The UN estimates that 4.5 billion people lack safely managed sanitation services, and 1.8 billion people drink contaminated water (WHO, UNICEF, 2015). Hundreds of billions of US dollars are spent every year in the water sector, and the financial requirements to meet future needs will be even higher (Water Integrity Global Outlook, 2016). The financing of WASH projects has largely come from public funding, either through government subsidies or aid transfers, yet new trends in the financing include a gradual shift from donations to socially-responsible investments and ‘impacting investing,’ meaning investors with the intention to generate social and environmental impact gain a financial return.
Commercial finance is defined as market-based finance, including debt, equity, and certain kinds of guarantees. It is market-based in the sense that the cost of this type of financing is determined by supply and demand in capital markets, rather than by governments or other regulatory bodies (World Bank). In developed economies, investors are usually willing to lend to water service providers as these are viewed as low risk with reliable, reasonable returns. Currently, many types of water funds – Pictet, Calvert, AllianzGI, Water Impax Asset Management, etc. – invest in listed companies whose main business is in the water sector, or that are significantly involved in water-related services or technologies.
A large and diverse amount of players from both the public and private sector are involved in WASH service delivery. It is recognised that universal access to water and sanitation will require the contribution by both public and private entities, as their roles and motivations are distinct. Whilst public water systems are usually non-profit entities managed by local or state governments – for which rates are set by a governing board – private water systems can be for-profit systems managed by investors – commercial financiers – or shareholders.
The nature of private sector involvement in the water sector has been controversial as many believe that water supply, sanitation, and hygiene services should be delivered for free (Water Integrity Global Outlook, 2016). The Water Integrity Global Outlook states that ‘many integrity issues can arise through tariff-setting, such as accountability of service providers, fee setting, and adequate service provision for the price paid.’ The risk involved in the privatisation of a resource is an important one to take into consideration. Whilst indeed the public sector has a critical role in ensuring that private sector providers are respecting compliance rules, private investors can and should also be a part of the solution by more explicitly making integrity a criterion for investment.
EVALUATION MECHANISMS AND THE ‘SOCIAL LICENSE TO OPERATE’
Waterpreneurs is an organisation that supports the scaling-up of impact investments that finance the growth of WASH enterprises that explicitly respect human rights in developing countries. Through our work, we ensure that private investors do not invest money in water providers without some guarantee of integrity from the companies. In certain cases, these guarantees also encompass the social impact that these businesses have. In the water sector, Waterpreneurs works with investors that perform due diligence, not only related to the financial aspects, but also in terms of social responsibilities.
Private water providers – including large utilities or small-scale, market-based organisations– are expected to respect certain rules when it comes to price setting, quality of services, non-discrimination, etc. These rules can be explicit – in national laws and regulations see WaterLex Legal Database– or implicit, through a ‘social licence to operate.’ The ‘social licence’ corresponds to the ongoing approval and broad social acceptance by local communities and other stakeholders for the organisation or project to operate. In this process, a collaboration between the public and private sector, as well as civil society is essential and expected.
Evaluation mechanisms and performance indicators can and should be used by private sector providers to ensure transparency and accountability. Indicators are strong when aligned with standards grids such as the Sustainable Development Goals (SDG) indicators, the Human Rights Criteria (quality, quantity, affordability, accessibility, availability, acceptability) and principles (access to information, non-discrimination, accountability, participation, sustainability), the WHO water quality indicators, or the GRI (Global Reporting Initiative) criteria for businesses.
The SDG framework, along with the human right to water principle and criteria can be seen as guidelines and can provide the private sector provider the social licence to operate, a symbolic licence that could be used by investors as a condition for loans. Waterpreneurs advocates that integrity improves if these frameworks and indicators are widely used and measured. Private investors can be part of the solution when it comes to integrity by requesting public and private sector service providers to comply with these criteria.
While working on accelerating private finance for WASH, Waterpreneurs evaluates market-based solutions on different criteria, including the Human Rights Criteria. This partly consists of performing a preliminary due diligence assessment – including financials, risk analysis, social impact, integrity, and compliance – on established and mature market-based WASH entrepreneurs and projects. These criteria are absolutely crucial for the investors Waterpreneurs work with, and we see integrity as a way to reduce risks in their investments.
RESPECTING THE HUMAN RIGHT TO WATER: A STARTING POINT
Respecting the Human Right to Water and Sanitation becomes a social licence to operate for Water and Sanitation enterprises, and brings the question of integrity to the fore. Ensuring that the human rights principles are respected leads to better integrity in the sector from all sides. No productive conversation between the broader WASH sector – government bodies, NGOs, etc. – and the private sector organisations can take place without recognising the importance of a human rights-based approach, and its implications for business. National regulations are expected to provide a framework for compliance; in the absence of such a framework, operating a business in the WASH sector is extremely precarious, and no private investor will take the risk to invest money on such projects.
The Human Right to Water and Sanitation comes down to accessibility, making the price of water a central topic: in any water or sanitation projects, it is key to defining a balance between the objective of social impact and the economic viability. It is also very sensitive from the point of view of the acceptance of the local populations. UNDP recommends that expenses on water and sanitation should not exceed 3% of the household income. Respecting this objective is often a challenge for water and sanitation entrepreneurs operating in low-income communities.
It can also be seen as a hurdle to attract commercial finance since low prices often mean low returns for private investors. However, it is part of the ‘social license to operate’ to ensure that everyone can access safe water and sanitation at affordable prices, and therefore necessary to attract investors. This is where blended finance is needed, to use public resources smartly to better leverage commercial finance and to ensure that domestic businesses can access finance of the right type and on the right terms as they transition to scale.
COOPERATION BETWEEN DIFFERENT SECTORS
Public authorities often delegate part of their duty to provide water to small-scale water providers. The provider will, therefore, need to work in close cooperation with local authorities; this has been the case of Eau et Vie operating in the slums of Manila in collaboration with the public authority, or Swiss Fresh Water in Senegal. This collaboration can reassure a potential private investor. A local NGO can support a private sector provider by providing capacity building, by endorsing the activity, and by supporting the social marketing aspect in the communities. A local industry can be interested that the entrepreneur provides safe water or sanitation in the places where they operate, to ensure sustainability in their value chains; and strengthen its WASH4Work commitment through the mobilisation of business to improve access to WASH in the workplace, in the communities where workers live, and across supply chains.
All these stakeholders operating with entrepreneurs, from the public sector, the private sector, and civil society are necessary to ensure the integrity of the business and provide the levers necessary to scale (capacity, finance, etc.). Waterpreneurs’ recommendations in this area are aligned with the one presented by ODI (2015) and focus on ‘establishing and strengthening partnerships between governments and larger businesses to unlock the contribution of the smaller scale, domestic private sector towards universal access’.
Today, it is challenging for funders and investors to design funding mechanisms able to support the scaling up of operations developed by entrepreneurs. Blended finance, with a part of the non-repayable money – often through public sources such as subsidies, and grants – covering the CapEx, and a part of the repayable money – often through private sources such as debt and equity –can allow a diversification of the sources of finance and a de-risking of investment projects, to support the scaling-up of water providers activities.
PRIVATE INVESTMENTS WILL NOT HAPPEN WITHOUT INTEGRITY
These initiatives can act as models to guide future financing structures of the water sector. Ultimately, the driving principle of delivering impact transparently, in respect of standards, but also of ethical principles, is above all finding the ‘right solution’ that works for local communities: it is a condition for private finance to step-in. There is a clear need for better policies integrating human rights, and bringing the framework for private sector providers to operate with integrity. Investors can also play a central role: efforts and opportunities for strengthening integrity should be welcome when working with the private sector: private investments and innovative financing mechanisms will not happen without integrity. Integrity in the water sector is key for private finance involvement, and integrity in finance is key to deliver on the SDGs.
For more information on this topic, find out more about these tools and best practices:
- To improve accountability, awareness, and action around the human rights to water and sanitation, but also to attract shareholders, guidelines are needed. The CEO Water Mandate released guidelines for companies, primarily large water users, to help them understand how to apply their responsibilities to respect the human rights to water and sanitation to their ongoing water stewardship activities.
- Through the Safe Water Project in India in 2016 and 2017, WaterLex has developed and tested a checklist to support water and sanitation entrepreneurs and help them assess their ability to comply with the human rights to water and sanitation. This is a self-assessment tool that can be used independently by small and medium-sized companies. The use of such tools can help companies manage their integrity issue and give extra-financial performance indicators to private investors. Waterpreneurs is using some these criteria to evaluate companies on their integrity.
- Another example is the Water Criteria – Climate Bonds Standard, developed by a consortium of recognized stakeholders (CDP, Ceres, World Resource Institute, Climate Bonds Initiative and the Alliance for Global Water Adaptation (AGWA)). This work was supported by Stockholm International Water Institute (SIWI) and provides a clear understanding of what sorts of investments are consistent with improving the climate resilience of water assets and will help bond investors quickly determine the environmental credentials of water-related green bonds. The Water Criteria lay out the requirements that water infrastructure assets and/or projects must meet to be eligible for inclusion in a Certified Climate Bond.
- Waterpreneurs launched a white paper on Impact Investing for water, providing examples and case studies of innovative finance for WASH market-based solutions. This document addresses the issues highlighted in this blog more into details.
For further reading on the topic, see these resources:
- CEO Water Mandate, 2015 – Guidance for Companies on Respecting the Human Rights to Water and Sanitation: Bringing a Human Rights Lens to Corporate Water Stewardship.
- GLAAS, 2017 – UN-Water Global Analysis and Assessment of Sanitation and Drinking-Water
- IFC World Bank, 2012 – Safe Water for All: Harnessing the Private Sector to reach the Underserved
- IFC, 2015 – Leveraging Market Opportunities to Achieve Development Impact: Entrepreneurial Solutions to Improve Access to Sanitation and Safe Water
- ODI / UNICEF / UN Foundation, 2015 – Private sector and water, sanitation and hygiene
- OECD, 2017 – Financing water and sanitation in developing countries – Key trends and figures
- UNCTAD, 2015 – Investing in Sustainable Development Goals Action Plan for Private Investments in SDGs. Geneva: United Nations Conference on Trade and Development.
- WHO / UNICEF, 2017 – JMP report: progress on Drinking water and sanitation
- World Bank Group & UNICEF, 2017 – Sanitation and Water for All: How Can the Financing Gap Be Filled? A Discussion Paper
- World Bank, 2016 – Achieving Universal Access to Water and Sanitation by 2030: The Role of Blended Finance
- World Bank, 2017 – Easing the transition to commercial finance for sustainable water and sanitation
This blogpost is part of a series of posts and briefs on WIN’s knowledge pack theme of ‘Integrity in Financing the Water Sector’.
Waterpreneurs is a global “for-impact organisation”, supporting the scaling-up of impact investments financing the growth of WASH (“Water, Sanitation and Hygiene”) enterprises operating in developing countries, and respecting human rights. The combination of an expertise in WASH, Impact Investing, Social Entrepreneurship and Innovation allows Waterpreneurs to help its clients and partners develop impactful global and local action plans. Based on practices of shared value creation, collaborative economy and social entrepreneurship, Waterpreneurs connects local entrepreneurs that have sustainable solutions for access to safe water (and sanitation) with impact investors, who can finance the scaling-up of their activities.