Financing Climate Change Adaptation in Transboundary Basins

33 Financing Climate Change Adaptation in Transboundary Basins Projects are more precarious when they intend to fos- ter behavioral change amongwater users if the national legal or policy framework are not supportive. An addi- tional complexity to this is in federal or decentralized systems for water management. Conversely, legal and regulatory coordination by an RBO, as well as involve- ment of the RBO in regionally relevant compliance sys- tems, can help manage these risks. Designing a sound risk-sharing protocol during the proj- ect development phase is crucial to ensuring bankability. For example, an infrastructure investment project could require a feasibility study including options assessment and financial and economic assessment for higher transboundary risks. If multiple countries design and agree to the project proposal, the risk of nonagreement is covered. The risk of slower imple- mentation resulting from higher transaction costs will always be there. In contrast, if a transboundary project has not secured agreement among affected co-riparian partners, the risk management strategy would include an explanation on why nonagreement does not affect the project or a strategy on how the project will other- wise address transboundary risk. If the risks are not allocated to the right parties during a project’s concep- tualization phase, the likely consequence is an inabil- ity to find investors and lenders. Insurance is an additional way to manage risk. Many pri- vate investments in adaptation for the water sector focus on small-scale insurance schemes to farmers or households to ensure against drought and flooding. Other types of insurance are focused on covering, for example, loss of investments resulting from restrictions on repatriating profits out of the country, expropriation and nationalization, breach of contract, and war and civil disturbance. Insurers can be brought together to spread and share exposure. International institutions and private insurance companies such as the Multilateral Investment Guarantee Agency (MIGA), part of the World Bank Group; Overseas Private Investment Corporation (meant to facilitate U.S. pri- vate investment abroad); or the Lloyd’s syndicates provide political risk insurance and investment guar- antees that can be used to mitigate against payment risks. MIGA provides guarantees in the form of politi- cal risk insurance for cross-border direct investments for private sector clients. New cross-border sovereign guarantee mechanisms are being explored that could be employed in transboundary settings, such as for hydropower cascade development (Leb et al. 2018). Although political risk insurance is unusual for invest- ments in transboundary river projects, there is no reason why it could not be tailored to this context. The Overseas Development Institute (ODI) proposes the establish- ment of a “risk guarantee fund” by the transboundary institution to facilitate economically viable projects that face political exposure and might be considered too high risk due to the uncertainty of transboundary contracts, such as when water stored in one country is used by another, (Nicol, van Steenbergen, and te Velde 2002). Alternatively, financiers or riparian countries can provide targeted guarantees to secure investments or establish a special purpose vehicle to limit political risk. An overview of levers for risk mitigation more generally is provided in figure 3.1 below. 3.5 Additional Tools and Resources that Strengthen Bankability Project preparation facilities (PPFs) support the develop- ment of bankable, investment-ready projects. PPFs pro- vide technical and financial support to project proponents. They can cover such activities as undertak- ing project feasibility studies, including value-for- money analysis; developing procurement documents and project concessional agreements; undertaking social and environmental studies; and creating aware- ness among the stakeholders. Having these preparatory elements in place strengthens a project’s bankability and improves future implementation options. Another tool for strengthening bankability suitable for large-scale transboundary projects or other private sector projects is a market sounding exercise. Such exercises communicate with and inform an array of investors and