SK Sur Chowdhury
We all know, Sustainable Development Goals (SDGs) will be the core development agenda throughout the whole world for next 15 years, even onwards.
There are two goals– ensure availability and sustainable management of water and sanitation for all and Ensure access to affordable, reliable, sustainable and modern energy for all– related to water and energy efficiency under SDGs.
To achieve the SDGs, the most crucial factors identified by the development experts are ‘Innovation’ and ‘Internal Resource Mobilization’.
Achieving SDGs will not be possible by only mobilizing public finance and development partner finance. Involving, ingraining and integrating private sector and private sector finance will be the key to smoothen the pathway for achieving SDGs. Obviously, the same thing is applicable for Water and Energy Efficiency.
Water efficiency is an investment in future service reliability, environmental stewardship and economic viability. Every gallon saved is water that does not have to be pumped, treated and delivered. In many places, conserving water is less expensive than every other source of new supply.
While there are short-term revenue impacts to consider, water efficiency keeps costs down for the utility and the ratepayer in the long-term. Efficiency helps to reduce or even eliminate the need for additional infrastructure and treatment capacity to meet growing demand, and helps to keep rates lower than they might otherwise be if conservation were not undertaken.
Water managers have numerous efficiency strategies available to them: Conservation Programs, Managing Water Loss, Efficiency- Oriented Rate Structures. An efficiency-oriented rate structure encourages efficient water use and discourages wasteful use by providing a pricing signal to the customer.
On the other hand, greater energy efficiency is the key for shifting country development paths toward lower-carbon economic growth. Especially in developing countries and transition economies, vast potential for energy savings opportunities remain unrealized even though current financial returns are strong.
Tapping more aggressively into the wealth of available, financially attractive energy-saving renovation projects requires mechanisms to develop and deliver large numbers of relatively small projects scattered among hundreds of thousands of industries and building complexes.
The investment opportunities result in operating-cost savings, as opposed to new production, and are technically and logistically diverse. As such, they often do not compete well with other opportunities for using up-front capital, such as capacity expansion or penetrating new markets.
If left unaddressed, problems of prevailing high transaction costs, perceptions of uncertain risks and unmet needs for financial intermediation or technical expertise mean that much of the potential for energy savings will remain unimplemented. Institutional innovation is required to address these problems and put in place efficient ways of identifying, packaging, and delivering bundles of energy saving projects.
New or improved programs to better capture the enormous potential for energy savings or water conservation in existing industries and buildings in the developing world have important roles to play for the environment and for economic development.
Many thousands of water and energy efficiency projects with strong financial rates of return remain unimplemented in the world at large, but especially in developing countries and emerging markets.
The essential issue blocking the realization of the potential energy savings and water conservation are the underdeveloped state of investment delivery mechanisms, adapted to be able to work well in national and local economic environments.
Traditional investment delivery mechanisms operated by local banks and other financing organizations often have played useful roles in the water and energy efficiency business, but still only a fraction of the potential has been tapped.
Renewed and strong efforts are required to develop financing programs that can combine effective technical project development with financial products appropriate for dispersed investments, with benefits focused on operating cost savings.
Development and operation of water energy efficiency investment delivery mechanisms is an institutional development issue. Water and energy efficiency financing programs and projects must recognize this clearly.
Lack of domestic sources of capital is rarely the true barrier; inadequate organizational and institutional systems for developing projects and accessing funds are actually the main problem. Therefore, mechanisms to capture the opportunities for water and energy efficiency investment need to be created or strengthened. This entails sustained efforts over years—new institutional constructs cannot be expected to develop and grow overnight.
Clearly, water and energy efficiency investment delivery systems must fit local institutional environments in order to be effective. Delivery systems developed in one institutional environment in one country often do not work effectively in a different institutional context. For success, local institutional environments must be well understood, and general solutions usually need to be at least partly customized for those environments.
For water and energy efficiency investments to be made, water and energy efficiency concepts must be marketed to enterprises, and specific projects must be identified, designed, and appraised.
This requires marketing, project development, and technical assessment skill, typically provided by local energy efficiency experts. Human and organizational capacity is needed to define target markets and market outreach strategies, identify project opportunities, design appropriate project packages at end-user facilities, assess financial returns and the risks influencing delivery of the project cost savings cash flow, and understand the incentives to participate by each of the designated parties.
Despite the variety of sources for financing energy efficiency projects, it is clear that ultimately the key source of sustainable and sizable flows of finance in most countries is the local banking sector
Water and energy efficiency projects can be attractively financed using existing bank loan products, without special adjustments or development of new financial products.
However, modifications of financial products to match the characteristics of water and energy efficiency projects can help expand the market for such loans and increase uptake of financially viable yet unimplemented projects.
The main direction for developing more customized financial products is to develop mechanisms that recognize and define the cost-reduction cash flow benefits of the projects and use this flow of funds as a source of loan repayment and security.
The key is for financiers to increasingly recognize the characteristics of the cash stream generated by the projects financed and to structure loans and repayment assurances to best take advantage of that stream. There is an art to developing such enhancements and modifications of existing primary loan products.
So, innovation is must! Diversifying and innovating newer financing modalities and financial instruments for water and energy efficiency viz-a-viz sustainable sectors will give the banks and financial institutions an added advantage.
Because, the time has already come to make the banks along with enter financial system sustainable. Definitely, the banks have to make profit, but the profit has to be sustainable.
So, sustainable finance is essential! In Bangladesh Bank, we are ready to give our hand of cooperation and support as usual to all relevant stakeholders for sustainable development. We have already started working to upstream the sustainable finance mechanism for future.
I would like to assert that more innovations sustainability is yet to come. One message from me in this regard is that the sustainability are no longer matters of ‘seminar topic’ since they are now ingrained into the core development process.
This means that sustainability practice of our financial sector will uplift gradually but surely, will have to get aligned to global best practice. And our banks and FIs must perform that level. But, it would not be difficult at all, just if you wish! Trust me!
This article is adapted from the keynote speech on Water & Energy Efficiency Financing of SK Sur Chowdhury, Deputy Governor of Bangladesh Bank, gave at a workshop, organised by the International Finance Corporation (IFC), World Bank Group in the capital Dhaka on February 28.