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CHAPTER 6

Financial Innovation for Water Cooperation

Rationale would be an important element of the way forward. Such
incentives would induce parties to prefer collaborative
The importance of transboundary water cooperation has been approaches to nationalistic ones whenever and wherever
already emphasized in this report. However, it is necessary to possible, which would also generate direct financial benefits.
develop sustainable financial mechanisms specifically aimed Collaborative projects mitigate the risk of protests by one of the
at promoting water as an instrument of peace to foster further countries due to wider ownership, reduce the overrun of costs,
transboundary water cooperation. and thereby increase returns on investments.

There is a growing commitment to fund the water sector; the Innovative financial instruments are needed to further promote
challenge is to channel some of this funding to collaborative cooperation in shared basins. Some such instruments do exist.
projects, which bring riparian countries together and generate There is now a clear need to build on this experience in order
growth that also promotes peace, stability and cooperation. to increase the scale and coverage of financial support to
international water cooperation and water diplomacy.
Transboundary water infrastructures, such as dams and
irrigation systems that constitute the most important projects Innovative financing can help achieve SDG 6.5.2, aimed at the
in this context, are currently financed by a variety of public and expansion of transboundary cooperation in all shared river
private actors. The guiding color of the current financing is black, basins by 2030. This financing can also be helpful in achieving
to ensure that the project balance sheet is black and does not SDG 6.5.1, which seeks to promote IWRM.
turn red. Thus the existing, strong domination of “black bottom
lines” leads to a heavy emphasis on the techno-economic Many Shades of Blue
viability of the project, without much concern for International
Water Law or the impact of the project on neighboring countries. There are many starting points for introducing financial
When designing financial policies, it is necessary to add a shade innovation to support water cooperation.
of green for environmental sustainability and a shade of blue for
transboundary cooperation and peace. First, as the ESG Principles (environmental, social and
governance factors) become widely accepted in the financial
Global guidelines for the financing of major water projects in the community, they should be extended to transboundary water
transboundary water infrastructure sector, with International cooperation.
Water Law principles at the center, would enable this change
to occur. If major political and financial actors and donors agree Second, the riparian states, river basin organizations and water
on the basic normative framework of their funding policies, the coordination committees of regional economic organizations
design process would support a high level of international water can prepare Joint Investment Plans. Some institutions in Africa
cooperation. and Latin America are already doing this, but such cases are still
rare. There is thus a scope to expand Joint Investment Plans in
It is important to address the challenges of financing basins around the world.
transboundary water infrastructure with an understanding of
the basic problems that need to be resolved. These include the Third, conventional sources of finance can be easily utilized for
need to define an appropriate legal framework and the relevant capacity building and institution building. This type of funding
technical standards and solutions to technical problems, assess is not generally available for large infrastructure projects, but it
the needed financial requirements, manage the interests of the can be used for enabling and preparatory activities, which pave
stakeholders, define the role of river basin organizations where the way for significant cooperation.
such organizations exist and, above all, help in building trust
among the cooperating states and reduce political risks. Fourth, non-traditional donors, such as China, India and
Islamic countries, are showing growing interest in supporting
These challenges need to be addressed comprehensively in the water infrastructure in the developing world and should be
preparatory phase, together with the necessary environmental encouraged to support transboundary cooperative projects
and social impact assessments. Transboundary infrastructure rather than national projects. This funding can be harnessed for
projects involve complex preparations, a process that also needs large infrastructure such as dams, irrigation and navigation.
funding, and should ensure that projects are bankable, a key
requirement for their completion. Thus, it is essential to invest in Fifth, several options in the current multilateral space can be
this stage to ensure the quality of the preparatory phase. explored in a new way.

The development of blue instruments of preferential and In short, financial innovation can be based on existing
concessional finance for transboundary water infrastructure opportunities that provide the occasion to introduce many shades

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