Is risk the real barrier to water investment in emerging markets?

The issue of water infrastructure in emerging markets has historically been trapped in contradiction.  The social and economic case for investment is well established, with clear links to improved public health, food security, higher productivity and greater resilience.  Financial returns, however, as measured through conventional risk-return models, often fall short of what is required to attract large-scale private capital.

This imbalance has contributed to decades of underinvestment.  All is not lost, however.  Carlos Cosín, Chief Executive Officer, ALMAR Water Solutions (part of Jameel Environmental Services), highlights a shift in approach that could transform the sector.

Multilateral Development Banks (MDB) and other institutions are introducing new risk-sharing instruments and blended finance structures, pointing towards a more structured and scalable approach to water investment.  These developments suggest that a new era of water finance may be within reach.

Almar Water Solutions was established in 2016, by Abdul Latif Jameel, with the mission of improving the world’s water security, particularly for the most vulnerable global communities.  A decade later it manages a portfolio of desalination, wastewater treatment, reuse and recycling programs.  With a growing portfolio of projects across Europe, the Middle East, Latin America, Africa, and Asia-Pacific., ALMAR designs, structures financing and operates systems across the full water cycle – from desalination and purification to wastewater treatment, reuse, distribution networks, and long-term operation and maintenance.

We spoke to Carlos Cosín about how risk, guarantees and financial innovation are reshaping the investment landscape in emerging markets, and what it will take to mobilise capital in some of the world’s most water sensitive regions.

Why has water investment in emerging markets historically been so challenging?

The financing of water systems in middle and low-income countries has long been a paradox.  On one hand, the social and economic returns are undeniable, driven by improved health outcomes, enhanced productivity and reduced gender inequality.  On the other, financial returns, as measured by conventional risk-return models, appear insufficient to attract large-scale private investment.

This has resulted in decades of underinvestment, leaving billions without access to safely managed water and sanitation services. Or it has been invested without meeting the expectations for which they were made.   A change in approach in recent years, however, suggests that a new era of water finance may finally be within reach.

How have traditional risk mitigation approaches shaped investment in the water  sector?

Institutions such as the World Bank, the African Development Bank and the Asian Development Bank have historically focused on sovereign financing and direct project lending.  Over time, this approach has expanded to include partial risk guarantees, credit enhancements and political risk insurance, all designed to de-risk projects and reduce the cost of capital for private firms entering fragile or uncertain markets.  The African Development Bank’s ‘Partial Risk Guarantee’ and the Asian Development Bank’s ‘Credit Enhancement Guarantee’ follow the same underlying logic: they do not guarantee profits, but they do guarantee stable rules of the game, absorbing those types of risk that private investors are unable to price effectively.

The World Bank Group’s International Development Association (IDA) and International Bank for Reconstruction and Development (IBRD) have scaled up guarantees to cover risks such as non-payment by utilities, breaches of regulatory contracts or government expropriation.  Similarly, the Multilateral Investment Guarantee Agency (MIGA) provides protection against currency inconvertibility, war and civil disturbance.

These instruments are particularly relevant in the water sector, where projects are capital-intensive, revenues accrue slowly and repayment depends on long-term regulatory stability.  At the same time, their practical application can be constrained by significant rigidity.  MIGA, for example, requires an international court to certify non-compliance before its mechanisms can be activated.  This process is lengthy and uncertain, and often ill-suited to contexts where immediacy is critical.  The high cost of access compounds this further, undermining the instrument’s real-world effectiveness precisely when it is needed most.

Why are guarantees especially important in water compared to other sectors?

The rationale for these instruments is strongest in water.  Unlike sectors such as energy or telecommunications, water projects rarely produce immediate commercial returns, and tariffs are politically sensitive.  Collection rates are often inconsistent, and utilities frequently operate under conditions of chronic under-capitalisation.

Private investors therefore face a combination of regulatory risk, payment risk and demand uncertainty, even where long-term demand is fundamentally secure.  Guarantees serve as a bridge between water’s undeniable public value and its private investment case.

Water projects are also uniquely exposed to sovereign and climate-related risks.  Critically, water infrastructure cannot be relocated.  A dam, a treatment plant or a pipeline is fixed in place.  If politics change or hydrological conditions deteriorate, there is no exit.  This physical immobility makes the combination of political stability and long-term regulatory certainty not just desirable but essential.  In this context, MDB guarantees provide not only financial protection but also a signal of international oversight that investors find genuinely reassuring.

How is the role of guarantees evolving?

If guarantees are the opening move, the next stage lies in how they are applied.  Much of the current approach remains project-based, covering specific contracts, utilities or facilities.  Yet investors, particularly institutional ones, are increasingly interested in portfolio approaches that spread risk across different countries and asset classes.

This allows water investment to move away from ‘betting on a single, potentially unstable territory’ and towards committing to a managed global portfolio.  In doing so, it enables broader participation and more stable, diversified returns.  Here lies the key.  We moved from a model that finance governments so they could manage their own investments in water infrastructure (despite lacking experience, lacking control over investment and construction, and lacking operational resources-factors that inevitably led to the historical failures we have seen) to a model that places these projects in the hands of companies that implement them on behalf of this states, contributing their experience and know-how, while covering the risk that governments cannot assume and without which these companies would not be willing to develop the projects.

What role do capital markets play in unlocking investment?

A second dimension of this evolution involves linking guarantees with mechanisms that build local capital markets.  Currency risk is one of the most significant barriers in middle and low-income countries, where revenues are collected in local currency while debt is often denominated in dollars or euros.

Tools such as currency hedging facilities, local-currency bonds and synthetic instruments can help reduce exchange-rate exposure.  Beyond risk mitigation, these instruments deepen domestic financial markets, creating virtuous cycles of reinvestment and strengthening long-term financial resilience.

How can guarantees be aligned more closely with performance?

The next evolution is about aligning incentives as well as managing risk.  Multilateral development banks could expand results-based guarantees that disburse or extend coverage when utilities meet performance criteria such as continuity of service, reductions in non-revenue water or inclusion of marginalised communities.

This approach transforms guarantees into active levers of accountability, ensuring that both public and private actors remain focused on service quality and long-term outcomes.  It also reinforces a shift towards value creation, with greater emphasis on outcomes rather than capital expenditure alone.

How do private companies assess risk in water investments?

From the standpoint of private companies, the central question is whether risks are predictable, allocable and insurable.  Before committing capital, companies typically assess three critical factors: the stability of the regulatory environment over a 15–20 year period, the extent to which currency risk is managed or absorbed, and the clarity of long-term demand and resource sustainability.

Infrastructure built without integrating hydrological projections may face stranded-asset risk within a decade.  For this reason, companies increasingly look for a complete risk-management architecture that integrates financial guarantees with resource-risk analytics and governance frameworks, rather than relying on isolated financial instruments.

How should guarantees be positioned within the broader financing model?

Critics sometimes argue that guarantees socialise risk while privatising profit.  This concern is not without merit if guarantees are deployed without clear conditions.  When designed effectively, however, they help rebalance risk across stakeholders and unlock investment that would otherwise remain out of reach.

In middle and low-income countries, their value lies in mobilising private capital, improving creditworthiness and reducing borrowing costs.  For multilateral development banks, they provide a way to leverage balance sheets for catalytic impact rather than direct substitution.

What needs to happen next to scale water investment globally?

Guarantees have opened a path that was closed for decades.  They are helping to shift water finance away from dependence on sovereign borrowing and towards models based on shared risk and private participation.

However, this evolution must go further.  Mobilising the trillions required to achieve SDG 6 – the UN Sustainable Development Goal of universal access to safe water and sanitation – will depend on scaling portfolio-based guarantees, market-deepening instruments and performance-linked finance.

At the same time, financial structures must remain closely aligned with hydrological planning and institutional reform, ensuring that risk coverage reflects the physical and governance realities of water systems.

When risks are more manageable, guarantees are credible and incentives are aligned, the private sector is ready to play a leading role.  The next phase of water investment will depend on pragmatic, adaptable instruments capable of operating in real time; ones that do not simply de-risk investment but actively enable sustainable water services where they are most urgently needed. Today we are in the middle of this transition in the model. Multilateral institutions are eager to push towards this approach, but they still lack projects from companies that can guarantee their development, construction, and operation. These projects only emerge when multilaterals, companies and governments all move forward together in the same direction and coordinate their efforts. This is the step that remains, but real initiatives are already beginning to appear in some countries.

Enabling investment at scale

Water finance is entering a new phase of development, shaped by a more structured approach to risk allocation and a growing role for private capital.  Instruments such as guarantees, blended finance and capital market innovations are expanding the toolkit available to investors and governments alike.

As Carlos highlights, it is vital that financial mechanisms are aligned with the realities of water systems.  Risk-sharing frameworks, performance-linked structures and stronger domestic financial markets all contribute to a more resilient and investable sector.

As pressures on water systems intensify, the ability to structure risk effectively will play a defining role in unlocking capital.  With the right frameworks in place, water investment can move beyond long-standing constraints and support sustainable infrastructure development to meet global needs.