A collaboration between the Dutch entrepreneurial development bank FMO and the Netherlands Water Partnership (NWP) aims to close the gap between finance and the Dutch water sector.
Being actively involved in the organisation of AIWW, we connected a group of enthusiastic young water professionals, the Future Water Leaders (FWL), to the owners of several Amsterdam Agreements signed in 2017.
This week, Future Water Leader Bobby Leijgraaf interviews Ger Pannekoek, Finance for Water adviser at NWP.
Q: Ger, what are your tasks and responsibilities with NWP?
“I am part of the team ‘Finance for Water’. NWP has been very active in putting the ‘Finance for Water’ subject on the agenda since 2013, initially primarily via knowledge development and the organization of events. More recently NWP became also instrumental in practically setting up water development and finance vehicles like the Kenya Innovative Finance Facility for Water (KIFFWA).”
“We strive to bring the financial and water sector closer together. During the last edition of the AIWW in 2017, we have actively focused on finance in several sessions viz. on corporate finance growth capital, on development finance and on large scale infrastructure finance. We notice that the Dutch water sector is well-known for knowledge, technical innovation and expertise, but devotes little attention to the financial feasibility of the projects they try to develop. Although the financial sector is searching for investments with societal impact and the water sector suits this description perfectly, financial expertise is hardly involved during project development. As a result, water and money are often not able to find each other. In order to align projects to what financiers have to offer, it is important to involve financial expertise in project development at an early stage.”
Q: Almost two years ago, the collaboration between NWP and FMO has been strengthened via an agreement with the aim to develop and finance at least two water initiatives. The collaboration has since been extended and the initial scope widened extensively. How did this process develop?
“Traditionally a private sector investor, FMO had limited investments in the water sector which is still dominated by the public sector. Since the set-up of FMO NL Business (FMO NLB), specifically aimed at developing and financing projects with Dutch content, came about, FMO NLB has more actively focused on leading Dutch sectors like health, agriculture and water. FMO NLB found in NWP a partner that understands the Dutch water sector and can support originating water projects. Henceforth, FMO NLB and NWP entered into a MoU. The focus of the MoU was largely transaction-oriented by explicitly wanting to bring two projects to financial close. Along the way we realized this target was unfortunately too ambitious. One of the challenges we encountered, was our insufficient knowledge about the exact international positioning, the risk profile, and the financeability of Dutch water sector propositions. To create a better understanding of this, NWP commissioned RebelGroup and CSC Strategy & Finance to capture the sector’s views.”
Q: This market analysis shows that the Dutch water sector is not well-aligned with the needs of the (international) market and struggles with finding the necessary investments. Which role does FMO-NWP plan to play in this struggle?
“We have documented several challenges, much of what needs to be done is in the hands of the water sector itself. The analysis shows the Dutch water sector can increase its foreign market opportunities by offering broader service solutions than till date, increasing collaboration beyond a focus on individual export transactions, improving the structuring of projects through early involvement of financial experts, and building capacity within the Dutch water sector in this field. Increased cooperation between contractors and suppliers may be helpful. Drinking water companies and water authorities and their international programs such as Blue Deal and WaterworX can act as ambassadors for the Dutch private sector as well.”
“The funding instruments in the Netherlands are quite fragmented with many different and often small facilities. If this is to change, one thing is key: put the investment opportunity first, not the financing instrument. In the current situation, it is not necessarily the best project that gets financed, but the project that best fits a specific financing instrument. That has to be turned around and this requires willingness and the ability to think along these lines at the side of those who manage the instruments and to co-create in partnership. A logical solution is a one-stop-shop where entrepreneurs are helped in finding their way through the ample available instruments. As FMO is used to such an approach, FMO NL Business could fulfil this role to some extent. In partnership with key public and private stakeholders in the Netherlands such as the Netherlands Enterprise Agency (RVO), the Ministry of Infrastructure and Water Management, Dutch commercial banks and International Financial Institutes (IFIs), FMO will invest in developing, structuring and implementing quality projects and contracts in which the Dutch water sector supplies local demand.”
“The biggest challenge may be a lack of what we call strategic equity. Companies that are willing and able to invest in projects as an integrator offering a full-service solution (including finance) to local governments or markets and are repaid by delivering services over a considerable period of time. Worldwide, there is a need for more full-service solutions: integrated contracts whereby the contractor can be involved from (pre)financing until the maintenance phase. Currently, the Dutch water sectors’ offer to meet this demand is limited. The energy sector for instance has Shell, but the water sector does not have such an integrator. The Dutch water sector has developed in a fragmented way with many small or medium sized niche players. It is unlikely that such an integrator of this scale pops up in the Dutch water sector, so we should invest in the development of smart consortia that can provide propositions that meets this demand for full-service solutions.”
Q: Can you explain this growing need for an integrated full-service solution?
“In addition to the technical offering, potential partners are expected to contribute financially and assume operational responsibilities. Local governments and markets become less interested in buying a specific technology, but require a service that provides them with safe drinking water or clean discharge water during a period of 20 to 30 years. In our view this is also the way to go as many projects face mismanagement or even fail due to lack of maintenance. Private finance can bring the discipline that results in more cost-effective investments and operations throughout the entire life-cycle of the technology.”
Q: Water-related issues require integrated solutions, right?
“That is absolutely true, and in order to accomplish this we need private consortia that can facilitate such integral solutions as their standard business. In the Netherlands, public drinking water companies and water authorities provide those solutions, subcontracting the Dutch private sector for operation and maintenance services. However, due to their mandate Dutch drinking water companies and water authorities will and cannot take upon such risks in international activities.”
Q: What opportunities do you see for NWP and FMO regarding coming edition of the AIWW?
“NWP and FMO agreed to transfer our collaboration into a structural partnership. As NWP Finance for Water team, we are very proud that during the AIWW the theme ‘Bankable Solutions’ is a cross-cutting theme. During previous edition three sessions were related to financing, this time it is one of the major themes, which is a great step forward. It is crucial that during coming AIWW, the perspective of financial feasibility is at the core of many of the discussions that will take place, as this will increase the chance more and more water projects will actually be realized. This will bring us closer to the realization of the SDG’s.”
Q: Is there anything else you would like to share with us?
“Essentially, we’re talking about a transition of the water sector. The market analysis is a way to speed things up, but we need to do a lot of homework if the Dutch water sector wants to improve its competitive position and increase its impact worldwide in relation to SDG6 (ensure availability and sustainable management of water and sanitation for all). Besides, we would like to mention that the study mainly focuses on water supply and waste water, but the scope of the NWP is much broader. It includes the maritime sector, water management, climate adaptation, water safety, coastal protection etc. Therefore, we will have to verify together with FMO until what extent the conclusions of the analysis also count for other subsectors of the water sector as well.”