Cambodia – Rural Water Supply Network

This blog post is part of a series that summarizes the REAL-Water report, “Financial Innovations for Rural Water Supply in Low-Resource Settings,” which was developed by The Aquaya Institute and REAL-Water consortium members with support from the United States Agency for International Development (USAID). The report specifically focuses on identifying innovative financing mechanisms to tackle the significant challenge of providing safe and sustainable water supply in low-resource rural communities. These communities are characterized by smaller populations, dispersed settlements, and economic disadvantages, which create obstacles for cost recovery and hinder the realization of economies of scale.

Financial innovations have emerged as viable solutions to improve access to water supply services in low-resource settings. The REAL-Water report identifies seven financing or funding concepts that have the potential to address water supply challenges in rural communities:

Village Savings for Water
Digital Financial Services
Water Quality Assurance Funds
Performance-Based Funding
Development Impact Bonds
Standardized Life-Cycle Costing
Blending Public/Private Finance

Understanding Development Impact Bonds

One type of performance-based funding is a development impact bond (DIB), which involves involve a tripartite contract between a service provider, an impact/angel investor (seeking both financial and societal returns), and an outcome sponsor such as a development finance institution or government (Clarke, Chalkidou, and Nemzoff 2019). Moreover, DIB moves some risks from service providers and primary donors to a third-party investor, while rewarding water development outcomes.

For rural water particularly, bond investors would finance a program aimed at achieving a particular outcome or set of outcomes (e.g., extending household water connections), while service providers (e.g., public utility, private company, nongovernmental organization, or partnership) would be responsible for delivery. If and when the outcomes are verified by a third party, then the outcomes funder (e.g., government agency) should repay the social investor. In general, more successful programs give higher returns to investors.

The rationale for involving the impact investor as an intermediary is to plan the arrangement and provide the service provider with the capital required to execute planned activities (Center for Global Development and Social Finance Ltd 2013). DIBs enable development finance to retain a results-based structure without placing all of the risk on service providers themselves; rather, some risk is shifted to the impact investor (USAID and Palladium 2018). Minimizing overall risk requires careful program design, detailed costing of capital requirements and intended outcomes, and selection of a proficient service provider with a good track record of results.

Figure 1: Structure of development impact bond (Source: USAID and Palladium, 2018)

Examples

As of 2018, seven DIBs have focused on improving agricultural, education, employment, and health outcomes for people and communities, with nearly $55 million set aside for project outcome payments. If outcome targets are achieved, private investors receive all of their upfront investment back; if the service provider achieves outcomes above prespecified target levels, investors receive interest (up to 7–15%); or, they may lose money if outcomes are not achieved. DIB case studies confirm design challenges (Belt, Kuleshov, and Minneboo 2017; Oroxom 2018; Convergence, Palladum, and Bartha Centre 2018; Kitzmuller et al. 2018). In particular, managing stakeholders’ different perspectives and priorities on funding and contract structures has proven difficult (Clarke, Chalkidou, and Nemzoff 2019).

A pioneering sanitation DIB used in Cambodia offers lessons on the benefits and challenges specific to WASH services (iDE 2022).

As shown in Figure 11, the institutions involved include:

1. USAID as the outcome funder;

2. The Stone Family Foundation as the impact investor; and

3. iDE as the service provider (an international nongovernmental organization that has operated in Cambodia for many years, facilitating uptake of sanitation services in rural areas).

Figure 2: Cambodia sanitation development impact bond structure (Adapted from iDE 2022)

The Cambodian DIB launched in 2019 and will run through 2023, with a maximum of $9.99 million in outcome-based payments from USAID back to the Stone Family Foundation (iDE 2022). The DIB aims to improve rural community sanitation services, especially for the poor and hard-to-reach groups (e.g., women, children, people with disabilities, and older people) across six provinces in Cambodia. Specifically, villages must achieve open-defecation-free status, as a

means of reducing disease burdens and preventing drinking water contamination. Outcome payments can be claimed in tranches (every 6 months) dependent on local village government reports collated and submitted by iDE. To mitigate risks, the financing structure relies on a

detailed operational model embedding the cost of services (plus risk premiums). This exercise envelops not just “core” activities but also a number of “soft” (i.e., enabling or supporting) activities. Activities in the latter category include capacity building, communications, engagement

with local authorities, and sourcing materials.

After the first 18 months, the program had enabled 750 villages (out of the targeted 1,600) to be declared free of open defecation (Morse 2021). From the service provider’s perspective (iDE), the DIB provides implementation flexibility and removes some of the project governance, design, and management burden, thus conserving costs. This flexibility is particularly important given the focus on harder-to-reach villages, which benefit from testing and innovative approaches that can be fine-tuned as the program rolls out.

Scale of dissemination

No DIBs have yet been trialed for rural water services in low- and middle-income countries. Given varied values and structural limitations of water development finance institutions, they may not hold universal appeal. One (in progress) seeks to address sanitation in Cambodia.

To access further information on financial innovations for rural water supply in low-resource settings, you can download the complete report HERE.

The information provided on this website is not official U.S. government information and does not represent the views or positions of the U.S. Agency for International Development or the U.S. Government.

References:

by Larry Siegel

My book, I Tried to Save the World and Failed, reflects on a time and effort to find rural water solutions in Mexico, Malawi and Cambodia that could be used everywhere. The effort started during the Vietnam war while working on an Army Civil Affairs team. There I was confronted with the reality that not everyone turns on the tap and drinks good water. Several of the rural communities I worked in desired more water, cleaner water, and more convenient water. Echoes of that experience grew from travels in later years.

A drinking water partnership formed when as a Congressional staffer I worked on the Safe Water Act of 1974. Years later I joined with a few of those colleagues to form Safe Water International (SWI), which had dreams of a silver bullet solution for the billion or so citizens around the world with only contaminated water to drink.

SWI put Rotary funds and private donations to the task of seeking that silver bullet through rural drinking water projects in Mexico, Malawi, and Cambodia. As these projects moved from one country to the next, it became clear that every rural drinking water project demanded a long-term commitment to the project community.

It is said that 35% of water well projects break down or are abandoned by users. Sad to say, the work of SWI in three countries met this unfortunate goal. As a consequence, I Tried to Save the World seeks to identify lessons learned from those drinking water efforts in remote rural communities. The observations that result come largely from field work and then from reflection in succeeding years on the successes and failures of those projects.

The book closes with a set of lessons aimed at sustainability. The lessons are not meant to be the final word. It is hoped they will provoke discussion on how to go about achieving project sustainability.

While there are stories of disappointment, there is also praise for the commitment and perseverance of all who undertake work to improve the health and sanitation of those desperately in need of help. The closing anthem of the book is “Help is Help.” Even unsuccessful projects can bring life-long benefits to those who for some short space of time have safe water and good sanitation.

Also available on Kindle from Amazon.com