of green bonds have been issued in India, which is merely 2.3 per cent of the global $118 billion labelled green bond market as on July 2016.

Of these green bond issuances in India, only about 2.2 per cent have been allocated to water management, mostly under the broader umbrella of low-carbon buildings.

Addressing these challenges is crucial to boost private investments in water infrastructure. The following points are of prime importance:

Policy support

The Indian Government’s ambitious infrastructure push has opened emerging points of intervention that may be readily suited for private sector participation, such as the Smart Cities programme, which envisions creating a holistic urban water management infrastructure.

Additionally, with stricter enforcement of environmental regulations, large scale industrial waste water management could create additional opportunities for private investments.

Policymakers have to continue support in the form of enabling water policies and institutional and legal frameworks, aimed at development and effective utilisation of water infrastructure. Importantly, they must work towards incorporating the true value of water, through measures such as, enhanced metering, rationalisation of subsidies, and innovative tariff-based mechanisms, to ensure recovery of operating costs and address some of the risks faced by financiers.

Strengthen bond markets

To meet critical urban infrastructure financing through capital markets, strengthening of the corporate bond market is crucial. Towards this, recent announcements of the RBI for reforming and expanding the Indian corporate bond market are commendable.

Similarly, there is also an urgent need to strengthen the municipal bond market in India. For example, India could look at creating a central or State-level body that could act as financial intermediary to issue municipal bonds on behalf of urban local bodies. Issuing pooled municipal bonds could help overcome high transaction costs and mobilise funds through a single bond issuance for a group of urban local bodies, while reducing investor risks due to a diversified project portfolio. In the past, States including Tamil Nadu and Karnataka have successfully raised pooled bonds that were externally supported by innovative financial mechanisms such as a partial credit risk guarantee to enhance viability.

Innovative instruments

Innovative mechanisms such as credit enhancement and partial risk guarantees may play a crucial role in issuance of maiden blue bond in India and expanding the blue bond market thereafter.

Credit enhancement provides comfort to investor, lowering down the investment risks by additional collaterals or guarantees, which may be needed for the market creation.

India has witnessed international financing in the water sector mostly in the form of concessional loans and overseas development aid. For example, the Rural Water Supply and Sanitation (RWSS) project was initiated across Assam, Bihar, Jharkhand and Uttar Pradesh in 2014 through $500 million concessional loans from World Bank for a six year period, directly impacting 7.8 million rural Indians.

This impact could be multiplied through directing a fraction of these loans as credit enhancements, further catapulting the infrastructure augmentation with enhanced private participation.Water resources are under severe climate risk due to the massive demand-supply mismatch. The private and public sectors will have to work together, to play a central role in augmenting climate-resilient water infrastructure.

Published on December 12, 2016

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