Development impact bond targets sanitation in Cambodia

WASHINGTON — The government of Cambodia has made a commitment to becoming open defecation free by 2025 and a new development impact bond — the first in the water, sanitation and hygiene sector — aims to help the country get there.

The Stone Family Foundation, International Development Enterprises, and the U.S. Agency for International Development launched a $10 million DIB this week focused on using a market-based model to help 1600 villages in six provinces become open defecation free in by the end of 2023.

While access to sanitation in Cambodia is improving dramatically, there is still a need for significant investment as those without access to toilets become harder to reach, are more often lower-income, or marginalized.

And Cambodia is not alone. WASH issues are underfunded globally, according to the World Bank, which estimates that $1.7 trillion will be needed to achieve the related Sustainable Development Goal 6. Most countries need to dramatically increase spending and to meet the significant needs, people working in the WASH sector are also looking to other sources. Thus far, though, it has been difficult to attract commercial finance into the WASH sector in low- and middle-income countries, because it is often perceived as high risk, according to a World Bank report. 

The Stone Family Foundation, which is based in the United Kingdom, has been working on WASH, and specifically sanitation, in Cambodia for more than 10 years. It was looking for a way to transition its investments in the country and in iDE’s market-based sanitation program from grant to impact investment.

“[We want to] catalyze new predominantly market-based approaches to have transformative impact,” said Sarah Hedley, head of programs at the Stone Family Foundation.

The foundation had invested about $11 million over 10 years in sanitation in Cambodia, including $6 million to iDE for two phases of its sanitation marketing program. When that funding ended in 2018, the foundation and iDE continued discussions about the next phase in the work, and the Stone Family Foundation was interested in shifting its role from grant funding to more of an impact investor.

“It’s important to stress that we did not do the DIB just because it is an innovative finance mechanism. We were thinking about the next phase and the right way to achieve outcomes IDE wanted,” she said. “What we’re really hoping is that this outcomes approach gives IDE room to innovate, make program improvements in open defecation free villages,” she said.

Through the DIB, the foundation will invest in iDE’s market-based sanitation program, which trains and coaches sales agents to sell toilets to households and communities and works with businesses, such as cement companies, to expand into the toilet business.

If the program succeeds in helping communities achieve open defecation free status, measured by their completion of the government process to get certified and iDE’s metrics, then USAID will pay the foundation back for its investments. How much the foundation gets paid depends on the performance of the program, and the returns it collects at the end will be split with iDE to provide an additional incentive.

iDE is working to build out a sanitation ecosystem but as it moves to the harder to reach and lower-income households it needs to find ways to market and make toilets affordable for a new group of people. To that end it is exploring financing products or smart subsidies that may help improve access, said Greg Lestikow, iDE’s global WASH director.

“The big, big picture vision is to create a market ecosystem that is self-sustaining,” he said.

Once a program gets to the point that it’s a proven model that has started to deliver at scale but needs some tweaks to adapt, then mechanisms like DIBs make sense, Lestikow said, adding that it will allow the organization needed flexibility.

A proven model is important, as is iDE’s existing versatile and sophisticated information management system and data collection, he said. But one of the key factors in this DIB’s success is having “an aligned vision” and the long relationship and foundation of trust that the Stone Family Foundation and iDE had coming into the DIB.

“The  opportunity to attract nontraditional investment capital into this space should be a high priority,” Lestikow said, adding that a DIB has the potential to attract some of that money and help start a positive trend.