For nearly 30 years, Stockholm International Water Institute (SIWI) has led World Water Week. This year, the conference went virtual, with over 270 virtual sessions, bringing together over 4,000 participants from science, business, policy and civil society backgrounds, to discuss solutions to address the current climate crisis, in line with this years’ conference theme “water and climate.”
Heading into the virtual conference this year, Convergence was eager to hear from climate and finance experts, in addition to the usual suspects in the water, sanitation and hygiene (WASH) sector. And, while we did notice the participation of some, by large, asset managers, institutional investors, and other private sector actors were absent. With little engagement from the private sector, it is no surprise ‘how to mobilize private finance’ emerged as a topic of conversation in multiple sessions. The good news is that this question arose often, and conversations around blended finance were prominent more this year.
Here are some key takeaways relevant to blended finance:
De-risking instruments can unlock commercial finance for WASH
In an earlier blog, we highlighted how blended finance can mobilize additional investment into water and sanitation projects by mitigating risks and enhancing project viability. At World Water Week, it was encouraging to her about several new initiatives including, Water Access Acceleration Facility, managed by IncoFin–in which Aqua for All will be partnering to deploy its philanthropic capital–and the Social Impact Incentives for Water, Hygiene and Sanitation Program (SIINC for WASH), launched by Roots of Impact and Aqua for All. Both are indicative of WASH actors moving towards making catalytic use of grant funding and concessional capital.
Several sessions also covered the role of technical assistance (TA) as a de-risking instrument. In Cambodia, for example, the French development agency AFD, the World Bank, and the EU collaborated with the Foreign Trade Bank of Cambodia (FTB) to extend commercial loans to small private water and electricity companies in rural and peri-urban areas. In addition to providing a guarantee and a concessional line of credit to FTB, AFD also provided grant funding to: (i) develop the capacity of FTB to assess water-related investment proposals, and (ii) support water operators in the development of sound business plans and investment studies. Participants learned that TA both for the financier and for its borrowers – that is, for both the supply and demand sides of the financing in this deal - was crucial to de-risk the investment.
Aggregate investment opportunities for scale
Aggregation helps mitigate investment risk and create investment portfolios, increasing the investability of some smaller scale and/or higher risk projects. It is a key principle for private investors that are looking for investment opportunities at scale. Take-a-Stake Fund, introduced in the session ‘Innovative Finance for Scaling Effective SDG 6 Solutions’, exemplifies aggregation. This new impact investment fund aims to invest in four sectors, from water purification systems to treatment of human waste, to public bath operators and laundry services. Take-a-Stake Fund will provide medium- to long-term capital (debt and equity) to small and growing businesses in the WASH sector. Besides capital, the fund also plans to provide TA to investees pre- and post-investment. The fund is being set up in a collaboration between the Dutch not-for-profit organization WASTE and the Swedish International Development Cooperation Agency (Sida), amongst others.
The UPTIME consortium featured in another session also demonstrated aggregation for scale. In this case, five providers of rural drinking water services in Africa joined forces with Oxford University to develop a performance-based funding mechanism for water maintenance services in rural Africa. Pooling the performance data from these service providers, which work in different settings from Burkina Faso to Kenya, allowed the consortium to develop a standardized results-based contract design for funding rural water services at scale. On August 28th, Duncan McNicholl, Director of UPTIME, presented the second Working Paper during the session ‘Results-Based Contracts for Rural Water Services’ and announced plans to establish the ‘Uptime Catalyst Fund’ as a UK non-profit to pilot the proposed mechanism. Concepts like this could be game changing.
Simplicity and trust keep you agile
When designing development impact bonds and other results-based financing models, stakeholders spend a lot of time upfront determining the expected outcomes against which payments will be made. As a result of COVID-19, many pre-agreed results frameworks had to be revisited. In a session on the Cambodia Rural Sanitation Development Impact Bond (DIB)–the world’s first sanitation DIB–USAID, iDE and Stone Family Foundation shared their partnership experience, particularly in how they were able to adjust program activities to meet local needs and continue delivering impact as the pandemic progressed. This was made easier because iDE, the implementing agency, and Stone Family Foundation, the upfront capital provider, could agree upon the pivots that made the most sense given the situation on the ground. In turn, Stone Family Foundation communicated these changes to USAID, the outcome funder.
Two factors allowed for quick shifts in uncertain times. One was the simple structure of the DIB. This DIB design included only three partners, no special purpose vehicle, and no independent verifier of results. The second was trust among the three partners. Having cultivated a relationship, their collaboration thrived during an otherwise distressing economic period.
Blended finance structures are often very complex. This DIB proves that simplicity and trust allow for agile implementation under unforeseen circumstances.
WASH practitioners are more interested in blended finance solutions
Lastly, we noticed that the number of attendees in finance-related sessions has steadily increased year after year. This is encouraging given WASH development practitioners are not the typical audience for private finance conversations. No doubt there is better awareness that increased private capital flows are imperative in closing the financing gap for water and sanitation. This week proved that more WASH actors identify blended finance as a helpful tool in attracting additional capital into the sector. It will take time for development practitioners to learn the language of asset managers and institutional investors and vice versa. To support this learning, we hope more private investors will take the floor in future World Water Weeks to advance the dialogue with WASH practitioners.
Are you working on a blended finance transaction in water and sanitation? Contact us to learn more about opportunities to gain visibility with funders and investors in the Convergence network, or check out our Resource Library to learn about blended finance in the WASH sector.