Blog: Early involvement of financing expertise in project development is key for international growth

Europe Finance for Water

The Dutch water sector could increase its market opportunities abroad by offering full-service solutions, structuring projects better by involving financial experts at an early stage and creating a one stop shop for funding instruments. That is the key message in the market analysis that FMO and NWP conducted as part of their Memorandum of Understanding. Arthur Gleijm from Rebel, one of the authors, lists the main issues. Read his blog.

Arthur Gleijm, Director at Rebel and Lead Consultant NWP Pool of Financial Engineering Experts

Full-service solutions

"The Dutch water sector is well positioned internationally, but it does face obstacles to further international growth. We identified these obstacles and potential solutions in the analysis. I will touch on three aspects in this blog.

The first aspect is that the market analysis shows an increasing demand worldwide for full-service solutions such as Design Build Finance and Maintain (DBFM), but the Dutch water sector offering is limited. It would help if a Dutch company would come forward that has the knowledge, skills and the financial position to act as a lead organisation to win water supply and treatment contracts abroad. Small and medium-sized businesses could benefit from this as well by internationalising in the slipstream, acting as a subcontractor to this company. However, there is currently no company like this in the Netherlands. The public drinking water companies and water boards could take on this potential role, but they are cautious and their mandate to operate internationally is limited.

Pieces of the puzzle

Nevertheless, we do have the right pieces of the puzzle for integrated sustainable water solutions for fast-growing metropolises in emerging markets. So let's put those pieces together for the challenges these metropolises are facing. By joining forces instead of working separately, we may open new markets for the Dutch water sector and forge competitive consortia with regular partners, depending on the assignment at hand. In my view, drinking water companies and water boards can bring in the necessary operational expertise without bearing the risks that commercial entities are expected to accept. But the most important piece of the puzzle is to partner with the right local champion: to be able to compete in terms of cost, to gain access to local networks and knowledge about operational and investment risks, and to manage these risks properly. Just look at Manila Water that is structurally conquering the South East Asian water supply market. It works with local partners at the urban level through various World Bank programmes for the initial most risky phase of the market entry, and in partnership with Japanese banks to finance growth. We have proof that we are able to develop full service solutions here in the Netherlands too. At the financial close of the integrated contract for the reinforcement of the Afsluitdijk, more than half a billion euro of private capital had been mobilised. This is unique for a delta project of this size, and something that could be replicated overseas and adapted to the local situation.

Gap between market and money

The second aspect is that there is a clear need to develop more capacity in financing project development and project implementation. You need to bridge the gap between the market and the money, and NWP could support and facilitate this. We have been talking about this for quite some time now. And at the same time, remarkably enough, investors and financiers are looking for investment opportunities. My conclusion is that, although we generate many project ideas, the business cases do not make ends meet – we have to do a better job. This is typically due to a mismatch between project risk profile (especially high in emerging markets) and return on investment. Furthermore, local and regional financiers and developers typically have a higher risk appetite compared to international financiers as they are typically more comfortable with the local regulatory environment. So it would make sense to consider this financing source as well. If the starting point is that the projects that we devise could be implemented at some point and have the potential to stand on their own two feet, it would be wise to involve high-quality financial expertise and financial institutions in the project cycle right from the start.

Ask the right questions

NWP can raise this issue with the governments, development banks and bilateral donors in its network. The point is to ask the right questions: what are the needs and necessity of the project; who is willing to pay for it; is the price reasonable, considering the risks? If the answers are positive, financing is no problem. If not, there is still time to structure the project in such a way that the signals turn green. And the starting point should always be local demand. Perhaps the willingness in an emerging market to pay may require scaling down the service offered, both in terms of scope and quality. We should not make our offer more attractive, larger or sophisticated than necessary and risk losing our competitive edge.

One stop shop

This immediately brings me to the third aspect. 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 coherent system of financing instruments must be able to grow along with starting companies, project development and new products launched. Every phase in the project cycle, from initiation and development, to start-up and scale-up, has a different risk profile and requires different types of financiers and money. This requires a one stop shop in terms of funding instruments. Furthermore, part of the available financial resources should be used for structuring the business case to transfer promising project ideas into sound and bankable projects. Moreover, a fresh look from the financial point of view can be cleansing and offer new perspectives. In the end, the financing facility will benefit from separating the wheat from the chaff and being able to focus on feasible projects."

About the market analysis

In November 2018, the Dutch Development Bank (FMO) and the Netherlands Water Partnership (NWP) renewed their Memorandum of Understanding reaffirming their commitment to collaborate on developing and financing water initiatives by and with Dutch water sector players. To create a better understanding of the international positioning and financing needs of Dutch water supply and water treatment players, NWP commissioned Rebel and CSC Strategy & Finance to capture the sector’s views. The market analysis will be published in early June 2019.