UNICEF’s Role in Leveraging Financing for WASH in South Asia UNICEF ROSA, 2020
This report was commissioned by the United Nations Children’s Fund (UNICEF) Regional Office for South Asia (ROSA). It seeks to contribute to UNICEF WASH staff’s knowledge on the difference between WASH funding and financing. It highlights different finance streams and financing mechanisms that can be applied to scale-up and accelerate progress towards SDG 6.1 and 6.2.
UNICEF Regional Office South Asia Lainchaur, Kathmandu, Nepal www.unicef.org/rosa © United Nations Children’s Fund (UNICEF) November 2020
Authors: Rolf Luyendijk, Senior WASH Consultant and Therese Dooley, WASH Regional Advisor, UNICEF ROSA.
Reviewers: Nicolas Osbert, WASH Chief, UNICEF India, Tameez Ahmad, WASH Chief, UNICEF Nepal and Kamran Naeem, WASH Specialist, UNICEF Pakistan.
For more information contact: Therese Dooley at [email protected]
Permission is required to reproduce any part of this publication: All images and illustrations used in this publication are intended for informational purposes only and must be used only in reference to this publication and its content. All photos are used for illustrative purposes only. UNICEF photographs are copyrighted and may not be used for an individual’s or organization’s own promotional activities or in any commercial context. The content cannot be digitally altered to change meaning or context.
Cover photo: © UNICEF/Vinay Panjwani
UNICEF’s Role in Leveraging Financing for 2 WASH in South Asia Contents
Executive Summary IV
1. Introduction 1
2. How are WASH services paid for? 3
3. Different forms of funding and financing for WASH investments 7 3.1 Self-supply 7 3.2 Grants 7 3.3 Loans 7 3.4 Equity 10
4. Blended finance structures and other innovative financing concepts 11 4.1 Blended Finance 11 4.2 Considerations for UNICEF WASH to take into account before engaging in blended finance structures 13 4.3 Other innovative financing concepts 15
5. Roles and opportunities for UNICEF WASH programs in South Asia to leverage financing for the WASH sector 17 5.1 Introduction 17 5.2 SWOT for UNICEF-WASH to engage in innovative financing 17 5.3 Roles and opportunities 18 5.4 Applicability of innovative financing opportunities for UNICEF in South Asia 23
6. Mobilizing Finance for WASH – Getting the Foundations Right 25
7. Way Forward 27
End Notes 28
UNICEF’s Role in Leveraging Financing for WASH in South Asia 3 Executive Summary
One of the programming approaches under The paper subscribes to the notion that ODA, the UNICEF WASH Strategy 2016 -2030 is to including grants and concessional financing should leverage public and private financing for scaled- be targeted to the poor and marginalized who are up, sustainable WASH programs. For most, if not unlikely to benefit from commercially financed all UNICEF WASH Staff, this is unfamiliar terrain. investments in WASH. UNICEF WASH staff typically have a background in civil-, sanitary- or environmental engineering, public We argue that blended finance structures that health, or a related discipline, but not in economics hold real promise for UNICEF-WASH are the ones or international financing. Whereas we know that whereby UNICEF provides technical assistance, traditional development finance known as Official either in the design stage or during implementation Development Aid (ODA) combined with out-of- A SWOT analysis shows that UNICEF’s pocket expenditures (self-finance) and remittances comparative advantage lies in leveraging will fall far short of the US$ 18.5 billion/year to meet concessional financing from multi-lateral the SDG water, sanitation and hygiene targets 6.1 Development Banks (MDBs) in South Asia. This and 6.2 in South Asia, most UNICEF WASH staff holds most promise to leverage an increased will find it difficult where and how to start with share of ODA for SDGs 6.1 and 6.2 and direct that leveraging public and private financing for scaled-up, ODA to reach the poor and marginalized. Through sustainable WASH programs. identifying and feeding the pipeline of projects for This paper is an attempt to bridge the knowledge the MDBs and the provision of technical assistance gap of UNICEF WASH Staff, about the difference to both governments and the MDBs on the design between funding and financing, about different and implementation of concessional loans, UNICEF finance streams and financing mechanisms that will also be able to secure funding to maintain a can be applied to scale-up and accelerate progress relevant WASH presence throughout South Asia. towards SDG 6.1 and 6.2. The objective is to This conclusion has gained in strength since the empower UNICEF WASH professionals to engage in outbreak of COVID19 in early 2020, which has discussions on innovative financing for WASH with triggered a massive response by the MDBs for government, development partners, WASH utilities, additional investments in WASH and particularly the private sector and financing institutions and hygiene and Infection Prevention and Control (IPC). make an informed decision about where best to The paper further identifies output-based aid focus UNICEF’s leveraging efforts. approaches, micro-financing and various private The paper summarizes and explains in layman’s sector investment opportunities whereby UNICEF terms what the main funding and financing can play a catalytic role in introducing and scaling mechanism are to finance WASH services and proven successful innovative initiatives in water explores in what specific context these hold most and sanitation that provide privately-operated promise to be applied. services to the poor.
UNICEF’s Role in Leveraging Financing for iv WASH in South Asia 1 Introduction
One of the programming approaches under The steps taken in this document to achieve this the UNICEF WASH Strategy 2016 -2030 is to objective include the following: leverage public and private financing for scaled- up, sustainable WASH programs. This paper has List and explain the most-commonly used been prepared to inform UNICEF ROSA WASH funding and financing streams and mechanisms staff about the different finance streams and for investments in WASH financing mechanisms that can be applied to scale- Demystify and explain some of the financing up and accelerate progress towards SDG 6.1 and terminology widely used in the financing world 6.2 on Water and Sanitation. The objective is to Explore different roles for, and provide practical empower UNICEF WASH professionals to engage in guidance to UNICEF WASH to leverage new and discussions on innovative financing for WASH with existing financing for WASH government, development partners, WASH utilities, the private sector and financing institutions and Hutton and Varughese (2016) have estimated that make an informed decision about where best to the cost for meeting SDG 6.1 and 6.2 in South focus UNICEF’s leveraging efforts. Asia1 amount to an annual investment of US$ 18.5
Figure 1 : Annual requirements (2016 -2030) to meet basic and safely managed WASH by 2030 in South Asia
Expenditures ($ million)
Annual requirements to meet basic WASH by 2030 Annual requirements to meet safely managed WASH by 2030
6,342
4,563 4,073 3,568
1,952 1,777 990 234
Rural Urban Rural Urban
Drinking water Sanitation and Hygiene
Source: Hutton and Varughese, 2016
1 South Asia comprised of Afghanistan, Bangladesh, Bhutan, India, Iran, Maldives, Nepal, Pakistan, and Sri Lanka
UNICEF’s Role in Leveraging Financing for WASH in South Asia 1 billion over the period 2016-2030. For meeting basic However, the technical assistance role that UNICEF WASH services by 2030 the annual requirement is programs around the world provide to governments at US$ 5.0 billion. The authors estimate that this is and UNICEF’s capacity in monitoring and tracking of roughly three times the average annual investment WASH impact and outcomes are very useful roles in South Asia during the MDG period of 2000 – in some blended financing models, discussed in 2015. These are daunting figures, which do not yet chapter 4 of this paper. give the whole picture as they do not include the significant operating and maintenance costs that UNICEF WASH staff is familiar with grants and the infrastructure requires. loans, with self-supply and self-finance/out-of- pocket expenditures, and with micro-financing, but Current investments including the traditional how many can explain bonds, concessional loans sources of ODA are by far not enough to cover or blended financing structures and recount the these extra investments. There is broad consensus different forms that blended financing can take? that commercial or private capital, preferably local And of those, who can explain and exploit the private capital, should be leveraged to invest in potential of these different forms for scaling-up meeting the SDGs. Private investors, however, WASH services for the poor? Who can explain what expect to have financial returns on their investment the different financing opportunities are in regular that match market expectations and contrary to urban areas versus informal urban areas and what grants, require full pay-back of any loans provided. the commercial financing opportunities are to reach the marginalized in remote rural areas? Getting better results from existing financial flows to the sector will be key to attract additional funding With this paper we aim to answer some of and to mobilize repayable finance. WASH services these questions and empower WASH Staff to can be run more efficiently to reduce costs and recognize opportunities as well as limitations and, ensuring long-term maintenance of assets. Non- explore innovative financing options for increased revenue water can be reduced, and tariffs can be investments in WASH. This paper draws on the increased. Discussion Paper: How Can the Financing Gap be Filled prepared by the World Bank and UNICEF for While increasing efficiencies in the provision of the March 2017, SWA Finance Minister’s meeting WASH services is extremely important, how to and the slide sessions of the 2018 UNICEF WASH do that is beyond the scope of this paper and the Financing Course, prepared by Oxford Policy reader is referred to the UNICEF WASH Strategy Management and the OECD 2019 publication and SWA enabling environment framework and Making blended financing work for water and building blocks for WASH sector reform and sanitation. The information is supplemented with development. other sources referenced in the end notes. UNICEF/Syed Altaf Qadri UNICEF/Syed © ©
UNICEF’s Role in Leveraging Financing for 2 WASH in South Asia 2 How are WASH services paid for?
UNICEF WASH Staff is increasingly familiar with the Taxes refer to funds originating from domestic 3Ts: Tariffs, Taxes and, Transfers which represent taxes that are channeled to the sector by the the different sources of funding that pay for WASH central, regional and local governments and, services Transfers refer to grants from international Tariffs are funds contributed by users of WASH donors and charitable foundations and include part of the soft loans from the Multi-lateral services and include their own investments into Development Banks (MDBs) that are used to their water supply and sanitation services as provide WASH services. Transfers also include well as the monthly payments of their water bill. remittances2 from migrant workers and the diaspora
Figure 2 : Sources of financing to the WASH Sector 2010 - 2015
Domestic and public funding are the largest sources of financing to the water and sanitation sector
0.4%
7.1%
Domestic- and public funding Bi-lateral/multilateral funding 29.9% Private investment in public private partnership projects Foundations, private equity and venture capital 62.6% funds
Source: Dahlberg analysis in IFC, 2015
2. In 2019, global remittances to low- and middle-income countries amounted to a record US$ 554 billion and are projected to fall to US$ 445 billion in 2020, due to the COVID19 outbreak. For South Asia remittances for 2020 are projected to amount to US$109 billion down 22% from US$140 billion in 2019. Source: World Bank (2020).
UNICEF’s Role in Leveraging Financing for WASH in South Asia 3 WASH services globally are largely self-financed Operating expenditures are incurred during (tariffs) or publicly funded (taxes) (62.6%) and for regular business, such as general and almost 30% dependent on bi-/multilateral financing administrative expenses, research and (transfers). Only little over 7% is financed with development, salaries, and the cost of goods private or commercial capital. This illustrates the sold largely public nature of WASH service provision. Expenditures on regular maintenance and repairs are critical in maintaining the serviceability of Most WASH staff are familiar with the expenditure systems and usually include cost for spareparts, terms capital expenditures (CAPEX) and operational staff and servicing expenditures (OPEX) and know about the importance of regular servicing and maintenance or To run a sustainable water and sanitation service capital maintenance expenditures (CAPMANEX). that eventually meets the ambitions of the SDGs of safely managed services, transfers need to Capital expenditures include the purchase of be phased out and taxes and tariffs need to be fixed assets, such as new buildings or business increased. For capital investments to extend equipment, upgrades to existing facilities services to new users and for upgrading of aging A capital expenditure is also incurred when a infrastructure governments and utility companies business uses collateral or takes on debt to buy can look for commercial financing to upfront a new asset or add value to an existing asset
Figure 3 : Toward Sustainable Financing for Water and Sanitation
1. Starting point 2. Cost savings from 3. Mobilize domestic 4. Mobilize financing 5. Services financed Define water SDG efficiency revenue source from multiple sustainably going forward strategy. Strategic Lower Opex and Raise tariffs and user sources Water SDG achieved financial planning. maintenance costs, charges. Mobilize Leverage commercial Capex efficiencies domestic taxes and financial with bleeding catalytic loans and grants
Financial Cost savings costs Financing gap Financial Financial Financial Capex costs Financing costs Financing Financial Private Private For gap gap costs finance costs finance ongoing capex Capex Capex needs Capex Capex
Tariffs Concesional Transfers Tariffs Transfers Concesional recover a OPEX and large part Tariffs Tariffs maintnance OPEX and OPEX and OPEX and of the costs maintnance Tariffs OPEX and Tariffs maintnance maintnance maintnance Taxes Taxes Taxes Taxes Targeted Taxes taxes only
Costs Funding
Source: World Bank (2017) Note: CAPEX = capital expenditures; OPEX = operating expenditures; SDG = Sustainable Development Goal.
UNICEF’s Role in Leveraging Financing for 4 WASH in South Asia the often-high initial investment cost. The cost 4. Mobilize financing from multiple sources, associated with drawing on commercial financing attracting private capital from the commercial will eventually also need to be covered by tariffs and market is considered the way forward to close the taxes. US$ 126 billion annual global financing gap. Grants and concessional financing can strategically be used In figure 3, the World Bank illustrated this effectively to attract commercial capital through structures with five scenarios known as blended financing. (see chapter 4). 1. Starting point Currently the 3Ts don’t fully 5. Services financed sustainably going forward cover the costs of meeting the SDGs. In addition would be paid fully by a mix of taxes, tariffs and to funding CAPEX investments, transfers (grants private financing. and concessional financing by the MDBs) still pay for part of the OPEX and maintenance. Part of There still is long way to go before WASH services the transfer come in the form of soft-loans from are financed sustainably as is illustrated by the the MDBs which need to be repaid – hence the findings of the International Benchmarking Network expenditures “financial costs” in the cost columns for Water and Sanitation Utilities (IB-NET at https:// of Figure 2. The financing gap to pay for CAPEX to www.ib-net.org/) below: extend services is considerable.
2. Cost savings from efficiency gains including IB-NET at the World Bank, based on a reductions in non-revenue water could lower the study of 605 water utility companies in overall expenses, but still leave a considerable financing gap. developing countries, found that only 15% of the water supply utilities could 3. Mobilize domestic revenue sources by raising fully pay for the existing OPEX from tariffs, asking for higher contributions from users tariffs and taxes and even generate and allocating a higher percentage of domestic a small amount of surplus income. revenues (taxes) can likely cover OPEX and 85% of the utilities relied on additional maintenance part of CAPEX. Transfers, however, will funding from transfers to fund the still fall short of the total CAPEX required. financing gap. UNICEF/ Vinay UNICEF/ Vinay Panjwani © ©
UNICEF’s Role in Leveraging Financing for WASH in South Asia 5 There is broad consensus among development As indicated before, private investors need their professionals and economists alike, that private investments paid back plus interest. This means that financing, also known as commercial- or institutional WASH services either need to be making a profit financing is required to close the current financing from which these loans and investments can be gap in WASH – simply because traditional ODA paid back or that the value of the services invested flows, including soft loans, plus remittances and in, appreciates. Direct profits in WASH generally domestic revenues (tax income) are by far not come from higher tariffs and contributions from sufficient to meet the SGDs. the users. Indirect profits can come in the form of better health outcomes, fewer health expenditures, fewer lost productive hours, but also from the fact Private-, commercial-, or institutional that neighborhoods are cleaner, better serviced financing are terms that are used and thus more attractive for other investments. interchangeably throughout this Depending on what kind of profits different private document. They refer to institutions investors are seeking, different financing modalities like commercial banks, insurance can be applied. Before we explore these modalities, we list the most common forms of funding and companies, pension funds and other financing for WASH investments in the next chapter. financial institutions that are usually seeking market-rate returns on their investments. They are found in almost any country and many have capital in largely local currency for which they are seeking local investment opportunities. UNICEF/ Zishaan Akbar Latif UNICEF/ Zishaan © ©
UNICEF’s Role in Leveraging Financing for 6 WASH in South Asia 3 Different forms of funding and financing for WASH investments
As figure 3 shows, the costs of running WASH NGOs, philanthropic foundations, corporations, or services are covered by the 3Ts, (taxes, tariffs and individuals. Government subsidies to households transfers), supplemented by private (commercial) either as cash or vouchers are also grants. Grants financing. We talk about funding when we ask who are considered funding and are categorized as pays for what? Tariffs and taxes are categorized as transfers. funding, like grants and other contributions that don’t need to be paid back of require an interest 3.3 Loans payment. We talk about financing when we raise Taking out a loan is a form of taking on debt. It is cash to pay for investments. This cash ultimately the borrowing of cash that needs to be repaid in full must be repaid in one form or another often with usually with a monthly or yearly interest payments. interest. The higher the risk that a borrower is unable to pay back the loan (defaults on the loan) the higher In addition to tariffs and taxes we distinguish four the interest rate. This principle is called the risk/ types of funding/financing streams: self-supply, return trade-off. Some institutions that provide grants, loans and equity. loans require the borrower to provide collateral against the risk of defaulting in addition to charging 3.1 Self-supply interest. The collateral will become the property Investments by households, either in cash, of the lender if the borrower cannot pay back the materials or labor usually is the most common loan. For companies or governments to obtain a and largest source of funding in rural sanitation loan (or issue a bond – see under 3.3.4 Bonds), and rural water supply and in many informal urban the lender often looks at the credit rating or credit areas, where families construct their own toilets score of the borrowing party. Such rating or score and invest in their own water supply or piped is an indication of the risk that the borrower will not connections. It is estimated that in developing be able to pay back the loan. A triple AAA rating is countries households themselves invest more in the best score associated with the lowest risk – a water and sanitation services than governments or C-rating or No-Rating presents considerable risk and donor agencies (Trémolet, 2012). These investments thus affects the interest rate charged and the type are considered funding and are counted under of investors interested in taking on that level of risk. the heading of tariffs – even when they do not There are many forms of loans, small and large with represent recurrent costs – like a monthly water bill. different risk levels. These are discussed in the next paragraphs. (for a guide explaining credit ratings 3.2 Grants see: Guide to Credit Rating Essentials). The funding that UNICEF receives is almost always in the form of a grant. Grants are gifts in the form of 3.3.1 Micro-financing or micro-credit funds or products given by one party to another. The schemes recipient does not have to repay the grant, nor pay Micro-financing includes the provision of small loans interest on the grant. Grants are typically made by (or credit) to individuals, cooperatives or small- and bi-lateral governments, international organizations, medium-sized enterprises (SMEs). One of the
UNICEF’s Role in Leveraging Financing for WASH in South Asia 7 first and most-well known large micro-financing the same time, it encouraged MFIs to cap their own operations is the Grameen Bank in Bangladesh. profit margins at 10-12%. The high interest rates Grameen Bank started with providing small loans to of MFIs are largely due to the high overhead costs people who could not obtain a loan from a regular for administering the relatively small loans and the bank because they were either considered too close contacts often maintained by the MFIs with high risk for defaulting on their loan and could not their clients. put up any collateral or who were asking for small loan amounts which were well below the usual Over the past 15 years, Water.org has been highly loans that commercial banks would issue. By 2020, successful in providing micro-credit to individual Grameen Bank has provided over US$ 24 billion in households and SMEs, reaching almost 30 collateral-free loans to over 9 million people. million people in 13 countries including India and Bangladesh. They have used their grant funding to Nowadays there are numerous micro-financing charge lower interest rates for their microfinancing institutions (MFIs) around the world, providing schemes and on occasion have provided interest loans to individuals, cooperatives and SMEs. Loans free loans to those at the absolute bottom of the are usually of a limited duration varying from a pyramid (BoP). couple of months to a few years at most. Default rates of MFI loans are usually quite small at <5% In recent years, in Bangladesh micro-financing has only. Interest rates however can be considerable increasingly been used for households to finance compared to commercial interest rates, varying sanitation often in combination with financing small- from 2% - 4% per month, with a global average scale producers of latrines. It has been challenging of 35% per year, one study across 71 MFIs, found though to convince some MFIs to include loans in 2008. Recent data from water.org for not-for- for investments in sanitation, as they claim that profit MFIs report rates varying from 15% to 28% these are not productive and don’t generate income annually. The Reserve Bank of India, in 2014, from which the household will be able to pay back removed the cap of 26% for MFI interest rates to the loan. This is a misconception and a barrier to adjust for higher commercial borrowing costs. At overcome when engaging MFIs to offer loans
Despite the high interest rates, micro-credit schemes are popular among lower income populations as often they are the only mechanism through which they can access credit. For the poorest-of-the-poor, micro-financing is often still out of reach as they will not have the ability to save enough to pay back any loans. They will continue to rely on grants and subsidies.
Figure 4 : The Poor are not equally poor
POVERTY LINE
People that previously depended on Where microfinace charity and/or government assistance can work who are now thanks to a loan, paying for their own water and sanitation Will always need charity/subsidy solutions
Source: water.org in SWA (2020)
UNICEF’s Role in Leveraging Financing for 8 WASH in South Asia for investments in sanitation – as the household 3.3.3 Commercial bank loans savings from decreased health expenditures and Banks offer loans but are notoriously risk averse. fewer days absent from work – quickly add up to They usually require collateral, a steady source of repay for the loan. income, a good credit history or any combination thereof to extend a loan for which they still charge a As the name already indicates micro-financing is a considerable interest. Few households at the BOP form of financing whereby the funds are used by will have access to bank loans. Utility companies households to make capital investments in water and municipalities however do have access to supply or sanitation. The fact that the loan needs to bank Loans – provided that their credit history or be repaid by the household makes them a form of credit rating is sufficient. Yet, they more often avail financing and not funding. themselves of other type of loans – like bonds or 3.3.2 Vendor or supplier finance concessional financing by MDBs – which usually carry lower interest payments. Vendor financing describes the lending of money by a vendor to a customer who uses that capital to 3.3.4 Bonds purchase that specific vendor’s product or service. Bond are a form of loans, issued by the borrower to Interest rates are usually hidden in the total product raise large scale funding. The issuer pays the bond cost. The customer often pays a small initial amount holder a fixed annual interest and at the end of the to the vendor and subsequently makes repayments duration (maturity) the issuer pays back the bond to the seller over time. If customers can pay for the holder the full amount of the bond. Bonds typically construction costs of their latrine in installments, a have a long duration of 5 to 30 years and they are latrine producer is likely to sell more latrines. This tradeable on the financial market. The fixed interest form of financing is widely used for a variety of rate on a bond gives investors the confidence of a products including cellphones and cars, but also in steady annual return on their investment. If interest agriculture where payments for seeds and fertilizer rates in the markets fluctuate, the price of the often only can be made after harvesting a crop. bond fluctuates as well, making them interesting
Figure 5 : Types of private financing depending on the size of borrowers and size of financial needs
Size of financing needs
Large
Bonds
Medium Commercial Bank Loans
Vendor / Supplier Finance Microfinance Small
Households SSIPS Communities Medium sized Utilities/ entrepreneurs Municipalities
Size of borrowers
Source: World Bank. Note: SSIPs = small-scale independent providers.
UNICEF’s Role in Leveraging Financing for WASH in South Asia 9 commodities in the financial markets. Bonds funding WASH infrastructure. They are foremost usually get assigned a credit rating, indicating the instruments that ensure government cash-flows. risk that the issuer may default on repaying the bond at the end of its maturity date. Bonds are 3.4 Equity issued by governments or government entities, Making an equity investment into a WASH service like municipalities, or larger utility companies. They is like buying a stake or a share in a company. An are useful instruments to raise funds in the local equity investor takes full or part ownership of the market, thus reducing the risk of exchange rate services or company in exchange for cash. Equity fluctuations that come with international bonds investments in WASH are often observed for paid for in foreign currency. They are interesting for urban water supply utilities or waste management the issuers who generally have many years before services. Examples of large global water companies the bond needs to be repaid and they benefit from are Veolia, Suez, Severn Trent and Thames Water inflation, which in fact make repaying the bond after who on occasion buy a stake in a municipal water a 20- or 30-year period relatively cheap. The fact supply utility in the developing world. These that bonds are tradable makes them interesting companies apply their expertise to increase for institutional investors like insurance companies efficiencies, expand and improve the services and and pension funds – who want to diversify their thus raise the profitability of the utility. With the investment portfolios with low and higher risk improved efficiency and revenues, their investment investments. appreciates in value.
Equity investments are often combined with In the next chapter we discuss Green Bonds, Social- international guarantees and other financing and Development Impact Bonds, which are financial instruments to lower the risk of the investment. constructs rather than bonds as described above. Such constructs are examples of blended financing 3.3.5 Concessional loans or concessional discussed in the next chapter. financing MDBs like the World Bank, Asian Development Returns on investment in WASH, Bank, Asian Infrastructure Investment Bank, and Education and Health Care may not others provide concessional loans also known as come in the form of direct financial concessional financing or soft loans. To qualify as a returns to those investing in these concessional loan, at least 25% of the loan must be sectors. The returns of a well-educated in the form of a grant. Concessional loans usually and healthy population come in a carry a below-market interest rate and often have multitude of ways – as productive, a longer grace period for when they need to be social and, creative citizens, producers, repaid. and consumers who in their own MDB loans are most often made to governments way will add to a country’s economy, or government entities (sovereign entities), usually development and prosperity. The backed by the Ministry of Finance. Some MDB returns on investment into basic WASH loans are available to non-government or non- services of US$ 5 – 9 per US$ 1 sovereign entities like utility companies or financial invested have thus been calculated. institutions. Concessional loans are considered These returns however, benefit society transfers because of the favorable conditions under as a whole and are therefore difficult which they are provided. to return as direct profit to investors. Governments taking on debt to fund 3.3.6 Non-concessional loans social sector investments, including Non-concessional loans are those available from WASH will eventually pay back their the IMF to be used by governments as a form of bonds and concessional loans from tax- temporary budget support. These non-concessional revenues generated through increased loans usually also carry favorable below-market economic activities because of a rate terms but are not the typical instruments for healthier and well-educated population.
UNICEF’s Role in Leveraging Financing for 10 WASH in South Asia 4 Blended finance structures and other innovative financing concepts
Blended financing is form of innovative financing, There are various ways to use grants and but not all innovative financing qualifies as blended concessional financing to lower the risk for financing. investors and thus attract or “crowd-in” private- or commercial financing for development activities. 4.1 Blended Finance Blended financing typically has three elements: The OECD defines blended finance as the strategic use of development finance to mobilize additional Leverage: Development finance, public and [read: commercial] finance towards sustainable philanthropic funds are used to attract private or development in developing countries (OECD, 2019). It commercial capital has also been described more specific as the use of Impact: Investments aim to achieve social and/ grants and concessional loans to de-risk investments or economic outcomes and make them more attractive to commercial financing (adapted from Fonseca et.al., 2019). Returns: Private investments expect to have financial returns which match with market This chapter explains the concept of blended expectations financing and lists some of the most frequently used elements and structures.
Figure 6 : What is blended finance?
Return on investment PRIVATE at market rate CAPITAL
CLEAN WATER BLENDED AND SANITATION Leverage FINANCE STRUCTURES
DEVELOPMENT Impact FUNDING Grants or (Public and philanthropic concessional loans funders)
UNICEF’s Role in Leveraging Financing for WASH in South Asia 11 transactions for development according to the Blended finance is a structuring OECD. In development financing the guarantee approach that allows organizations with fee is often waived and effectively absorbed by the different objectives to invest alongside party providing the guarantee. Swedish Sida has a each other while achieving their own guarantee fund backed by the Swedish Government objectives (whether financial return, that issues guarantees to small and medium social impact, or a blend of both). The enterprises (SMEs) to attract commercial financing. main investment barriers for private If one of these enterprises fails to live up to its investors addressed by blended finance expectation, the Swedish Government reimburses are (i) high perceived and real risk and the commercial financer for an agreed upon (ii) poor returns for the risk relative percentage of their losses incurred. USAID, DfID, DGIS, the European Union and many others have to comparable investments. Blended similar guarantee schemes to lower the investment finance creates investable opportunities risk for commercial investors into development in developing countries which leads activities. to more development impact (from: https://www.convergence.finance/ For large investments, the World Bank hosts blended-finance) the Multilateral Investment Guarantee Agency (MIGA) that provides guarantees to investors to sovereign states, sub-sovereign state entities, and For specific examples of blended financing state-owned enterprises. Guarantees provided by structures discussed in this chapter, please go MIGA hold great promise for international utility to the Policy Highlights of the OECD publication: companies that are seeking to make an equity OECD (2019) Making-Blended-Finance-Work-for- investment into utility companies in the developing Water-and-Sanitation and SWA (2020), Water and world – considerably lowering their investment risk. Sanitation – How to make public investments work, A Handbook for Finance Ministers.
The following paragraphs explain some of MIGA can provide guarantees the elements most used in blended financing (insurance) against: structures. - Currency inconvertibility and transfer restrictions 4.1.1 Guarantees - Expropriation Like a fire insurance policy where an insurance - War, terrorism and, civil disturbance premium is paid to cover against the risk of fire, - Breach of contract there are financial instruments that cover an - Non-honoring of financial obligations investor against the risk of not making enough www.miga.org profit from their investment or the risk of even losing part of its investment. In the financial world such insurances are called guarantees, and like In recent years the use of guarantees has been an insurance premium, the guarantee has a cost successful in unlocking domestic financing often or guarantee fee. The party that is providing the achieving great leverage of several times their guarantee in fact takes on the role of an insurer. value. When one of the loans it has guaranteed results in a non-payment or default – than the guarantor pays 4.1.2 Use of concessional capital to lower investment risk up to the agreed percentage of the losses incurred. The borrower and lender still need to do due If two parties pool their investments, they each diligence in assessing the viability and bankability share part of the risk. When one party requires only of the proposed project, and the guarantor too will partial payback of their investment as is often the assess the risk of the investment to determine case with concessional financing from the MDBs the size of its guarantee. Guarantees are the most and on top of that requires a below-market rate widely used instruments in blended financing return on their investment, then the investment risk
UNICEF’s Role in Leveraging Financing for 12 WASH in South Asia for the other party is reduced. After guarantees, the 4.1.5 Ringfencing use of concessional capital or transfers from either Ringfencing is construct whereby e.g. a utility public or philanthropic investors against below- company guarantees that a fixed part of its income market terms is the most common form of blended from tariffs will not be spent on anything else, financing to lower the overall cost of capital and to but to pay the interest e.g. on a loan. Typically, the provide an additional layer of protection to private utility company will be required to open an escrow investors account, where it deposits part of its revenues. This is another mechanism to reduce the risk for a 4.1.3 Use of a grant-funded technical assistance to increase efficiency and private investor that its loans will not be re-paid. accountability and articulate the develop- 4.1.6 Public-Private Partnerships ment impact Public-Private-Partnerships can take on many Lowering operational risk by increasing quality, forms and can also be part of a blended financing accountability and efficiency can be achieved construct whereby the private party provides through system strengthening, capacity technical assistance in addition to making an equity development, improving M&E and improving investment in a public utility. Whereas this is a overall management capacities. Influencing policies common form of financing of public WASH utilities and regulations too can help in strengthening the in OECD member countries, it holds great promise commercial viability of a WASH service. Grant- for many countries in the developing world, where funded technical assistance in these areas can there are already several successful examples in give private investors the confidence that their urban water supply; see: OECD Making-Blended- investments will be utilized well and that the Finance-Work-for-Water-and-Sanitation-Policy- service will generate sufficient revenues from Highlights.pdf which it can meet its financial obligations, including paying back any loans. A blended financing 4.2 Considerations for UNICEF WASH agreement with a technical assistance component to take into account before engaging in is particularly interesting for impact investors and blended finance structures MDBs who will gain confidence from the fact Formulating and structuring a blended financing that a third-party is supporting the WASH services agreement usually requires the expertise in articulating and measuring its impact and in of financial- and legal institutions to act as strengthening the accountability systems for the intermediaries. Both the OECD and the World implementation of their impact-bond (see 4.7) or Bank acknowledge that the transaction costs concessional loan-funded program. for innovative financing agreements are high, often too high, and that the process is time- 4.1.4 Preparation or design stage grants consuming. There are many organizations and Like the construct of grant-funded technical institutions better placed than UNICEF to take assistance, this form of blended finance is popular the lead in facilitating such transactions. In the for the formulation of an impact bond- or loan- innovative financing models presented in some funded project. Grant funding is used to work of the literature these institutions are usually with government or WASH services in preparing listed as intermediaries. The intermediaries can a project design or proposal, including the theory be commercial banks (who usually charge hefty of change, M&E framework, BOQs, social- or fees for their services) or specialized not-for profit environmental impact assessments or any other organizations, who serve as a broker for formulating requirements that the lenders may require. Often and closing the innovative financing agreements. the MDBs or private investors do not have the These intermediaries also prepare the legal and required expertise or staff to collaborate with financial agreements in accordance with local government on working out the details of a laws and regulations. Where bi-lateral donors have proposal. A good preparation and project proposal explored blended financing under their development lower the implementation risk for the investors. cooperation, they usually have engaged dedicated With a relatively small amount of grant funding, a financial experts or similar intermediaries. large loan can thus be leveraged. E.g. DGIS, the Dutch Directorate General for
UNICEF’s Role in Leveraging Financing for WASH in South Asia 13 Development Cooperation co-funds the FMO – a Since blended financing constructs always are Dutch public-private entrepreneurial development seeking some return on investment, an important bank. Through the FMO, DGIS is engaged with take-home message from this graph relates to many innovative financing transactions in different those providers on the far end of the x-axis, those sectors, including WASH. without a credit rating from whom little to no direct financial return can be expected. These often WASH, however, is not widely considered an include decentralized or community-based utilities attractive sector for commercial financing. Unlike and informal providers who serve the poorer the energy-, agriculture- or financial sector, which segments of society – sometimes with some usually generate direct profits, WASH like education revenue collection, sometimes without any, but and health care is considered to draw from, rather most often barely enough revenue or income to than to add to a government’s budget – as these meet operating expenditures. do not generate direct profits. Ownership of WASH infrastructure is often unclear, tariff-setting is often These populations and institutions will continue politicized and many government-run – as well as to rely on micro-financing, concessional financing, (semi-)privately-owned utility companies are poorly grant funding and public financing (government’s managed, with high proportions of non-revenue investments from taxes). Commercial financing is water and long-overdue investments in operation, largely out of reach for these groups. maintenance and replacement of infrastructure. ODI (2019), in its report on Blended Finance in the Gietema et. al. (2017) depicted blended financing Poorest Countries cautions that the use of ODA opportunities of different financial instruments for blended financing arrangements may actually for utilities and service providers with different “steer ODA away from low-income countries, as it credit scores and project funding sizes for which is easier to mobilize private finance in more stable financing is sought. In the graph below, the striped and mature markets”. It further cautions about the overlapping sections show the opportunities for risk that mobilization targets, using ODA as subsidy blended financing.
Figure 7 : A simplified framework for discussing blended financing
1.000.000.000 Bond financing Project finance 100.000.000
10.000.000 Public Finance or Finance Gap? 1.000.000 Commerical bank financing 100.000 Development Cooperation Funds 10.000 (incl. concessional loans) 1.000
100 Micro loans 10
Project size, USD, log scale USD, size, Project 1 AAA BB/BBB Medium risk No credit rating Low risk Utilities High risk Utilities Decentralised providers Decentralised providers No formal providers
Source: Gietema et.al. 2017
UNICEF’s Role in Leveraging Financing for 14 WASH in South Asia to attract private or commercial financing under 4.3.2 Social- or Development Impact blended financing structures may actually crowd- Bonds out or replace commercial financing, reducing the Social- or development impact bonds are a form financial additionality and also shift emphasis away of result-based financing. They are interesting from prioritizing development impact. (see: ODI to investors who are seeking a social or a (2019), Blended Finance in the Poorest Countries – development return on their investment. Some The need for a better approach) of these investors do not require interest on their loans, while others ask for a below-market return in 4.3 Other innovative financing concepts addition to the social or development return. Impact There are other financing concepts that have bonds usually have an investor, an implementer, and crowded-in commercial or institutional financing an outcome payer and often have an independent that have successfully been used for development evaluator that verifies and certifies the achieved financing. Although these may not necessarily meet outcomes. The risk of not achieving the full outcome all the criteria for blended finance, they usually can be shared between the three main parties or share the interest in achieving social or economic fully absorbed by one or two. If the pre-determined outcomes. Some may not require their investment results are achieved, the outcome payer often pays to be paid back, while others seek only a below- a premium on top of the full initial investment. This market return or will consider the social outcome way the investor receives a return on its investment as the return on their investment. We have listed a when all the results are achieved. Typical investors few common examples which we believe may be of in Development Impact Bonds are foundations or bi- interest to UNICEF WASH Staff. lateral donors. The investors risk losing their entire investment and with it forgo their profit when the 4.3.1 Payment for results, output-based- project does not deliver the agreed upon results. aid or results-based financing The difference between a Social Impact Bond and Results-based financing approaches are forms a Development Impact Bond lies in the outcome of financing that makes funding or payments payer which usually is the government for a Social contingent on the verification of predetermined Impact Bond and a development funder (grant results. The approaches were adopted in funder) for a Development Impact Bond. development to make the delivery of aid more efficient and move from funding inputs to funding 4.3.3 Green Bonds and Climate Bonds outputs and outcomes. There are various modalities Green bonds and climate bonds are innovative whereby the risk is usually shared between the financial instruments where the proceeds are implementers and the funders, but there are also invested exclusively in green projects that generate modalities where the risk is predominantly on the climate or other environmental benefits, for side of the implementer. When this is the case, the example in renewable energy, energy efficiency, payment for the results will likely have a premium sustainable waste management, sustainable land based on which the implementer can make a profit. use, biodiversity, clean transportation and clean Results-based financing is increasingly popular for water. Green bonds are usually best suited to the provision of health services by private-sector large-scale projects such as sustainable water parties or NGOs. Key to this form of financing management, and renewable energy, which is the monitoring of the exact results for which generate cash flows over a long investment horizon. payment will be made. Often an independent entity Like regular bonds, this is financing that needs to is contracted by the funder to verify the reported be repaid over time usually with a below-market results. (See further: RBFA -What are they?) and interest rate. the SWA Handbook for Finance Ministers (SWA 2020) with RBFA examples from Indonesia and 4.3.4 Pooled funds Philippines). Pooled funds bring financing of different investors together to reduce the investment risk of each individual investor. They usually:
UNICEF’s Role in Leveraging Financing for WASH in South Asia 15 Figure 8 : Impact Bond Structure
Outcome payer Identifies benficiaries, Investment defines payable outcome, +% interest pays for achieved outcomes
Out comes achieved
Investor Beneficiaries Provides upfront funding to the service provider, runs the investment risk Independent Evaluator Verifies and certifies achieved outcomes
Implementer Works with the Investment beneficiaries to achieve outcome
allow for spreading the funds across multiple The Dutch Water Bank is an example of a pooled investments fund owned for 81% by the 21 Water Boards in The Netherlands. This Bank provide loans to its share the risk across all investors members for water-related investments and raises allow for different financial constructs to be part of its capital on the commercial capital market. combined drawing on the same pool of funding UNICEF/Habib Haque © ©
UNICEF’s Role in Leveraging Financing for 16 WASH in South Asia 5 Roles and opportunities for UNICEF WASH programs in South Asia to leverage financing for the WASH sector
5.1 Introduction 5.2 SWOT for UNICEF-WASH to engage in UNICEF does not have the financial and legal innovative financing expertise to broker innovative financing transactions To determine how best to position UNICEF-WASH on its own and, like the bi-lateral donors, therefore for engaging with different ways of leveraging better engages intermediaries for this or leave financing for the sector we thought it useful to this work to other partners. UNICEF however do a SWOT analysis that helps visualize UNICEF- has many other unique strengths which it can WASHs’ strengths and weaknesses for engaging in use as leverage to engage in innovative financing innovative financing and to list the opportunities and to draw more funding to the WASH sector. The possible threats. following paragraphs explore these strengths and opportunities.
Figure 9 : SWOT Analysis for UNICEF to engage in innovative financing for WASH
Strengths Weaknesses
l Good knowledge and data about the WASH sector l Limited financing expertise
l Trusted partner to government l No programming relationship with MoF
l Convening and advocacy power l Not considered a natural partner for implemen- tation of concessional loans l Mandate to reach the marginalized l Limited experience working with utilities l Experienced strengthening enabling environment l Limited experience working with private sector l Hands-on experience with community-based aproaches l High operating cost
l Ability to pilot, demonstrate and scale
Opportunities Threats
l Interest from MDBs, private sector, bi-laterals and l Inability to cover staff cost without programming Foundations to collaborate budget
l Strong private sector in most of South Asia l The transaction costs for leveraging private or commercial capital are high l Ample promising examples of private sector l CPAP lacks incentives for leverage, so why l WASH initiatives ready to replicate or scale engage? l Corporate support for working with private sector l and engaging in innovative financing Fundraising for UNICEF is not guaranteed when leveraging funds for the sector
UNICEF’s Role in Leveraging Financing for WASH in South Asia 17 From the strengths we see that UNICEF-WASH 5.3 Roles and opportunities is well-placed within the sector to identify both The following paragraphs explore which of the the needs and opportunities for extra investments innovative financing modalities hold most promise in WASH and connect the different parties with for UNICEF WASH programs in South Asia to each other to address the WASH situation of the engage in with the dual objective of leveraging marginalized and vulnerable populations. UNICEF’s additional funding for the sector and raising some excellent knowledge and data about the local funding for UNICEF-WASH that allows UNICEF to situation, its hands-on experience with community- maintain adequate WASH staff levels throughout based approaches combined with its work on the South Asia. different enabling environment components means that UNICEF can speak with authority about priority How much of newly leveraged funds will eventually areas, policy formulation as well as on-the-ground be channeled through UNICEF depends on the implementation strategies. type of financing agreement, the funders and their interests and risk appetites, the type of Having almost exclusively relied on Grant funding programming planned, the national and local UNICEF WASH has limited financing expertise and, context and capacities and the capacity and position in most countries it has no active relationship with of UNICEF in the specific context. It is highly the Ministry of Finance through which we could unlikely that the full amount of innovative financing position UNICEF as a partner in implementing will be channeled through UNICEF. It is more likely concessional financing for WASH. Our expertise that some funding may come to UNICEF depending working with utility companies has largely focused on how UNICEF chooses to position itself in the on service delivery and less on strengthening the arrangement. We identify four possible roles for operational and accountability systems of utilities. UNICEF WASH:
The opportunities for collaboration and exploring Piloting innovative approaches innovative financing for WASH are plenty as all Implementation manager development partners have realized the importance of leveraging commercial financing to meet the Catalyst to investment opportunities SDGs. There is strong support from UNICEF HQ Provider of technical assistance (capacity through the Innovative Financing Unit to assist development, system strengthening, M&E, community-based approaches, etc.) programs with the identification and formulation of innovative financing opportunities. The myriad These roles are not mutually exclusive and each of successful and growing private sector initiatives hold different funding prospects for UNICEF. in WASH throughout the world and the increased interconnectedness through which we can 5.3.1. Piloting innovative approaches exchange these experiences faster, allows for a Role quick replication of new initiatives from one country Traditionally, UNICEF WASH programs have piloted to the next. new approaches or implemented approaches developed elsewhere on a demonstration scale UNICEF WASHs’ efforts to explore and more widely to introduce them in a new country or new engage in innovative financing mechanisms could environment. A choice to seek innovative financing be undermined by the high transaction-cost and opportunities for developing new and replicating or lengthy negotiations that usually precede such scaling proven approaches to reach marginalized arrangements. In combination with the limited and vulnerable populations is a valid programming fundraising prospects for UNICEF, country-offices strategy that is applicable across all countries in will have to be selective in what kind of innovative ROSA. financing arrangements it will invest its staff time.
UNICEF’s Role in Leveraging Financing for 18 WASH in South Asia Prospects for UNICEF-WASH Role: Piloting Innovative Approaches
Provide basic services Leverage of Fundraising Peri Urban Urban for marginalized + private- or prospects for Urban water sanitation vulnerable populations commercial UNICEF Rural water Rural financing WASH sanitation
n Good prospects n Some prospects n Limited to no prospects
Opportunities as domestic commercial capital. For small-scale There are numerous private sector engagement individual producers, micro-credit schemes are models in WASH that country offices can adapt to suitable, whereas for larger businesses equity the local context in South Asia to leverage private investments or loans backed by guarantees may be capital. The Swachh-Bharat Mission in India has applicable financing options. Since these initiatives sparked a wealth of SME initiatives that other include basic-service delivery by SMEs, there likely countries can explore or that can still be scaled will be guarantee schemes available from either locally. Bangladesh and Nigeria are taking micro- bi-lateral donors or government as it addresses two financing for sanitation of consumers and producers SDGs goal: 6 and 8. to scale and Nigeria has also included micro- financing for private operators of public toilets in The commercial financing prospects for SMEs public places like markets and bus stations. There providing basic WASH services is huge, but since are opportunities to introduce and scale some many are relatively small, the transaction cost will of the new container-based sanitation models. be high. UNICEF could work with relevant (UN-) The concept of the circular sanitation economy partners to improve the investment climate and offers ample opportunities to engage the private ease of doing busines for small-scale providers to sector and leverage commercial capital for reuse attract more financing to the sector (see chapter of human waste – for energy production, protein 6: Foundational Issues for Attracting Financing for production or as fertilizer. In water supply, Danone WASH ) Communities is seeking partners to introduce The funding prospects for UNICEF are likely limited their highly successful water kiosks concept in to UNICEF’s Role in Leveraging Financing for WASH in South Asia 19 UNICEF fulfilled the role of implementation The financing prospects for output-based manager. Often UNICEF still engages NGO programming or development impact bonds for partners for the implementation of service delivery WASH, depending on the size of the country can programs, but increasingly like under ASWA, it easily be in the range of US$ 5-10 million per year. provides technical support to national or local As implementation manager, the funding prospects government to implement the program. Because for UNICEF are equal to the financing prospects. the funding flows through UNICEF, UNICEF is ultimately accountable for the expenditures and 5.3.3 Catalyst to influence large scale results and thus has an important oversight role for investments in WASH the implementation of the program. Role Convening, connecting-the-dots or bringing Opportunities different parties to the table, is an important role The typical development programming context that UNICEF-WASH plays in many countries. where UNICEF can still occupy the role of In most of South Asia UNICEF-WASH has implementation manager are those areas where successfully coordinated sector efforts around government and private operators struggle to global, regional and national initiatives like the provide services or where the populations is too global SWA meetings, SACOSAN and national poor to be of interest to any commercial providers. GLAAS consultations. More recently UNICEF- These populations are usually found in remote rural WASH collaborated with India on the Mahatma areas and informal peri-urban or slum-areas. In Gandhi International Sanitation Convention that line with the universality principle of the SDGs of brought together 55 Sanitation Ministers and leaving-no-one-behind, reaching the marginalized 200 International delegates, representing 70 and hardest-to-reach remains an important focus of countries. UNICEF WASH has brought sector UNICEF’s programming and of future ODA flows. partners together around technical approaches, ranging from standardizing drilling technical and Financing models and funding prospects handpump design in the early days to promoting It is widely acknowledged that basic WASH CATS, water quality monitoring and the three-star services for the poorest-of-the-poor will not be WINs approaches across the WASH sector partners funded by commercial capital that seeks a return over the past decade. Through the WASH Cluster on investment. They will rely on grant funding UNICEF still plays a leading role in the coordination and concessional financing. Rather than the of humanitarian WASH response where the Cluster traditional grant-based funding it has received as is activated and together with WHO, UNICEF-WASH implementation manager, it is recommended that through the JMP leads on SDG-monitoring and UNICEF-WASH programs adopt the output-based standard setting. funding modalities – either through direct payment- for-results programs or through Development On WASH sector financing discussion, it has been Impact Bonds, whereby both the funder and the World Bank and the ADB that have largely outcome payer are traditional grant funders. This is taken the lead across South Asia. We see that the far more cost-effective as it significantly lowers the share of the large MDB WASH investments that transaction costs. ultimately benefit the poorest and hardest to reach Prospects for UNICEF-WASH Role: Implementation manager Provide basic services Leverage of Fundraising Peri Urban water Urban sanitation for marginalized + private- or prospects for Urban vulnerable populations commercial UNICEF Rural water Rural sanitation financing WASH n Good prospects n Some prospects n Limited to no prospects UNICEF’s Role in Leveraging Financing for 20 WASH in South Asia Prospects for UNICEF-WASH Role: Catalyst to investment opportunities Provide basic services Leverage of Fundraising Peri Urban Urban sanitation for marginalized + private- or prospects for Urban water vulnerable populations commercial UNICEF WASH Rural financing Rural sanitation water n Good prospects n Some prospects n Limited to no prospects populations is often in the single digits, with most Opportunities of the WASH investments going into large urban Concessional financing for WASH has not kept infrastructure – piped supplies, sewerage and trend with the overall growth in concessional sewage treatment with only odd exceptions here financing (Winpenny et.al., 2016). The MDBs have and there. more funds available for WASH than are currently being absorbed. The AIIB and ADB are actively Armed with a situation analysis that is updated looking for pipeline projects in WASH so they can every five years, decades of on-the-ground allocate a larger share of their loan portfolio to experience and highly qualified staff with extensive WASH programs. UNICEF is well-placed to support networks across the country, UNICEF-WASH is government with the identification of opportunities particularly well-placed to identify investment for concessional WASH financing. needs and opportunities in addition to formulating approaches to reach marginalized and hard-to-reach UNICEF-WASH can position itself as a convener or populations who still lack access to basic WASH broker between the supply and demand for funding services. UNICEF-WASH is well-placed to identify and use its knowledge, its network, its experience excess absorption capacity for WASH funding and, position to attract more financing to the WASH among national and local government entities who Sector, including domestic financing from pension can respond to the WASH needs of marginalized funds or insurance companies which are looking for populations. local investment opportunities. Likewise, UNICEF-WASH is well-placed to identify Financing models and funding prospects opportunities for private sector engagement in Leveraging additional concessional financing is WASH and can use its convening power to bring likely the largest contribution that UNICEF can existing and new partners together to explore make to attracting more funding to the WASH common interests and investment opportunities. sector. Concessional loans are usually in the order Examples of such catalytic roles are: of hundreds of millions of dollars. If these loans could be directed to the address the WASH needs working with Chambers of Commerce to bring of the marginalized and most vulnerable the impact sector professional together around market is even bigger. The focus on leverage instead assessments of fundraising for UNICEF should eventually be leveraging corporate social responsibility (CSR) captured in the CPD and CPAP with appropriate funding for adoption of WinS by local business indicators to measure UNICEF’s success in leaders leveraging financing for the sector. UNICEF’s Role in Leveraging Financing for WASH in South Asia 21 5.3.4 Provider of technical assistance Pories et.al. 2019, argue that too much Role development finance and government UNICEF’s decades long local presence throughout funds have been used for investments ROSA, its status as a trusted partner of national that could have attracted commercial and local government, its independence from financing, like sewerage systems, bilateral donors, its technical capacity, intimate wastewater treatment plants and knowledge of the sector and its close involvement upgrading of water supply services in in national policy formulation, joint sector reviews, relative affluent urban areas. Too little WASH advocacy through the JMP,GLAAS and of concessional WASH financing has SWA, make UNICEF WASH a well-rounded partner been allocated to those left behind. to the multi-lateral development banks to provide The writers therefore appeal to the technical assistance not only to the identification development community to identify and formulation of concessional loan programs, but the opportunities and create a pipeline also to the implementation and monitoring of the for investing development financing, programs. especially concessional financing. Opportunities A particularly interesting technical assistance role for UNICEF-WASH programs in South Asia could Design-stage grant funding for UNICEF will likely by be that of an independent third-party monitor in the range of US$ 200,000 – 500,000 per grant. combined with a role in providing quality assurance As the example below illustrates, every UNICEF to the implementation of ADB, AIIB or WB WASH Program throughout South Asia could pro- concessional loan funded WASH programs. MDBs actively work on preparing the pipeline for MDB usually do not have much technical in-country financed WASH investments. As one thing tends to WASH capacity and both government and the lead to another, this eventually may create funding MDBs may benefit from extra in-country support for opportunities for UNICEF as well for design stage the implementation of a WASH loan. Through quality grants and technical assistance during program assurance activities, UNICEF together with the implementation. authorities can identify bottlenecks in government systems and capacities and rectify them with activities aimed at systems strengthening and The Asian Infrastructure Investment capacity development. This semi-independent Bank (AIIB) is financing the Rural technical assistance role that UNICEF could play Drinking Water and Sanitation would be hugely beneficial for all parties involved Department of the Government of and greatly contribute to de-risking or mitigating Karnataka in India with US$400 loan implementation risks. million concessional loan to, among others, provide bulk water supply to Other roles funded through technical assistance include UNICEF’s work on enabling environment rural communities in two districts of factors i.e. policy formulation, capacity development Karnataka. Currently AIIB has no other and systems strengthening. similar project in the pipeline. With ample opportunities and absorption Financing models and funding prospects capacity in India, UNICEF can assist in The leverage that technical assistance provides identifying a pipeline of similar projects to concessional financing is in the de-risking in other States that eventually will of the investment, improving the quality of the draw-in more concessional financing for programming and improvements in monitoring and WASH to India. Throughout South Asia accountability. The technical support role of UNICEF such opportunities exist with AIIB as could be a factor that for the Board-of-Directors of well as with ADB and the World Bank. the relevant MDB to support a concessional loan for investments that otherwise may have been considered too high risk. UNICEF’s Role in Leveraging Financing for 22 WASH in South Asia The long-term funding prospects for a partnership 5.4 Applicability of innovative financing between UNICEF and the MDBs for drawing-in opportunities for UNICEF in South Asia more concessional WASH financing to underserved In South Asia there are still hundreds of millions areas and populations and for providing technical of people without basic WASH services. In 2017, assistance are significant. For a third-party according to the JMP (JMP, 2019), there were still: monitoring and quality assurance role to a concessional loan funded program funding could 776 million people without a handwashing facility amount to US$ 1 – 5 million per year depending on with water and soap on premises the size of the overall program. 738 million people without a basic sanitation service 137 million people without a basic drinking water The final recommendation of the service Working Paper: Mobilizing Financing for WASH: Getting the Foundation Well over three-quarters of these reside in rural Right (Pories et.al., 2019) states that areas. In addition, only 67 per cent of schools had Development finance [grants and basic access to clean drinking water, 63 per cent concessional loans] and government had access to basic sanitation facilities and one funds are scarce resources that in two had hand washing facilities with water and need to be used strategically to soap present (JMP 2020). 92 per cent of health care maximize the well-being of those facilities in South Asia have basic water services. in greatest need. To ensure these These figures illustrate that the needs for increasing funds are reserved for initiatives that access to basic WASH services at the household cannot attract commercial finance, level, in schools and health care facilities across governments and the development South Asia is still significant. community should plan and coordinate The following table summarizes the potential of the more effectively to provide improved different roles and associated innovative financing services to those being left behind. opportunities described under paragraph 5.1 to best reach those left behind. Prospects for UNICEF-WASH Role: Provider of Technical Assistance Leverage of Peri Urban Urban Provide basic services Fundraising private- or Urban water sanitation for marginalized + prospects for commercial Rural vulnerable populations UNICEF Rural sanitation financing WASH water n Good prospects n Some prospects n Limited to no prospects UNICEF’s Role in Leveraging Financing for WASH in South Asia 23 Water Supply Sanitation Urban water supply Urban Sanitation Rural Opportunities for engagement with Peri- Peri- innovative financing for UNICEF-WASH urban Small- urban Small- Water /slum towns General /slum towns General Supply Sanitation Piloting & scaling innovative approaches XXX XX - XXX XX - - Water kiosks/Safe Water Enterprises XXX XX - - Public- or privately-operated water points XXX XX X and hand-washing stations - Formalize & regulate tanker trucking XXX X - operations - Support small utilities X XXX - XX - Privately operated public toilets XXX XX X - - Sanitation marketing XX XXX - X - Micro-financing for consumers and/or XX XX - X producers - Container-based sanitation systems XX XX - - - De-sludging of pits and drains XXX XXX X - - Re-use of human waste XX XXX - XX - Solid waste management XXX X - X Implementation manager XX X - X XX - XXX XXX - Output-based aid programs XX X - X XX - XXX XXX - Development Impact Bonds XX X - X XX - XXX XXX - Micro-financing XX X - XX X - XX XX Catalyst to investment opportunities XXX XX - XXX XX X XXX XXX - Concessional loans from MDBs XXX XX - XXX XX X XXX XXX - Development Impact Bonds XXX XX - XXX XX X XXX XXX - Guarantees for small utilities XX X - XX X X X - - Equity investments X X - X X X X - - Pooled funds X X - X X X X - Provider of technical assistance XXX XX - XXX XXX - XXX XXX - Design-stage grants from MDBs and XXX XX - XXX XXX - XXX XXX bi-laterals - TA and QC for concessional WASH loans XXX XX - XXX XXX - XXX XXX XXX high potential; XX good potential; X some potential; - limited potential UNICEF’s Role in Leveraging Financing for 24 WASH in South Asia 5 Mobilizing Finance for WASH – Getting the Foundations Right The title of this chapter is of a 2019 publication strong performance, financial capacity (i.e. by Water.org, IRC and the World Bank written strong revenues to cover costs of operations by Lesley Pories, Catarina Fonseca and Victoria and debt service), good asset management and Delmon (Pories et.al., 2019). The writers introduce business planning; ten foundational issues that need to be addressed track record of borrowing and repaying debts; to make the WASH sector attractive to commercial and financing and ultimately self-sufficient. Most of these issues fall within the enabling environment an asset base against which collateral can be taken. factors of the UNICEF WASH Strategy 2016 -2030 and those of the SWA Framework for Action and as WASH sector service providers in most developing such UNICEF WASH has a role in addressing them. countries meet few of these requirements. The reader is encouraged to read the entire paper to get a good understanding of the ten foundational The authors argue that “without addressing issues identified and see where UNICEF-WASH can foundational issues in the sector any finance add value to address these. mechanism, whether public, private or blended, will be a short-term, band-aid solution and the sector Shortcomings that undermine the sector’s ability will continue the cycle of dependency on external to attract finance include underdeveloped national assistance rather than fixing the root causes and financial sectors; a lack of vision by governments building self-sufficiency”. to seek alternative sources of finance; ineffective regulation; low cost recovery; weak governance; The authors identified 10 key issues, which have mismatch of supply and demand of finance, low been grouped under three categories: service provision and operational efficiency of urban and rural WASH service providers; and a lack of anti- (1) the governance, institutional, policy, tariff, and corruption measures. regulatory arrangements to ensure transparency, consistency, and sustainability Commercial finance generally seeks low-risk, (2) the technical and financial efficiency of service dependable-return investments. Commercial providers to sustain creditworthiness and lenders want to see that a borrower is financially (3) issues related to the supply of finance healthy and well-managed (i.e. they are “credit worthy”) and that the basics are taken care of, and argue that sustainable success in mobilizing including: finance at large scale is dependent on a reasonable level of performance across all 10 foundational a clear legal mandate and scope for service areas. provision; financial capacity – solid financial track record The ten foundational issues for mobilizing finance with a positive net cash flow over several years; for WASH are schematically depicted below. strong management – including business- minded leadership, operational efficiency and UNICEF’s Role in Leveraging Financing for WASH in South Asia 25 Figure 10 : Ten Foundational issues for mobilising finance for WASH 1. Planning and financing strategies for maxmizing public and commercial Government/ funds to achieve social objectives sectoral level 2. Effective tariff-setting practices and economic regulation 3. Adequate performance regulation Service Supply of and transparent accountability providers finance mechanisms 4. Clarity of mandate and performance obligations of service providers 5. Solid financial and operational 8. Rectifying the mismatch between management commerical bank risk profile and 6. Capacity strengthening for business WASH sector realities planning 9. Avoiding mechanisms that create 7. Enhanced autonomy and legal market distortions framework 10. Targeting development financial for maximum impact Source: Pories et.al., 2019 UNICEF/Zishaan Akbar Latif © © UNICEF’s Role in Leveraging Financing for 26 WASH in South Asia 6 Way Forward With this paper we have attempted to provide a currently still left behind. Above anything else these practical way forward for UNICEF WASH Programs in are the people, the children and women, who continue South Asia to choose where and how to engage with to suffer the most from a lack of access to even basic existing and innovative WASH financing opportunities. WASH services; they are the hardest to reach and We hope that this paper has demystified some of the one who least benefitted from economic growth the financing instruments and constructs and that it elsewhere in the country. has explained why and how they could be applied to increase financing to the WASH sector. We included As you move forward, documenting your experiences the SWOT analysis to tease out the uniqueness of is critical to learn and read across to other countries. UNICEF’s position in the sector. A unique position As critical is, to look for experiences elsewhere that that we should capitalize on and use as lever to attract can be replicated and taken to scale. WASH is a more financing to the sector. By exploring some of the sector with a huge number of actors. While this often roles of how UNICEF-WASH programs can engage leads to fragmentation, it also provides a wealth of in leveraging financing for the sector, we de-facto experiences. There are various viable examples of excluded other roles and forms of engagement. We business models that provide basic WASH services have not included much about working with utilities, to marginalized populations. UNICEF with its global we have not addressed working on credit-ratings reach and distribution like no other organization, is which allow private sector entities to access financing very well placed to replicate and take these to scale at the capital market at lower rates then when they in environments and countries other than where they don’t have a credit-rating. We have not identified were conceived, nurtured and developed into the UNICEF in a role as brokering intricate blended viable models that they are today. financing agreements, simply because country offices This paper by no means is comprehensive and the do not have the skills, knowledge and experience reader is encouraged to read some of the background formulate and structure such agreements. documents most cited to get a better understanding We hope that this paper will provide the UNICEF of the intricacies of structuring innovative and blended WASH programs with a basic level of understanding financing agreements. You will find lots of individual what sector financing is about, what the most examples of financial constructs, but you will find common financing mechanisms are, how commercial few examples or financing models that have been investors are seeking a return on their investment replicated widely. Micro-financing for sanitation clearly and therefore only invest in programs that deliver a is becoming a success in several countries; the Safe revenue stream. Water Enterprises or Water Kiosks models have been replicated across all continents; pay-as-you go public We believe that the roles and opportunities that we toilets are sprouting-up across different continents have listed in Chapter 6, offer most prospects for and concessional WASH financing has outgrown the UNICEF to engage with, offer us the most prospects traditional grants to become the largest funding source for leveraging additional financing for the WASH sector after self-supply and government’s own funding. To and, offer some prospects of funding for UNICEF to date, UNICEF’s experience with innovative WASH stay engaged. Most of all, the roles and opportunities financing hardly figure in these papers. We hope that that we have listed offer most prospects for those this paper will help change that. UNICEF’s Role in Leveraging Financing for WASH in South Asia 27 End Notes Hutton G., Varughese M., (2016), The Costs of Fonseca C. and Pories L. (2019), Financing WASH: how Meeting the 2030 Sustainable Development to increase funds for the sector while reducing Goal Targets on Drinking Water, Sanitation, and inequities; Position paper for the Sanitation and Water Hygiene, Water and Sanitation Program (WSP) for All Finance Ministers Meeting, April 19, 2017, Technical Paper, https://openknowledge.worldbank. https://www.ircwash.org/sites/default/files/2017-4-19_ org/bitstream/handle/10986/23681/K8543. financing_wash_postion_paper_final.pdf pdf?sequence=1&isAllowed=y Pories L., Fonseca C. and Delmon V. (2019), Mobilizing Tremolet S, Rana M., (2012), Tracking national financial Finance for WASH – Getting the Foundations Right, flows into sanitation, hygiene and drinking-water, https://www.ircwash.org/sites/default/files/mobilising_ WHO-GLAAS Working Paper, https://www.who.int/ finance_for_wash_-_web.pdf water_sanitation_health/publications/glaas_working_ AQUAYA (2012), The Water Business Kit™, http://www. paper/en/ aquaya.org/WaterBusinessKit.pdf World Bank Group and UNICEF. 2017. “Sanitation and SIDA (2015), Results-based Financing Water for All: How Can the Financing Gap Be Filled? Approaches - What are they? A Discussion Paper.” World Bank, Washington, DC. 1b13c3b7a75947a2a4487e2b0f61267c/18235.pdf https://openknowledge.worldbank.org/bitstream/ https://www.sida.se/contentassets/ handle/10986/26458/114545-WP-P157523-PUBLIC- SWA-Country-Preparatory-Process-Discussion-Paper-8- Safe Water Enterprises (2016), The untapped Mar-17.pdf?sequence=1&isAllowed=y potential of decentralized safe drinking water enterprises – Highlights from a study on the OECD (2019), Making Blended Finance Work for Water State of the Safe Water Enterprises Market and Sanitation, OECD Publishing, https://www.oecd. 0eed97e0992c4996b1067582bb425ca0.pdf org/environment/resources/Making-Blended-Finance- http://docs.wixstatic.com/ugd/2c9167_ Work-for-Water-and-Sanitation-Policy-Highlights.pdf Gietema, van Oppenraaij en Fonseca (2017) for the 2017 World Bank (2020), World Bank predicts sharpest decline International Amsterdam Water Week, in powerpoint of remittances in recent history, Press Release 22 presentation: Blockages to Financing SDG 6, https:// April 2020, https://www.worldbank.org/en/news/press- www.ircwash.org/sites/default/files/blockages_to_ release/2020/04/22/world-bank-predicts-sharpest- financing_sdg_6_context-setting.pdf decline-of-remittances-in-recent-history Useful links: SWA (2020), Water and Sanitation – How to make public investment work - A Handbook for Finance Ministers, https://www.convergence.finance/ blended-finance https://www.sanitationandwaterforall.org/sites/default/ files/2020-08/Financial%20Handbook-Digital-EN.pdf https://water.org/solutions/ waterequity/ ODI (2019), Blended Finance in the Poorest Countries – https://water.org/solutions/ watercredit/ The need for a better approach, https://www.odi.org/ https://www.toiletboard.org/ sanitation-economy sites/odi.org.uk/files/resource-documents/12666.pdf http://safewater.enterprises/ wp-content/ Winpenny J., Trémolet S., Cardone R. (2016), Aid uploads/2017/09/20170208-Water-Kiosk-Study-Sector- Flows to the Water Sector, World Bank Publishing, Report_vSS.pdf http://documents1.worldbank.org/curated/ en/348721480583568708/pdf/110656-WP-W16009- https://www.danonecommunities.com/ category/water/ PUBLIC.pdf UNICEF’s Role in Leveraging Financing for 28 WASH in South Asia ©© UNICEF/Vinay Panjwani United Nations Children's Fund Regional Office for South Asia P.O. Box 5815 Lainchaur, Lekhnath Marg Kathmandu, Nepal Telephone: +977 1 441 7082 Facsimile: +977 1 441 9479 E-mail: [email protected] www.unicef.org/rosa