Innovating Financial Solutions

Mexico City’s water fund will meet basic needs and finance environmental sustainability

Mexico City is deploying an innovative Water Fund which will offer an economically self-sustaining method for meeting the basic needs of its vulnerable citizens while also protecting its critical environmental resources.

100RC’s member cities are pledging their own resources for resilience building, with 75% of all Resilience Strategy initiatives relying at least partially on city funding, and nearly 50% of that funding already committed by the time the Strategies were published. But significant gaps still exist, as less than half of all initiatives thus far are fully funded. Funding is often a challenge for cities; recent research on 80 global cities found that only 25% of them are able to issue municipal bonds, and only 20% are able to borrow from the state. Taken together, Resilience Strategies therefore represent a clear opportunity for investors, philanthropists, or otherwise mission-driven capital to flow toward well-structured projects within an aggregated marketplace of global demand across a range of topics.

In particular, the multiple benefits inherent to urban resilience-building interventions are a natural fit for innovative social finance, a rapidly developing tranche of global markets in its own right. The term “innovative finance” includes a range of financial approaches to addressing development challenges, including social enterprise, impact investment, transaction taxes, and levies on goods and services. It may be provided by actors such as the private sector, development banks, foundations, national governments, or multi-laterals. Since 2000, innovative financing mechanisms have experienced 11% annual growth, and in total have mobilized over US$73 billion to support investments in energy and environment (US$14 billion), access to finance (US$9 billion), and global health (US$7 billion), with an additional US$43 billion spread across multiple sectors.

As a tool for development, innovative finance is an excellent option for cities looking to fill gaps in their ability to meet the basic needs of their citizens, and an initiative from Mexico City’s Resilience Strategy illustrates this potential. For decades ranked among the largest urban areas in the world, Mexico City (CDMX) is a vibrant metropolis and the oldest capital city in the Americas. Its land was originally settled by indigenous peoples over 700 years ago, who built their city of 300,000 on an island in the middle of a large series of lakes. As the city grew through the colonial era and into modern times to reach 21 million inhabitants, it developed and expanded directly atop those lakes. This geographic legacy has created unique and substantial challenges to the city’s massive infrastructure. The lake also became the subsurface aquifer to the city’s water supply. Over-exploitation of this aquifer has not only caused the city to rapidly sink into the ground, when combined with a lack of adequate infrastructure to capture rainfall or distribute existing water supplies, it has meant today that nearly 20% of Mexico City’s residents lack reliable access to running water.

The city has a high level of inequality, and 28.5% of its population lives in poverty. The poorest residents currently must pay a high premium to meet their basic water needs through the unreliable delivery of water from privatized tanker trucks. Mexico City has sought innovative financing methods as a solution to this challenge, and is now partnering with The Nature Conservancy and the private sector to structure a Water Fund as one of its Resilience Strategy initiatives.

Mexico City, Mexico

Water funds are conservation mechanisms that regulate the water cycle and protect ecosystem features in order to strengthen the water security of urban areas. They attract private, public, and philanthropic funding in an organized and transparent manner from large water users and other donors, such as drinking water and sanitation operators, irrigation districts, hydroelectric plants, and philanthropic foundations. Grounded in the fact that it is often much cheaper to prevent resource degradation in the first place than it is to re-mediate it after the fact, these funds enable downstream water users, such as cities, to jointly invest in upstream, nature-based efforts to secure their water supply, such as improved land management or reforestation. Water funds achieve economic sustainability by investing in financial markets, and leveraging returns to protect extensions and land easements for conservation, developing technical support for water management, and promoting sustainable paths for community development.

The Water Fund for CDMX aims to reduce imbalances in the use of the aquifer and promote a positive long-term water balance. Conservation of aquifer recharge areas will contribute to making the city’s water supply system more robust and redundant, lowering costs while improving and expanding access for those currently living in water poverty. At the same time, these actions will have a number of benefits, including reducing subsidence, assisting with mitigation of and adaptation to climate change (for example, in a scenario of regional drought), and protecting biologically significant sites. At the time of publication, Mexico City’s Water Fund had nearly US$400,000 already invested, and another US$1.7M in pledges from development banks, private sector foundations and CSR funds, and the environmental ministry of the national government.

The action contributes to the city’s capacity to adapt to climate change because it promotes the integrity of ecosystems to maximize their hydrological functions. In addition, it helps make the city’s drinking water supply system a more robust one that will buffer the city during droughts and other disruptions.

Across the Network: Innovative Finance

Many 100RC cities have designed resilience initiatives that will leverage innovative financing models to meet the needs of their residents, including:

• BOULDER is demonstrating the value of applying a resilience lens to city financial management. The city is leveraging its capital budgeting process to better understand how local expenditures interconnect and impact resilience priorities within climate change and energy policies. This process is allowing Boulder to identify opportunities for internalizing costs, and moreover to identify the risk and resilience trade-offs of investments citywide.
• NORFOLK has been a leader in developing innovative financing methods to catalyze resilience. Through collaborative partnership with the private sector, the city has created the RE.bound Program, which is designing a catastrophe bond to reduce the city’s vulnerability to natural disasters and will support risk mitigation solutions for projects. For example, one approach integrates insurance coverage into cost-effective green infrastructure options. Additionally, Norfolk is exploring how social impact bonds can be employed to support social service programs. This financing method could potentially decrease costs for city services.
• OAKLAND is exploring how to finance adaptation to a rapidly changing and complex future, in order to build a more connected and economically secure city. The city’s EcoBlock project is exploring new financial models like financing districts, which could support the deployment of renewable technologies and seismic retrofits across the housing sector.
• ROTTERDAM understands the importance of lifecycle considerations in infrastructure development. Too often, these are not incorporated into traditional project design. To bridge this gap, the city is working to embed resilience thinking into the decision-making processes for critical underground infrastructure, by employing cost-benefit analysis which takes into account holistic concerns. These efforts will amplify resourceful and integrated approaches, building Rotterdam’s capacity to be infrastructure-ready for the twenty-first century.
• THESSALONIKI has high levels of air pollution, in part due to increased car use and limited public transit options. In response to this challenge, the city is creating a metropolitan Air Quality Fund that will act both as a financing tool and as an integrated governance structure. Through this aspirational initiative, Thessaloniki will leverage the innovative finance mechanism of an Air Quality Fund to implement best practices from around the globe, including developing bike lanes at the metropolitan scale and offering free transit days. By monitoring and assessing local air quality, the city aims to mitigate pollution and protect vulnerable populations and historical assets while unifying its wider metro region around a common vision.