The story of Quito — the first ‘Water Fund’
This short article reviews the success of the Quito Water Fund, now celebrating 20 years. FONAG, as the Water Fund is called, has a close relationship with the municipal water supply agency and has leveraged this, together with other partners, to build up an impressive endowment of over $18 million USD.
FONAG — the first official ‘Water Fund’ — Quito, Ecuador
A good example of a functioning water fund is one of the oldest, namely that of Quito’s Water Protection Fund — FONAG (Fondo para la protección del Agua). FONAG, created in 2000, came during an era when the link between nature conservation and water availability was less obvious than it is now. The concept of “green infrastructure” or “nature-based solutions” was still in its infancy and a lot of the debate took place in academic circles.
Why the focus on source water protection?
The city of Quito is home to approximately 2.6 million people. The water resources that supply the needs of the population of Quito — and the remainder of the upper Guayllabamba basin — come from transfers, surface water and groundwater. Over time there was a deterioration in the infrastructure tapping the aquifer as well as the quality of the water therein. This led to shift towards surface water as the means to source water for Quito.
However, this merely shifted the risk — exposing the water supply to risks linked to the ongoing deterioration of the high Andean paramos (high altitude tropical grasslands) and wetlands, ecosystems that harbor many threatened animal species, and which act as the source of much of the city’s water supply.
Concerns around this underlay the creation of FONAG, the first formal water fund supported by The Nature Conservancy (one amongst several partners). From the outset the Water Fund was then part of a wide multi-sectoral collaborative effort with a clear focus on natural infrastructure.
What does FONAG do to protect the water source?
Most directly, FONAG runs programs and conservation projects that focus on ecological restoration. It also supports targeted environmental education, aiming to foster a new ‘culture of water’ and garner support for integrated water resources management.
The Water Fund is, at its heart, a financial and governance mechanism that collects and safeguards the money required to support these activities, as well as overseeing a coherent plan of work to protect the watershed.
How FONAG sees its mandate:
How does FONAG fund this scope of work?
In 2007 the local water utility (EPMAPS) was allocating 1% of all sales income to FONAG — in order to protect watersheds and to build a culture of integrated water management. That same year a municipal law (ordinance) was passed that required this to rise by 0.25% over a four year period until it reached the 2% level, which is where it now stands. This raises the bulk of funding, but in the early years was complemented by financial contributions from other partners, including an electricity company, a beverage firm, a bottled water company, an NGO (The Nature Conservancy) and a bilateral international donor (SDC).
As of December 2018, FONAG had a 18.7 million-dollar estate; in which the return plus proceeds from agreements, generates an annual budget greater than 2 million dollars.
Who participates in the Water Fund and how?
FONAG has signed 18 conservation agreements with a range of actors, including upstream landowners. It continues to actively manage almost 20,000 ha of land and has, over time, recovered and restored 15,000 ha.
The Technical secretariat, of over 50 people, supervises the fund, but this includes the work of nearly 40 rangers and technicians in the field. The team is multi-disciplinary, including biologists, sociologists, hydrologists, educators, communicators and administrative staff, as well as field rangers.
The ‘anchor tenant’ is EPMAPS, the public water utility, who contributes not only financially to the activities of the Fund, but has also handed over land in the catchment to the Fund to manage. It sits on the Board of Trustees, alongside other key constituents.
How is FONAG structured?
The figure below shows how the Fund is structured with the flow of money represented in orange. An oversight structure is in blue, supervising the activities that are managed by a Technical Secretariat (both green). A technical working group used to exist, but was disbanded once FONAG had grown the internal capacity to manage actions itself.
How does FONAG measure success on interventions — and how does this relate to Water Funds more broadly?
The generation of information has been a fundamental pillar of FONAG since the outset. This information is needed for appropriate water management decision-making and takes place at several scales.
One use is to guide priority areas for interventions and to outline specific actions pertinent to that geography and social context. Another is to influences river catchment management, supporting wider processes of integrated water resources management.
The approach to monitoring has always been one of strategic partnerships, especially the water utility. Since 2017, jointly with EPMAPS, FONAG has worked to strength and integrate hydro-meteorological monitoring networks, aiming at a single integrated network that guarantees quality, continuity and shared use of the compiled data.
The results of this, plus return-on-investment (RoI) studies (2017, 2019) show that the work of FONAG has been even more effective at maintaining water quality than at impacting water quantity, but, in the Cinto catchment at least, was generating a RoI of 2.15.
Generally speaking, Water Funds typically have to show value to a diverse group of stakeholders. Within that range though, there is typically one ‘anchor tenant’ for the Water Fund — often a water utility (although some Water Funds have more than one anchor tenant, for instance, Upper Tana-Nairobi Water Fund in Kenya, where the hydropower company and local utility share this privilege).
Each stakeholder in the Fund will be ‘investing’ for its own reasons or objectives, but the more these reasons/objectives are explicit, understood and accepted by the other stakeholders, the more solid its foundations. Like them, the anchor tenant will be judging the success of its investment over time to see if the anticipated benefits are truly delivered. There thus a strong argument for any ‘business case’ for the Water Fund to go beyond the generic, becoming business case that can speak meaningfully to the expectations of a limited set of key tenants — of which the anchor tenant is typically the largest and most influential.
In this sense the alignment of FONAG’s monitoring with that of the public water utility EPMAPS is commendable, both in terms of immediate influence and cost effectiveness, but also as a strategy to ensure long-term relevance and financial sustainability.
Who bears the risk of investing in NbS — in Quito, but also elsewhere?
Water Funds are an example of choosing green over grey and hence a valuable addition to the grey-green infrastructure portfolio that enlightened water utilities are looking to grow. Much work remains however to ‘de-risk’ green infrastructure, this being a crucial step not just to growing the appetite of utilities to adopt them, but for them to also grow as ‘bankable projects’.
Grey infrastructure often has a long track record and, as such, the distribution of risks is often well understood. Take the example of raising a dam wall to increase the capacity of a reservoir. If results are less than expected, because the design is poor, the design firm can be held accountable. If the construction is not up to scratch, the contractors may be liable. A complex set of contracts, but which build from a standardised base, govern all this. These all help protect the investor, say a water utility, and guarantee a return on investment.
This level of risk allocation has not yet been reached for green infrastructure and, given its different nature, may not even be feasible. Nevertheless certain steps can assist with a move in this direction — and monitoring the performance of existing nature-based solutions, quantifying their diverse benefits — are important building blocks.
In Quito the tariff allocation passes to FONAG regardless of the short-term performance of its work. To a certain degree then, EPMAPS bears the risk and there is no sense of ‘pay for performance’. Nevertheless, over the long term, FONAG needs to justify its role and the monies it receives, hence the stress places on harmonising the monitoring programme with that of the utility.
In other locations the effort to ‘de-risk’ the nature based solutions that underpin Water Funds take other directions. Perhaps the most advanced example of this is the Brandywine Christina Healthy Water Fund in the United States where upstream restoration is looking to reduce river pollution that severely impacts the city of Newark, amongst others. New legislation allows Newark to invest in remediation activities upstream in Pennsylvania, crossing State lines, rather than use the little land available within the city on projects that would have lesser impact. The drive is to reduce nutrient and sediment pollution loads that the municipality contributes to and which are regulated by permits, including total maximum daily load limits (TMDLs).
Essentially this project enables Newark to purchase source water protection practices — on agricultural land upstream in the Brandywine-Christina watershed — that are cheaper and more effective than projects on the highly urbanised and expensive land within city limits.
“In Newark we could only really do wetland ponds and flood mitigation, and downtown land is very expensive. It is more efficient to look upstream, it adds more tools to our toolbox.” — Tom Coleman, Newark City Manager. Source: Conservation Finance Network (2019).
Those financing and implementing the restoration activities upstream are paid for performance, in that the municipality only pays if the reduction in nutrient and sediment load can be demonstrated to the satisfaction of regulators. An article outlining how this works can be found in the further reading provided.
Takeaways from FONAG’s experience
FONAG has been able to play the role it has as it has a long term financial base, which has allowed it the time to establish itself. Thinking long-term is crucial here, FONAG itself operates on a 80 year time horizon.
A broad portfolio of interventions helps to respond to social and environmental diversity (“not putting all your eggs in one basket”) and can make you useful to different partners and alliances at different times, in different ways.
It helps to build up technical capacity within a Water Fund, such that the fund can offer technical resources to other partners. This makes the Fund a valued contributor to action in the watershed and supports requests for joint decision-making.
It is important not only to show the value of investing in NbS at the outset, but to maintain this argument over the medium-term. Return on Investment and other financial and economic analysis can contribute to this — but it is important to keep the analysis current, updating it as new information becomes available over time. This should also be linked to decision-making (hence the Water Fund in Cape Town is turning its initial analysis into a more refined ‘Decision-Support System’ which can inform the actions of all partners under a range of future scenarios).
Develop a monitoring system that is cost-effective and can be sustained over time. It can be helpful to partner with academia on this aspect. The data this generates can also inform other work, such as Return on Investment studies. If a Water Fund has an ‘anchor tenant’ (e.g. a water utility) then aligning this monitoring system with the expectations, parameters and practices of that stakeholder can be helpful — making it easier for them to assimilate the data and boosting its credibility.
References and further reading
- Water funds featured in Revolve Magazine #30 (Winter 2018), op-ed by TNC’s Andrea Erickson: https://revolve.media/water-funds/
- Lorena (2019). The Path of Water — FONAG: work and lessons. https://www.oecd.org/water/FONAG-Water-Protection-Fund-(2019)-The-Path-of-Water.pdf
- Learn more about TNC’s source water protection and water funds work: https://www.nature.org/en-us/what-we-do/our-insights/perspectives/better-water-security-we-sink-or-swim-together/
- TNC’s global analysis demonstrating the multiple benefits of source water protection: https://www.nature.org/en-us/what-we-do/our-insights/perspectives/a-natural-solution-to-water-security/
- How TNC is applying the water fund concept in Africa: https://www.nature.org/en-us/what-we-do/our-insights/perspectives/source-water-protection-in-africa-/
- TNC’s recent report on the opportunities to apply nature-based solutions in the European contexts, as part of hybrid (green-grey) water investment strategies (with 19 case studies): https://www.nature.org/en-us/what-we-do/our-insights/perspectives/nature-based-solutions-for-european-water-security/
- TNC’s water fund toolbox: https://waterfundstoolbox.org/
- Resources on how to monitor and evaluate efficiency and effectiveness of interventions implemented: https://waterfundstoolbox.org/methods/monitoring-and-evaluation-programs
- Article on the first ever pay-for-success transaction funding on-farm agricultural restoration activities to reduce nutrient and sediment flow into waterways — the Brandywine-Christina Healthy Water Fund: https://www.conservationfinancenetwork.org/2019/08/28/revolving-water-fund-pilots-pfs-approach-for-water-quality-improvements
Return to ‘Module A’: Looking to nature for solutions to the global water crisis. This introductory model covers the components and structure of the Water Fund model.
Looking to nature for solutions to the global water crisis
We should look to nature for solutions to the global water crisis. An introduction to nature-based solutions and the…
Or go on to explore ‘Module C’: How the Water Funds model took hold in Kenya.