Cat Bonds on the Nile: A Risk-Sharing Approach to the Nile Waters Dispute

[Junius O. Williams is a third-year J.D. candidate at NYU School of Law, where he is an Institute for International Law and Justice (IILJ) Scholar and a Salzburg Lloyd N. Cutler Fellow]

On 9 September 2025, Ethiopia inaugurated the Grand Ethiopia Renaissance Dam (“the GERD”), Africa’s largest hydropower project and the culmination of over a decade of planning and construction. At a cost of over five billion dollars, this dam is expected to generate roughly six gigawatts of electricity at capacity. Situated on the Blue Nile, it could double Ethiopia’s electricity output and provide the country over one billion dollars in annual electricity export revenue. Ethiopia intends for the dam to help supply at least 90% of its population with electricity by 2030, compared to 55% today. 

Yet Ethiopia remains at loggerheads with its downstream riparian neighbors – Sudan and Egypt – over the dam. While Ethiopia argues that the dam will allow it to meet the development needs of its population of 132 million, Egypt and Sudan counter that damming the river will starve it of water resources while also increasing the risk of catastrophic and uncontrolled downstream flooding. The Nile and its tributaries provide 96% and 73% of Egypt’s and Sudan’s renewable freshwater resources, respectively, and over 165 million people depend on it in the downstream countries. 

All three parties have invoked principles and jurisprudence from international law to justify their respective positions. Egypt and Sudan argue that Ethiopia’s construction of the dam was unilateral, in light of the failure of the parties to reach a negotiated solution or publish a comprehensive environmental impact assessment. They argue that because of this unilateral construction, Ethiopia violated the customary international law principle of “equitable and reasonable” use of a shared watercourse and the duties to cooperate and avoid transboundary harm as articulated in the ICJ’s water and environmental law jurisprudence. Egypt also invokes its “historical rights” to the Nile waters in support of its current position. Ethiopia counters that the sovereign has a right to develop and exploit its natural resources; that Ethiopia has made good faith efforts to cooperate with Egypt and Sudan; and that Egypt’s invocation of its “historical rights” are rooted in unenforceable colonial-era treaties which the British procured through duress on Ethiopia’s leaders or Ethiopia’s exclusion altogether. 

Establishing liability under international law is not the focus here, and many legal scholars have already opined on the issue. The dam has been built, the Nile’s flow altered. So, too, has the dam altered the regional balance of power. The international community’s posture has also shifted. Massad Boulous, President Trump’s special advisor for Africa and the Middle East, expressed the importance of resolving the dispute by “technical means,” now that the dam has become something of a fait accompli. And ideally, tripartite negotiations between Egypt, Sudan, and Ethiopia would provide the forum for such technical solutions to emerge. 

Catastrophe bonds (or “cat bonds”) are one such solution, the kind that would address the downstream countries’ concerns about environmental disasters arising from the dam’s operation while also respecting Ethiopia’s developmental needs and accepting the inevitability of the dam. Ultimately, this financial solution would be implemented in service of the parties’ customary obligations to avoid and mitigate transboundary harm under international law. 

A Financial Instrument to Manage Physical Risk

Cat bonds are about allocating risk. As the IMF summarizes, they are debt instruments that allow the insured party to get funding from capital markets “if and only if catastrophic conditions, such as an earthquake or hurricane, occur.” The bondholders “bet on the nonoccurrence of catastrophic events,” thereby creating an insurance instrument by which the insured party can mitigate its risk.

Cat bonds originated in the private insurance market but have gained traction among sovereign states as a way to cover disaster-related losses. Countries like Chile, Philippines, and Mexico have used them as a way to insure against climate-related risk. Most recently, Hurricane Melissa’s devastating effects on Jamaica triggered the payout of a $150 million cat bond. The typical sovereign cat bond is structured as follows:

• The sovereign sponsors the bond and enters into a risk-transfer agreement with a special purpose vehicle (“SPV”). An SPV is a legally distinct entity formed by a parent company to manage and isolate financial and other risks. 
• The sovereign pays a regular insurance premium to the SPV, which issues the bond and sells it to bondholders on the capital markets. 
• These bondholders (investors) pay a principal and, in exchange, receive a coupon (premium-plus-interest) from the SPV. 
• The contract between the SPV and the bondholders defines the term of the bond (i.e., its duration) and the trigger event, whose occurrence would result in a payout to the sovereign sponsor, but whose nonoccurrence would result in the return of the principal to the investors. 

In recent years, the World Bank has played the role of issuer for sovereign cat bonds, obviating the need for an SPV. Through its capital-at-risk program, the Bank puts the bonds on its balance sheet, which eliminates the sovereign default risk that oftentimes scares investors away from such transactions. The sovereign enters a risk-transfer agreement with the Bank (not the SPV), which can lower the insurance premium payments the sovereign must make. The Bank then arranges and sells the bonds on international capital markets.  

As part of a negotiated settlement, Ethiopia would sponsor a tranche of cat bonds under the World Bank’s capital-at-risk program. The Bank would hold the bonds on its balance sheet and Ethiopia would pay a subsidized insurance premium. If a catastrophic event occurred, like uncontrolled downstream flooding caused by the dam’s rupture or collapse, it would trigger a payout. 

A Regional Insurance Policy

However, unlike a typical cat bond, where the sponsor receives the full payout when the trigger event occurs, the downstream countries would receive some share of the payout depending on its nature and location. For example, if the dam’s redirection of the Nile’s flow caused the rupture of Sudan’s Roseires Dam, then Sudan would receive proceeds from the cat bond payout. Or, if the dam caused Egypt’s freshwater flow from the Nile to fall below a certain, predetermined amount, then Egypt would receive a payout. 

Under this structure, Ethiopia would be taking out an insurance policy not just for itself, but also for its downstream neighbors. This structure would incentivize Ethiopia to take even further steps to mitigate the potentially devastating effects of environmental damage triggered by the dam. It is a compromise that would require Ethiopia to pay relatively small insurance premiums to the World Bank (which would likely be lower than what Ethiopia would pay under a traditional SPV model) in exchange for control over the dam and its hydroelectric output. Moreover, because the cat bonds would not sit on its balance sheet, Ethiopia could do so without accumulating additional debt. 

One may argue that such an arrangement is unfair to Ethiopia, particularly given its sovereign right to exploit its natural resources. While this right exists, it must coexist with and be balanced by obligations under customary international law. Fundamentally, the Nile is a shared resource, and any negotiated solution must account for the needs of all its beneficiaries. Cat bonds align Ethiopia’s desire to profit from the dam with the downstream states’ goal to mitigate the most catastrophic risk. 

No Easy Answers

However, there is more nuance to this proposal. The most significant challenge to this bond issuance would be defining the appropriate trigger event. Some of the downstream risks, like the sudden flooding of a particular area, could be easy to pinpoint and ascribe to an operational failure of the dam. Others, like the potential reduction of freshwater resources for the downstream countries, would materialize in a more attenuated fashion. 

So, too, would the question of causation be a challenge when establishing the trigger event. Just this year, Sudan and Egypt experienced flooding after the dam commenced operations. While Egypt argued that the dam exacerbated this flooding, Ethiopia’s Water Minister suggested that without the dam, the flooding would have been even worse, at least in Sudan. In such case, the bond covenants may need to structure the payout to reflect a modeled estimate of the total losses rather than the occurrence of a single, objective, and measurable event. But could a modeled loss structure result in an impermissible level of imprecision that would unfairly disadvantage Ethiopia? 

Moreover, there is the question of Egypt and Sudan’s own poor water management practices and whether they could give rise to a finding of contributory fault. Upon the occurrence of a trigger event, would the downstream countries still be eligible for a payout? Would it need to be discounted to account for reductions in water volume that may have arisen without the GERD? 

And finally, there is the question of Sudan, where violence and humanitarian disaster rages. Sudan’s government is likely unable to engage in the rigorous technical negotiations with Egypt, Ethiopia, and the World Bank that are required to issue the bonds. Is it fair, or even administrable, for a cat bond solution to exclude Sudan, a country that could experience severe impacts from the dam’s failure in the worst-case scenario? 

Concluding Thoughts

None of these questions have easy answers, nor do cat bonds offer an ironclad solution to the catastrophic environmental harm that the GERD could proliferate. However, the failure of previous negotiations to provide a workable solution to all parties creates an opportunity to use capital markets to spread and allocate risk. Ethiopia has completed one of Africa’s most important infrastructure projects: it should not be punished for doing so. On the other hand, Egypt and Sudan have legitimate concerns about their access to freshwater and devastating flooding. Sovereign catastrophe bonds carefully structured through a World Bank issuance could address each of the parties’ concerns while complying with international law. Moreover, this transaction could provide a framework for other transboundary water disputes, which become ever more frequent in the global race for critical resources.

Photo attribution: “Blue Nile” by Ondřej Žváček is licensed under CC BY-SA 3.0