European Microfinance Week 2020

Josien SLUIJS, from Aqua for All, set the stage for this session by explaining how the world is currently not on course to meet Sustainable Development Goal (SDG) 6: ‘Ensure access to water and sanitation for all’ by 2030. To date, about 2.2 billion people still lack access to safe drinking water, 4.2 billion people are without sanitation amenities and about 3.0 billion people lack basic handwashing facilities.

Achieving SDG 6 would require an estimated USD 114 billion per year in the run-up to 2030, money that is currently not available. Water and sanitation have been historically financed by the public sector, and these public funds are simply insufficient. Therefore, there is an urgent need to unlock private funding through blended finance solutions, Sluijs continued. According to OECD data, only USD 2.1 billion of commercial finance has been mobilised from 2012-2017 for water and sanitation, through blended finance. Sluijs stressed that it is important for (impact) investors and financiers to engage and understand the role their capital can play in bridging the financing gap, while securing social and financial returns on SDG 6-related investments.

Sluijs then shortly introduced the work of Aqua for All, an organisation that aims to be an influential catalyser within the water and sanitation economy. It uses grant money to de-risk investments and mobilise new and additional capital. Since mid-2019, the not-for-profit runs the five-year € 40 million programme ‘Making Water Count’, aiming to facilitate and finance access to clean water, good sanitation and hygiene for all. In the programme, Aqua for All supports innovations, solidifies business cases, removes barriers for funding, and makes the connection with financiers. Impact investors have different investment opportunities, Sluijs explained. They can invest either in MFIs/local banks, funds/innovative finance structures or directly in water and sanitation SMEs. Aqua for All covers the investors’ risks through de-risking grants and guarantees. Other instruments of Aqua for All include the provision of technical assistance, the preparation of grants and result-based financing

Bjoern STRUEWER, from Roots of Impact, explained the company’s ‘social impact incentive’ model, which is used by Aqua for All to enhance the returns and reduce the risks of WASH investments. Struewer explained that social impact incentives can effectively leverage funds to catalyse private investment in underserved markets with high potential for positive impact. These incentives act as an additional revenue stream that directly improves the profitability of the impact enterprise and makes it more attractive to investors. It enables enterprises to continue or even accelerate their efforts to generate deep impact while scaling and offering sufficient returns to their investors. Through this model, Aqua for All committed to pay outcome-based incentive payments to impact enterprises as they meet their social goals over a period of two years. The payments will be based on the additional social impact generated by their operations.

Struewer shared some of his initial insights for social impact incentives in the WASH sector. Firstly, he mentioned that many innovations are on the way to a proof of concept: there is good potential to raise investment and reach scale, in particular in the water sector. Sanitation is a harder play, Struewer clarified. Here, there is a need to provide targeted capacity building to get sanitation enterprises investment-ready. Another lesson was about the large role to be played by public actors, and their power by contracting WASH companies and by creating regulations that are beneficial to them.

Dina PONS presented the case of the partnership between the French multinational Danone and the company she works for: the international impact investor Incofin Investment Management. Both companies built a 10-year equity fund and jointly invest in innovative water businesses that provide affordable and safe drinking water to underserved populations.  The partnership provides private equity and quasi-equity, as well as technical assistance. The fund will invest in Africa and Asia in tranches totalling € 3-5 million per investee, taking minority stakes as the lead/co-lead investor and with board representation.

Pons elaborated that a first take away from this partnership is that the WASH sector is investable. The current COVID-19 pandemic underlines the relevance of this sector, and the crisis has also showed how resilient the sector is to market shocks. Pons also explained that there is potential to work with grant funders in moving their cash from technical assistance donations to first-loss money investments that can leverage much greater amounts of capital.

The partnership between Incofin and Danone has also laid out a framework for private corporations to enter the impact investment field, Pons explained. To this end, it is important that social missions are aligned and have targeted strategies, which enhances the efficiency and effectiveness of interventions. Also, complementary expertise within the partnership is important. All parties should bring their own expertise built from their respective industries or established networks that can enhance the initiative. Lastly, Pons stressed that having local presence is crucial. At least one of the parties should have local, long-standing presence in the targeted markets to maximize impact reach.

Darren MIAO of Water.org discussed how the organisation seeks to mobilise capital at scale for the WASH sector. As he explained, WASH receives only a fraction of blended financing compared to most other SDG goals. Water.org identified and structured a new WASH transaction that mobilises finance from across the capital spectrum: the Global Credit Enhancement Facility (GCEF).

GCEF is a partial-loan guarantee program designed to help domestic financial institutions increase their lending for water and sanitation by mitigating risks, thereby increasing the financial institution’s comfort to lend to the sector. GCEF offers a flexible partial-credit guarantee that can be tailored to market demand at the individual country level to avoid a ‘one-size-fits-all’ approach. GCEF blends both first-loss philanthropic capital with commercial second-loss capital provided by the International Finance Corporation to offer an appropriately-priced guarantee mechanism.

Miao explained that Water.org expects to launch a USD 13 million GCEF India Facility with the support from Aqua and All. This facility is expected to catalyse USD 125 million in WASH lending over 3 years, reaching 3 million people. This is made possible through the USD 7.8 million committed by donors to cover a portion of the first losses. Banks must also cover a percentage of first losses, stressed Miao. Second losses are covered by the World Bank Group’s International Finance Corporation, amounting to a maximum of USD 5.3 million. Miao finished the session by announcing that, after the launch in India, Water.org is now evaluating the demand for the GCEF to start other facilities in Kenya, Bangladesh, the Philippines and Indonesia.