SUSTAINABLE WASH FINANCE SERIES: How Blended Finance Can Help Us Accelerate Progress to SDG6

This story is part of our series on sustainable WASH finance. Susan Davis shares how blended finance can help us accelerate progress towards SDG6.

By Susan Davis

Despite the traffic challenges typical to UN General Assembly week, 15 people gathered in midtown New York for a Funder Collective for More Effective Partnerships event to discuss how blended finance can help us accelerate progress to SDG 6; five joined us online. While the chart above might seem complex, simply put, “blended finance is about using public money to de-risk investments and thus make them more attractive to private money” (Fonseca, 2018).

Representatives of USAID’s Water, Sanitation, and Hygiene Finance (WASH-FIN) program, Catholic Relief Services, and Water1st described their different approaches to a similar topic. Our discussion covered much more than this, but here are the key takeaways:

  • Blended finance can mean different things to different actors. One speaker said he thinks of it more as “braided finance” because different sources of finance must be woven together to achieve goals.
  • In Bangladesh, revolving loans funded by Water1st have led to double the impact of simple grants. Small loans are made to landlords in slum areas to construct small-scale water systems and/or toilets serving multiple families. Some landlords are upgrading poorly functioning systems. Some are providing services where there were previously none.

    This chart shows Water1st partner DSK’s loan repayment rates. They have recovered more than 100% of funds due for all contracts to date. (Contract 1 2006-2008; Contract 2 2007-2008; Contract 3 2009-2013. Contract 4 2014-2018 is still in repayment, but preliminary data suggest the results will be similar to the previous 4 contracts.)

  • To manage risks, financiers and funders must carefully consider the conditions in a country. Good governance in government and water or sanitation service providers is critical. The potential for political involvement can be a lender’s biggest concern. For example, if a new water service provider board comes in, they could decide they will not pay the loan.  Another example of important conditions to consider is Kenya’s interest rate cap.
  • Azure – a partnership between Catholic Relief Services and a Salvadorian social enterprise to provide training and access to capital for water and sanitation services – has been successful in part because of El Salvador’s dollarized economy, reasonable repayment rates, banking law, and a unique culture of paying for water. Replicating this in other countries will be much more challenging.
  • Grant funds for technical support in combination with finance can be used to strengthen governance and become more credit-worthy. For example, efficiency improvements such as installing meters or streamlining billing systems can generate savings that help re-pay debt over the long term. Cost reduction can also help the service provider expand to reach more customers.
  • Credit ratings for individual loans can be cost prohibitive. Kenya has a performance index for all utilities in the country based on operational and financial performance.
  • When trying to get commercial banks to work in an area they do not know well, a funder can share the risk with them. One way to reduce risk of non-payment of loans is to create an intercept so the water service provider’s revenue stream goes directly into bank account that services the debt. Another method is credit enhancement, in which the US Treasury backs up to 50% of the principal of the loan.
  • We can learn from finance facilities – funds that aggregate resources or projects to attract capital. An example is the Kenya Pooled Water Fund.

Thanks again to our presenters and participants for an edifying and useful conversation about an important yet not well understand topic: finance for WASH access and services. Any errors are my interpretation of the discussion and not those of the presenters or participants.

Resources

Azure
USAID’s Water, Sanitation, and Hygiene Finance (WASH-FIN) program
Water1st support of revolving loan program in Bangladesh
No savior: Can blended finance work for WASH?” A summary of blended finance discussions at Stockholm World Water Week 2018
Blended finance: beyond the hype