How is financing evolving in the water sector?

• Climate change poses a big challenge to Arab countries. The region is among those most affected by the impacts of climate change, particularly sea level rise and drought, which have dire consequences on food production. Equally, Arabs have a vested interest in the implementation of the sustainable development goals; in particular, those that help them deal with the interlinked water-energy-food challenges and goals that foster social and human development in general.

Climate change poses a big challenge to Arab countries. The region is among those most affected by the impacts of climate change, particularly sea level rise and drought, which have dire consequences on food production. Equally, Arabs have a vested interest in the implementation of the sustainable development goals; in particular, those that help them deal with the interlinked water-energy-food challenges and goals that foster social and human development in general.

As countries identify measures to fight against climate change, investors all over the world are increasingly incorporating particular investment objectives into green infrastructure projects, with an ever-clearer focus on water projects. This trend, observed in recent years, is giving rise to the exponential growth of “green financing”, where investors and lending institutions consider Environmental, Social and Governance (ESG) aspects an ever more important part of their criteria when selecting assets.

A recent report launched by the Arab Forum for Environment and Development has found that Arab countries would need a minimum of USD 230 billion annually to support the achievement of the SDGs. Arab countries need to develop their financing strategies and action plans to support the implementation of the 2030 Agenda. Beyond identifying prospective sources of financing, this implies putting in place adequate laws, policies and regulations to stimulate investments in the right direction.

Increasingly, sources of finance are being made available for sustainable infrastructures. Investors and financiers are allocating larger volumes of capital to green infrastructure projects, in which green loans and bonds have become attractive investment propositions.

Clearly, there is increased recognition of the fundamental role of water in the economy in general and in any effort to progress towards a more sustainable economy. The scarcity of water is a systemic risk for almost all segments of the global economy.  The growth in the world’s population will mean an even greater scarcity of water resources in the next few years. And it is necessary to address the problem in order to develop a sustainable development.

The key role that water will have in any commitment to achieve the desired sustainable development, and make the circular economy grow in general, is something that is already very evident.

From theory to practice

Madinah 3, Buraydah 2 and Tabuk ISTP projects in the Kingdom of Saudi Arabia

One of our latest contract awards where we participate as a developer relates to the Madinah 3, Buraydah 2 and Tabuk 2 wastewater treatment plants in Saudi Arabia.

Madinah 3, Buraydah 2 and Tabuk 2 are three independent sewage treatment plants (ISTPs) to be constructed in the Kingdom of Saudi Arabia. The Saudi Water Partnership Company (SWPC) has signed an agreement with each project company to procure the treated water from the ISTPs for 25 years. These three companies will design, build, own, operate and transfer the ISTPs, which are being built to expand and improve wastewater and sewage treatment services in the Kingdom.

Each of these project companies is structured in the same way, in terms of stakeholders in the financing, engineering, procurement and construction as well as operation and maintenance. We are acting as a lead member in the project, formed also by International Water Distribution Company (Tawzea) and Tamasuk Holding Company (Tamasuk), and it is also participating in the construction and operation and maintenance of the three plants for the 25-year contractual term.

Key environmental features and benefits of these projects

1. Recycling of wastewater for agricultural activities

The use of treated sewage effluent will substitute the use of available fresh water for farming purposes, thereby producing direct water savings.

The plants have been designed to comply with stringent technical requirements regarding the quality and quantity of discharged water to satisfy the needs of local farmers who will ultimately use the water.

2. Treatment and reuse of sewage sludge (‘zero-sludge-dispatch’ method)

All sewage sludge produced in the plants will be suitable for agricultural application and cement manufacturing. The plants will handle, transport, and deliver it to the designated Sludge Disposal Area (specific for each ISTP), so that the amount of non-beneficial sludge that is removed or leaves the ISTPs’ site is equivalent to zero.

3. Renewable electricity consumption

Up to 57% of the daily electricity consumption for the different sites will be supplied from renewable energy sources onsite (solar photovoltaic electricity), resulting in a significant reduction in greenhouse gas emissions generated by the ISTPs. This is the maximum renewable energy available from the extension of land available for the installed capacity of PV panels and the production of biogas derived from water treatment processes.

With the incorporation of these solutions into the sewage treatment plants, we set out to make a contribution to the European Union objectives on the sustainable use of water and offsetting climate change, while working within the framework of the United Nations Sustainable Development Goals on water and clean energy.

Implementing Green Financing

Aware of the importance of these projects to optimize the use of water resources in Saudi Arabia and their clear alignment with Saudi Arabia’s Vision for 2030 programme, the projects have been considered clear objectives for the application of green finance from the outset. They have represented a perfect opportunity for lending institutions to take a position in a financial trend that is rapidly growing globally.

In this sense, the project companies have developed a Green Loan Framework that has been appraised by a Second Party Opinion (SPO) Provider, concluding that the Green Loan Framework for the ISTPs is aligned with the Green Loan Principles. This enables the project companies to close a green loan for each of the projects.

Islamic Project Finance

In addition to the priority objective of applying a green loan to these projects, we have given priority to a structuring of finance that will incorporate an additional Islamic tranche to the more common conventional approach. In these three projects, Islamic finance has accounted for just over 60% and is structured under the “Ijara Facilities” modality.

Islamic banking, which has its roots in Sharia law, is characterized by its strong ethical commitment. Nowadays, the fundamental role of ethical principles in the development of a sustainable international financial system is unquestionable.

In the past, the additional complexity, time and cost involved in incorporating an Islamic tranche into project finance dissuaded many developers from actively considering these structures. Nevertheless, as they continue to develop, and due to the need to gain access to alternative sources of finance, more and more developers – particularly in the Middle East – are focusing their attention on this rapidly evolving market.

With the financial closure of these projects, we take a further step in our commitment to sustainability and innovation. For the first time in our water projects, the company is structuring not only a green loan but also Islamic finance, which it links to local, regional and international banking.

By Laura de Andrés, Head of Structured Finance. Water Business. ACCIONA