Rural Livelihoods – Rural Water Supply Network

“Financial Innovations for Rural Water Supply in Low-Resource Settings” Innovation 7: Blended Public/Private Finance.

Image Credit: Report World Bank, 2014. ©Albert Gonzalez Farran/UNAMID

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 Blended Public/Private Finance.

Water supply development in low- and middle-income countries has traditionally relied on public or aid funding, rather than commercial financing. “Blended” finance refers to leveraging public funds (e.g., concessional loans or grants from national governments or development banks) to mobilize additional capital from private banks or investment groups (OECD 2019b).

Combining development finance with private investment can assume different structures to reduce risk, employing a range of instruments (e.g., equity, debt, partnerships, technical assistance, grant-funded transaction design, guarantees, or insurance; Figure 1; OECD 2019a; Convergence 2023). The most common blended finance instruments across the development sector from 2018–2019 were direct investments in companies or subsidiaries, loan guarantees, “syndicated” loans, and lines of credit (OECD 2019a). Syndicated loans come from a group of collaborating financial institutions (a loan syndicate) to a single borrower, reducing the risk and buy-in amount needed for each individual group and/or ensuring sufficient specialized expertise. Alternatively, a smaller amount of pure grant funding may be used to support technical assistance or subsidies, with the goal of attracting other investors.

Figure 1. The four most common blended finance structures (adapted from Convergence 2023)

Examples

Although not all water-related “public-private partnerships” leverage public funding to attract commercial finance, these long-term collaborative arrangements among one or more government and private sector entities have been in place for decades in low- and middle-income countries, including throughout Africa, with encouraging results. Overall,

private operators have tended to be more efficient than governments at managing construction, service delivery, and asset maintenance (World Bank Group 2014). One frequently documented benefit among several Sub-Saharan African examples, where private management covers an estimated one-third of small piped water schemes, has been reduction of “non-revenue” water, or water losses for which production costs are never recovered. Among small-scale water providers in Uganda, a private sector participation model led to expanded coverage and financial performance with only modest tariff increases (World Bank Group 2014; Hirn 2013). Active connections tripled over 10 years with tariffs rising less than inflation.

In Madagascar, a host of rural community water user committees and private water operators have signed long-term concession agreements in which a private company invests in the water system to increase household access, generate more revenue, and share profits. This model has been replicated over roughly 15 years with donor support, such as USAID’s Rural Access to New Opportunities in Water, Sanitation, and Hygiene (RANO WASH) activity (Tetra Tech 2021).

Another long-running example of blended finance comes from Benin. Between 2007 and 2017, more than half of Benin’s rural piped water systems transitioned to private operation and maintenance contracts known as “affermages” (Comair, Delfieux, and Dakoure Sou 2021; Migan and Trémolet Consulting 2015). In these agreements, a private operator collects tariffs and then retains a percentage of an agreed-upon price per unit of water sold, turning over the remainder to the contracting authority (Janssens 2011). The initial pilot with 10 private operators successfully rehabilitated all water systems with no additional costs to the customers (World Bank Group 2018); however, subsequent scale-up experience brought a pivot to regional contracts to attract more professional operators. In 2022, a 10-year public-private partnership was formed with a consortium of French companies (Eranove, UDUMA, and Vergnet Hydro) to rehabilitate, extend, and operate rural water systems for 100% customer coverage (Marteau 2022). Public funds will ensure private connections and tariffs remain affordable.

Although some examples (e.g., Madagascar, Benin, Cambodia) have applied blended finance to rural water supply in low- and middle-income countries, it remains at a proof-of-concept stage. Blended finance is possible where rural water provision is more organized and mature and where people pay consistently, justifying lending. This is more likely to be the case in middle-income economies.

Further proof-of-concept is required to evaluate blended financing to drive rural water supply performance. It faces a dual challenge: persuading commercial lenders that water supply represents a lucrative investment opportunity and persuading water service providers to seek loans at rates higher than those routinely offered by development finance institutions.

Blended finance projects create an evidence base for effective public investment and in turn, incentivize the capture of better financial and impact data (Convergence 2019). Objective selection criteria may help “prime” service providers to continue the behaviors and actions that support blended finance (USAID 2022). Building the foundations for blended finance will require a transition period with accompanying public sector support, to allow for a paradigm shift on the part of both borrowers (who face increased pressure to manage operations efficiently) and lenders (who often do not know the market well enough to participate in investment opportunities).

While they take time, these adjustments have taken place in other sectors, most notably energy (IRC n.d.). Pories, Fonseca, and Delmon (2019) detail foundational issues ranging from governmental sector planning and tariff setting to service provider project preparation and financial market distortions. Experiences with the approach will elucidate the degree to which blended finance can work at large scales, but transformation is unlikely to occur rapidly.

Do you want to know more? Access to the complete report on financial innovations for rural water supply in low-resource settings 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.

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Charting the evolution of rural water services delivery across continents

This year we are celebrating 30 years since the Rural Water Supply Network was formally founded. From very technical beginnings as a group of (mostly male) experts – the Handpump Technology Network- we have evolved to be a diverse and vibrant network of over 13,000 people and 100 organisations working on a wide range of topics. Along the way, we have earned a reputation for impartiality, and become a global convener in the rural water sector.

RWSN would not be what it is today without the contributions and tireless efforts of many our members, organisations and people. As part of RWSN’s 30th anniversary celebration, we are running a blog series on rwsn.blog, inviting our friends and experts in the sector to share their thoughts and experiences in the rural water sector.

This is a guest blog by RWSN Member Lilian Pena P. Weiss based in Washington DC, USA.

I started working in the rural water sector in 2002, in my very first assignment with the World Bank, when I was part of a team assessing the social and environmental impacts of rural water systems in the dry northeast part of Brazil. As a recent engineering graduate, I was very much focused on the infrastructure – but I quickly learned that sustainable rural water services need to take into account a lot more than that. I remember vividly exchanging with the rural users on how to organise the community associations for managing water services, discussions on tariffs, Operation & Maintenance, and support from local governments amongst others. Since there, I never stopped working on delivering rural water services

In the early 2000s in Latin America, I worked on many projects in rural water services to indigenous and Afro-Latin communities that had been financed by the Inter-American Development Bank and the World Bank. Through those, I gained a better understanding of how these communities value water, the related cultural connections, and their willingness to have and pay for better services! This underlined the importance of working on the social side, especially behavior change and communications to make rural water services sustainable. At the time, the Demand-Responsive Approach (DRA) was the mantra with rural water practitioners! Some of the lessons learned from my engagement with Indigenous communities in Latin America and the Caribbean were later captured in this publication.

Around 2010, we started to develop a joint rural water information system, SIASAR, with Honduras, Nicaragua and Panama, which has since turned into a rural water platform across 14 national or subnational governments, from Costa Rica and Uganda to Kyrgyzstan. Developing SIASAR has been one of the most interesting and rewarding initiatives of my professional career so far; we worked hand in hand with multiple countries to develop – from scratch – a new governance and structured information system that focused on service delivery and sustainability with active participation from local users up to central governments harmonized across a wide range of countries.

It was around 2012 that I became involved in the Rural Water Supply Network. At the time, I was co-chairing the internal rural water thematic group of the World Bank together with my colleague Miguel Vargas. The interactions with the RWSN I believe were a win-win for us and for them. The RWSN with its powerful outreach and strong presence in Africa could deepen our dialogue and understanding of how to reach the last mile in rural water supply and give us the opportunity to exchange lessons and initiatives with so many institutions working on the same topic. At the same time, the World Bank’s global perspective also helped the RWSN to expand beyond Africa.

Later in 2015, I was fortunate to join the World Bank’s team in Vietnam, to lead a new generation of rural water projects where financing was fully based on results. It was fascinating to evolve our dialogue from delivering tanks and connections to really focusing on ‘how can we make sure these systems will deliver 24/7, reliably, with O&M cost recovery and sustain over the years? The work started in Vietnam has scaled up globally; this blog gives a good overview of the lessons learned from this approach in Vietnam. To date that the World Bank has supported more than 20 programs for results in the water sector globally.

Although so much progress has been achieved in rural water over the last 20 years, from an old top-down, infrastructure-based approach, to the evolution of the CBO-based models with institutionalized backstopping support, and growing Private Sector Participation, the challenges ahead remain complex. Not only do we need to continue working to ‘leave no one behind’,we also need to promote better and more efficient levels of service (ie. household connections, 24/7 supply, financial sustainability, etc). Moreover, climate change and its impacts on water security are perhaps the greatest challenge for this decade. Rural systems and their water sources are naturally more vulnerable to extreme climate events. The role of Development Partners, including the RWSN, become increasingly important to work with Governments, rural water practitioners, academia, and the private sector to develop and deploy effective solutions and advocate for the necessary funding to ensure universal, sustainable and climate resilience rural water services.

About the author: Lilian Pena P. Weiss is a Lead Water Supply and Sanitation specialist at the World Bank, based in Washington DC, USA. She has been working for over 20 years with World Bank operations, in Latin America countries, in East Asia and more recently in South Asia. She has led over 20 World Bank-financed investment projects in the water and sanitation sector, mostly focused on the rural water and sanitation sector. Lilian has also worked with water sector reforms, institutional strengthening of water utilities, environmental sanitation topics, community-driven development (CDD), results-based approaches and water security. She was the co-chair of the World Bank’s Rural Water Thematic Group from 2012 to 2015. Lilian is a Brazilian national, civil engineer, has a master in water resources management and environmental technology, and has a MBA in financial management.

Did you enjoy this blog? Would you like to share your perspective on the rural water sector or your story as a rural water professional? We are inviting all RWSN Members to contribute to this 30^th anniversary blog series. The best blogs will be selected for publication. Please see the blog guidelines here and contact us (ruralwater[at]skat.ch) for more information. You are also welcome to support RWSN’s work through our online donation facility. Thank you for your support.

Photo credits:

Inauguration ceremony of a new water system in Panama. Photo credit: Lilian Pena P. Weiss.
SIASAR information system. Each point represents a rural community and the colour defines the status of rural water services.
Visiting a rural water source in Vietnam. Photo credit: Lilian Pena P. Weiss.

Beyond the Borehole: what do ecosystem services have to do with rural water supply?

If there were no aquifers what would need to be built instead? That may seem an esoteric question given that groundwater is relied on every day by several billion people, but it is important to consider what useful things aquifers are, what we stand to lose if we mismanage them and what opportunities there are to tackle deep rooted poverty if they are used well. Continue reading “Beyond the Borehole: what do ecosystem services have to do with rural water supply?”