Economic & Financial Analysis

Water insecurity is one of the greatest risks to global prosperity. Global water consumption has doubled since 1960, and by 2025, at least two-thirds of the world’s population will likely be living in water-stressed areas (Walker et al., 2019; UN, 2014). In the future, government, utility and industry actors will be required to better manage scarce water resources and allocate them against competing needs. 
Conventional interventions to secure water focus on grey infrastructure—constructed, man-made structures such as treatment facilities, stormwater systems, storage basins, dams, pipes, etc.—to transport, store and filter water for use, but nature, or green infrastructure, can perform many of these same functions, often at more cost-effective rates. Our science shows that working with nature delivers sustainable, cost-effective solutions: 1 out of 6 cities could pay for green infrastructure solely through savings in water treatment costs (Abell et al., 2017). There is an urgent need to mobilize the power of nature to meet water security challenges in a sustainable way. The costs and benefits associated with constructing, operating and maintaining grey infrastructure are relatively well-known and, therefore, well-integrated into current planning and lending processes. The same cannot be said for nature-based solutions (NbS). Though becoming increasingly defined, the business case for investing in nature is still an emerging field: robust examples of application in the water sector are required so that these solutions can become a trusted, mainstream alternative or addition to grey infrastructure. A business case, in the most basic sense, would provide the reasoning for initiating an NbS project. 

As such, it is useful to analyze the return on investment (ROI) of a package of NbS interventions so investors can objectively compare results with grey infrastructure investments that would provide similar benefits. A return on investment (ROI) analysis refers to a common financial metric of profitability that measures the return—monetary value of the benefits the stakeholder receives—for the money they invested. 

See the Economic & Financial Analysis Deep Dive for further reading.

Types of Financial and Economic Analyses

1. A cost-benefit analysis (CBA) helps assess whether a proposed NBS investment is worthwhile for society, as a whole. This tool can help define the optimal investment package for society and the environment by valuing a broader set of impacts. Monetizing a large number of benefits, however, can be challenging especially if attempting to do so rigorously and for many beneficiaries. Instead of attempting full monetization, most CBAs focus on valuing key economic costs and benefits while capturing others in qualitative terms.
2. A cost-effectiveness analysis (CEA) assesses how an NBS intervention or a combination of NBS interventions performs in terms of cost per unit change in a single targeted ecosystem function, or, inversely, the change in ecosystem service per unit cost (e.g., the concentration of TSS of water at the intake of the municipal water supply). You can use this value to compare the program’s ROI to that of other alternative interventions investors may be considering that produce the same ecosystem service. For example, the cost of removing invasive plant species versus the cost of constructing a new desalination plant to increase water supply. 

The success of your economic and financial analysis is largely dependent on your team’s level of preparation and stakeholder consultation, as well as your team’s knowledge of the project development cycle. It’s important the project manager understands how to use the economic and financial analysis to help inform a project’s funding and financing strategy (Sustainable Funding Deep Dive) and future governance and institutional framework (Governance Deep Dive). Clear objectives for your NbS project or program will also clarify the scope of the analysis and drive more effective collaboration. 
There have been cases where economic and financial analyses have not furthered a program’s objectives due to poor execution and lack of preparation. The table below outlines common pitfalls to avoid during the process and how to do so. Revisiting this table throughout the project will help your team.