KEYS TO SUCCESS

BLENDED FINANCE
IN THE WATER
SECTOR
CHALLENGES AND ATTRIBUTES
The World Water Council is an international multi-stakeholder platform organization, the founder and co-organizer of
the World Water Forum. The Council’s mission is to mobilize action on critical water issues at all levels, including the
highest decision-making level, by engaging people in debate and challenging conventional thinking. The World Water
Council, headquartered in Marseille, France, was created in 1996. It brings together over 300 member organizations
from more than 50 different countries.
www.worldwatercouncil.org

Published in March 2022 by the World Water Council.

All rights reserved.
Cover photograph by Muzammil Soorma on Unsplash
 KEYS TO SUCCESS

BLENDED FINANCE
IN THE WATER SECTOR
CHALLENGES AND ATTRIBUTES

MARCH 2022
ACKNOWLEDGEMENTS
This document was written by Alex Money and prepared within the Action Plan of
the World Water Council Task Force on Financing Water, led by Franz Rojas of the
Corporación Andina de Fomento (CAF – Development Bank of Latin America).

We would like to thank the author and the following people for their direct supervision
and contribution to the report: Franz Rojas (CAF), Florencia Pietrafesa (CAF), Khatim
Kherraz (WWC) and Mariem Khemiri (WWC).

We would also like to thank Kathleen Dominique from the OECD and Yasser Ahmed
from the African Development Bank for their helpful feedback.
FOREWORD
The current pandemic has been a painful example of the terrible
threats that millions of people had to suddenly face. Under these
difficult circumstances, one the primary solution to fight this
virus was hygiene, which implied water availability. What would
have happened if water was not available?

For several years now, it has been clear that public money alone
will not suffice to close the investment gap – between what is
invested and what is required to achieve water security for all.

Now more than ever, it is important to improve the financial system effectiveness in
mobilizing more capital from various sources towards investment in water and sanitation.

“What would have happened if water was not available?”

Many barriers are still hindering investments: difficulties in designing bankable projects,
perception of high risk notably in many developing countries, which are precisely the
countries who would most need those investments, lack of guarantees, and inadequate
enabling environment.
Attracting additional investors, including commercial and private investors, will require
significant and fundamental changes in those areas.
Since its creation, the World Water Council has always considered the issues related to
financing water as a high priority. The work of the current Task Force on Financing Water
yielded this report that discusses blended finance as a mechanism to attract additional
finance towards the water sector.
It presents the common features of successful blended finance projects and highlights
some of the challenges that prevent blended finance to be used more widely.

We hope that this report will be useful, not only to the technical and financial projects
designers, but also to the political decision-makers who must ignite and embrace the
change. Business as usual is no longer an option.

Loïc Fauchon
President
World Water Council
 CHALLENGES AND ATTRIBUTES

TABLE OF CONTENTS

8 PART 1: Context
1.1 Purpose of the Report
1.2 Introduction to Blended Finance
1.3 Blended Finance Structures
1.4 Key Concepts
1.5 Blended Finance and the Water Sector
1.6 Country-level challenges
1.7 Entity-level challenges
1.8 Summary

16 PART 2: Case studies

2.1 Bulk Surface Water Supply, Rwanda
2.2 As Samra Wastewater Treatment Plant, Jordan
2.3 Pooled Municipal Bond Issuance, Tamil Nadu, India
2.4 Municipal Bond Issuance, Tlalnepantla de Baz, Mexico
2.5 Municipal Project Finance, Rustenburg, South Africa
2.6 Hybrid Finance, Tshwane Metro, South Africa
2.7 Credit Enhancement Facility, Jamaica
2.8 Water Revolving Fund, Philippines
2.9 Household Investment in Sanitation, Bangladesh
2.10 Facilitated Access to Finance, Cambodia

28 PART 3: Common factors associated with successful blended finance projects

3.1 Domestic Liquidity
3.2 International Liquidity
3.3 Project Development
3.4 Capacity Development
3.5 Revenue Diversification
3.6 Sovereign Underwriting
3.7 Multi-tier Protections
3.8 Industry Engagement
3.9 Project Divisibility
3.10 Cooperation with Development Finance Institutions

34 PART 4: Concluding Reflections

40 PART 5: Links to Case Studies

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 KEYS
COMMON
TO SUCCESS:
FEATURES
BLENDED
OF SUCCESSFUL
FINANCE BLENDED
IN THE WATER
FINANCE
SECTOR
PROJECTS

PART 1
CONTEXT
88||
 CHALLENGES AND ATTRIBUTES

PART 1
CONTEXT

1.1 Purpose of the Report

The sustainable provision of universal safe water and sanitation services, when coupled with effective water
resources management, is a precondition for eradicating poverty and promoting economic growth. Water security
underpins sustainable development and generates positive economic, environmental and social externalities.
However, despite the strong economic case for investing in water security1, the level of public sector financing
available for water related investments in developing countries has persistently lagged what is necessary to achieve
the Sustainable Development Goals. At the Third International Conference for Financing for Development in 2015
in Addis Ababa, UN member countries reached consensus on the importance of deploying public funds to attract
private investment. The potential for blended finance as a structuring approach to mobilise new sources of capital
has since been widely recognised although to date, there has been limited use of blended finance structures at
scale for water-related investments.

Blended finance is not an investment approach, product or instrument; but rather a structuring mechanism to
achieve one or more of the following outcomes:

i) the supply of capital on favourable terms (through grants, or loans at lower than market rates of interest, or
with more flexible repayment terms) in order to lower the overall cost of capital for a project;
ii) the provision of credit enhancements, such as guarantees, on concessional terms in order to lower the risk
profile of a project;
iii) the provision of technical assistance on a concessional basis in order to improve a project’s risk-adjusted
return profile; and
iv) the use of concessional funds in the design or preparation of a proposed project transaction. In each case,
the aim of the structure is to mobilise commercially oriented funds (from a range of sources, including
development finance and the private sector).

COVID-19 has highlighted the vulnerability of society to low-probability, high-impact events. It will be years before
the consequences of this pandemic are fully measured. It is however clear that the pandemic will have its most
potent impact on marginalised communities, particularly in developing countries. Public debt in emerging markets is
higher than at any time in the last 50 years. Many countries have been forced to borrow much more than they had
previously planned to, and this comes at a cost.

“Public debt in emerging markets is higher

than at any time in the last 50 years.”

1 https://www.gwp.org/globalassets/global/about-gwp/publications/the-global-dialogue/securing-water-sustaining-growth.pdf

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 KEYS TO SUCCESS: BLENDED FINANCE IN THE WATER SECTOR

Achieving the global Sustainable Development Goals by 2030 was a stretching target well before COVID-19. The
effect of the pandemic has been to push back some of the progress made in recent years. According to some
estimates, COVID-19 will push more than 100 million people into extreme poverty2. In 2020, the global extreme
poverty rate rose for the first time in over 20 years. The crisis has threatened the livelihoods of 1.6 billion workers
in the formal and informal economy. At the same time, it has mobilised a global fiscal response at a scale that is
unprecedented since the Second World War. Hundreds of billions of dollars have been committed to mitigating the
effects of the pandemic, and with interest rates in the world’s wealthiest countries as low as they have ever been,
some governments have used their capacity to raise debt to finance these interventions.

From the perspective of blended finance and sustainable development, this creates at least the prospect for
accelerated progress as the world slowly emerges from the pandemic. A step-change is possible in how critical
basic services are delivered, financed, and maintained across many parts of the world. The pandemic has
highlighted interdependencies between economic and social systems that transcend national borders. The reality
that “no one is safe until everyone is safe” means that while economic recovery and support packages in the
developed world have preserved livelihoods for many of their citizens, over the medium term a more structural
transformation in global welfare systems will be necessary to provide long term resilience.

This presents an opportunity for the water sector, provided four conditions are met:

First, there needs to be significant increase in financing that is both available and accessible to developing
1 countries for investments in water, sanitation and hygiene (WASH); along with productive uses of water, such
as irrigation, as well as initiatives that mitigate against the effects of climate variability and climate change.
At COP 26 in Glasgow, the commitment to providing US$ 100 billion per year of finance for climate change
adaptation in developing countries was reaffirmed. The centrality of water security as an adaptive response to
climate change could help to unlock climate finance for the water sector.

Second, the enabling environment for financing water projects needs to be supportive at the sovereign and
2 sub-sovereign level. This includes the presence of adequate policy, institutional and regulatory frameworks;
a functional judicial system; public infrastructure that is fit for purpose; market-based mechanisms to
facilitate capital transfers; and adherence to international rules of law. The dynamics of an effective enabling
environment are also likely to be affected by the pandemic. With key personnel in many institutions working
remotely in response to the pandemic, new procedures may be introduced that help lower the transaction
costs of implementing blended finance arrangements.

3 Third, there need to be viable projects that are suitable for investment. On the demand side, historically
water has attracted less commercial finance than the energy, transport, or telecommunications sectors,
reflecting differences in the historic capacity of water infrastructure projects to generate the financial flows
that are necessary to repay the original investment, along with interest. Equally on the supply side, public
development banks often do not have access to sufficiently comprehensive data on prospective projects in
the water sector that is needed to evaluate credit risk and operational viability appropriately.

Fourth, success depends on the capacity to execute projects effectively, and suitably experienced personnel
4 are needed across the process chain to design, develop and successfully implement these projects.
From the lending side, the challenge is often a lack of familiarity with credit enhancement instruments,
or institutional conservatism and risk aversion. From the borrowing side, there may not be sufficient
understanding of the process chain to identify where and how risks might be mitigated. It is in part to help
address this latter challenge that this report has been commissioned.

2 https://blogs.worldbank.org/opendata/updated-estimates-impact-covid-19-global-poverty-looking-back-2020-and-outlook-2021

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 CHALLENGES AND ATTRIBUTES

The purpose of this report is to identify, through a review of case studies, some of the attributes that are commonly
associated with successful blended finance projects in the water sector. It has been written to provide information
to practitioners in the water sector who are not financial specialists and therefore includes a brief description of
what blended finance is. The report consolidates the information presented in the case studies through an analysis
of some common factors associated with successful blended finance projects in the water sector. It concludes by
outlining some of the challenges to scaling up the use of blended finance, while proposing some tangible ways in
which these challenges can be overcome.

1.2 Introduction to Blended Finance Report

Achieving the Sustainable Development Goals requires a significant injection of capital investment over the next
decade. The gap between current SDG-focused funding, and what is required to achieve the SDGs is estimated at
US$ 2.5 trillion per year3. Most of this investment is required in developing countries. Official development flows and
philanthropic commitments are insufficient to close this gap, and capital from the private sector has to be mobilised
if the SDGs are to be achieved.

In many developing countries, it is difficult to access commercial capital due to real and perceived market risks.
Forward-looking opinions of a country’s ability to meet its obligations are provided by agencies such as Fitch and
Moody’s, and the credit ratings that they derive can heavily influence the ability of a country to borrow via the
capital market. Many lower-income countries do not have an ‘investment grade’ credit rating, indicating that they
are at higher risk of default. This typically puts such borrowers out of scope for many institutional lenders, reducing
their access to capital. Projects that are perceived to be too risky for the expected return available will not receive
commercial finance, even if they contribute to improving sustainable development outcomes.

for developing
countries
working to unlock

COMMERCIAL
CAPITAL

DEVELOPMENT
CAPITAL PROJECT

3 OECD (2019) https://www.oecd.org/newsroom/development-aid-drops-in-2018-especially-to-neediest-countries.htm

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 KEYS TO SUCCESS: BLENDED FINANCE IN THE WATER SECTOR

Blended finance has evolved in response to this challenge. It is a structuring approach that involves using grants,
concessional and non-concessional development finance to mobilise additional finance - from commercial
(public and private) sources – into developing countries, to help meet sustainable development objectives4.
Beyond offering concessional terms, development finance can also support improved outcomes by improving
the credibility, capacity, knowledge, and networks of the transacting parties. The purpose of blended finance is
to lower the market risk of an investment, relative to its expected return. Blended finance can therefore alter the
financial structure of a project such that additional capital on commercial terms is ‘unlocked’, enabling an otherwise
unfeasible project to move ahead. Investments in capacity development are often necessary to facilitate blended
finance structures, and these costs are typically covered through grants and via technical assistance.

“... additional capital on commercial terms

is ‘unlocked’, enabling an otherwise
unfeasible project to move ahead.”
Blended finance is characterised by: leverage, i.e. using development finance to mobilise and engage commercial
finance at scale; impact, i.e. investments that deliver measurable social, environmental and economic outcomes in
addition to financial returns; and performance, i.e. market-based financial returns for commercial capital investors.

1.3 Blended Finance Structures

Convergence5 a membership network that promotes the use of blended finance, identifies four common structures,
which are summarised here:

i) Lower-cost capital: public financiers or philanthropic investors provide funds on below-market terms, which
when combined with funds from commercial investors within the capital structure, lowers the overall cost of
capital to the borrower

ii) Credit enhancements: development finance provides guarantees or insurance to commercial investors on
below-market terms, lowering their risk in relation to the investment.

iii) Technical assistance: public or philanthropic investors provide a grant that is used to provide technical
capacity that either reduces the risk and/ or enhances the return on an investment, making it more attractive
for commercial finance

iv) Design funding: public or philanthropic investors provide a grant that is used to design or structure projects
such that they can attract investment from commercial finance providers.

4 Development actors can add value to commercial actors based on their experience in development issues.
5 Convergence (2020) The State of Blended Finance
https://www.convergence.finance/resource/3902657f-693e-453a-ba75-ca3bf7d2448e/view

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 CHALLENGES AND ATTRIBUTES

1.4 Key Concepts

The blended finance literature typically references concepts that – although straightforward enough to understand
– may be framed in unfamiliar language. These concepts typically involve the use of some industry-specific jargon,
including:

1 Additionality: Added value in terms of enhancing existing financial and development capacity, rather than
competing with what is already available.

2 Bankability: The capacity of a project to sustainably generate the cash flows necessary to repay the
amount borrowed, including interest payments.

3 Credit enhancement: a risk mitigation tool, such as a guarantee, that provides investors with one or
more layers of protection against non-payment by the borrower.

Crowding-in: using sufficient public or philanthropic funds to lower risk or improve returns such that
4 commercial financial providers increase their service.

Crowding-out: where excessive use of public or philanthropic funds results in commercial financial
5 providers becoming uncompetitive and reducing their service.

6 Concessional capital: Public or philanthropic funds, including grants, that are provided on more
attractive terms than what is available in the market

7 Commercial finance: Funds that are typically provided at market rates by private or state-owned banks,
microfinance, or through the capital market.

8 Development finance: Grants, philanthropic funds, concessional and non-concessional loans; provided
with an explicit development purpose

9 Development impact: The result of interventions on the welfare of communities, typically measured
through progress in achieving national SDG targets.

10 Financing v funding: Funding refers to the ultimate source of payment for a service, such as tariffs,
taxes and transfers. It is non-payable. Financing refers to providing capital to enable that service, and is
generally repayable.

11 Leverage: the level of commercial finance that is mobilised for a given level of public or philanthropic fund
commitments.

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 KEYS TO SUCCESS: BLENDED FINANCE IN THE WATER SECTOR

1.5 Blended Finance and the Water Sector

A recent analysis6 of blended finance transactions for the period between 2017 and 2019 shows that sub-
Saharan Africa accounts for the largest share of activity by number of transactions (33%), followed by East Asia
and the Pacific (21%), South Asia (15%) and Latin America (11%). By sector, energy accounted for 35% of recent
transactions, followed by financial services (21%), agriculture (15%) and infrastructure (11%). Although interest from
public and private actors has increased, blended finance for water and sanitation accounts for just 5% of total
transactions by volume and less than 1.5% by value of commercial finance mobilised.

Why does the water sector attract so small a share of blended finance? The investment needs are significant. For
example, an updated analysis7 of the global costs of achieving the sanitation component of SDG Target 6.2 alone
shows annual costs at close to US$70 billion between 2017-30. Including the capital requirements for achieving
SDG 6.1, the investment requirements are as much as three times the current levels of commitment8. Public and
philanthropic finance will not be sufficient to bridge this gap.

Beyond SDG6, investment in the water sector is necessary for achieving wider sustainable development objectives.
For example, transformation of the agricultural sector is necessary to improve food security, and this requires
having the necessary resources available to improve traditional rainfed systems and upgrading irrigation projects.
A recent study finds9 that it would be feasible to deploy 154 million hectares of additional irrigated land by 2050
– corresponding to a 60% increase in irrigated areas in developing countries – at a cost of US$ 50-60 billion per
year. Other investments are necessary for adaptation to climate change, including flood control systems in urban
areas, improved sewer drainage, and multi-purpose infrastructure that meets resource, productive use and amenity
requirements.

“... the investment requirements of the sector amount

to over US$ 200 billion per year.”
Taking this broader perspective of water infrastructure in terms of meeting the SDGs, the investment requirements
of the sector amount to over US$ 200 billion per year. Water resource projects can be categorised in various ways,
and this can help to illustrate their potential for accessing blended finance. The OECD distinguishes between utility-
scale water and sanitation service providers; small scale (typically off-grid) providers of sanitation services and water
supply; and multi-purpose water infrastructure projects that support agriculture, fisheries, energy production and
tourism.

Utility scale providers generally require long-term financing to service the debt while keeping user tariffs
affordable. In principle, blended finance structure can serve a catalytic role in helping utilities finance capital
expenditure and improvements in scale and efficiency that result in cost recovery and financial sustainability in the
medium term. In practice, utilities need to be able to set tariffs and ensure revenue collection that enables these
objectives to be met.

Small scale operators are often not attractive to commercial investors because their capacity to absorb
investment is limited, and so the share of transaction costs as a proportion of a single investment is often very high.
The business models themselves are also often less well proven. As a result, these providers are currently highly
reliant on philanthropic capital providers and social impact investors, rather than mobilising commercial capital.

6 Convergence (2020) The State of Blended Finance https://www.convergence.finance/resource/3902657f-693e-453a-ba75-ca3bf7d2448e/view

7 UNICEF (2020) Global and Regional Costs of Achieving Universal Access to Sanitation to Meet SDG Target 6.2
8 OECD (2019) Making Blended Finance Work for Water and Sanitation
9 World Bank (2019) Investment Needs for Irrigation Infrastructure along different socioeconomic pathways

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 CHALLENGES AND ATTRIBUTES

For multipurpose water infrastructure where there are well-developed revenue streams (such as hydropower
projects, agricultural schemes, leisure and tourism), there is long record of using blended finance structures. In
recent years, the concept of ‘landscape’ infrastructure at the watershed scale has also evolved, using water funds
and other ‘nature-based’ solutions.

To date, there has been limited use of blended finance structures at scale for (non-hydropower) water-related
investments. In a recent report focused on the three sub-sectors (utilities, off-grid sanitation, and multi-purpose
infrastructure), the OECD identified various factors to account for this.10 The analysis highlights the significance of
local context and the importance of mobilising domestic commercial investment as emphasised in the OECD DAC
Blended Finance Principles.11 This reflects the attributes of the sector, and services need to reflect that context.

1.6 Country-level challenges

At the country level, implementation challenges include the high cost of capital in developing countries, which
makes it difficult to generate attractive returns. Also, projects typically serve local markets and generate revenues
in local currency. When it comes to borrowing, local currency debt is often not available at sufficiently low interest
rates, and/or sufficiently long repayment periods, that would allow for an effective matching of assets and liabilities.
Access to information is asymmetric and emerging markets are often characterised by incomplete or limited
information, at both the macroeconomic and the project levels, which may make accurate modelling difficult.
Developing countries are often particularly susceptible to geopolitical or macroeconomic risks. Many governments
face a high risk of debt distress and are constrained in their ability to assume more debt; the COVID-19 has
highlighted this fragility. High debt levels and poor credit ratings can have an impact on a country’s ability to mobilise
private finance.

1.7 Entity-level challenges

At the entity (e.g. water utility) level, a lack of financial resources is self-evidently a common challenge in undermining
the sustainability of an investment proposition. Other potential barriers to the application of blended finance include
a lack of political championship: frequently there are diverse and often conflicting internal interests within a public
utility. Increased complexity in WSS loan or credit operations may delay project effectiveness and disbursements,
and hence in practice, may constitute a counter incentive. A lack of demonstrable tangible results associated with
financial returns – such as increasing revenues or reducing costs – or a poor record in investment decision-making,
can also undermine lender confidence. In addition, a reticence within the entity to use innovative and accountability-
driven approaches, such as results-based financing, can also be an impediment. Often, there is a revealed
preference for the traditional procurement model of procuring input-based services.

1.8 Summary
Much more can be said about the challenges of implementing blended finance, and indeed there are several
publications that explore this in detail. In this instance, the purpose was to provide some context for the case
studies that follow in the next section. These case studies involve blended finance structures that have, to various
extents, mitigated or overcome the implementation challenges described here.

10 https://www.oecd-ilibrary.org/sites/5efc8950-en/index.html?itemId=/content/publication/5efc8950-en
11 https://www.oecd.org/dac/financing-sustainable-development/development-finance-topics/OECD-Blended-Finance-Principles.pdf

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 KEYS TO SUCCESS: BLENDED FINANCE IN THE WATER SECTOR

PART 2
CASE STUDIES
16 |
 CHALLENGES AND ATTRIBUTES

PART 2
CASE STUDIES

Ten programmes are reviewed across countries in sub-Saharan Africa (South Africa x 2,
Rwanda), the Middle East and North Africa (Jordan), Latin America and the Caribbean
(Mexico, Jamaica), South Asia (India, Bangladesh) and South-East Asia (Cambodia,
Philippines), based on the information available from public sources: in particular, a series of
summary case studies in blended finance for water and sanitation12,13. This section merely
highlights some relevant attributes from each case study: comprehensive information is
provided in the annexe of this paper.

The case studies frequently reference public-private partnerships, or PPPs, as part of a

blended finance structure. PPPs are long-term contracts between the government and
a private contractor to build public infrastructure and/ or provide infrastructure services.
In these contracts, the contractor typically agrees at its own cost to build, operate, and
maintain an asset that provides a service. In return, the government promises either to
pay the contractor for the service, or to allow the contractor to collect fees from users.
PPP’s take various forms, but in most cases governments remain ultimately accountable
for providing the infrastructure services. It is important to make clear that blended finance
structures are not synonymous with PPPs, and – as per the archetypes described earlier –
may not involve project financing at all.

12 World Bank (2016) Case Studies in Blended Finance for Water and Sanitation.
https://www.wsp.org/sites/wsp/files/publications/WSS-9-Case-Studies-Blended-Finance.pdf
13 OECD (2019) Making Blended Finance Work for Water and Sanitation.
https://www.oecd-ilibrary.org/sites/5efc8950-en/index.html?itemId=/content/publication/5efc8950-en

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 KEYS TO SUCCESS: BLENDED FINANCE IN THE WATER SECTOR

2.1 Bulk Surface Water Supply, Rwanda

OPERATIONAL: 2021

The city of Kigali has a population of over 1 million people, with rapid growth. The civil war in 1994
destroyed much of the city’s water production capacity, leaving the majority of the population reliant
on communal stand posts, and dependent on intermittent supply.

T his arrangement was possible partly because of

Rwanda’s unique circumstances. The civil war in
1994 had all but destroyed basic infrastructure, and
It is the first large-scale water treatment facility financed
through a PPP in sub-Saharan Africa.

significant greenfield investments were needed. Rapid The preparation process resulted in a water concession
urbanisation and growth since the end of the civil war had that has more in common with a greenfield (i.e. new)
put the Kigali’s infrastructure services under immense independent power project (IPP), rather than the
strain. After a US$117m proposal in 2003 was rejected brownfield rehabilitation projects typically associated with
on cost grounds, a new arrangement was structured and the water sector. It is a greenfield project that builds and
financed, at a cost of US$75m. operates new infrastructure assets, which the private
partner will continue to own, operate, and maintain over
In 2010 the Rwandan government retained the the contract period. Because it does not involve the
International Finance Corporation (IFC) to develop and rehabilitation of previously owned assets that may have
structure a bulk water supply PPP for the city. The IFC fallen into disrepair, the risks to cash flows are lower.
provided technical assistance – a key enabler in many In addition, with the take-or-pay purchase agreement
blended finance transactions – in two phases. First, it denominated in US dollars, lenders are not exposed to
supported due diligence around the most appropriate the risk of collecting end-user tariffs in local currency.
location for the project; as well as assessing customer
demand, to ensure the project size was appropriate. “It is the first large-scale water
Second, the IFC helped the government run a competitive
selection process for parties to develop the project.
treatment facility financed
through a PPP in sub-Saharan
The Kigali Bulk Surface Water Supply (KBWS) reached
financial closure in 2017. It is a PPP between the
Africa”
Government of Rwanda and a private partner that is a Unlike traditional brownfield water concessions, the Kigali
subsidiary of the Dubai-based Metito Group. The 40,000 project does not directly address issues in relation to
m3 of potable water per day produced is sold to the ongoing management of the utility, retail distribution or
government-owned water utility, for distribution to end- tariff setting. However, support for reform in those areas
users in Kigali. The structure adopted was a 27-year was made available as part of the technical assistance
concession on a Build, Operate and Transfer (BOT) basis. offered on this project.

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 CHALLENGES AND ATTRIBUTES

2.2 As Samra Wastewater Treatment Plant, Jordan

OPERATIONAL: 2015

The As-Samra Wastewater Treatment Plant was constructed in 2008 and is the primary facility for
treating wastewater from Jordan’s Amman and Zarqa Governorates (combined population of 6 million).
The demands of a growing population had pushed the capacity of the existing plant to its limits,
presenting safety risks.

The objectives of the As-Samra Expansion Project were to

(i) increase the capacity to treat wastewater

(ii) increase the volume of treated wastewater, and
(iii) protect existing agriculture from untreated
wastewater.

U nder a project finance PPP, the plant was upgraded

between 2012 and 2015, allowing the Government
to treat 70% of the country’s wastewater and meet the
region’s wastewater treatment needs through 2025. The
expanded plant provides 133 million cubic meters of
high-quality treated water per year – equivalent to over 10
percent of Jordan’s entire annual water resources – for
irrigation in the Jordan Valley. The As-Samra plant also successful implementation of the project.
provides bio-solids for potential reuse in fertilizer and Due to the grant nature of MCC’s investment, the project
fuel, and produces nearly 13 megawatts of energy, or was more affordable for the Government of Jordan (who
80 percent of its own energy needs, from biogas and contributed US$20m) and financially attractive for SPC
hydropower, making it one of the most modern and and Jordanian banks. MCC’s grant did not crowd out the
energy efficient treatment plants in the Middle East. private sector, as the private investors earn a return only
on their investment. MCC’s involvement also reduced the
The project was financed using a build-operate-transfer cost of capital, allowing lower water and wastewater tariffs
arrangement. In these arrangements, a government to consumers than might otherwise had been necessary.
assigns responsibility to a private sector entity to finance, Through this financing method, the private sector not
design, build, operate, and maintain the facility for a only provided over 50% of the cost of construction, but it
certain period. The As-Samra expansion was financed assured the Government that the facility will be operated
from the Millennium Challenge Corporation (MCC) – the and maintained at world class standards for 25 years. At
US government’s blended finance vehicle - in partnership the end of the concession period, in 2037, the agreement
with the Samra Wastewater Treatment Plant Company requires that the facility be transferred back to the
Limited (SPC), a private company that built the original Government of Jordan in good working order and at no
plant and operates it under a concession from the additional cost.
Government of Jordan.
The project represented MCC’s first major participation
Under this arrangement, the MCC covered US$93m, or in a build-operate-transfer agreement, and its role in
half the cost of construction, while SPC facilitated debt providing ‘viability gap funding’ was critical to expanding
and equity funding to cover the remaining construction As-Samra. MCC also provided grant funding for the
costs, along with project development and design, Jordanian government to hire transaction advisors to
project management, and interest costs, totalling assist the Ministry of Water and Irrigation in the project’s
US$110m. This ‘viability gap funding’ was key to the commercial negotiation.

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 KEYS TO SUCCESS: BLENDED FINANCE IN THE WATER SECTOR

2.3 Pooled Municipal Bond Issuance, Tamil Nadu, India

OPERATIONAL: 2003

In the 1990s and early 2000s, reforms in India included facilitating private sector investment and
increasing the capacity of municipal authorities, known as Urban Local Bodies (ULBs), in India. In
parallel, growth in the local debt markets meant that local debt became an attractive tool for reducing
the financing gap in the sector, particularly for ULBs. In 1996, the State of Tamil Nadu (population 70
million), the World Bank, and USAID set up the Tamil Nadu Urban Development Fund (TNUDF) as a PPP,
attracting private domestic financing primarily for large ULBs, that were generating reliable cash flows.

H igh transaction costs associated with issuance fees,

legal charges and the lack of a credit rating meant
that many small and medium-sized municipalities ULBs
The state government of Tamil Nadu capitalized a debt
service reserve fund with nearly 150% of the expected
annual principal and interest payments, helping to
tended to be excluded from accessing financing via create investor confidence that the fund could pay
the TNUDF. In response the state government of Tamil creditors if the municipal borrowers were unable to meet
Nadu created a special purpose vehicle - the Water and scheduled repayments. Further credit enhancement
Sanitation Pooled Fund (WSPF). An early WSPF pooled was provided by establishing escrow accounts where
bond issuance took place in 2002, to facilitate access to the 13 participating local governments would make
domestic capital markets for 13 small and medium ULBs, advance payments on their debt service obligations. In
none of which could issue a municipal bond on their own. addition, the arrangement was structured such that the
The bonds were issued by WSPF, and the proceeds were WSPF could intercept State revenue transfer payments if
then lent back to the 13 municipalities as sub-loans to obligations were not being met. Finally, USAID provided
finance their infrastructure projects. The pooled bond took a partial guarantee – underwritten by the government of
the form of a structured debt obligation for US$6.2 million. Tamil Nadu - on the principal in the event of a default.
The bond was AA rated, with multi-layered guarantees,
and had a coupon of 9.2 percent per annum and a The Tamil Nadu pooled fund was able to attract
maturity of 15 years, with put and call options after ten repayable finance to small- and medium sized water
years. These options acted as a safeguard for investors by and sanitation service providers. However, setting it
offering them the opportunity to take their money out prior up took significant time and resources, particularly
to the end of the bond lifespan. in establishing the multi-layered credit enhancement
mechanism. Domestic investors were unfamiliar with the
pooled instrument and the bond needed to be carefully
“The Tamil Nadu pooled fund explained. After the first US$ 6.2m issue in 2003 the
was able to attract repayable WSPF did not issue another bond for several years,
affecting liquidity. This was partly due to the departure
finance to small- and medium of key staff, reflecting the importance of maintaining
sized water and sanitation institutional memory.

service providers.”
The ULBs paid back their WSPF debt obligations from
project and municipal revenues, including water tariffs
and from interest earned on the money deposited from
connection fees. WSPF bonds were unsecured, but
a multi-layered credit enhancement mechanism was
put in place, involving an escrow account and financial
guarantees underwritten by the state government and
local municipal government.

20 |
 CHALLENGES AND ATTRIBUTES

2.4 Municipal Bond Issuance, Tlalnepantla de Baz, Mexico

OPERATIONAL: 2003

Following institutional and regulatory changes in Mexico in the late 1990s there was a boom in
domestic municipal bond market issuance. All followed a similar structure, with federal backing
through a master trust mechanism established by the Mexican government. This mechanism provided
investors with the assurance that payments would be received as scheduled. However, the cost of
bond issuance was high, due to complexity and transaction costs, encouraging municipalities to look
for more cost-effective options.

The Tlalnepantla de Baz bond was the first municipal

bond offering in Mexico to finance infrastructure
investments relying on the strength of the project’s own
revenues and not directly using federal transfers. With
the partial credit guarantee, both Standard and Poor’s
and Moody’s rated the bonds AAA (local) — two notches
higher than the municipality’s rating. By mitigating the
credit risk, it was possible to attract local currency
financing – including from domestic pension funds - that
would not have been available without the guarantee.
By using local currency debt, it was possible to reduce

I n June 2003, the city of Tlalnepantla de Baz (population foreign exchange risk by matching with local revenues.
1 million) successfully issued a ten-year US$ 9 million The issue was fully subscribed, with 8 domestic
bond to fund its water and sanitation investments institutional investors taking up the offering.
program, using the municipal water company’s own
revenues to service the debt, along with enhancements “The Tlalnepantla de Baz bond
to achieve the credit quality required to access domestic
capital market at competitive rates. Significantly, the was the first municipal bond
bond was issued without any recourse to federal offering in Mexico to finance
transfers. The proceeds were used to build the first
wastewater treatment and recycling plant in Mexico City. infrastructure ...”
To secure the loan, the municipality pledged property tax The successful placing of this bond provided evidence
revenues in favour of the trust and the municipal water that municipalities in Mexico could broaden their
utility pledged revenues from water tariff collections. funding options by accessing the domestic capital
Debt service payment were supported by a letter of market, extend the maturity of their debt to better
credit issued by Dexia Credit Local – a development match the long-term nature of the capital investment
bank subsidiary of the European group - for 90% of programmes, and reduce its borrowing costs. Moreover,
the principal and interest outstanding. In turn, Dexia the municipality was able to design a financing structure
was supported by a partial credit guarantee from the that was attractive to long-term institutional investors.
IFC, through their Municipal Fund. These external credit However, the placing involved partial credit guarantees
enhancements were administered in Mexican Pesos that are generally only available to larger and financially
for issuance if funding was insufficient. Additional stable municipal governments.
enhancement was provided through a second municipal
revenue pledge, underwritten by municipal tax revenues
from the parent municipality.

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 KEYS TO SUCCESS: BLENDED FINANCE IN THE WATER SECTOR

2.5 Municipal Project Finance, Rustenburg, South Africa

OPERATIONAL: 2003

The Rustenburg economy (population 500 000) is heavily dependent on the mining industry, and the
expansion of operations in the 1990s spurred population growth, increased water demand for domestic
and industrial uses, and put pressure on existing wastewater treatment facilities. By the start of the
new millennium, infrastructure upgrades were necessary, including refurbishment and expansion of the
wastewater treatment plant, restoration and modifications of the water treatment plant, and repair of
the pipeline infrastructure to improve the reliability of water service provision.

R ustenburg Municipality faced constraints in terms

of institutional and financial capacity, which limited
its ability to finance and upgrade infrastructure. Its poor
During the transaction design stage, which was
supported by technical assistance grants, the institutional
and technical capacity at the SPV level provided comfort
credit rating made it unable to raise finance on its own to the commercial lenders. A contractual provision for
behalf. Meanwhile, the mining sector was economically automatic review and re-bidding of the operator after
motivated to support the municipality in addressing its a specified period was also included in the overall
infrastructure needs. In 2003, the Rustenburg Water structure, to ensure that strong performance would
Services Trust (RWST) was created as a special purpose be maintained over time. The infrastructure has been
vehicle (SPV) thereby ring-fencing its finances from the successfully operated since, and all debt commitments
Municipality. The RWST signed a 25-year concession and obligations have been met. A financially sustainable
contract with the Municipality to finance, upgrade, bulk water and sewerage system was established with
and operate water infrastructure. In addition to the cash reserves of US$12 million after seven years of
revenues generated from municipal bulk water sales, the operation.
initiative was supported by two major platinum mines
(Anglo Plat and Impala Plat), who agreed, via an off-
take arrangement, to purchase the non-potable treated
“The infrastructure has been
wastewater produced. Bulk water sales accounted successfully operated since,
for 50% of the Trust’s revenues, while the off-take
arrangement accounted for the other 50%.
and all debt commitments and
obligations have been met.”
Revenues provided by the two mines for the purchase
of effluent created a strong cashflow stream for the This case shows how small and financially weak
Trust and helped secure a commercial loan from ABSA municipalities can raise significant funding through
bank. Lender confidence was bolstered by the ring- well-structured projects, where there are strong revenue
fenced arrangement of the SPV, and the buy-in of the streams available. Public funds were used mainly to help
public sector (including the Department of Water Affairs structure the transaction. There is potential for replication
and Rustenburg Municipality) in the arrangement. in areas where industry has the capacity and motivation
Financial close for the deal was achieved in December to engage. Private sector companies can provide reliable
2003. A Board of Trustees was set up for RWST, with revenue streams and can pledge such revenues in
representatives from the Municipality and the funding exchange for increased security of supply. A prerequisite
consortium. While the structure of the project ensured for reproducing this model would be to identify private
that the Municipality maintained full control over the companies that have a high demand for water and
Trust, in accordance with national law, the Trust’s steady revenue streams.
constitution regulates the transfer of funds, reducing the
risk of municipal interference.

22 |
 CHALLENGES AND ATTRIBUTES

2.6 Hybrid Finance, Tshwane Metro, South Africa

OPERATIONAL: WORK IN PROGRESS

The City of Tshwane Metro (population 3 million) loses 25% to 40% of the water in its network due to
leaks. Water meters are frequently non-functional. Combined with poor service levels that contribute
to users’ unwillingness to pay, cost recovery is inadequate. However, the capital requirements to
implement a turnaround programme cannot be met using conventional financing instruments, given
the municipality’s inability to service the implicit level of debt. The proportion of non-functional water
meters is growing rapidly, and this has a direct impact on billing and cost recovery. Inadequate
management systems, lack of capacity, poor credit control, consumer resistance to pay more for
services due to poor service levels as well as corrupted databases are all contributing factors to
poor cost recovery. However, significant capital is required to implement a holistic municipal Water
Conservation and Water Demand Management Programme (WCWDM). Thus, funding for such
a programme will often not fit within standard balance sheet financing instruments given debt
sustainability issues and requires an alternative financing approach.

I n response, the approach under development consists

of several sub-projects that will cover a district metering
area [DMA]. Each DMA will be able to be managed and
monitored on a continuous basis, including monthly
rolling annual water balance estimates, active leak
detection, and financial performance measurement.

In terms of financing, the structure is a hybrid between

conventional balance sheet finance and project finance.
By generating new cash flows through interventions
at the sub-project level, the municipality will be able to
build its credit rating and receive financing for future
sub-projects in tranches. This financing would be
contingent on the KPIs for existing sub-projects being grant funding of US$ 8.6 million to identify feasible
met and sustained. The programme is currently under sub-projects and to determine the sequencing. The
development. feasibility study will contain recommendations on the
technical, institutional, legal and financial risks of the
sub-projects. The next phase of the programme relates
“... the structure is a hybrid to post-financial close. Achieving this depends on the
between conventional recommendations from the feasibility study, which will
impact the final terms of reference for the programme
balance sheet finance and and needs to be approved by the municipal council. This
project finance.” will form the basis of the future credit evaluation and
approval process for the financing and implementation of
For the pre-close stage, the Development Bank of the identified sub-projects in the programme. Assuming
South Africa provided a modest level (US$ 16k) of financial close is achieved, it implies total disbursements
grant funding and technical assistance to support a of US$ 270 million in capital expenditure. This will be
pre-feasibility study. Subsequently the Infrastructure financed by a combination of development finance,
Investment Programme of South Africa (IIPSA) provided commercial finance and grants.

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 KEYS TO SUCCESS: BLENDED FINANCE IN THE WATER SECTOR

2.7 Credit Enhancement Facility, Jamaica

OPERATIONAL: 2015

Development finance for this project was sourced from the Caribbean Regional Fund For Wastewater
Management (CReW), a USD 20 million fund which aims to reduce the negative impacts of untreated
wastewater on the environment and human health in the Wider Caribbean Region.

Active between 2011 and 2017, it focused on three areas: Activities were organised across five components areas:

i) bridging the funding gap for investments in 1) Investment & Sustainable Financing;
wastewater collection and treatment; 2) Reforms for Wastewater Management;
ii) supporting reforms in legislative, regulatory, and 3) Communication, Outreach & Training;
policy frameworks to facilitate greater 4) Monitoring & Evaluation;
investment in wastewater management; and 5) Project Management.
iii) fostering peer learning among key stakeholders
in the Wider Caribbean Region.

J ust 18% of Jamaica’s 3 million population had a

sewerage connection in 2010, compared to 80% with
access to piped water; with around 7% of effluent being
system; and three plants were to be rehabilitated.
Following successful completion, the aim is to extend
the programme of decommissioning, rehabilitation and
treated. The Jamaica Credit Enhancement Facility was reconstruction to further facilities. To facilitate this, the
established by NWC, the national utility, in 2012. Using NWC issued a new bond for US$ 125m in 2018, which
catalytic funding of US$3m from CReW to unlock private was underwritten by K-Factor revenues.
capital, the NWC was able to leverage this investment
to obtain US$12m of commercial finance from domestic Although there have been implementation challenges,
financial institutions, with an initial mandate of rebuilding, the Credit Enhancement Facility has been effective in
rehabilitating or replacing 8 wastewater facilities. Raising mobilising commercial finance through the use of catalytic
this funding was possible because the NWC had already capital. Moreover it has established some institutional
established monthly customer surcharges where the memory among domestic financial institutions regarding
income generated was held separately in an account a new and innovative model of financing. Further
established to invest in water and wastewater facilities. information is available in the Annexe.

These so-called K-Factor surcharges provided a

source of collateral and a basis for loan repayment,
“... it was possible to build
reducing default risk and giving NWC greater access to local banks’ confidence in
commercial capital. The K-Factor revenues were higher
than the annual debt service, and by over-collateralising
a mechanism that had not
the loan, it was possible to build local banks’ confidence previously been used in
in a mechanism that had not previously been used in
Jamaica.
Jamaica”
Of the 8 facilities selected to participate in the initial
phase, two were being rebuilt; three were to be
decommissioned, with new conveyance systems
constructed that would connect to the central sewer

24 |
 CHALLENGES AND ATTRIBUTES

2.8 Water Revolving Fund, Philippines

OPERATIONAL: 2008

In the Philippines (population 108 million), traditional sources of finance for the water sector included
international development funds, domestic public funds, and revenues from tariffs. In the 1990s, the
income generated from these sources was not enough to cover infrastructure investment costs. The
focus shifted to mobilising private sector financing, with legal and regulatory reforms introduced to
facilitate this. Legislative reforms in the early 2000s to mobilise commercial finance established a
system whereby water service providers were categorised according to their levels of creditworthiness.
The most creditworthy were expected to replace public funding with market-based alternatives.
H0wever, domestic commercial banks did not have experience of lending to water utilities, nor did they
have confidence in their ability to repay. As a result, private sector finance did not flow into the sector.

I n 2008, the Philippines government established

the Philippines Water Revolving Fund (PWRF) in
partnership with USAID and the Japan Bank for
creditworthy utilities would not easily be able to borrow
for periods longer than 10 years. Typically, utilities need
15 to 20 years to amortise capital costs. With the PWRF
International Cooperation. It was set up as a co-financing providing liquidity and enhancements through standby
facility to facilitate private institutional financing and to credit lines and guarantees, lending risk was sufficiently
support innovative financing, operational strengthening reduced to enable loans to be offered with tenors of 15
and regulatory reform. In addition to the revolving fund years and longer.
mechanism, the programme featured a credit rating
system to help inform investors; and a water project
appraisal training program to build the capacity of
“An estimated six million
lenders. people have benefited from
the new or improved access
to piped water.”
The PWRF mobilised over US$200m million in loans
to more than 20 water and sanitation projects with the
majority of finance being provided by private commercial
banks, attracted by the returns and guarantees provided.
Around 6 million people have benefitted from new or
improved services, and to date there have been no
defaults. 60 percent came from private banks. An
estimated six million people have benefited from the new
or improved access to piped water. To date there have
been no defaults on loan repayment. Moreover, domestic
banks are now lending to water districts even where
concessional finance is not in place. This crowding-in of
The PWRF provides concessional funding that is private finance is a core objective of blended finance and
blended with funds from domestic private commercial can be attributed not just to the mechanism developed,
banks, offering loans over a longer repayment period but to the capacity created for appraising and rating
and at lower financing costs than what is available on projects.
the market. Prior to the establishment of this facility, even

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 KEYS TO SUCCESS: BLENDED FINANCE IN THE WATER SECTOR

2.9 Household Investment in Sanitation, Bangladesh

OPERATIONAL: 2017

Bangladesh (population 163 million) has a strong tradition of using microfinance in various economic
sectors. In 2009 a pilot initiative was developed via a partnership between the World Bank and
the government of Bangladesh initiative to leverage private sector resources and help households
adopt improved sanitation. Most households need to purchase and install their own latrines, and
the programme was developed to offer poor households the option of paying in instalments, and of
spreading the purchase cost over time.

own funds to finance household sanitation loans. PKSF

provides wholesale loan financing to retail MFIs (partner
organizations) to finance household sanitation loans and
ASA provides sanitation loans directly to households,
who use the subsidised loans to pay certified local firms
to construct the latrines. The subsidy is capped to help
target the poorest households.

“Many households are willing

and able to invest in improved
sanitation solutions ...”
The OBA subsidy is paid once an independent agent
has verified that the latrine has been constructed per
specification. According to World Bank data, the
subsidy amounts to between US$5-16 per household,
and effectively reduces households’ weekly repayments
by 11%. Loans can be repaid over a period of up to 55
weeks. This subsidy and extended repayment period
for a relatively small loan increases the access and
affordability of better-constructed latrines for even the
poorest households, while reducing the lending risk for
the MFIs. Many households are willing and able to invest

T he programme was scaled up in 2011, and in

2016 an output-based aid (OBA) component was
added to provide loans to the two leading microfinance
in improved sanitation solutions, but they are not able to
mobilize sufficient funding to invest. Support that enables
households to spread the costs of such investment over
institutions (MFIs) in Bangladesh; the Association time is transformative to the facilities that households
for Social Advancement (ASA, the second largest can procure. The blending of OBA with MFI loans targets
microcredit lending institution worldwide) and the Palli reduces the affordability constraint both by lowering the
Karma-Sahayak Foundation (PKSF, the Government latrine cost; and also though spreading repayments out
of Bangladesh’s wholesale microfinance facility). The in weekly instalments over the course of a year, making
World Bank provided a US$3m OBA subsidy which them more manageable.
was blended with commercial financing and the MFIs

26 |
 CHALLENGES AND ATTRIBUTES

2.10 Facilitated Access to Finance, Cambodia

OPERATIONAL: 2014

In 2015 just one in five Cambodians (total population 16 million) had access to piped water supply; a
much lower figure than in most Southeast Asian countries. Meanwhile, only 7% of rural households
had access to piped water services, compared to 75% of urban households. While small-scale
private sector operators were providing services in urban and peri-urban areas in the country,
their ability to serve rural areas was constrained by several factors. These include a lack of sector
knowledge amongst lenders, including domestic commercial banks; along with relatively low-quality
business plans being prepared by the operators. And while some lenders were extending loans,
they required collateral typically amounting to more than double the loan size. Lenders were highly
selective on what could be offered as collateral, requiring liquid or easily tradeable assets such as
land and buildings. With only short tenors (5 years or less) being offered, these loans were only a
realistic option for highly solvent large-scale water operators.

I n 2014, the French development agency AFD

provided FTB, a local private bank, with a US$10
million concessional credit line and a US$5m partial
credit guarantee, to help underwrite loans by the
bank to small water operators. The credit line
facilitated loans being offered at lower interest rates
and over longer tenors, typically up to 10 years.
Meanwhile, the guarantee provided the bank with the
security it needed to significantly reduce the collateral
it required. Meanwhile, technical assistance was
provided by the World Bank and the European Union
to support operators seeking loans, and to strengthen
FTB’s capacity to evaluate projects. arrangement was wound down, FTB has continued to
extend loans, demonstrating the catalytic capability of
“... over 60,000 households blended finance to reduce risk and stimulate activities
that contribute to improved development outcomes
benefitting from water over the longer term. It also indicates the importance
service improvements.” of a well-developed and concerted programme,
where credit lines were augmented with guarantees
By July 2016, loans totalling US$8.7m had been as well as technical assistance, in order to drive
extended across 32 projects, with over 60,000 structural change.
households benefitting from water service
improvements. Since 2019, when the concessional

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 KEYS TO SUCCESS: BLENDED FINANCE IN THE WATER SECTOR

PART 3
COMMON FACTORS
ASSOCIATED WITH
SUCCESSFUL
BLENDED FINANCE
PROJECTS

28 |
 CHALLENGES AND ATTRIBUTES

PART 3
COMMON FACTORS ASSOCIATED WITH
SUCCESSFUL BLENDED FINANCE PROJECTS
In the figure below, ten distinct attributes relating to blended finance are listed with reference to the
case studies described in this paper. Where an attribute is considered prominent within a specific
case study, this is highlighted in the figure. The attributes are subsequently described in brief, and
in the context of the case studies. While this table does not capture the nuances of these cases, it
does show that certain attributes are consistently evident in successful blended finance structures.
(Tlalneplanta de Baz)
(AS-Samra WWTP)

(Household Saving)

(Water Operators)
(Tamil Nadu UDF)

2.5 South Africa

2.6 South Africa

(Tshwane Metro)

2.9 Bangladesh
(Revolving Fund)
2.8 Philippines

2.10 Cambodia
(Rusternberg)

2.7 Jamaica
2.1 Rwanda
(Kigali Bulk)

2.4 Mexico
2.2 Jordan

(CEFacility)
2.3 India

3.1 Domestic Liquidity ● ● ● ● ● ● ●

3.2 International Liquidity ● ● ● ●

3.3 Project Development ● ● ● ● ● ● ● ●

3.4 Capacity Development ● ● ● ● ● ● ● ● ● ●

3.5 Revenue Diversification ● ● ●

3.6 Sovereign Underwriting ● ● ● ●

3.7 Multi-tier Protections ● ● ● ●

3.8 Industry Engagement ● ● ● ●

3.9 Project Divisibility ● ● ● ●

3.10 DFI Cooperation ● ● ● ● ●

Figure 1: Common Factors in Successful Blended Finance Water Projects

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 KEYS TO SUCCESS: BLENDED FINANCE IN THE WATER SECTOR

3.1 Domestic Liquidity

One of the most commonly observable attributes across the case studies is the mobilisation of domestic capital.
Typically, this is achieved by stimulating domestic commercial banks to lend. This requires a range of credit
enhancements, guarantees and protections that blended finance structures are characteristically able to introduce.
Catalytic interventions may include direct funding from government, such as the US$ 20m provided for the As
Samra plant in Jordan, or activities supported by DFIs and other parties that change the actual and perceived
risk balance for lenders. These interventions include credit enhancements, project design, capacity development
and other technical assistance that helps to stimulate capital flows from domestic institutions such as pension
funds and long-term lenders, as evidenced in Tamil Nadu, Tlalnepantla de Baz, Jamaica and the Philippines.
Similarly, activities that contribute to enhanced return – creating additional revenue streams, or accessing capital
at discounted rates, for example – have mobilised domestic lending in Rustenburg, South Africa. Meeting borrower
demand through domestic capital pools also often has the benefit of matching assets with liabilities without
requiring currency devaluation risk to be incorporated into the lending decision. And the programme in Cambodia
exemplifies the catalytic role that blended finance can play in stimulating changes in a sector that can thereafter be
sustained.

3.2 International Liquidity

For some projects, there may not be sufficient domestic capital available or accessible, or the cost of capital may
be cheaper from non-domestic sources. However, when revenues are in a different currency to repayments, there
is a risk of mismatch due to exchange rate movements. This risk was negated in the case of the Kigali bulk water
project, with the take-or-pay purchase agreement denominated in US dollars, avoiding lenders being exposed
to the risk of collecting end-user tariffs in local currency. For the As Samra project in Jordan, the scale of the
investment required was an important factor in sourcing international capital, and involvement of the Millennium
Challenge Corporation was key to crowding in private finance. Regional funds can also be significant: the
Caribbean Regional Fund for Wastewater Management (CReW) was funded by the Global Environment Facility
and works with 13 countries across the Caribbean to provide sustainable financing, support policy reform and
foster dialogue and knowledge exchange. The Jamaica Credit Enhancement Facility was set up under the CReW,
providing hard currency funds which could be used as collateral by local banks to extend loans for wastewater
projects. In the case of Tshwane Metro in South Africa, projects are in an advanced feasibility study stage, but it is
anticipated that concessional capital from non-domestic sources will be part of the financing mix.

3.3 Project Development

Many blended finance arrangements involve assistance in project development, prior to execution. This is
usually to improve a project’s bankability, i.e. the ability to attract commercial finance in addition to concessional
investments. A good example of project development comes from Kigali, where the preparation process
resulted in a water concession that is similar to a ‘greenfield’ (i.e. new infrastructure) IPP electricity project. This
arrangement is still quite unusual for the water sector, and much less common than ‘brownfield’ contracts, where
the emphasis is on maintenance and rehabilitation of existing infrastructure. Familiarising relevant stakeholders in
the water sector about how such contracts work was a core contribution of the Private Infrastructure Development
Group (PIDG), one of the key actors in this transaction. Project development assistance can also unlock access
to finance for borrowers who would otherwise be too marginal to justify the transaction costs associated with
these structures. Examples include Tamil Nadu’s small and medium-sized municipalities, and the feasibility
studies funded by the WPPF. Assistance can highlight where the biggest incremental returns are, helping to

30 |
 CHALLENGES AND ATTRIBUTES

prioritise projects for investment, as the case studies in Jamaica and Tshwane Metro show; and they can support
new models of cooperation, as per the As Samra project and the Philippines Water Revolving Fund. In all these
examples, the availability of project development assistance was critical to creating the conditions necessary to
catalyse commercial finance.

3.4 Capacity Development

Capacity development is a salient attribute in every case study reviewed in this paper. Support is provided to
borrowers (in terms of achieving investment readiness), to lenders (in terms of evaluating investment readiness) and
to regulators (in terms of improving the enabling environment). Beyond conventional assistance such as education
on how various PPP structures can work (Rwanda, Jordan) support for project developers and borrowers
has included building demand-creation, marketing and promotion capability (India, Bangladesh). For lenders,
capacity development has involved project appraisal training programmes (Philippines, Jamaica), enhanced local
governance through regulatory vehicles (Rustenberg), and improving confidence and trust through transparent
market-based instruments (Mexico, Colombia). For projects that are at an earlier stage (e.g. Tshwane Metro)
capacity development can be critical across all actors, i.e. borrowers, lenders, enabling organisations, regulators
etc.

3.5 Revenue Diversification

As described previously, blended finance structures are associated with reducing risk and/ or enhancing return.
Revenue diversification can contribute to both. In the case of pooled fund instruments as used in Tamil Nadu,
risk is spread across multiple projects, which – along with the protections provided through credit enhancements
– helps insulate lenders from a single point of failure, i.e. one project. Similar benefits of diversification apply
to the structure used in Jamaica, where of the 44 wastewater facilities scheduled for upgrade, a total of eight
were eventually selected, across three different loan packages. In terms of return enhancement from revenue
diversification, Rustenberg is an instructive case study. The sale of treated effluent to two local platinum mines
constituted 50% of project revenues; creating a reliable stream of cash flows and bolstering investor confidence
as it was sourced from the private sector. The remaining 50% of project revenues come from the municipality, in
return for the supply of bulk water and provision of sewerage services, funded through the collection of water and
sewerage tariffs at the household level. The Rustenberg case is interesting not least because it demonstrates how
revenue diversification can involve both the public and private sector as sources of income.

3.6 Sovereign Underwriting

One of the most effective ways to reduce actual and perceived risk is though the borrower’s obligations being
underwritten by a solvent and credible guarantor. In many cases, this function can be provided by central
government through sovereign underwriting of the exposure. In the Kigali project, cashflows are backed by a
take-or-pay agreement with the state-owned utility, meaning that project income is guaranteed by the Rwandan
government irrespective of whether end-users pay on time or in full. Elements of sovereign underwriting feature
in several of the case studies, including India, Mexico and the Philippines. Underwriting of this nature provides
lenders with confidence in contexts where the sovereign has a strong track record of meeting its obligations.
Where that track record is being re-built, blended finance can help to improve investor confidence over time,
contributing to an enhanced enabling environment.

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 KEYS TO SUCCESS: BLENDED FINANCE IN THE WATER SECTOR

3.7 Multi-tier Protections

Self-evidently, the more credit enhancement that can be provided, the less risky and more attractive an investment
looks. Many of the projects described in this paper have multi-tier protections, meaning that even where one
source of enhancement becomes depleted or is otherwise non-operational, other protections can be deployed. For
example, the case of Tamil Nadu featured three levels of enhancement. First, the state government of Tamil Nadu
capitalised a debt service reserve fund that could cover 1.5 times the annual principal and interest payments in the
event municipal borrowers were unable to. A second level of enhancement was created by requiring municipalities
to deposit tax revenues in an escrow account, while a partial credit guarantee provided a third layer of protection.
In the case of Tlalnepantla, the bond issue was backed by a revenue pledge from the water utility. However, a
second municipal revenue pledge was provided – underwritten by tax revenues - if the water revenues proved
insufficient. Similar structures are sometimes used from municipal bond issuance in the US market. In the case
of the Philippines Revolving Fund, in addition to the sovereign guarantee, a private third-party guarantor was also
established that could assign central government revenues being paid to local government units in the event
of default. A similar arrangement was in place in the case of Colombia, where commercial banks can intercept
intergovernmental revenue transfers if loan repayments are not made.

3.8 Industry Engagement

Blended finance involves the use of concessional capital to mobilise commercial investment and so definitionally
involves the private sector on the financing side of the transaction. Increasingly, blended finance involves engaging
the private sector in the operational side too, either as customers (e.g. Rustenberg), under a PPP (e.g. Kigali, As
Samra), or in project execution (e.g. Bangladesh). In the case of Rustenberg, the two platinum mines provided a
valuable source of revenue diversification, as described previously. The expansion of mining operations had put
pressure on the mining sector to help the municipality address urgent water and sewage treatment needs.

In the case of Kigali, the private partner is Metito Group, a Dubai-based international water management company
that is active in emerging markets. The As Samra project was financed using a build-operate-transfer arrangement
in partnership with the Samra Wastewater Treatment Plant Company, a private company that built the original plant
and operates it under a concession from the Jordanian government. In Bangladesh, households use microfinance
loans to pay local construction firms to build latrines, whose quality is then verified by an independent agent. The
arrangement stimulates the economic conditions for these firms to operate, creating a positive multiplier.

3.9 Project Divisibility

A complement to revenue diversification, project divisibility supports the management of risk through financing
projects incrementally and subject to meeting the requisite performance standards. In the case of Tshwane, it is
envisaged that sub-projects will be rolled out sequentially, with the aim of strengthening the financial position of the
municipality over time. Funding will be advanced in tranches against criteria for the achievement and maintenance
of key performance indicators of the sub-projects already implemented. As the programme is rolled out, the
expectation is that less debt will be required to finance the new sub-projects as the municipality will be able to fund
a larger portion through own funds generated from the savings and improved revenues stemming from already
implemented sub-projects. In the case of Tamil Nadu, Jamaica and the Philippines where various formats of pooled
fund arrangements are in use, project divisibility provides the benefit of reduced transaction costs. This helps in
making finance arrangements and guarantees more cost-effective, while simultaneously providing some protection
at the project allocation level.

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3.10 Cooperation with Development Finance Institutions

One of the realities of financial services provision is the presence of competition. This applies to development
finance as it does to commercial finance. Development finance institutions (DFIs) often compete to offer loans
to the most creditworthy borrowers. As a result, some segments of the market are very well serviced (or even
overserviced, crowding out commercial lenders, who cannot compete with terms being offered by DFIs) while
other segments – where credit quality is lower, for example – may be perennially underserviced. While competition
is generally a good thing in the provision of services, given the wider development objectives that are also at play,
this dynamic may not always be conducive.

However, where DFIs work in cooperation there is often the potential for leveraging a more impactful outcome.
Blended finance is a good exemplar of where this cooperation can achieve tangible results. In the case of Kigali,
the African Development Bank (AfDB), PIDG and the IFC worked together to create a different form of concession
agreement, as described earlier, than what was historically used in the water sector. In the case of Tlalnepantla,
the IFC and Dexia – a large European financial group – acted as co-guarantors. In Tshwane, the pre-feasibility and
feasibility studies have been funded by the Development Bank of Southern Africa and the Infrastructure Investment
Programme of South Africa, respectively. And in the case of the Philippines, perhaps the most storied example of
effective DFI cooperation in blended finance, both USAID and the Japanese Bank for International Cooperation
(JBIC/ JICA) provided guarantees.

A promising area for further DFI cooperation is in knowledge sharing.

• The Water Project Preparation Facility (WPPF) was approved by Corporación Andina de Fomento (CAF
– Latin American Development Bank). in December 2018, to accelerate investments in Latin America and
the Caribbean by improving the quality of project feasibility and design studies. CAF finances the WPPF
with USD 5 million per year, with USD 20 million committed to date. International agencies are invited to
participate in the WPPF to co-finance studies, as well as the corresponding investment projects should
they materialise. Currently, AFD has partnered with CAF in co-financing the final design of a wastewater
treatment plant in Ecuador. Other conversations with IFIs are ongoing.

• Meanwhile, the African Water Facility (AWF) which has many features in common with the WPPF, is
an initiative of the African Ministers Council on Water (AMCOW). It is hosted and managed by the African
Development Bank (AfDB). The overall purpose of the Facility is to assist African countries to mobilize and
apply resources for the water and sanitation sector. The AWF began its operations in 2006, and the current
volume of the fund is EUR 130 million.

• And in Asia, the Water Financing Partnership Facility (WFPF), also established in 2006, aims to mobilise
additional financial and knowledge resources from development partners for the implementation of the
Asian Development Bank’s (ADB) water financing program for ADB developing member countries. Its initial
focus was to support achievement of targeted outcomes set for 2006-2010 and was subsequently adjusted
and extended. It will continue to support ADB’s water operations, guided by the Water Sector Framework
2021-2030: Water-Secure and Resilient Asia Pacific that articulates how water operations contribute to
ADB’s Strategy 2030.

As these facilities across 3 continents demonstrate, DFIs can play a unique, important and very successful role
in mobilising investment. To the extent that they can operate in partnership, sharing experiences and promoting
knowledge exchange and transfer, the prospects for accelerating innovative practices around blended finance
remain attractive.

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PART 4
CONCLUDING
REFLECTIONS
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 CHALLENGES AND ATTRIBUTES

PART 4
CONCLUDING REFLECTIONS

The liquidity and functionality of the global financial system has emerged broadly intact
from the pandemic, and both concessional and commercial providers of capital have
remained active. This is important for the preservation of blended finance activity. In this
report, a series of case studies involving the use of blended finance in the water sector
were reviewed, with the aim of identifying some factors that are commonly associated
with successful arrangements. The purpose was to highlight to water practitioners –
particularly whose primary focus is not on finance – some project attributes that appear
to be consistently present. As in any case-based study, the approach has limitations.
The cases span a period of nearly 20 years and there are important nuances associated
with the specific project. Those interested are encouraged to refer to the source
material, using the links in the next section.

Investment in the water sector continues to lag what is required to meet SDG 6 and
water-related SDGs by 2030. The relative lack of more recent case studies attests
to the reality that water remains a relatively marginal part of the blended finance
landscape, both in the value and volume of transactional activity. Indeed, the case
studies suggest that blended finance is often used opportunistically, based on specific
local circumstances, rather than as an expected outcome from a systematic and
strategic process. This matters, because if the enabling environment for scaling up
is to be optimised, a high level of engagement and cooperation is needed across a
range of stakeholders that are exposed to different risks and rewards. Understanding
the interests/motivations of key actors is a sine-qua-non for embedding the incentives
that are necessary to influence behaviours. Under the current status quo, even where
motivations are well understood, the necessary incentives are not in place. This
report concludes by highlighting four challenges that, if better addressed, will support
appropriate incentives to be more effectively embedded into the enabling environment
framework.

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 KEYS TO SUCCESS: BLENDED FINANCE IN THE WATER SECTOR

1
Allocation Challenge
Excessive or inappropriate use of concessional capital can distort market incentives (crowding-out). If
a creditworthy borrower can access financing at very low or zero cost, it is entirely rational to do so,
even if that borrower can afford to pay more. This can create a misallocation of public resources, where
perceived ‘free money’ is directed towards a few entities who are already creditworthy, leaving less for
entities who need this capital to move forward. This can create a spiral where a small group of entities
appear to become progressively more creditworthy (as they avail of concessional capital) while others
struggle to access funding and become less effective. Under these conditions, there is limited scope for
blended finance to scale up, and the model is unlikely to meet its development objectives. Part of the
solution would appear to be for an informed market assessment of creditworthiness, with appropriate
sanctions and incentives provided to both concessional and commercial lenders. However, market forces
determine capital allocation, and the availability of concessional capital inevitably creates some distortion.
Evidence of blended finance in other sectors (such as agriculture, energy and financial services) suggest
this can be overcome, particularly where the development benefit of doing so is clear. However, within
the water sector, where creditworthiness is perhaps a more widespread challenge, the risk of distortion
through the allocation of concessional capital is more acute than is generally acknowledged.

2
Incentive Challenge
The business of providing loans is competitive. This holds equally true whether the lender is a
development bank or a private sector operator. Loan officers are judged by their employers against
a range of indicators – how many loans they made, in what sectors, of what value, and so on. A key
indicator is, of course, loan performance. If two prospective borrowers approach a lender it is rational for
the loan officer to prioritise the more creditworthy applicant. However, a problem emerges when there
are relatively few entities that are perceived to be sufficiently creditworthy to extend loans to. Loan officers
are often effectively competing with each other - to make loans to the most attractive customer. As a
result, the borrowers that arguably need it least are offered the most favourable terms, amplifying the
allocation challenge, described above. And prospective borrowers who are considered higher risk are
either not offered loans at all or may be offered loans on financing terms that are not viable. This nuance
is occasionally lost in narratives that use the healthy balance sheets of some private banks to make the
argument that ‘ample’ funding is available, and the problem is a lack of bankable projects. However these
narratives are usefully evolving to define eligible projects in terms of sustainability also, i.e. including social
as well as economic returns.

Solutions for the incentive challenge are not easily tractable. No lender wishes to lose money, and simply
advocating for lower creditworthiness thresholds is unlikely to change anything. However, there is a case
for widening the performance indicators that lenders can use – for example, incorporating social impact
or ESG outcomes into the scoring framework – such that loan officers have some incentive to identify
and engage with higher-risk borrowers. Or to put another way, this is an argument for less conservatism
and more imagination to help address the incentive challenge.

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 CHALLENGES AND ATTRIBUTES

3
Specification Challenge
Water infrastructure projects are often complex, requiring millions of dollars in finance, involving many
thousands of users, and dozens of policy, institutional and regulatory stakeholders. Projects can take
many years or even decades to proceed from conception to implementation as economic, financial
and political hurdles are negotiated. A wide variety of actors are typically involved in developing project
specifications and preparing engagement terms for different contractors. While considerations of
blended finance may feature from an early stage in this process, some evidence suggests that they
are rarely mandated within project specifications. This also helps to explain why blended finance
often appears to be used opportunistically, i.e. as a result of local enabling circumstances, rather than
something more strategic. One solution would be to embed a requirement to use blended finance within
the project specifications, from the outset. However, it is not obvious who would advocate for this.
Financing decisions are typically made based on market conditions, and the most appropriate financing
arrangement will often change based on current local circumstances. Proscribing blended finance at the
start of a multi-year project could constrain the options for both borrowers and lenders. But if left to be
deployed opportunistically, then the momentum needed to create and maintain an optimised enabling
environment for blended finance may never materialise. An improved process to embed blended finance
structures within project specifications from the outset – perhaps with redress mechanisms to reflect
local market conditions at the time of implementation – may help to address the specification challenge.

4
Accountability Challenge
As the case studies show, blended finance arrangements often involve multiple tiers of guarantees and
other lender safeguards. Some guarantees may be provided by the lender directly, but in other cases the
guarantors include local and national governments. When projects run to plan, these guarantees are not
called on. But on the occasions where they do not, guarantors will rationally seek to protect their interests
to the extent that they can. This can result in disagreements as to how much each guarantor is required
to compensate the lender, even where this has ostensibly been specified in the loan agreements.
Complex projects may not run to plan for a host of reasons and any scope for equivocal determination
may trigger a lengthy legal dispute resolution process. Awareness of this risk may deter lenders from
engaging with blended finance arrangements in the first place, particularly where the option exists to
extend a conventional bilateral loan. While the obvious solution is to prepare agreements that offer
little room for subjective interpretation, this process adds to the transaction costs and may render the
arrangement uneconomic, particularly if the deal is small. Alternative arrangements that involve a single
guarantor, for example, may be more viable from a transaction cost perspective – although this would
likely change the risk profile. In short, there are trade-offs to navigate when addressing the accountability
challenge. These would benefit from greater visibility and discussion, as they can present a significant
impediment to scaling up blended finance.

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 CHALLENGES AND ATTRIBUTES

CONCLUSION
While the case studies serve to highlight some common attributes of successful
blended finance structures within the water sector, there is still limited evidence of scale-
up. This has often been attributed to the lack of bankable projects, or weaknesses in
the enabling environment. This report attempts a more granular framing, highlighting the
challenges of allocation, incentives, specification and accountability. While none of these
challenges can be addressed by a simple universal solution, accelerated innovation in
financial services is a prospect, in part as a consequence of the pandemic. The reality of
global interdependence has been reinforced as each variant of the virus emerges. With
that has come a rising awareness in richer countries that investment in development
brings benefits to donors and recipients alike. There are therefore reasons to be
optimistic that fund flows to the water sector will accelerate this decade, underpinned
by climate adaptation finance. Blended finance remains an important pathway to
achieving SDG 6, provided the sector can unlock the shackle of conservatism and path
dependency to access financing that is consistent with the scale of the opportunity.

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 KEYS TO SUCCESS: BLENDED FINANCE IN THE WATER SECTOR

PART 5
LINKS TO
CASE STUDIES
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 CHALLENGES AND ATTRIBUTES

PART 5
LINKS TO CASE STUDIES

More information on each case study is accessible via the links, below.

Kigali Bulk Water project, Rwanda

Private Infrastructure Development Group (PIDG
https://www.pidg.org/2020/03/world-water-day-the-kigali-bulk-water-concession-meeting-the-challenges-of-private-investment-in-water-
infrastructure/

International Finance Corporation (IFC)

https://www.ifc.org/wps/wcm/connect/e9bc9b20-38bd-4513-ae76-9947f6a2c7d3/PPPStories_Rwanda_KigaliBulkWater.
pdf?MOD=AJPERES&CVID=lHJaYtM

As Samra Wastewater Treatment Plant, Jordan

Millennium Challenge Corporation (MCC)
https://www.mcc.gov/resources/story/section-jor-ccr-as-samra-project

World Bank Case Study (Blended Finance)

https://documents1.worldbank.org/curated/en/959621472041167619/pdf/107976-Jordan.pdf

Pooled Municipal Bond Issuance, Tamil Nadu, India

Development Studies Institute (DESTIN)
https://www.files.ethz.ch/isn/137908/WP68.pdf

World Bank Case Study (Blended Finance)

https://documents1.worldbank.org/curated/en/702211472040099035/pdf/107974-BRI-P159188-BlendedFinanceCasesIndia-PUBLIC.pdf

Municipal Bond Issuance, Tlalnepantla de Baz, Mexico

International Finance Corporation (IFC)
https://ifcext.ifc.org/IFCExt/Pressroom/IFCPressRoom.nsf/0/C28834B69E7E5F0185256CD400599431?OpenDocument

World Bank Case Study (Blended Finance)

https://documents1.worldbank.org/curated/en/156721472042044468/pdf/107978-Mexico.pdf

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 KEYS TO SUCCESS: BLENDED FINANCE IN THE WATER SECTOR

Municipal Project Finance, Rustenburg, South Africa

2030 Water Resources Group
https://www.waterscarcitysolutions.org/wp-content/uploads/2016/02/A-Innovative-Financing-Arrangements.pdf

World Bank Case Study (Blended Finance)

https://documents1.worldbank.org/curated/en/959781472033563640/pdf/107980-South-Africa.pdf

Hybrid Finance, Tshwane Metro, South Africa

UN Habitat (contextual document)
https://unhabitat.org/sites/default/files/2020/02/the_frugs_city_study_report_on_tshwane_south_africa.pdf

OECD Case Study

https://www.oecd-ilibrary.org/sites/a0ecb034-en/index.html?itemId=/content/component/a0ecb034-en

Credit Enhancement Facility, Jamaica

Caribbean Regional Fund for Wastewater Management
https://www.gefcrew.org/index.php/pilot-projects/credit-enhancement-facility-in-jamaica-cefj

OECD Case Study

https://www.oecd-ilibrary.org/sites/5efc8950-en/1/3/2/index.html?itemId=/content/publication/5efc8950-en&_csp_=6f524d6f7dc250ba913c88
ad8727c82b&itemIGO=oecd&itemContentType=book#section-d1e7447

Water Revolving Fund, Philippines

Design Framework (USAID)
https://www.rmaconsult.com/files/123419625.pdf

World Bank Case Study (Blended Finance)

https://documents1.worldbank.org/curated/en/651521472032148001/pdf/107979-BRI-P159188-BlendedFinanceCasesPhilippines-PUBLIC.pdf

Household Investment in Sanitation, Bangladesh

Global Partnership for Results-based Approaches (GPRBA)
https://www.gprba.org/sites/gpoba/files/publication/downloads/2020-09/Bangladesh-sanitation-GPRBA-case-study.pdf

World Bank Case Study (Blended Finance)

https://documents1.worldbank.org/curated/en/455191472040719961/pdf/107975-BRI-P159188-BlendedFinanceCasesBangladesh-PUBLIC.pdf

Facilitated Access to Finance, Cambodia

World Bank Case Study (Blended Finance)
https://documents1.worldbank.org/curated/en/680211472030707975/pdf/107972-BRI-P159188-BlendedFinanceCasesCambodia-PUBLIC.pdf

World Water Week 2021 Blog (AFD)

https://www.afd.fr/en/actualites/tapping-global-finance-expand-access-clean-water

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