New financing model blends grants and Islamic bonds for WASH

NEW YORK — An innovative financing model aiming to fund programs that could reduce cholera-related deaths by 90% has been launched by the Islamic Development Bank and the International Federation of Red Cross and Red Crescent Societies. The One WASH Fund aims to reach 5 million people in 29 of the most cholera-affected countries, all of which are member states of the Organisation of Islamic Cooperation — an international organization working to protect the interests of Muslim communities while promoting international peace and harmony — by supplying $100 million to IFRC water, sanitation, hygiene, and public health interventions. Cholera, an acute diarrhoeal disease, affects 2.9 million people each year and causes 100,000 deaths, with a lack of clean drinking water often to blame. OIC countries are some of the worst affected. The disease is estimated to cost $1.6 billion per year in emergency response and health care costs, while providing access to basic WASH services is estimated to cost between $40 and $80 per person. “Our ambition is to end cholera, but secondly to show our friends in the humanitarian and development world that there is a different way to do things,” said Jemilah Mahmood, under secretary general for partnerships at IFRC, adding that the fund provides a new financing model for the sector as a whole and will ensure scalability. Created as an outcome-based funding model, the mechanism behind the fund blends various types of grant capital. Traditional humanitarian donor financing is contributed to the fund with the objective of attracting additional outcome-based philanthropic and other private grant capital. Outcome funders contributions are only released after health outcomes are assessed and activities are pre-funded through the issuance of an Islamic bond, or sukuk, which enables it to operate at scale. “We are bringing two types of grant capital in a fund structure. The first one is risk absorbing and the second one is outcome funding like in a classical development impact bond,” explained Amine Hillal, lead of alternative development finance at IsDB. The traditional grant capital absorbs the implementation risk that would usually be transferred in an impact bond to private sector investors, and as a consequence, whatever premium is usually paid to investors for absorbing that risk would stay within the fund in this structure, he said. With the private sector only taking on the credit risk of reputable donor institutions, the idea is that more funding could be leveraged to achieve greater impact at scale, especially for low- and middle-income countries for which the perceived implementation risk is high. “And because the premium stays in the fund, we have more dollars going to cholera eradication and control than we’d have in a standard impact bond structure,” Hillal said, emphasizing that if outcomes aren’t achieved, the outcome funders grants aren’t paid or partially paid. The emergence of the fund follows calls for the sector to take more risks in the blended finance space and is an alternative to traditional grant financing, which tends to focus on shorter-term WASH projects. This is the first time these three types of financing have been blended, Mahmood said, arguing that the model gives the private sector a mechanism to finance development efforts while limiting the risk, ensuring impact, and making business sense. The issuance of the sukuk is expected to happen by mid-2020 with the first disbursements to projects following later in the year. Emily Gustafsson-Wright, a fellow at the Brookings Institution, said in an email that as the impact finance market continues to develop, adaptations to existing models, such as this fund, are increasingly emerging. She explained that, as a whole, the outcomes-based financing and impact bond market is still in its early stages, and that rigorous evaluative evidence about these mechanisms is missing. “That being said, what we do know from the evidence that has emerged thus far is that impact bonds have the potential to invest in preventive programs, to focus attention on outcomes and incentivize collaboration, to drive performance management and to build a culture of monitoring and evaluation,” she said.