Beyond wells and hand pumps: The next phase in the fight for clean water

LONDON — New approaches to delivering clean water to the world’s poor are desperately needed to reach the call for universal and sustainable water and sanitation by 2030 — but the challenge is hard to meet in a sector not known for innovation. Nearly 850 million people around the world are still without access to a reliable, quality source of drinking water, without which development experts say fundamental improvements in other sectors such as health and education cannot be achieved. Water supply has traditionally been the domain of engineers building large infrastructure projects in cities, and NGOs digging wells and installing hand pumps in rural areas. These efforts have been largely financed by government and development finance institutions who have tended to favor tried and tested, large-scale models, similar to the kinds of water utilities seen in developed nations. Applied to the developing world, though, these models are failing, and most municipal utilities, with a few exceptions such as in the Philippines and Cambodia, are poorly run, failing to serve the poor or those living on the fringes of towns and cities. Studies show that 36 percent of rural water projects are nonfunctional at any given time. But WASH experts say things are beginning to change, with the sector moving away from hardware and subsidy-driven models toward more service-based, sustainable water solutions led by entrepreneurs. The shift from the Millennium Development Goals, which focused on increasing basic access to services, to the Sustainable Development Goals, which call for sustainable and quality access, has helped precipitate this shift in thinking, as has the growing urgency of the situation brought on by rapid urbanization and water scarcity. “Thinking beyond access, which in reality often led to poor programming … and instead focusing on quantity, quality and price of services, does change the dynamic and it has created an opportunity to discuss more practically, how are we going to provide services to all of these people,” according to Paul Gunstensen, WASH director at the Stone Family Foundation, which funds nonprofits, for-profits, and social enterprises in the WASH sector. Implementers are embracing the need for new thinking, as seen by the launch of Agenda for Change in 2015, a coalition of organizations dedicated to collective action and new partnerships to deliver scalable and sustainable WASH in accordance with Sustainable Development Goal 6. The coalition has been pushing for the sector to adopt a more holistic, systems-based approach to WASH. However, their impact will be limited unless funders also embrace new modes of financing the sector, said Louis Boorstin, managing director of the Osprey Foundation and former head of WASH at the Bill & Melinda Gates Foundation. “Clearly the current system — between government funding, official aid, development finance, and private capital — is not providing anywhere near the resources needed to reach the SDGs,” Boorstin said. According to the World Bank, an investment of $114 billion annually is needed to meet the SDG targets on WASH — about three times current levels, with official development assistance standing at around $8 billion a year. “Someone who is willing to take more risk, but still against agreed milestones, and has deep pockets will need to come in,” he said. But attracting this kind of investment to the water sector is notoriously difficult. “Innovative finance for WASH is very far behind financing for other infrastructure, such as renewable energy,” said Gaia De Battista from Lion’s Head Global Partners, a financial advisory and asset management firm with offices in London, Nairobi, and Lagos which advises water and sanitation funders and enterprises. This is in part because water typically requires significant upfront capital expenditure, comparatively high ongoing operational and maintenance costs, and produces lower margins, sometimes due to the political sensitivities around setting tariffs for water, she explained. Boorstin agreed, adding that where energy and power are typically implemented and funded at a national level, water “is almost always a local business,” and “that adds a degree of complexity in terms of regulatory structure, tariffs, and local political factors that can make water harder to finance,” he said. Supporting water enterprises “There is no ‘one-size-fits-all’ solution to water supply,” said Gunstensen. Instead, the Stone Family Foundation sees the need for “a spectrum of services,” with water solutions for the rural poor — which may still be best served by boreholes in some situations — at one end, to large-scale utility models designed to serve high-density urban areas at the other. The foundation has been looking at models that fall somewhere in the middle, and in particular is supporting a number of micro-utilities operating in small towns and slums, which it refers to as safe water enterprises, or SWEs. These SWEs typically offer high-quality drinking water sold in 20-liter jerry cans, which can be picked up or delivered to households for a fee. They fill a gap in the market between water utilities offering piped water to a communal tap or household — which is generally unreliable, inaccessible to the poor, and can be contaminated — and water vendors, who typically sell at inflated prices and with no guarantee of quality. The foundation, along with Aqua for All, Danone Communities, Conrad N. Hilton Foundation, and Osprey Foundation, recently commissioned a report which looks at 14 existing SWEs serving approximately 3 million people. Consultants from Dalberg Global Development Advisors, who authored the report, concluded that SWEs have massive potential but pointed to challenges such as the huge variation in how much they charge, ranging from 2 cents to $1.60 for 20 liters. According to Boorstin, this raises the “fundamental challenge of how do operators price water to make it as affordable as possible to as many people as possible and stay financially solvent at the same time.” For Gunstensen, who has worked in WASH for a number of years including at WaterAid and Water and Sanitation for the Urban Poor, the emergence of WASH enterprises is a relatively new phenomenon, with “actual enterprises that weren’t NGOs trying private sector approaches or trying to play a facilitation role” first starting to emerge in about 2009. “There’s definitely been a shift and WASH enterprises are now being seen as more viable and able to attract broader types of finance,” Gunstensen said. However the sector is still waiting for “one of them to make a real breakthrough in terms of generating scale and viability.” This is where the foundation comes in, he said, by supporting half a dozen promising enterprises with the “risk capital and wrap around support in key financial or operational areas which will enable them to reach break-even or beyond.” The idea is that they can then attract more commercially minded capital. Plugging the gaps Nat Paynter is head of partnerships at Safe Water Network, an NGO that has pioneered a water enterprise model setting up branded, community-level water treatment facilities that sell affordable, high-quality water to communities in Ghana and India. He told Devex that development agencies and funders are increasingly looking for water solutions that offer financial sustainability in a bid to move beyond aid dependency. Paynter, a trained engineer who has worked for the World Bank’s water and sanitation program, said SWN’s model is aligned with this trend since the water treatment plants only require a one-time investment and can then become sustainable. Furthermore, rapid urbanization in developing countries has created a unique market for water enterprises like SWN, since these populations are “too large for hand-pumps, [and] too small for a utility.” Sprawling slums, small towns, and cities offer the “high-population density, a cash-based economy, and a comfort with fees for services” that enterprises need to thrive, he said. Yet access to capital remains a major challenge. SWN’s water stations require an upfront capital investment and startup cost, but can attract enough revenue to cover local operating expenses such as salaries, electricity, and purification chemicals within a year. But it takes up to 10 years for a station to break even and be able to cover maintenance and replacement costs. In order to scale, SWN will need to tap into larger streams of innovative funding products that can deliver loans to stations to expand their reach, and to SWN to build more stations. The NGO is currently in the early stages of exploring and modeling potential options, including structuring a development impact bond and making use of blended finance, with the help of experts like De Battista. But it still needs grant funding to build more stations, assess performance, make the case for SWEs to governments and donors, and build out SWN’s capability for replicating SWEs with other implementers, Paynter told Devex. Innovative financing for the water sector? In recent years, a number of “innovative” financing initiatives have emerged proposing new and creative ways of combining public and private money — known as blended finance — in order to fund water interventions. For example, the Kenya Innovative Finance Facility for Water is a new financing scheme that uses donor funding to act as a guarantee to attract local commercial financing for water utilities in Kenya. Lion’s Head Global Partners advised on the fund, which is set to launch this year, and is financed by Water Finance Facility and the Netherlands Water Partnership. “Blended capital could work here by aggregating loans to lots of different water utilities to diversify the risk and include a chunk of equity which absorbs initial losses and so acts as additional protection for lenders,” De Battista explained. Five utilities are currently set to be included in the fund, and have had to demonstrate they will be able to hit targets on expanding access to low-income customers. Lion’s Head also advised the Global Investment Fund for Water on its potential fund structure, mechanisms for disbursements, and areas of focus. It is being funded by the Rockefeller Foundation to test the development of an innovative financing mechanism, to be funded through a 1 cent per liter contribution from the global bottled water industry. According to an April 2017 report, GIFFW is looking at three financing strategies: Funding governments to improve WASH systems through improving capacity; offering a pool of capital for local currency hedging to de-risk foreign investment in WASH; and funding at-scale WASH services with “risk tolerant, patient capital.” Boorstin said the emergence of such financing facilities is indicative that funders are beginning to have a “better understanding of the challenges it takes” to finance WASH — but “I have seen few of those risk-taking facilities implemented at large scale coming to fruition,” he warned. Microlending for water and sanitation Water.org, an NGO founded by Gary White and the actor Matt Damon, was the first mover in microlending for WASH, starting its WaterCredit program in 2003. The model works with local microfinance institutions in Africa, Asia, and Latin America to underwrite startup costs to provide loans to households to enhance their WASH facilities — for example, by building rainwater harvesting tanks, buying household water connections, or building toilets. Since then, the program has enabled 2.2 million loans to be disbursed with a 99 percent repayment rate, and estimates it has reached 10 million people with enhanced WASH services. “When Gary first conceived of microlending for WASH, it hadn’t been done before, people didn’t see how it could work because WASH wasn’t income generating,” Rosemary Gudelj, senior public affairs adviser at Water.org, told Devex. However, it was soon apparent that having access to water and sanitation facilities was “income enhancing” since it cut down on time spent queuing at community pipes, buying water from vendors, or collecting water. It also reduced illness, cut the time children spent away from school, and allowed women to take paying jobs, Gudelj said, allowing people to pay back their loans on time. PepsiCo was the first donor to support WaterCredit, and was soon joined by other businesses “who loved the idea of using market forces to solve this problem,” Gudelj explained. Water.org’s founder also took part in the World Bank Spring Meetings last year. In response to this interest from DFIs, investors, and foundations, Water.org began exploring innovative financing mechanisms. That resulted in the creation of WaterEquity, the first dedicated WASH impact investment manager. WaterEquity raises and distributes investment capital to qualified microfinance institutions and small, local enterprises that offer water and sanitation supply to the poor. WaterEquity’s first fund, launched in 2014, provided loan capital to seven of Water.org’s highest performing microfinance institutions in India. The loans from the fund are projected to reach at least 730,000 people, while targeting a 2 percent return to investors. WaterEquity is now hoping to raise another fund, worth $50 million, to invest in enterprises — primarily microfinance institutions — serving poor customers, and could also include micro-utilities, toilet construction companies, and product manufacturers. Revisiting utilities While many in the sector are excited by the possibilities of blended finance and the trend in supporting more sustainable, service-based WASH models as opposed to pouring money into big infrastructure developments, experts say project financing for big utilities remains the simplest and most attractive model for donors. Last year, the government of Rwanda signed a deal with Metito, a United Arab Emirates-based water management company, to develop a $75 million water project to supply drinking water to the city of Kigali. Such public-private partnerships have been few and far between in recent years after a series of disastrous privatization deals, most famously in Dar es Salaam where a United Kingdom-led consortium was kicked out by the government, accused of failing to adequately manage the city’s water under the terms of a World Bank and International Monetary Fund-led privatization deal. The Metito transaction could prove significant, according to De Battista. It could signal a trend toward more traditional PPPs likely running in parallel with funding for new business models. Water utilities can work in lower-income countries, as has been shown in Cambodia and the Philippines where urban water companies have successfully served the poor while remaining financially sustainable, according to Boortstin. “When there is good governance, good separation of the regulatory function from the service delivery function, and a strong regulator who is holding service delivery companies to account, then the utility model can work just fine,” Boorstin said. ROCKBlue, a new consultancy group based out of South Africa and made up of seasoned water utility experts, is set up to make DFI investments in utilities go further by offering senior management of major public utilities bespoke technical assistance. Peter Macy, ROCKBlue’s founder, told Devex that water utilities are still the main way of delivering clean and reliable water to people living in cities. Their role is becoming increasingly crucial, but simultaneously more challenging, thanks to the twin forces of population growth and urbanization. “Utilities can be money makers and they provide an important commodity that commercial, industrial and public sector clients are willing to pay good money for,” Macy said. But currently there is a lack of confidence among utility managers, customers, and donors about the viability of the utility model. Utilities are also still the most viable investment for public financiers such as the World Bank, since they are the only type of water intervention able to absorb large-scale funding. However, the history of development finance for utilities in developing countries has been disappointing, Macy said. “For all the billions of dollars that have been spent on these utilities, typically they are only successful for as long as there is external support,” he said, adding that DFI technical assistance tends to end after five-10 years, after which “things tend to fall apart” due to the lack of capacity within the senior management teams running the utilities. “Lots of donors throw technical expertise at utilities … but when [the assistance] leaves, oftentimes staff are left asking ‘now what?’” Macy explained. The kind of intense support that is offered, while very expensive, is often more than what’s needed, targets the wrong things, and tends to create dependency, he said. Instead, ROCKBlue proposes offering utility bosses a coach or mentor in the form of someone with experience running utilities in the developing world, which is a far cheaper and less intense approach. The experts commit to working with utility managers for as long as it takes, and are always reachable by phone. The organization currently has approximately 25 experts on its “roster” and is in discussions with two utility partners, with plans to add another nine utilities in sub-Saharan Africa in 2018. “Right now, these poor senior managers are staring at the wall worrying about how to solve all these problems,” Macy said. “We offer a very small footprint and for a very low cost to be a mentor, partner or coach to work with these utilities to get over that struggle.” “With a little bit of positivity, that senior management team can turn things around and gain confidence and capacity to run their utility sustainably for a longer period of time,” he added. This will in turn give donors like the World Bank confidence, Macy said. Whether delivered through traditional utilities, microwater stations, loans for household connections, or other approaches, the experts are clear that clean water needs greater political attention and more funding as an essential building block of development. But with ODA budgets being stretched alongside ever-increasing needs, WASH advocates will have to work harder than ever to make the case that water is a smart investment.