Blue credits offer an innovative financing approach for attracting private capital to oceans health improvement projects.
In the midst of perhaps the worst crisis of our lifetime with loss of life, livelihoods and a spreading fear across the world as a result of the COVID-19 pandemic, there have also been glimpses of the possibility to reverse decades of environmental damage. This opportunity must be grasped to avoid the catastrophes likely to be unleashed if the damage continues unabated. As the world works to recover from the ongoing crisis, governments need to include in their recovery strategies, actions that can especially focus on sustaining and improving one of the most critical, visible and universally needed environmental resources, our oceans – including all water bodies, seas, lakes and rivers.
The case for the oceans. The case, if ever needed, for protecting oceans is the sheer importance of this resource to every sphere of life, including climate change. Oceans have been acting as a giant carbon sink, absorbing about a third of the carbon dioxide (CO2) generated by human activities since the industrial revolution. However, while helping mitigate climate change, with greater carbon absorption the oceans are also facing a 30% rise in seawater acidity since the industrial revolution – an acidification rate estimated to be ten times faster than at any other period during the preceding 55 million years. This is already impacting marine biodiversity, and with an estimated 1 billion people dependent on seafood, and a global fishing market worth an annual $100 billion, it will eventually affect the global economy.
An 8-million-ton problem. The specter of polluted rivers across the region, several having already lost their battle against a tide of municipal and industrial waste and deemed "dead", is worsened by 8 million tons of plastic ending up in the oceans each year. And this is also coming back full circle with cities such as Bengaluru, Chennai, Cape Town, Jakarta, Karachi, included in the lists of global cities facing water stress and water crises.
Projects are clear… funds are not. The projects that need to be done to address these challenges have always been well known – municipal and industrial effluent treatment, agribusiness run offs, plastic waste management, coastal protection, marine protected areas, river basin pollution control. The challenge has always been that of a shortage of funds, conducive institutional and regulatory environments and financial incentives. This shortage of funds, an estimated annual gap of $459 billion, according to ADB, can only be met by a significant ramp-up in flows from commercial and institutional finance, capital markets and public private partnerships.
The case, if ever needed, for protecting oceans is the sheer importance of this resource to every sphere of life, including climate change.
However, such "blue" projects suffer from a lack of bankability, with many having either low tariff and revenue levels due to affordability considerations or no revenue streams at all. Other risk factors include high cost technology, environment clearances and land acquisition risks, further deterring the flow of private capital, and resulting in a growing demand supply gap for capital. This is only likely to be exacerbated in the post COVID-19 scenario, causing further budgetary pressures on governments to fund such projects.
A time for "blue credits". How then can one persuade private capital into such projects? Several models exist within blended or leveraged finance approaches, which aim to better apportion risk to the party – public or private – best suited to manage that risk and hence create a more bankable project structure.
One mechanism that could be included to address the lack of revenues in many of these projects is that of "blue credits", being developed by the ADB’s Southeast Asia department’s innovative finance hub. Based on the concept of the "hybrid annuity" model that India tried successfully for its PPP road projects, this would essentially entail a local or national government providing a pre-determined annual payment or "blue credits" to a project implementing entity (whether a government-owned company, a PPP, or private sector entity), linked to performance or impact indicators that a project needs to achieve, such as for instance, chemical oxygen demand (COD) and biochemical oxygen demand (BOD) levels.
The main aim would be for private capital to finance most of the capital expenditure, take the construction risk and subsequently focus on operational efficiencies, while insulated from revenue risks as long as project benefits are delivered. The mechanism of blue credits should be seen as aligned with the principle of ‘avoided costs’ from alleviating future economic or health disasters, such as diseases arising from lack of access to clean water, polluted river bodies or decline in fishing stocks. An estimate of such avoided costs could provide a benchmark to limit the level of blue credits provided to a project.
Similar to initially higher feed-in tariffs for wind and solar energy plants, the need for this financial support will likely fade over time once scale and technologies improve, costs are reduced and “grid parity” is achieved. The circular economy for waste and water treatment plants will improve when the sector develops, governments create conducive regulatory environments and financial (tax) incentives, and counterproductive (fuel) subsidies are eliminated.
The payment mechanism for such blue credits could be ringfenced into dedicated special purpose vehicles funded by governments, multi-lateral development banks and donors. ADB could work with interested governments in developing the mechanisms and structures for such vehicles or ‘blue credit funds’ as well as in implementation of some early pilots.
A visible commitment. The elements of the idea above are not new, however creating a visible mechanism such as this would clearly and strongly signal a government’s intent and commitment to both project sponsors and private capital sources creating a clear momentum for leveraging in private capital of 3 or 4 times the government funds committed. Including such mechanisms along with credible sovereign funds into post COVID-19 recovery packages would be a critical step forward to renewing the attention on this hugely critical theme and lead to safer, healthier and sustainable economic growth in the region.