Aqua for All is a not-for-profit focused on access to clean water and good sanitation in frontier markets in Asia and Africa. In the last two years they started exploring how to use their funding in smarter and more effective ways and move beyond providing one off grants for projects and companies. They now work with social enterprises, financial institutions, and impact investors to accelerate access to finance through blended finance structures both at the enterprise and fund level. Aqua for All has deployed catalytic funding into a range of blended finance structures by providing technical assistance, design stage funding to enable proof of concepts and feasibility of new models, results-based funding i.e. their Social Impact Incentives (SIINC) program, and as first loss or as guarantees in different fund structures.
We spoke to Shabana Abbas, Innovative Finance Lead at Aqua for All, about their unique Impact-Linked Fund for WASH, how they measure their impact, the gaps and opportunities they see in the blended finance market, and much more.
Can you describe a couple of transactions that Aqua for All has been involved in?
I’ll start with the Water Access Acceleration Fund. It’s a blended equity fund in which Danone is the anchor investor and Incofin Investment Management is the Fund Manager. As one of the investors in the fund, Aqua for All is providing catalytic first loss capital and funding for pre and post investment technical assistance for the investees. At the same time, we're also bringing in the water sector expertise. In short, we are the strategic link for the fund to the water sector players and potential investees. Further, we are facilitating the fund in collating market intelligence and in pipeline development. In this way, we’re trying to ensure that we’re being catalytic through our investments, but also through our technical expertise and experience in the water sector.
The second is our SIINC program. The SIINC model essentially has an outcome funder who provides incentive payments to enterprises for achieving pre-defined and independently verified outcomes. The model is blended as alongside Aqua for All (as the outcome funder) are impact investors or investors also deploying their capital into those enterprises. We have seen that the incentive payments can serve as an additional revenue stream for the enterprises which may help improve their profitability and attract additional investments to scale. Since its launch two years ago, we’ve completed three transactions for aQysta, ATEC*, and KWSH. Now we're scaling the initiative through the recently launched Impact-Linked Fund for WASH with Roots of Impact, which aims to enable impact enterprises focused on WASH in Africa, Asia, and the Middle East to gain access to suitable and innovative finance. Aqua for All will be the outcome funder in this fund and has also committed funding for targeted technical assistance for service providers as well as enterprises. We think that the water sector is at a very nascent stage of crowding in private capital and therefore with all new approaches and financing structures, there is a need for technical assistance in tandem with the investment funding.
In summary, when it comes to the blended finance transactions I explained, we’re playing two roles, first is providing de-risking capital, and second is providing outcome funding and technical assistance funding.
How are SIINCs different from development impact bonds?
Development impact bonds primarily support government and non-profit interventions whereas SIINC is designed for social enterprises that are ready to scale their impact through mostly for-profit business models.
The goal of impact bonds in most cases is to de-risk the testing and rolling out of innovative service delivery models by non-profit entities. The goal of SIINC is to mobilize larger impact investments towards the highest impact enterprises and create the concurrent enterprise level incentives for impact.
Additionally, from a risk perspective, investors involved in impact bonds carry impact risk - often ‘all or nothing’. In SIINC, both investors and companies carry financial and impact risk. Finally, in impact bonds outcome funders are responsible for full cost of intervention plus investor return whereas in SIINC, outcome funders are responsible for marginal payments linked to impact allowing for greater leverage.
What is Aqua for All hoping to achieve with its catalytic capital?
We are committed to mobilize more private funding for the sector as the current funding gap is too big to meet SDG 6 targets. At Aqua for All we have three goals in mind before deploying our catalytic funding, first is to improve the risk return profile of investments to mobilize additional private investments into the sector and we do it specifically by taking high risk. Second, as a not-for-profit, we want to ensure that impact is not an afterthought and that additional and deep impact is achieved through our capital. Third, since attaining financial returns is not our primary goal, we can take positions of first loss or provide guarantees, which enables other investors to step in. Finally, we want to contribute towards creating sustainable markets and we’re very aware and conscious to not distort them by offering subsidies or grants in a way that is not strategic or is not addressing the systemic challenges that the sector is facing.
How does Aqua for All measure the impact of its blended finance activities?
We’re focused on the impact and financial additionality of our work. When I say impact additionality, I mean that we are additional in a way where those impacts would otherwise not be achieved if we were not there. The SIINC program is a good example of that, we only provide incentives to companies for things that they would otherwise not be able to do because of possible tensions between improving profitability and achieving deep impact. In terms of financial additionality, we look at whether our funding is able to catalyze more funding.
How do you see the blended finance space and Aqua for All’s blended finance activities evolving in the future?
We anticipate that much more catalytic funding will be needed to de-risk investments in crucial sectors and build capacity of investors and create awareness around blended finance. At the moment as the field is emerging, new actors are interested but they lack understanding of specific sectors and local markets, so there is a lot of work to be done. As a result, we believe there is a greater room for building newer partnerships and synergies between catalytic funders, NGOs, and impact investors.
We also anticipate that more funds will be set-up in the coming time. In that regard, Aqua for All will be building up on its learnings from its current participations in blended structures before we deploy more capital. We also see that more design stage funding will be required as new innovative structures need to be tested, so we see a role for us there too to provide the required expertise, but also funding and expert support. Finally, we also see that more and more technical assistance will be required to not just prepare the market, but also particularly prepare investees that can benefit from these kinds of blended structures.
We believe there will be much more demand for blended approaches to address development finance challenges and in that regard the work of Convergence and others can be very helpful for new entrants in the field.
From the perspective of a non-profit, what gaps or opportunities do you see in the blended finance space?
In my view, there is a unique opportunity for non-profits operating in the markets to engage with impact investors who may not have the local, frontier markets’ context or experience working with enterprises in specific sectors to bridge the knowledge and expertise gap. When it comes to the blended finance market, I think the funding available at the moment is extremely limited. There is a need to make more catalytic funding available because with limited catalytic funding we can only unlock limited private capital.
Another challenge but also opportunity lies in building our human talent to accelerate the progress on SDGs. There is a limited pool of talent out there that bring both innovative finance and impact management experience and skill sets. To create and navigate new blended finance structures, we will need professionals that have an understanding of risk return profiles for different kinds of investors as well as ambition to set higher impact goals. We believe that there is a greater opportunity ahead of us to build our future talent and that’s why the work of Convergence is so relevant.
