This blog post is part of a new series that will look at the impact of blended finance, including key opportunities and challenges for achieving, measuring, and disclosing the impact of blended finance transactions. Go to the bottom of the page for other blogs from the series.
There are currently 785 million people globally without access to drinking water and 2 billion people without access to basic sanitation. WaterEquity, the first impact investment manager with an exclusive focus on ending the global water crisis, recently closed its first blended finance fund, WaterCredit Investment Fund 3 (WCIF3). As outlined in our latest case study, the fund uses a market-based approach to provide debt financing to financial institutions, including microfinance institutions, and enterprises that serve the water and sanitation needs families living in poverty.
As stated in our first blog in this series, impact in blended finance transactions can be viewed on two levels:
Impact of the blended finance approach, and
Impact of the transaction’s underlying activities.
Below, we examine how WCIF3 achieves impact at both levels.
The impact of WCIF3’s overall blended finance approach
First, WCIF3 – using blended finance – catalyzes additional investments from global capital markets to invest in the water and sanitation sector. We can measure impact at this level according to the following metrics: mobilization, sustainability, replicability, and additionality.
- Mobilization: To achieve SDG 6 by 2030, the World Bank estimates an additional $114 billion in annual financing will be needed. Through WCIF3, WaterEquity employed risk mitigation tools to crowd in additional forms of capital. This included concessional equity, a first-loss guarantee, and zero- to low- interest loan facilities. As a result, WCIF3 mobilized $50 million in total capital commitments – its largest fund to date.
- Sustainability: To be sustainable, WaterEquity aims to reduce the share of concessional funding over time. Using the tools identified above, WCIF3 mobilized new, more sustainable forms of capital from both traditional philanthropic funders and commerially-oriented investors. This included foundations, looking to move beyond donations and grant capital to more innovative instruments such as program-related investments (PRIs), and commerially-oriented investors looking to make first-time impact investments into the sector, such as Bank of America through the provision of a zero-interest loan.
- Replicability: Through WCIF3, WaterEquity is building a track record that demonstrates the scalability of its underlying business model, which relies on a pipeline of investable and bankable deals in the water and sanitation sector backed by consumer demand. The WaterCredit model, first championed by Water.org and the underlying principles on which WCIF3 is based, has demonstrated a 99% average repayment rate amongst consumers. WCFI3 aims to provide investors with a moderate 3.5% return, demonstrating the investability of the sector.
- Additionality: Historically, the water and sanitation sector has been less aligned with blended finance initiatives (fewer than 10% of blended finance deals captured in the Convergence database are aligned with SDG 6), and faces considerable barriers to private sector investment given its public nature. Through blended finance, WCIF3 is mobilizing additional, first-time impact investors into the water and sanitation space to meet the financing gap.
WCIF3’s impact on its underlying activities
Using the capital catalyzed by blended finance, WCIF3 invests in a portfolio of financial institutions (primarily microfinance institutions), , as well as water and sanitation enterprises, to build their capacity to tap into local market demand. Consumer demand is significant – estimates suggest it to be worth over $18 billion. Moreover, by supporting financial institutions to develop their own affordable loan portfolios, WaterEquity maximizes the effectiveness of each dollar invested. Since reaching its $50 million close in March 2019, WCIF3 has already deployed seven loans to microfinance institutions and one loan to a water and sanitation enterprise in India, supporting 60,000 microloans across India, Indonesia, and Cambodia. This impact is far greater than what can be achieved using traditional philanthropic approaches –water and sanitation loans can reach up to five to ten times as many people compared to traditional grants.
These financial institutions and water and sanitation enterprises provide water and santiation loans, products, or services to families living in poverty. This is crucial given that a lack of affordable financing is the key barrier to accessing safe water and sanitation for families living in poverty, many of whom pay up to 15 times more to purchase water from local water vendors than if they were connected to a utility. Moreover, by serving this market, WaterEquity offers clients the autonomy to decide their own water and sanitation needs. This impact goes beyond accessing water and sanitation; by reducing the considerable time spent finding clean water, clients – disproportionately women and girls – can pursue education and work opportunities, and ultimately lift themselves out of poverty.
Finally, clients purchase water and sanitation products and services from local water and sanitation businesses and contractors, thereby supporting the local market while ensuring the sustainability and affordability of products offered.
The result: more people with access to water and sanitation
Using blended finance, WCIF3 aims to reach 4.6 million people with access to safe water or sanitation – reaching far greater amounts of people than traditional grants would allow.While blended finance should not serve as the only solution to financing SDG 6, WCIF3 demonstrates the additional role it can play in driving market-based solutions, by crowding in critical financing to the sector while building a pipeline of investable opportunities for the private sector.
WaterEquity is currently in the process of launching its next blended finance fund, the Global Access Fund, with a target size of $75 million+, and a mandate to reach millions more men, women, and children with access to safe water or sanitation.
To learn more about WCIF3, read our latest case study.
Other blogs from our impact series: