Mobilising Capital for Water:

Blended Finance Solutions

to Scale Investment in
Emerging Markets
ABOUT THIS DISCUSSION PAPER
This discussion paper has been developed by WaterAid and the Blended Finance
Taskforce (managed by impact investor & advisory firm, SYSTEMIQ). Its purpose is to
explore how blended finance solutions can unlock capital for high-impact water and
sanitation assets and services that serve developing economies.

WaterAid, founded in 1981, is an international not-for-profit organisation working to get

clean water, decent toilets, and good hygiene to everyone, everywhere. The Blended
Finance Taskforce is a global coalition set up to help mobilise public, private and
philanthropic capital to accelerate the transition to a net-zero, nature-positive and
equitable economy. It structures blended finance vehicles, including ‘SDG Indonesia
One’, the USD 3billion platform investing in sustainable infrastructure in South East Asia
and the USD 625million Global Fund for Coral Reefs.

The paper aims to serve as a conversation starter for members of the development
finance community, private sector investors, developing country governments and water
practitioners, developers and experts on how to best fund a critically underserved sector
– including through new/optimised investment vehicles and products.

Insights and recommendations are based on desktop research, expert interviews and
case study analyses. We screened existing blended finance initiatives both for water and
sanitation, and adjacent sectors, and derived key challenges and lessons learnt to inform
the recommendations for unlocking private finance for water. Synthesised insights from
these case studies are portrayed throughout the paper, while the detailed case studies
can be found in Annex A.

The writing team include Jonathan Farr (WaterAid); Katherine Stodulka, Evelyn Holland,
Isabella Wedl, and Karl Fletcher (SYSTEMIQ); and Nathaniel Mason (independent expert).

We would like to gratefully acknowledge the contributions provided during the expert
consultation by Stevia Angestry, Ger Bergkamp, Chris Chijiutomi, Susan Davy, Kathleen
Dominique, Leticia Ferreras Astorqui, Jeremy Gorelick, Jean-Michel Herrewyn, Steven
Lizars, Meera Mehta, Erik de Ridder, Pierre Rousseau, Josien Sluijs, and Julien Touati,
which helped shape this discussion paper.

BLENDED FINANCE TASKFORCE

c/o SYSTEMIQ
69 Carter Lane
London EC4V 5EQ
United Kingdom
contact@blendedfinance.earth

© Copyright Blended Finance Taskforce. This work is licensed under a Creative Commons License Attribution-NonCommercial 4.0 International (cc by-nc 4.0).
All photos: iStockphoto
TABLE OF CONTENTS
About this discussion paper 1
Executive summary 4
Introduction: The water investment opportunity 6
Financing challenges specific to water & sanitation 10
Blended finance solutions to unlock investments 12
Key learnings for water & sanitation from successful 14
blended finance solutions
Overcoming monetisation challenges 14
Overcoming cost-related challenges 16
Overcoming governance challenges 17
Conclusion and recommendations 19
Annex: case studies 26
Endnotes 32

Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets 3
EXECUTIVE SUMMARY
Well-managed water and sanitation systems are central to human and planetary health. Yet they
are chronically under-invested, especially in low- and middle-income countries. While we know that
the social returns from water investments reach far beyond their economic impact, perception of
financial returns tends to be much lower. This paper puts that perception to the test. It argues that,
when blended with catalytic sources of public funding, private capital can find investable
opportunities, at scale, in the water sector – while generating outsized benefits for countries
and communities.

Today, over a quarter of the global population don’t have access to safely-managed drinking
water. Almost half the world lacks proper sanitation. Population growth, rapid urbanisation,
agricultural demand, and climate change – especially climate-related natural disasters like drought,
extreme heat and flooding – amplify these challenges. 99% of people impacted by natural disasters
experience water-related distress. Meanwhile, climate finance only covers a fraction of the adaptation
costs needed in climate-exposed regions. This funding gap for water and sanitation generates major
economic, social, and environmental costs. Children die due to diarrheal diseases, floods devastate
communities, crops fail. These losses are preventable. Better and more investment in efficient, inclusive
and nature-positive water systems is key.

To achieve universal targets for access to clean drinking water, sanitation and hygiene, investment in
low- and middle-income countries needs to triple by 2030, with at least $200 billion a year needing
to be invested into water-related infrastructure and services.

This funding need conceals an even greater opportunity. Scaling and optimising water-related
investments can deliver at least USD 500 billion a year in economic value. Investment opportunities can
be found across the spectrum of water assets and services, including (1) ‘big water’ infrastructure (USD
157 billion investment opportunity); (2) decentralised, small-scale sanitation and water solutions (USD
29 billion investment opportunity); (3) nature-based solutions including restoration and protection of
watersheds (USD 21 billion investment opportunity). Additional concessional capital will be needed to
help improve water governance in countries to strengthen the enabling investment environment.

Challenges specific to water and sanitation – especially cost, monetisation, currency risk and
governance – have historically hampered investment in the sector. However, financial innovation
that optimises the use of public and philanthropic funding to de-risk and crowd in private
capital (blended finance) offers an opportunity to overcome these challenges. Blending capital
with different risk/return requirements can increase the overall pool of capital available to invest in
high impact sectors like water. Tailoring the right blended finance structures (like first loss equity,
guarantees, insurance, currency hedging, and targeted technical assistance) aligns development and
financial goals.

Unfortunately, the USD 200 billion annual financing gap for water and sanitation is growing.
The good news is that this sector is attracting increasing attention from public, private and
philanthropic investors. That makes it more urgent than ever to design the right structures to capture
this increasing interest. To date, investment in this area is limited to a small number of successful
projects, and water projects struggle to compete with other sectors to attract private funding.

4 Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets
For example, only 9% of investment in water assets/services in developing countries comes from
the private sector; versus 87% in telecoms and 45% in power. To rapidly unlock the investment
opportunity in the water sector and reduce the costs of an inefficient, unequal and environmentally
destructive system, players across the financial system will need to work differently together. Key
recommendations to accelerate, scale, and optimise investment in this sector include:

Donor governments should deploy concessional capital more catalytically to de-risk and crowd
• 
in private investment

Philanthropies should play a pathfinder role, utilising flexible capital to innovate and scale new
• 
business models and trial new solutions to the barriers which currently prevent investment in the
water sector

Multilateral Development Banks (MDBs) and Development Finance Institutions (DFIs) should
• 
set mobilisation targets for their capital, embed a more strategic focus on water and sanitation
in climate finance, and use guarantees and other blended finance instruments for ‘big water’
infrastructure

National Governments should send clear signals to investors about favourable investment
• 
environment through clear, climate-integrated water strategy and enabling policy and regulation

Project developers, Entrepreneurs,Incubators, NGOs and Civil Society should strengthen

• 
partnerships to ensure bankable solutions that attract private capital and create co-benefits for
communities where possible

Private sector investors should support early-stage development of water and sanitation assets,
• 
and ensure their portfolios are aligned with planetary boundaries and SDG goals for water

Corporations should explore water conservation and restoration activities to reduce costs and
- 
improve ESG outcomes of their supply chain

- P
 rivate equity firms & asset managers should explore innovative ways to ringfence assets
to reduce risks, and bundle transaction to achieve scale

- B
 anks, insurers & pension funds should scale sovereign financing for water infrastructure
de-risked by guarantees

Academia and NGOs should standardise what ‘water positive’ assets and impact looks like
• 

There is a cross-cutting need for enhanced strategic coordination between different capital providers
and other actors to ensure coherent and joined-up interventions.

Unlocking private investment for equitable and sustainable water outcomes requires significant,
sustained, and collective effort on the part of both public and private players. But we know what to
do. This paper provides targeted recommendations for players across the financial system to optimise
and unlock capital for this critical sector. Not only because water is central to delivering climate
action and the SDGs, but because there are real opportunities for investors as well as countries
and communities, to mitigate risk, generate returns, and mobilise large-scale finance if we get
this right.

By laying out clear opportunities and tangible case studies, we hope this paper helps accelerate
investment in water solutions which are good for both people and planet. It should also prevent us
reinventing the wheel by highlighting where we can scale and replicate what is already working.

Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets 5
INTRODUCTION: THE CASE FOR CHANGE
The cost of poorly managed water and sanitation services, to society and the economy, are both well
documented and unacceptably large. But less is understood, particularly in low- and middle-income
countries (also referred to in this paper as emerging markets), about the opportunities: where they are,
where the private sector can play a role, and how blending models can align objectives and make best
use of concessional and non-concessional capital.

There is a critical need for investment to address water and sanitation service gaps globally. This
investment requirement will only increase as a result of the climate crisis.

Today, 26% of the global population are lacking safely managed drinking water and 46% do not
have access to safely managed sanitation.i Over 97 million people were affected by water disasters
in 2020, which carried a death toll of at least 8,400 lives and led to USD 152 billion in damages.ii
Inadequate drinking water services cause much as 10% of the global disease burden.iii In a business-
as-usual scenario, global water requirements would grow to 40% above current accessible and reliable
supply by 2030. Any investments into water and sanitation, therefore, must be targeted to increase the
available quantity of freshwater, improve its quality, improve access, or mitigate risks such as floods
and droughts.

Climate change will affect, and indeed already is already affecting, the availability and quality of water
resources. A warmer climate is projected to increase the frequency of droughts, worsen water quality
(due to e.g., heavy rainfalls which increase sediment, nutrient, and pollutant loadings), and reduce
renewable surface water and groundwater resources significantly in drier lower-latitude regions. In
addition, rising sea levels will accelerate saltwater encroachment at the coast, as coastal regions
become more prone to flooding and groundwater aquifers are contaminated with saltwater.iv

The capital investments needed until 2030 to achieve safely managed water supply, sanitation
and hygiene are estimated at USD 200-400 billion per year in low- and middle-income countries.v
Current service gaps create hidden costs to both health and wealth of at least USD 500 billion
per year.

The current funding gap for water and sanitation amounts to roughly three times the current spending.
When considering the global investment need for all water infrastructure – including irrigation and
flood protection – this figure is even higher at USD 900-1500 billion a year.vi

The lack of access to safely managed sanitation for almost 4 billion people has devastating effects on
global health and is a leading cause of diarrheal diseases, which kill over 290,000 children under five
every year.vii Water is critical from an economic perspective, with annual losses related to inadequate
water supply and sanitation estimated at USD 260 billion per year. In some countries, more than 6% of
their annual GDP are lost due to poor sanitation and hygiene. Urban property flood damages amount to
USD 120 billion p.a., and the effect of water insecurity to existing irrigators is estimated to be economic
losses of USD 94 billion p.a.viii

6 Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets
USD 200 billion in water-related investments in LMICs could bridge the current funding gap and
200 billion
achieve globalUSD in water-related
benefits investments
of at least USD 500 billion in LMICs could bridge the current
funding gap and achieve global benefits of at least 500 billion USD
Water sector funding, USD billion

Nature-based solutions 500+

Small-scale WASH
‘Big water’ infrastructure

x
Benefits include estimates of

2.5
287 avoided hidden cost to
31 13 10 households and industry in
the water system, including
41 58 206 health, avoided floods, and
-81 21 efficiency improvements
29

214
157

Funding need Current spend Funding gap Benefits

Based on Hutton and Varughese (2016), Rozenberg and Fay (2019) State of Finance for Nature – UNEP (2021), and GWP & OECD (2015)
Figures are based on global estimates that focus on Low and Middle Income Countries (LMICs). Where specific estimates for LMICs could not be found, global figures were instead
scaled by the proportion of GDP covered by these countries. All figures represent the capital cost of needed investments. Costs will be higher when considering operation and
maintenance of assets, and benefits are likely under-estimated based on the true value of water security. Numbers have been rounded for clarity - Rounded totals may not equal
sum of rounded constituents.

Despite these escalating threats, current levels of climate funding and other SDG financing
cover only a fraction of adaptation costs.

Most low- and middle-income identify water as a key sector in their climate change plans. However,
domestic climate finance flows to the water, sanitation, and hygiene (WASH) sectors are difficult to
track due to a lack of data. International Monetary Fund data suggests that general domestic spending
on water rarely exceeded 0.3% of GDP, in countries for which data are available.ix

Only 1.6% of international, public climate finance goes to basic WASHx – the types of service that
poor people in rural and peri-urban areas in low- and middle-income generally rely on. While the
commitment to COP26 to double adaptation finance should be welcomed, whether this funding will
actually flow from donor governments remains to be seen. Much more transparency around donor and
development funding – especially for adaptation and resilience – will be critical to unlock further funds
for water and sanitation in emerging markets.

To achieve USD 500 billion+ of benefits, investments need to target three different kinds
of water & sanitation-related assets and services: ‘big water’ infrastructure, small-scale
decentralised WASH solutions, and nature-based solutions. There is no universally adopted
framework that defines the different types of water-related investments. For the purpose of this paper,
we will consider investment opportunities in water assets and services under three categories, with a
fourth overarching component of water governance.xi

Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets 7
 1. ‘Big water’ infrastructure
Water supply infrastructure linked to agriculture and other industry sectors,
• 
such as dams and reservoirs for hydropower and agricultural water management,
irrigation canals, water treatment and distribution networks for food industry
companies, and other industry sectors including desalination plants

Large-scale, networked water supply, treatment & sanitation infrastructure

• 
for municipal uses including reservoirs, pipelines, channels, and other forms
of water distribution infrastructure as well as primary water treatment and
collection, and treatment of sewage and wastewater; some of these might
include waste-to-energy

Flood protection and urban drainage (grey) infrastructure, including dikes,

• 
sewer systems, retention facilities, and open channels that improve resilience
against flooding and storm water

2. Small-scale WASH solutions

Non-sewered sanitation solutions, including a range of technologies and service
• 
delivery models for the safe disposal of human urine and faeces in settings where
centralised, large-scale infrastructure is absent or not cost-effective

Decentralised, off-grid water supply and treatment, including energy-efficient

• 
and/or solar-powered point-of-use systems and point-of-entry systems (designed
for individual households), and small-scale systems (designed for communities)
providing abstraction, purification and/or distribution of water where centralised
supply systems are not feasible (e.g. in rural communities or informal settlements),
and small-scale desalination solutions

3. Nature-based solutions for protection and restoration

Such as upstream ecosystem restoration or farm management practices that improve
water quality from soil filtration, increase reliability of water availability and resilience
to water related disasters
Watershed restoration, protection, and management, including, e.g.,
• 
reforestation and rewetting of wetlands

Regenerative agriculture, including the reduction of the use of chemical fertilizer

• 
use and other potential pollutants to avoid water pollution from agriculture

4. Water policy & governance

This forms a critical component of the enabling environment for investments, including
integrated watershed planning and collaboration, monitoring of water quality
and quantity, and law enforcement capacity to ensure equity and prevent water
contamination or over-extraction. Governance requirements and enabling services
associated with the categories above needs to be provided by public sector, although
some, like specific water monitoring and data services, can involve private participation.

8 Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets
Each of the water sub-sectors presents a different mix of revenue sources and level of public
involvement. As such, the blended finance mechanisms to unlock private capital going into these
sub-sectors likewise vary in their structure and application. Across the water ‘value-chain’,
investors of all sizes – from large infrastructure funds to individual angels – have deployed capital
towards addressing water challenges. The goal of this paper is to describe the possible financing
mechanisms, highlight success stories to date, and derive actor-specific recommendations so
these examples can be replicated and scaled.

From funding gaps to investment opportunities

From funding gaps to investment opportunities
Sector Example funding
Sub-sectors Revenue streams Examples
(Funding gap) models
Water supply infrastructure for O&M / Infrastructure Land or volume-based Olmos Irrigation & West
agriculture and other industries concession PPPs tariffs, service fees Delta projects
‘Big water’ Subsidised (tiered)
Municipal supply, treatment, and Infrastructure funds, Kenya Water Financing
infrastructure tariff, Local taxes
sanitation Green bonds Facility
($157 bn)
Flood protection and urban drainage Land value capture Sale of development Ahmenabad riverfront
(grey infrastructure) mechanisms rights, Special levies restoration
Non-sewered sanitation solutions Impact investment Taxes, donor transfers, Sanivation, LooWatt
funds, Accelerators household payments
Small-scale
WASH Off-grid water supply and treatment Impact funds, Pay-as-you-go or prepay City Taps, AquaForAll,
($29 bn) microfinance tariffs Water Equity
Small-scale desalination / irrigation Microfinance Tariff structure Solar Water Solutions

Watershed restoration, protection, Water funds, supply Downstream users or Upper-Tana, Quito
Nature-based and management chain finance PES models water funds
solutions
($21 bn) Regenerative agriculture Land restoration funds Pay for performance or Sustainable Water
PES models Impact Fund

Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets 9
 FINANCING CHALLENGES SPECIFIC
TO WATER & SANITATION
There are unique barriers to financing water and sanitation in low- and middle-income countries which
can hinder private capital providers and, in some cases, make it infeasible to replace public funds.
These can be split into three broad categories of challenges: monetisation, cost, and governance. While
some of these are challenges specific to water and sanitation investments, others (particularly for
governance), relate to investing in emerging markets more generally.

Monetisation is challenging due to affordability constraints, inefficient subsidies, latent demand

for sanitation, and harder-to-monetise public benefits.

Water is currently often under-priced and affordability constraints limit pricing options: Unlike for
most other scarce resources, there is often no clear link between the price of water and its value, a root
cause of its mismanagement. Where water is priced, this is often driven by attempts for cost recovery
and affordability concerns, not value delivered. From an investment perspective, the typically low prices
of water and sanitation services result in unattractive returns for the associated risks. Particularly
in emerging markets, affordability concerns often lead political decision-makers to keep tariffs low,
although this might not always reflect the willingness and ability of poor households to pay for water
and sanitation services. Indeed, alternatives to networked water supply often end up costing poorer
households more than their wealthy neighbours. Water subsidies meanwhile can lack targeting and
efficiency, further disguising the true value of water, and typically benefit households that are already
connected to the network. For those lacking a connection, affordability of up-front connection fees can
be key constraint.xii

Sanitation services require creation of demand and market building: Off-grid sanitation businesses
often face low awareness and low demand for services and products. This can require social marketing
of the convenience, dignity, and health benefits to create demand.

Public benefits of water can be hard to monetise: The water sector offers a mix of public and private
benefits; where public good benefits are predominant, as in the case of flood protection, or public
health benefits associated with sanitation, they cannot be easily monetised, undermining potential
revenue flows.

Long-term investments face liquidity risks: Water infrastructure investments usual require long-term
investment commitments and can be difficult to exit when desired.

Cost-related investment challenges result from long amortisation periods for ‘big water’,
high transaction costs for small, decentralised solutions, and externalisation of costs from
upstream actors.

Big water infrastructure requires long-term investments: Infrastructure to store and transport large
amounts of water is capital-intensive and calls for a high initial investment. When compared to energy
infrastructure, long-term pay-back periods can be lengthened by low rates of cost recovery resulting
from the monetisation challenges laid out above. To palliate the risk of lending to utilities, commercial
investors often offer shorter financing (5 to 7 years) than large water infrastructure needs (at least 15 to 30
years), together with high interest rates and collateral requirements, such as sovereign guarantees.

10 Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets
The generally small scale of water & sanitation projects increases transaction costs: apart
from large water utilities and industrial projects, many projects in the water and sanitation sector are
small, context-specific, and require investment at smaller scale. This is especially the case for off-grid
solutions, but also for small-scale municipal water infrastructure. Transaction costs for investors can
be prohibitively high, as every project typically requires separate commercial and legal due diligence.
Commercial investors are therefore more interested in large-scale investments with deal sizes greater
than USD 50 million.

Costs resulting from negative effects of upstream activities are externalised: The availability
and quality of water is highly affected by local, context-specific upstream activities, particularly from
agriculture or industry, which impose additional costs. The negative downstream effects are usually not
properly accounted for.

Service providers may have credit or counterparty risk: Many water and sanitation service
providers in low and middle-income countries, even larger utilities and municipalities, have weak or no
credit history on which to base financing decisions.

Governance challenges include perceived corruption risks, the need for close collaboration
between state and non-state actors, and the need for consistent measurement standards.

Country-specific policy goals and regulations can create a poor enabling environment for
investment: Water-specific policies, for example on tariffs or subsidies, can constrain revenue flows.
Some countries also have policies that prevent mobilising finance, e.g., explicit prohibitions for private
investors to be involved in the sector. Lack of an established domestic financial sector and capital
markets further contributes to a poor enabling environment.

High degree of interconnectedness requires collaboration across jurisdictions: Catchment

and watershed areas sometimes span different companies, states, or countries, which makes the
coordination of water management more challenging. At the project level, investors usually have a
preference to invest in discreet units, such as water extraction and treatment plants that have clearer
revenue streams than, for example, water distribution networks.

Corruption risks (real or perceived) hinders investment in emerging markets: Large-scale

water infrastructure projects can carry significant corruption risks linked to the procurement of civil
works and associated design, supply, and consultancy services. Private investors or multinational
project partners tend to be concerned about reputational risks and the uncertainty of the economic
environment and bureaucratic quality, especially if they have not worked in the country before. This is
especially true for large scale projects.

Economic data on water is insufficient and measuring water impacts lacks standardisation:
A lack of transparency on the economics of water resources makes it difficult to assess future demand,
supply, and water productivity. This constrains the development of knowledge-based water policies
as well as economic and financial decisions.xiii Climate change increases the challenge, as historical
hydrological patterns are no longer a reliable basis for the future projections. The lack of appropriate
analytical tools and data to assess the track record of complex water-related investments can deter
financiers. In addition, there are currently no agreed methods for measuring corporate impacts on
complex water systems, increasing the difficulty of target setting and performance monitoring.

Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets 11
BLENDED FINANCE SOLUTIONS TO UNLOCK
NEW INVESTMENT FOR THE WATER SECTOR
Using the right instruments to optimise public and philanthropic funding can mitigate risks, overcome
key barriers, and strengthen the development of high-quality pipeline to create a more efficient and
investable water sector. Targeted use of blended finance can thereby overcome the disincentives
private sector investment has faced in countries and sectors where the contribution to sustainable
development would be highest.

Blended finance is the strategic use of public or philanthropic

development capital to de-risk investments related to the SDGs
in order to attract commercial capital from private investors who
would otherwise not have participated. In other words, it ‘blends’
capital which has a development mandate with capital which
does not, in a way which makes the SDGs more ‘investable.’xiv

By de-risking investments, development capital becomes catalytic in increasing private

sector investment.

To date, blended finance vehicles have mobilised at least USD 258 billion (2012-2019)xv in capital
towards sustainable development in emerging markets, largely driven by clean energy investments.
Blended finance in infrastructure is often particularly interesting for private institutional investors due
to the benefits of strong long-term returns, portfolio diversification, and significant downside protection
provided through blended finance structures.

Financial additionality and development additionality are key to the positive impact of blended finance,
in other words the public investment must result in private investment that would not have materialised
without it, and the commercial investment secures development impacts that would otherwise not have
materialised. xvi Measurement of both has been challenging, but as methods evolve their robustness
is expected to improve. Usually, blended finance aims to enable a capital market building process by
shifting from purely concessional development finance to blending concessional development finance
with non-concessional development finance to crowding in commercial finance.xvii In the longer term,
growing institutional capacity and increased experience and understanding on investor side may
create a virtuous cycle as risks are diminished, and private investments will can be attracted without
need for development capital.

12 Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets
 
 
 

  
 


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Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets 13
KEY LEARNINGS FOR WATER &
SANITATION FROM SUCCESSFUL
BLENDED FINANCE SOLUTIONS
There is no standardized ‘playbook’ to design and develop blended finance structures for water and
sanitation projects, but successful examples do exist, which reveal insights on the roles of different
actors to catalyse investment. The following examples and lessons learnt are based on a selection of
existing blended finance case studies as well as on expert interviews.

A number of strategies have been successful in overcoming water-specific financing challenges

A number of strategies have been successful in overcoming water-specific financing
related to monetization, costs and governance
challenges related to monetization, costs and governance
Strategies to overcome challenges with case examples, non-exhaustive

Long-term purchase or offtake Creating a market for rural

agreements with utilities sanitation solutions
Monetisation
challenges Pre-payment models to Monetizing the benefits from
Energy IPP overcome perceived improved upstream watershed
affordability constraints management

Credit enhancement instruments Aggregation and standardization to lower

such as guarantees transaction costs, via funds or companies
Cost-related
challenges
Upfront donor capital for project and
pipeline development

Clear, climate-integrated Political risk insurance Common understanding and standardization of

national strategies on water water impact measurement
Governance
challenges Collaboration with trusted local
institutions and credit worthy
intermediaries

Overcoming monetisation challenges

User pays: Bottom-up approaches can create viable markets for water and sanitation services in
emerging markets; mobile technology can be leveraged to improve access to services through
innovative pre-pay or pay-as-you-go models.

Despite a perception that end-users will be unwilling or unable to pay, several examples have shown
a viable market can be created for water and sanitation services. Where affordability is a key constraint,
targeted financial support in partnership with domestic/local financial institutions can be crucial to
achieve desired outcomes.

To help develop the market for sanitation in rural areas in Indonesia, for example, FeelWell Ceramics
uses an approach where they work with the local government to establish free public toilet facilities,
thereby generating interest and increase awareness of the benefits of sanitation. Building on the
demand generated, they then sell their affordable products to households in the area through local
intermediaries.

14 Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets
The Water Credit Initiative’s microfinance approach helps create a market for water and
sanitation solutions by cooperating with domestic financial institutions on offering small, affordable
loans to households to improve water and sanitation access. Not only are poor households willing
to take up these loans, but there is also a very low risk for the financial institutions, with repayment
rates at 99%.

Leveraging existing technologies like mobile payments can help ease technical challenges
in providing water services to the urban poor by making payment systems more convenient,
transparent, and accessible. Despite a common conception that access to financing is a key barrier
for poor communities, greater convenience and transparency can go a long way. For instance,
CityTaps, a pre-payment service for water access through mobile payments, reports that 25% of
their users in Niger are on less than USD 25 per month yet using their service has lowered water
bills for most.

Linking the benefits of water investments to more revenue-generating sectors (such as

power, food & agriculture) to monetise otherwise ‘unpriced’ natural capital assets (like clean
water and other ecosystem services).

Several water funds have been established globally to coordinate conservation and restoration
activities at the watershed level through funding by corporate (or public) downstream users. These
downstream users are incentivised to invest reliable water availability, quality, or other ecosystem
services created through water-related nature-based solutions that generate cost savings. The crux
for unlocking commercial contributions from private sector players is to identify a clear link and
business case between the integrity of upstream supply and the benefits for downstream users.

In the case of the Upper Tana Water Fund, for example, the global beverage corporation Coca
Cola, a local electricity generation company, and the city’s water and sewerage company have
supported upstream interventions for water resource protection, which resulted in significant cost
reductions for the companies. Another example in development is the Cloud Forest Blue Energy
Mechanism which engages hydropower operators in Latin America to pay for upstream forest
conservation and restoration. Cloud forests provide measurable ecosystem benefits (and cost
savings) to the hydropower industry in the form of reduced sedimentation, increased water flow and
improved water regulation.

Where funding is unavailable for municipal water supply and treatment, projects can be linked to
local industrial users with existing water assets in the area. In this model, local water treatment
facilities associated with industries for their own operations, e.g., livestock farming or mining, can
be extended using tacked-on public funding to serve surrounding communities by adding the
necessary distribution infrastructure.

Accessing voluntary carbon credit markets helps monetise the co-benefits of nature-based
water conservation and restoration activities while mitigating currency risks.

Carbon credits markets provide another avenue to monetise ecosystem services provided by water-
related nature-based solutions. Projects that generate Certified Emission Reductions (CERs) can
be verified and sold to the voluntary market. For instance, the Pennon Group, a UK-based water
utility company, funds NBS activities by farmers and landowners to improve water quality who then
benefit from the sale of carbon credits. As these voluntary market are global, these credits can
mitigate local currency volatility.

Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets 15
Building a business ecosystem along the value chain, for example through waste-to-energy
models, can help make ‘unpriced’ elements financially sustainable.

For ‘harder-to-monetise’ sectors like sanitation, bankable projects can be developed by integrating
different elements of the waste value chain. For instance, waste to energy technologies have been
used to make sanitation services a financially sustainable business opportunity. While sanitation
services themselves are often difficult to price, they can be monetised by converting sludge into usable
inputs for commercially valuable products such as power generation or fertilizer. Prerequisites for this
business models are a reliable supply of sludge and secure off-take agreements. In Kenya, for example,
Sanivation is helping to develop new value chains for faecal sludge from the ground up that transform
treated sludge into briquettes that can be used for heating and energy.

Long-term purchase or off-take agreements and affordability assessments can ensure

profitability.

Linking investment with purchase agreements from public entities to ensure revenue flows can reduce
monetization challenges. For instance, the private sector operator of the Kigali Bulk Water Supply
project in Rwanda has a long-term agreement with Rwanda’s public water utility WASAC for selling
drinking-quality water. An affordability assessment made sure that costs did not exceed a certain level
which would have made corresponding tariffs unaffordable for the population.

Likewise in India, hybrid annuity models (HAM) have been utilised to build and improve waste
management transportation and treatment facilities under the Namami Ganga Programme. Using
HAM, municipal governments provide an upfront construction and ongoing annuity payments to
private waste management service providers selected through competitive bidding process. Ongoing
payments can be linked to meeting certain key performance indicators, giving service providers greater
certainty of payment over longer periods.

Overcoming cost-related challenges

Credit enhancement instruments, such as guarantees, have been successful in addressing credit
risks and long payback periods for infrastructure investments.

Credit enhancement, such as the use of guarantees or revolving funds, address the payment
uncertainty that water infrastructure often faces due to uncertain revenue streams and long pay-back
periods. Several examples of water and sanitation infrastructure financing, for example the Jamaican
National Water Commission, have used guarantees. These can come from both from domestic
and international institutions, along with other blended finance instruments to back loans for the
infrastructure development.

Early-stage capital helps bear high upfront costs for pipeline development. Some initiatives have
built in re-investment models where a portion of the benefits from current projects are captured
and re-invested in further projects.

Up-front funding is needed to identify the opportunities, fund project development, and structure
investments. This upfront capital is usually provided by donors or philanthropic funds, e.g., in the case
of Climate Investor One and Two for which donor funds cover the pipeline and project development
costs. Another prominent example is the Private Infrastructure Development Group (PIDG) which
provides upfront funding, knowledge delivery, capacity building and targeted technical assistance to
make projects more commercially viable and creditworthy.

16 Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets
To create leverage from donor capital, it is vital to develop a self-funding model where benefits from a
program can be re-invested into its expansion. For instance, the Emerging Africa Infrastructure Fund
provides upfront capital in the form of equity and loans for large water infrastructure projects, and once
the fund closes a deal, a certain amount is captured to invest in further projects.

Aggregation of small investments can increase the attractiveness by lowering transaction costs;
having an overarching framework facilitates raising funds for multiple smaller projects.

To achieve an attractive deal size for investors, small-scale projects need to be aggregated. Bundling
projects together is also key to diversify the risk for one particular deal.

The Pennon Group uses an independently verified Sustainable Financing Framework and reporting
process that facilitates the pooling of smaller projects into green bonds and provides transparency for
investors, while avoiding the need to raise financing deal-by-deal. Likewise, the Kenyan Pooled Water
Fund (KPWF) aims to aggregate many water supply projects into one investable vehicle, where the
KPWF will serve as intermediary between the projects and the funding raised.

Overcoming governance challenges

Cooperating with countries that have clear strategic goals regarding water & sanitation and
where government receptiveness to private investment helps create a supportive enabling
environment.

The willingness of governments to involve the private sector in the domestic water sector is a
prerequisite for the success of infrastructure projects funded with private capital. For example, in
Rwanda, the government’s strategic policy goal to achieve universal access to drinking-quality water
created the framework conditions for the Kigali Bulk Water Project, where public and private actors
worked closely together. Similarly, Egypt has a clear strategy and vision to develop water infrastructure,
and the government has proactively worked towards creating an enabling environment for these
investments in cooperation with Development Finance Institutions.

Political risk insurance and collaboration with trusted local institutions can be used to overcome
political and corruption risks.

Political risk insurance can help lower the risk from unexpected policy changes and political conflict.
For instance, the U.S. International Development Finance Corporation offers coverage of up to USD
1 billion against losses due to factors such as currency inconvertibility, government interference, and
political violence including terrorism. Another approach is to work with quasi-governmental institutions
in emerging markets, such as the Colombian Financiera de Desarollo Nacional, a financial
corporation for infrastructure projects that had been founded as part of the Colombian government’s
move to strengthen its institutional capacity and build up national infrastructure.

Over time, private providers of political risk insurance in emerging markets, such as Liberty Specialty
Markets, could increasingly be used as water and sanitation project development becomes more
standardised.

Better understanding and standardising water impact measurement would help companies and
investors to engage in the field.

Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets 17
Without a common understanding of water impact, providers struggle to credibly measure the impact
of investments, impact investors have difficulties to tell a compelling water story, and all investors
struggle to quantify their water liabilities. Compared to greenhouse gases, there is no universally
agreed-upon standards for water but rather a multitude of competing efforts to measure impacts
that are often locally specific (e.g. Alliance for Water Stewardship Standard, Ceres Valuing Water
Investor Taskforce, Science-Based Target Network). New concepts like ‘water net positive’ and
‘water footprinting’ have been developed but are still in a low maturity. There needs to be a concerted
effort from NGOs and the scientific community to develop alignment on a single, usable water impact
framework which investors and multinational companies can use for their ESG reporting & screening.
This could, for instance, follow the example of current efforts to align ESG and climate frameworks, by
the likes of the International Sustainability Standards Board and the Task Force on Climate-related
Financial Disclosures (TCFD).

18 Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets
CONCLUSION AND RECOMMENDATIONS
While the funding gap has widened, there is growing interest in and demand for financing
projects in the water and sanitation sector.

The rising interest in sustainable investing, reflected by a growing number of sustainability funds
that target ESG or SDG-related themes or sectors, means the potential ‘pot’ of funding for water and
sanitation has grown in recent years. In 2021, global issuance of green bonds alone is on track to reach
a record USD 500 billion.xviii

The water and sanitation sector provides outsized impact, contributing to a range of SDGs including
improved health, biodiversity, gender equality, food security, and climate adaption while providing
for underserved communities in emerging markets. Using blended vehicles to better match investor
criteria with project needs is key to unlocking this impact.

However, interested investors struggle to find assets which match their investment criteria.

Different investors have different risk/return appetites & size requirements

ILLUSTRATIVE

More
commercial Venture Private Infrastructure funds /
Angels
risk return capital Equity Institutional investors
ratio

Friends,
Impact infrastructure funds
Family, Impact VCs Impact PE
(e.g. Climate Investor 2)
Fools

Multilateral Development Banks’ private investment

arms & Development Finance Institutions

1m 10m 100m 1b Transaction

Size (USD)
More Development Programmes (funded by Official Development
concessional Assistance, philanthropies or charities, public grants, and
capital Multilateral Development Banks’ concessional financing)

Despite interest and demand for water projects, investment in this area has been limited to a small
number of successful projects, and water projects struggle to compete with those in other sectors that
have a more commercial risk-return ratio. For example, in low- and middle-income in Latin America and
Asia, only 9% of water funding is private versus 87% in telecoms and 45% in power. xix One of the major
reasons for this is that the assets and services that need funding currently do not match interested
investors’ investment criteria and preferred transaction size.

Lessons learnt from case studies show that this mismatch can be overcome with tailored
financing models, innovative business models, and the right type of concessional support.

Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets 19
Many water investments are mismatched with interested investors criteria today
ILLUSTRATIVE

More 1A Industry linked ‘big water’

commercial
Industrial waste
risk return
water treatment
ratio
Mu Hydropower
Estate lt i-
pu reservoir
Irrigation rpo
1B Municipal ‘big water’ se
da
ms
2 Small-scale WASH solutions Bulk water
supply (e.g. City water
Rural water Small holder reservoirs)
supply & waste
supply irrigation water treatment
Ability to
return capital Flood defences
Rural Sanitation 1m 10m 100m 1b Transaction
Catchment Size (USD)
restoration,
regenerative
3 Nature-based solutions agriculture etc.
More
concessional 4 Water Governance
capital

Looking at the array of water and sanitation sub-sectors, solutions can be found to allow each type
of project to meet investor requirements. Where possible, opportunities in each category can be
‘daisy-chained’ together, to move those opportunities with less attractive risk-return ratios towards
bankability.

1. A. Industry linked ‘big water’: This group represents where most financing has traditionally
gone as projects are large-scale with clear revenue streams from reliable payers (e.g., Rwanda’s
Nyabarongo II Hydrodam). However, these large infrastructure projects can potentially have
significant impacts on downstream and upstream communities and ecosystems, as well as geopolitical
repercussions. They therefore require impact assessments, the involvement of relevant stakeholders,
accountability mechanisms, and a business model that ensures a fair distribution of benefits.
Remaining barriers to investment can be overcome by:

Utilising blended instruments to de-risk investments: Guarantees from international donors

• 
for ‘big water’ investments can help overcome barriers including long payback periods (~30
years), perceived lack of credit worthiness and payback reliability, and currency risks. Meanwhile
other mechanisms, such as securitisation to overcome liquidity risks or insurance to cover political
and technical risks, can also be used.

Leveraging private sector experience early in the project development process to ensure the
• 
project is set up efficiently and sustainably. This will include identifying, and working with locally
connected project developers and consulting with investors from early stages

1. B. Municipal ‘big water’: In addition to the recommendations made for industrial or

agricultural ‘big water’, for these assets to attract additional investment they must be designed using
blended structures and a more catalytic use of development finance to improve risk/return ratios and
reduce transaction costs. This means projects should:

Clarify and strengthen revenue streams. This can be done by linking projects to industry,
• 
reducing non-revenue water inefficiencies, or by exploring new revenue models – such as

20 Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets
 pay-as-you-go. Tariff designs could be tailored (e.g. intensive users paying largest tariffs) and
subsidies could be targeted based on thorough affordability assessments linked to performance
improvements. However, due to the entrenched interests of stakeholders that benefit from current
support frameworks, changing subsidy frameworks tends to be challenging approach that
requires significant political will and potentially financing for compensation schemes.

Where possible, standardise and bundle transactions. Taking lessons from IFC’s Scaling
• 
Solar ‘one stop shop’, work to standardise balanced project documents to ensure speed, reduce
transaction costs and to achieve sufficient scale.

2. Small-scale water & sanitation solutions: Innovative decentralised WASH technologies

and business model solutions are being developed (e.g. Majik Water solutions to harvest drinking
water from air, decentralised desalination run by solar energy, decentralised container sanitation, pit
emptying, fecal sludge and septage management, and rural water supply operations and management)
but these companies need support in rapidly scaling.

• I ncubate and accelerate innovative WASH start-ups, via dedicated WASH incubators and
accelerators. Philanthropies or non-profits such as AquaForAll can galvanise private investment
into these venture builders by providing early-stage capital or by providing grants and technical
assistance to cover transaction costs, project development and pipeline building activities.
Venture capital firms can drive investment into technological innovation that reduce costs.
National governments can support growth of these businesses by improving ease of business and
enabling environment for start-ups. To avoid grant dependence of ‘social enterprises’ that are not
set up to scale commercially, these ventures should be supported through a spectrum of capital
that allows them to scale and reach financial sustainability.

Link ‘unbankable’ aspects to more profitable elements of the value chain, for example
• 
through sanitation business models that use sludge as input for the power or fertilizer industry,
thereby cross-subsidising service access.

3. Nature-based Solutions: Nature-based solutions like regenerative agriculture and catchment

restoration have a wealth of benefits for water and beyond but if these benefits aren’t monetised,
projects lack secure revenue streams to raise capital.

Further develop impact frameworks and payment mechanisms which allow the benefits of
• 
good natural capital management to be monetised. Whether through formal carbon markets or
adopting more tailored solutions (like Pennon’s sustainable financing framework)

4. Water governance: Good governance will be a pre-requisite for systemic changes to the water
investment environment, and required to allow greater flows of investment into the water system in
low- and middle-income countries.

Dedicate public budget to water governance activities such as monitoring and enforcement.
• 
As well as directly leveraging and de-risking, philanthropic and development capital should
also be used to support institutional capacity building. The private sector can usefully engage
in dialogue with governments – where this is conducted transparently – on conducive policy
reforms. It may also contribute to cost-recovery for governance activities, for example through
service fees. However, core governance activities will generally not be financed directly by private
capital. Governments should ensure public finance is available where needed, but private finance
is used wherever possible, tailoring for differing risk-return profiles and appetites.

Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets 21
To narrow the funding gap, capture the USD 500 billion economic prize, and mobilise private
capital for water & sanitation, each actor has a critical role to play.

Tailored financing models, innovative business models, and the right type of concessional support
required to overcome the funding gap will only be achieved though collaboration from a wide range of
actors from public, private and philanthropic sectors.

The USD
The $200200bnbillion financing gap
USD financing gapand
andatatleast
leastUSD 500bn
$500 billion
USDofofbenefits
benefitswillwill
onlyonly
be achieved through
be achieved
public/private/philanthropic
through collaborationcollaboration
public/private/philanthropic

Providers of concessional capital Private sector Enabling environment

Donor Governments Banks Institutional investors Corporations National governments

Should play a critical role in providing Explore domestic Use their expertise to Understand their Make water & sanitation a strategic
concessional capital to support the financing options support the water footprint and priority and include related targets in
alignment of water projects’ risk- for water structuring of how positive water their national climate commitments,
return profiles with investor criteria. infrastructure investment and impact could unlock as well as provide reassurance to
MDBs & DFIs de-risked by explore ways to cost reductions and investors
guarantees ringfence assets and financing
Use guarantees for ‘big water’ Academia / NGOs
bundle transactions opportunities
projects, support strategic policy Develop water impact frameworks
focus on water & sanitation, and align to help understand what 'water
their portfolios with water positive Project & business development positive' looks like and its
investments implications for businesses
Philanthropies Entrepreneurs & Incubators & Project Developers

Should play a pathfinder role, utilising Ensure the bankability of the solutions they (help) create by
their fast-moving capital to innovate involving private sector expertise early on, cooperating with
and trail new solutions to the barriers domestic financial institutions, and developing projects with
facing water funding. replicability in mind

The table on the following pages sets out some targeted recommendations for each actor to enable this
to happen.

22 Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets
 Providers of development capital

Donor governments • Embed water & sanitation in existing grant programmes as a key way to deliver
Deploy concessional climate, nature, and covid outcomes
capital more catalytically • Create and scale dedicated blended finance initiatives for water to increase
to de-risk and crowd in funding for the sector
private investment
• Launch and fund incubators, accelerators and project developers for water
assets and credit schemes for entrepreneurs

• Provide targeted technical assistance to national governments and

sub-national agencies, building capacity to strengthen the enabling investment
environment by developing the right policies and targeting pipeline development
that aligns with national climate targets

• Mandate development banks and climate funds (donors as shareholders) to set

mobilisation targets for water & sanitation, applying standardised measurement of
additionality and ensuring market development

• Scale the use of more catalytic products like guarantees for investment in the
water sector that help overcome key barriers of long payback periods and perceived
risks (credit, currency, counterparty, political etc) for ‘big water’ infrastructure (donor
governments) and smaller transactions (philanthropies)

• Partner with other capital providers to ensure coherent, effective,

and synergistic interventions

Philanthropies • Support incubation of early-stage technologies and business models

Play a pathfinder role, utilising in sanitation and small-scale water supply and treatment
flexible capital to innovate and • Partner with domestic financial institutions to improve their understanding
scale new business models of water and sanitation assets and businesses to help distinguish between real
and trial new solutions to and perceived risks, and support small-scale water and sanitation solutions via
the barriers which currently guarantees and capacity building with in-country commercial lenders
prevent investment in the
water sector • Require clear scaling pathways and roadmaps to financial independence
as a condition for concessional finance, in order to avoid donor dependence

• Partner with other capital providers to ensure coherent, effective,

and synergetic interventions

• Finance feasibility and development studies that provide the knowledge

base for strategic private sector investments and accelerate high quality
pipeline development

Multilateral Development MDB PUBLIC FINANCE ARMS DFI AND MDB PRIVATE
Banks (MDBs) and FINANCE ARMS
• Support national policy roadmaps for
Development Finance making water and sanitation a strategic • Set private capital
Institutions (DFIs) political priority by leveraging relationships mobilisation targets for
Set mobilisation targets, with local governments & financial institutions water positive projects, both
embed a more strategic for water investments and for
• Develop replicable transaction structures
focus on water & sanitation existing portfolios with impacts
and test frameworks for investment that can
in climate finance, and use on water in a way that prices
be later replicated by private sector
guarantees and other catalytic in negative/positive water
instruments for ‘big water’ • Provide concessional loans for ‘big water’ impacts of different projects
infrastructure projects in partnership with local organisations
• Bundle smaller projects in
• Provide guarantees for ‘big water’ funds or other financing
investments that help overcome key barriers vehicles, to diversify risks,
of exceptionally long payback periods and lower transaction costs, and
perceived credit risk as well as currency risks improve attractiveness to
private investors

• Partner with other capital providers, to ensure coherent, effective, and

synergistic interventions

• Apply standardised measurements for impact and additionality

Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets 23
 Actors involved in developing projects & shaping the local enabling environment

National Governments • Make water and sanitation a strategic priority and ensure water targets are
embedded in climate planning (including NDCs) to signal to investors that this
Send clear signals to
is a long-term opportunity, and reassure them against unexpected policy changes
investors about favourable
investment environment • Improve water regulation and tariff structures to create a better enabling
through enabling regulation environment and thereby improve the credit worthiness of water projects
and businesses. Smarter design of tariff structures could account for different
affordability levels while helping recuperate investment costs sooner and shorten
amortisation periods

• Extend private sector water infrastructure/services to communities, building

on local water treatment facilities that industries have set up to serve their own
business, e.g., livestock farming and mining, and use public financing to leverage
this infrastructure for serving surrounding communities by adding the necessary
distribution infrastructure

• Facilitate local water governance activities, such as watershed planning,

monitoring and enforcement, and financial regulation

• Provide sovereign guarantees for domestic ‘big water’ projects, expand sovereign
funding opportunities by leveraging DFI support

• Bring in private sector expertise to improve efficiency of water infrastructure

operations

Project developers, • Scale business models with clear revenue streams, such as innovative low cost,
entrepreneurs, decentralised solutions
incubators, and NGOs • Bring in private sector expertise early on, including private companies to design
Strengthen partnerships to and operate assets and investors to structure financing
ensure bankable solutions
• Conduct affordability assessments to ensure prices are feasible; partner with
providers of catalytic capital to help cover early-stage project costs

• Develop projects with replicability in mind, whether in terms of scalable

start-ups or standardisation of water and sanitation assets

• Cooperate with local commercial lenders as a cost-effective mechanism to

provide loans to small-scale water and sanitation solutions

• Improve the understanding of different kinds of financing including impact

investor criteria and language

Non-governmental stakeholders involved in water

Academia and NGOs • Develop water impact frameworks, share knowledge with industry partners and
raise awareness with providers of development capital and local governments.
Standardise what ‘water
Independent entities, such as universities and NGOs can have an outsized impact
positive’ assets and impact
looks like by developing water risk frameworks to develop a common understanding and
measurement framework of positive and negative water impacts and standardise
these frameworks with industry partners. This will allow climate-aligned investors
(and investors more broadly) to better understand how to design and ensure
investments are ‘water positive’ and how to mitigate water liabilities within their
current portfolio

• Contribute to wider efforts to ensure blended finance solutions are additional

and efficient

24 Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets
 Private sector

Corporations • Provide strategic funding in a local context if they are intensive water users and
Explore water conservation procure water for commercial uses, to reduce costs and ensure sustainability
and restoration activities to of the watershed area
reduce costs and improve • Explore water as an option for ESG improvements and carbon offsetting
ESG outcomes (or insetting), and improve understanding of water impacts

Private equity firms & • Invest in companies that own and operate water plants to address scale issues,
asset managers make it easier to control the asset, and lower risks by securing offtake agreements,
and contracting with utilities (backed by the state) rather than facing end consumers
Explore innovative ways to
ringfence assets to reduce • Design blended finance funds for water infrastructure investment that allow for
risks and bundle transaction risk diversification and bundling of smaller assets
to achieve scale
• Support the development of water and sanitation deals by providing financial
and structuring expertise

• Align existing portfolios with SDG goals for water, based on an improved
understanding of water impacts

Banks, insurers & • Provide early expert advice in finance structuring for water investments during
pension funds project development

Scale sovereign financing for • Provide finance to governments for water infrastructure to facilitate de-risking
water infrastructure de-risked through guarantees and insurance mechanisms
by guarantees
• Explore water and sanitation as a high impact sector in the context of in-house
impact investing

Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets 25
 ANNEX : CASE STUDIES

Upper Tana-Nairobi water fund

Upper Tana Water Fund Challenge to be addressed Impact and challenges

Geography: Kenya, Upper Tana River The Tana river supplies 95% of Nairobi’s drinking water and 50% of the country’s electricity from
basin hydropower. Agricultural activities along the Upper Tana river basin over the last several decades >1 million litres/day increase in
have increased the amount of sediment and chemical run-off entering the river, increasing water water availability in Nairobi
Sector: Agriculture, Energy, Municipal treatment costs and reducing the reliability of hydropower. Over 300,000 smallholder farmers
water
rely on the river for irrigation, but unsustainable abstraction has led to a lowering of water levels, 15% reduction in sedimentation,
Organisations involved: TNC, IFAD, Coca putting further pressure on water supplies downstream in Nairobi, where only 40% of residents achieving WHO standards
Cola, Kenya Electricity Generation have access to a reliable supply of drinking water.
Company (KenGen) , Nairobi City Water 40% increase in yields for around
and Sewerage Company (NCWSC) 8,500 coffee farmers trained
Blended finance solution
Blended finance structure: Endowment +
revolving water fund To stem the decline in both water quality and quantity in the Tana river (and thus Nairobi), public Estimated $850k in revenue
and private partners worked together to establish a watershed management plan, funded increase and cost reduction for
Funding sources: Public concessional
through Upper Tana Nairobi Water Fund (UTNWF). The premise behind this fund is that it is KenGen and NCWSC
funding (GEF), private concessional (Coca
typically much cheaper to invest in protecting water resources at their source rather than paying
Cola Foundation), In-kind contributions
to clean up downstream. The fund developed a programme to train and support smallholder
from beneficiaries
farmers in the Upper Tana basin to reduce erosion, improve water use efficiency, and sustainably A key challenge for the water fund is to
Established: 2015 increase productivity. This in turn helps improve overall water supply and quality for downstream validate the cost-reduction business case
users such has KenGen and NCWSC. in order to attract more private capital

The Upper Tana case highlights the value of using concessional funding for up-front technical assistance and business planning. The business
Key learnings
case developed by TNC helped to create a crucial link between up-stream farmers and impact they had on downstream users such as Coca-Cola.

CityTaps

CityTaps Challenge to be addressed Impact and challenges

Geography: Niamey, Niger Over one billion urban people live without access to running water in their homes. For residents,
disconnection from water supplies due to non-payment is a common challenge. For water utility An average per-litre cost
Sector: Municipal water supply, Smart companies, it can be difficult to expand service to poor communities while also reducing the reduction of 20% for new
meters physical and commercial losses they need to remain financially sustainable. Post-payment customers
Organisations involved: CityTaps, GSM systems for water services act as a barrier to access due to opaque payment structures and poor
M4D (Mobile for Development grant customer service. As a result, poor communities often pay more for water from non-utility Over 1,000 meters installed, with
programme), Orange Niger (local sources than their wealthier neighbours. an order for 10,000 more
telecoms and payments),
50% of CityTaps customers were
Blended finance structure: Grant Blended finance solution first-time mobile money users
financing coupled with technical advisory
services, user payments CityTaps with initial funding from a digital innovation fund, have developed an integrated smart 10-20% OPEX savings for water
metering and cloud-based account management platform to enable pay-as-you-go water access utilities from streamlined billing
Funding sources: Public concessional,
through mobile payments. This pre-payment model improves reliability and transparency of
Public non-concessional, private non-
services to water customers, while allowing utilities to reduce operating costs and improve
concessional (venture capital)
collection ratios (to 100%). In Niger and Kenya, CityTaps have enabled utilities to expand their A key challenge is to finance the up-front
Established: 2015 service to new and previously disconnected customers. After initial concessional funding they cost of providing smart-meters. This
have attracted venture capital, while also improving the economics to the water utilities they investment takes time to recoup when
work with. using a tariff-share model.

Leveraging existing technologies like mobile payments can help overcome challenges in providing water services to the urban poor. Despite a
common conception that access to financing is a key barrier for poor communities, greater convenience and transparency can go a long way
Key learnings
(25% of CityTaps users are on less than $25/month). Grant capital can lead to follow on private funding (VC in this case), but also enhance user
payments for utilities.

26 Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets
 ANNEX : CASE STUDIES

Water Credit Initiative

Water Credit Initiative Challenge to be addressed Impact and challenges

Geography: International People in need pay high prices for water daily, in both time and money. Many could get a long-
term water or sanitation solution in their home for a fraction of their annual water costs, but do 8.5 million loans/ $3.1 billion for
Sector: Sanitation & hygiene
not have access to affordable financing that would allow them to pay for these improvements water and sanitation disbursed;
Organisations involved: Water.org, Local over a reasonable period of time, since many financial institutions in developing economies do
microfinance lenders not offer loans tailored to financing water and sanitation. Over 6.7 million people p.a.
Blended finance structure: Technical reached; so far, 38 million people
assistance/ small grants for local financial benefitted
institutions who offer commercial
microfinance to users;
Blended finance solution 99% of loans are paid back
Water.org has also established Water
Equity, which enables international
investors to buy into the model, for Running for more than 15 years, Water Credit is addressing this gap by cooperating with 25% of borrowers report reduced
example through lending to the domestic domestic financial institutions on offering microfinance services. After identifying a region where illness
financial institutions people need access to water and sanitation, Water Credit partners with selected local institutions
and provides technical assistance, connections and small grants to support them in establishing
Funding sources: philanthropic
concessional and private commercial small, affordable loans for water and sanitation in their portfolio. Households in need, the A key challenge is access to loan capital
funding majority of which live on less than $3.20 a day, use these loans to put a tap or toilet in their due to potential reluctance among local
homes. Water.org, the organization behind the Water Credit Initiative, have also established commercial banks to finance WSS
Established: 2003 Water Equity, which enables international investors to buy in to the model. portfolios

A viable market can be created for financing water and sanitation improvements in developing economies; not only are poor households willing
Key learnings to take up loans, but there is also a very low risk for the financial institutions as repayment rates are extraordinarily high. Cooperation with
domestic/local institutions can be crucial to achieve desired outcomes.

Water Finance Facility – Kenya pooled water fund

Envisaged impact and
Water Finance Facility Challenge to be addressed
challenges
Geography: Kenya (pilot) Kenya aims to achieve access to safe water and sanitation for all by 2030; as of 2017, water
coverage stood at 55%, and sewerage at 16%. Water supply and treatment infrastructure is Aims to enable water &
Sector: Water and sanitation usually very capital-intensive with long pay-back periods. However, in many developing sanitation access to 400,000
Organisations involved: Innovation Lab economies, water utilities have little or no access to commercial finance, or only at unfavorable people in Kenya
for Climate Finance, Dutch Ministry of terms, such as short tenors. These projects are perceived as high-risk, and the small size of single
Foreign Affairs, Waterworx, Kenyan investment opportunities is usually not attractive for the capital market as it implies high 25% of which are living in Low
National Treasury, Ministry of Water and transaction costs. Income Areas
Irrigation, Water Sector Trust Fund,
USAID, SIDA, SNV
Blended finance solution
Blended finance structure: Securitization,
guarantees & other credit-enhancing To help local water utilities obtain access to financing, WFF develops local water financing
instruments facilities – the first one in Kenya – that will mobilise large-scale private investment from domestic
institutional investors. The facilities pool loans from creditworthy water service providers and
Funding sources: concessional capital,
issue a single bond to the capital market, which lowers transaction costs and diversifies risk; the
commercial debt
risk is further reduced through de-risking instruments such as guarantees or reserve accounts. A key challenge is the time-intensive
Established: 2015 Once the bonds are issued to the market, bond proceeds are on-lent to water utility companies process to set up the national facilities,
to fund projects, who have 15 years to pay back the loans. and the high complexity due to the
variety of stakeholders involved.

Initial funding, time, and effort need to be invested to identify the opportunities on the ground. It might take several years to develop the
Key learnings
structure and investment, and technical assistance is continuously necessary.

Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets 27
 ANNEX : CASE STUDIES

Kigali Bulk Water Project

Kigali Bulk Water Supply Challenge to be addressed Impact and challenges

Geography: Rwanda Only 40% of Rwanda’s population had access to piped water supply as of 2015, especially in rural
areas. One of Rwanda’s strategic policy goals has therefore been to achieve universal access to Daily supply of 40 mega-litres
Sector: Water treatment and supply safe drinking water. Rapid urbanisation in the country’s capital Kigali has further exacerbated the
Organisations involved: International problem of limited public water supply. Providing >500,000 people with
Finance Corporation (IFC), African drinking quality water
Development Bank (AFDB), Rwanda’s
Energy Water and Sanitation Authority Covering 40 % of Kigali’s water
(EWSA); Private Infrastructure supply need
Development Group (PIDG), Emerging
Blended finance solution
Africa Infrastructure Fund (EAIF); Metito The Kigali Bulk Water project is a long-term PPP to finance a large-scale water treatment facility
Blended finance structure: well- south of the city which draws water from the Nyaborongo River. Kigali Water Ltd. (KWL), a
coordinated package of blended finance subsidiary of Dubai-based water company Metito, builds, maintains, and operates the treatment
plant, and sells drinking-quality water to Rwanda’s public water utility WASAC which distributes it
Funding sources: Public concessional, to local consumers. After 27 years, Metito will transfer KWL over to WASAC. The project capital
Public non-concessional, private non- investment included 40 million in debt from AFDB and EAIF, backed by a guarantee from the
concessional A key challenge is currency risk since
Ministry of Infrastructure of Rwanda, as well as USD 11 million equity finance provided by Metito, loans and equity were provided in USD,
Established: 2017, construction complete and a 6 million technical assistance grant from PIDG, which also allowed the government to while tariffs are paid in local currency
in 2021 expand the piped water supply system without raising tariffs (RWF), which a free-floating currency

The project has received much recognition for its financial structuring and successful implementation. Separating the distribution infrastructure
Key learnings from the plant under a concessional loan helped significantly reduce project costs, and transparency within the PPP about the composition of
the tariff helped keep tariffs affordable by addressing ‘hidden’ costs.

Pennon Group - Sustainable Financing Framework

Sustainable Finance Framework Challenge to be addressed Impact and challenges

Geography: UK As a leading water utility in the UK, providing clean water and/or wastewater services to over 3
million customers, Pennon Group must balance the needs of the business and its customers with Over 350,000 customers with
Sector: Water utility, wastewater its ESG goals. Pennon is typically an infrequent issuer of debt to the market for infrastructure or improved drinking water from
services, NBS and watershed other upgrade projects. Linking sustainability outcomes with financing requirements on a deal- new facilities
management
by-deal basis can be cumbersome and slow down the capital raising process. Yet the company
Organisations involved: Pennon Group realizes its long term business and ESG objectives must be aligned to secure the future for the 85,000 hectares of land restored
PLC, Sustainable finance providers, business and its customers. or improved as part of upstream
Independent monitoring and verification projects
organisations (including DNV) Blended finance solution
Blended finance structure: Sustainability- Nearly £1bn in new financing
To fully align their financing and ESG strategies, Pennon have developed a Sustainable Financing raised through the framework,
linked bonds, loans, private placements
Framework that allows them to raise capital linked to Sustainability Performance Targets and 75% of total debt raised
Funding sources: Project-dependent, KPIs. This framework, which is independently monitored and verified, allows Pennon to raise new
Pennon’s upstream projects with farmers sources of finance for sustainable projects while progressing the company towards its goals
are 50% match funded by the UK (including Net Zero by 2030). In some cases, performance on sustainability KPIs reduces interest
government. A key challenge for Pennon is to find the
costs. Since the inception of the framework, Pennon have drastically improved their sustainability
right projects to bundle together so they
Established: 2018 scoring, and moving forward aim to raise all their financing through the Sustainable Financing can diversify risk while achieving their
Framework. KPIs

Monitoring and Evaluation of sustainability outcomes can increase up-front costs of raising capital, but also provide tremendous value. In this
Key learnings case, by creating the Sustainable Financing Framework, Pennon were able to not only streamline their financing process, but also see improved
interest rates and enhance customer engagement around ESG goals.

28 Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets
 ANNEX : CASE STUDIES

Jamaican credit enhancement facility

Jamaican Credit Enhancement
Challenge to be addressed Impact and challenges
Facility
Geography: UK While access to piped water had been well developed in Jamaica, as of 2010 only 18% of the
population had a sewer connection, and only 7% effluent sewage was treated. The government 8 wastewater facilities were
Sector: Water utility, wastewater took regulatory action to promote better wastewater management, but a significant proportion rebuilt or rehabilitated
services, NBS and watershed of the country’s wastewater facilities were operating below standards. The deteriorating
management
infrastructure also undermined water revenues due to leakage and illegal connections. In the follow-up, the NWC secured
Organisations involved: Pennon Group Addressing this problem required long-term financing, which is rarely available from domestic a 96 million USD bond for further
PLC, Sustainable finance providers, commercial banks. projects, guaranteed by the K-
Independent monitoring and verification Factor funds
organisations (including DNV) Blended finance solution
Blended finance structure: Sustainability-
The Jamaica Credit Enhancement Facility (JCEF), a pilot project of the Caribbean Regional Fund
linked bonds, loans, private placements
for Wastewater Management (CReW), was implemented as a 3 mn USD guaranteed fund at the
Funding sources: Project-dependent, National Commercial Bank of Jamaica. The bank provided a 12-year loan of JMD 1.4 bn (USD 12
Pennon’s upstream projects with farmers mn) to the National Water Commission (NWC), for which the JCEF provided secondary collateral.
are 50% match funded by the UK The initial collateral and source of payment came from a surcharge collected monthly from
government. Key challenges were the co-ordination
NWC’s customers (‘K-Factor’ funds). In return, efficiency gains from investments were reflected
among stakeholders, lengthy
Established: 2018 on customers’ bills. negotiations over currency risk, and
delays in the procurement process

Significantly reducing the credit risk through high collateralisation of loans can be critical to build local banks’ confidence, especially when the
Key learnings financial structure is novel to domestic financial institutions. Contributions by customers can be a reliable source of funding and designed in a
way that rewards customers in the mid-to long-term.

Sanivation

Sanivation Challenge to be addressed Impact and challenges

Geography: Naivasha, Kenya The fecal sludge management (FSM) sector faces several challenges to developing viable and
investable business models. The safe management of human waste provides numerous health Pilot plant in Naivasha is providing
Sector: Off-grid wastewater management and other benefits, but FSM services often face a high degree of latent demand. Models often FSM services for 10,000 residents,
Organisations involved: Sanivation, depend on payments from local governments which are in turn influenced by policy priorities. with plans for scaling to 100,000
County or Municipal Governments Off-grid FSM service providers operate in fragmented markets, making it hard to capture the full
value of FSM services (collection, transport, treatment, re-use) As a result, where services are The plant produces and sells 350
Funding sources: Sale of waste-to-energy
products covers operational costs, Local available they are usually expensive and unreliable. tons of fuel per month,
government funding for up-front capital substituting the need for wood-
Blended finance solution biomass fuels
Established: 2015
Sanivation is a social-enterprise that develops and builds FSM plants in ‘African secondary cities’ Operational costs of the facility
in partnership with local governments. Sanivation facilities treat the fecal sludge, turning it into are covered by fuel sales
briquettes that can be used for firewood fuel. These briquettes are then sold-on, covering the
operational costs of the facility. Up-front capital for construction of the treatment plant is
provided by the government.
A key challenge in developing new
projects is to source financing for the
capital cost of treatment facilities

Sanitation services, particularly off-grid solutions, are likely to always require at least some portion of public funding to create viable business
Key learnings models. Even so, new processes or technologies (like waste-to-energy) show a promising route to bridge the ‘monetization gap’ when it comes
to financing sanitation.

Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets 29
ENDNOTES
i WHO/UNICEF Join Monitoring Programme (2021): Progress on household drinking water, sanitation and hygiene
ii HELP (2021) - Global Report on Water and Disasters
iii WaterAid/Vivid Economics: Mission-critical: Invest in water, sanitation and hygiene for a healthy and green economic recovery
iv International Resource Panel (2015): Options for Decoupling Economic Growth from Water Use and Water Pollution; and 8. IPCC
AR5 (2014): Coastal Systems and Low-Lying Areas
v Various sources including WaterAid (2020): Mission Critical; UNCTAD (2014): World Investment Report
vi OECD (2017): Technical note on estimates of infrastructure investment needs
vii Prüss-Ustün et al (2019): Burden of disease from inadequate water, sanitation and hygiene for selected adverse health outcomes:
An updated analysis with a focus on low- and middle-income countries, International Journal for Hygiene, Environment and Health
viii Global Water Partnership (2015): Water Insecurity a Drag on Global Growth
ix ODI (2020): Just add water: a landscape analysis of climate finance for water
x Based on WaterAid internal research
xi Partly building on OECD (2019): Making Blended Finance work for Water and Sanitation
xii OECD (2019): Making Blended Finance work for Water and Sanitation
xiii 2030 Water Resources Group (2010): Charting Our Water Future
xiv Blended Finance Taskforce (2018): Better Finance, Better World
xv OECD (2020): Blended Finance in Least Developed Countries
xvi ODI (2019): Blended Finance in the poorest countries: the need for a better approach
xvii OECD (2019): Making Blended Finance work for Water and Sanitation
xviii Climate Bonds Initiative: 2021 Green Forecast
xix World Bank (2020): Private Participation in Infrastructure Database

30 Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets
Mobilising Capital for Water:
Blended Finance Solutions
to Scale Investment in
Emerging Markets

Mobilising Capital for Water: Blended Finance Solutions to Scale Investment in Emerging Markets 31