NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Great water, sanitation and hygiene (WASH) innovations are often inspired by entrepreneurs’ personal stories and experiences. One example is John Nyagwencha, CEO of Aqua Clara Kenya (ACK): “I grew up with my family in a village in Western Kenya, and my mother was always concerned about contaminated water,” he said. “She boiled it religiously. When I moved out during my master’s degree and lived on the outskirts of Nairobi, I was much more careless. As a result, I came down with typhoid, which turned out to be quite serious.”

When Nyagwencha returned home after his studies, he saw that his mother was putting all her faith in a new “dubious-looking object in the back of her house” — a water filter. As a trained scientist, he was obsessed with evidence. So he reached out to the provider, then a U.S.-based charity called Aqua Clara International, to learn more. The call marked the start of a relationship that eventually convinced him to work for Aqua Clara Kenya, and his initial skepticism turned to conviction. “I still remember an old man who called us. After drinking our filtered water for a month, it was the first time in his life that he didn’t have stomach aches. He thought that something must be wrong with our product. It was wonderful to hear such stories and witness the positive impact on the lives of our customers.” Today, ACK is a for-profit enterprise that Nyagwencha has been leading for the past 10 years, serving the most vulnerable and hardest-to-reach communities in Kenya.

ACK has been successful in attracting capital, but this isn’t the reality for most WASH enterprises: Many of them are struggling to find the right financing to scale their impact. As of today, the WASH sector has been unable to close the staggering finance gap of around US $138 billion per year that is required to reach SDG 6’s goal of universal access to water, sanitation and hygiene by 2030.

To address this funding shortfall, funders and investors need to get their hands dirty, working closely with the entrepreneurs and organizations they finance to better understand their context, challenges and needs. Only by building this deep familiarity can they develop financing approaches that are as innovative as the entrepreneurial solutions they support. This is particularly true since historically, Official Development Assistance has been the sector’s biggest funding source — and it has faced dramatic cuts, especially this year. In response, many public and philanthropic funders have begun to explore new impact finance models that can mobilize additional private sector investment.

Impact-Linked Finance (ILF) is one of these new approaches, and it has proven to be effective. ILF links financial rewards for market-based organizations to the achievement of positive social outcomes, and thus provides entrepreneurs with “better terms for better impact.” One initiative that utilizes this approach is the Impact-Linked Fund for WASH (ILF for WASH) program, pioneered by Aqua for All and Roots of Impact. ILF for WASH builds on a now-finished pilot called “SIINC for WASH” that kicked off in 2020 and leveraged one specific ILF instrument called Social Impact Incentives (SIINC). SIINC was granted to three WASH companies: aQysta, ATEC and Khmer Water Supply Holding (KWSH). In 2022, Aqua for All and Roots of Impact published a NextBillion article on the first findings from SIINC for WASH. Now, after five years with this innovative approach, it’s time to share two key lessons learned that we applied to the ILF for WASH successor program.

Lesson 1: ALWAYS USE incentives THAT ARE CONTEXT-Specific

Contextualization is key in ILF. This is why two of the nine Design Principles for Impact-Linked Finance (which Roots of Impact, BCG and the BCG Henderson Institute defined in 2019) focus on the need to “provide incentives to the value creator” and “adapt pricing to a specific context.” In short, this means that instead of investors receiving rewards, which is normal in other outcomes-based finance approaches, it’s the enterprise that typically gets the incentives, since it’s the central value creator. Also, the incentive pricing builds on a thorough analysis of each enterprise’s specific context and model. This supports the enterprise best in creating the impact it strives to achieve.

For KWSH, a company that makes safe piped water accessible to many underserved households in Cambodia, these two ILF features played out very well. William Puyo, General Manager of KWSH, confirms that what sets ILF apart is the clear willingness of the transaction team to develop a thorough understanding of the specific business and build appropriate incentive structures that truly meet its needs. As a result, KWSH was able to achieve the deeper impact it had wanted to achieve prior to the SIINC for WASH program, but couldn’t due to a lack of incentives.

“To me, SIINC is a clear win-win-win situation,” said Puyo. “For our existing grant providers, SIINC makes sure that we stick to our mission statement and impact objective. For our lenders and shareholders, SIINC improves our commercial performance by allowing us to install connections to last-mile households and then serve these households in perpetuity. And for our end users, SIINC enables them to access services that they would otherwise be excluded from.” In our new ILF for WASH program, the same positive effects can be observed for companies such as ACK.

Lesson 2: ALWays Use smart technical assistance

While no enterprise is born investment-ready, we observed that many WASH enterprises were not fit enough to take on ILF. Typically, the main challenge is the availability and quality of the impact data that ILF builds upon. Antony Kamotho, Managing Director of Purefresh, an ILF for WASH program enterprise, described the challenge like this: “I find it [the ILF instrument] pretty straightforward. The only thing that took us a bit of time to understand is how exactly the metrics system works: which metrics to use, how to measure them and how they are rewarded.”

We took this lesson seriously and developed a technical assistance (TA) strategy based on an innovative funnel approach. Rather than using the ad hoc TA we had included in the predecessor program, we now follow a standardized TA trajectory that targets enterprises in varying stages of readiness and thus builds the pipeline for ILF-ready transactions. Earlier-stage enterprises, in particular, are encouraged to go through multiple TA offerings in impact measurement and management as well as impact investment readiness. These offerings are created by Roots of Impact’s capacity-building arm, the Social Finance Academy (SFA), and are jointly provided by SFA-certified trainers as well as by Aqua for All and local TA providers.

The most novel TA component is the “Impact-Linked Finance Readiness Bootcamp.” It dives deeply into the enterprises’ impact measurement and management systems and ensures that the requirements to build an impact baseline and incentive scheme for the ILF transaction are in place. When necessary and within scope, enterprises also get the opportunity to receive tailored TA throughout the entire transaction. This type and depth of TA is refreshingly new: Enterprises gain a better understanding of their impact and its potential, and benefit from developing their overall business intelligence. As one participant expressed it: “The Bootcamp helped us to understand how to unpack our target audience and the intended impact we wish to have on them. This has been a useful starting point in defining our impact measurement plan. What was incredibly enlightening for us was to learn about additionality, counterfactual considerations and packaging of our concept.”

Through our five years of experience with ILF in the WASH space, it has become obvious to us that many WASH enterprises need this kind of innovative support to survive and thrive. We hope our lessons learned will inspire funders and investors to gain a deeper understanding of these businesses’ core challenges and strengths, empowering them to push water boundaries and help the WASH sector scale, rather than letting it dry out. If you share this vision and seek true additionality, we encourage you to reach out to us. Real impact thrives on collaboration, so let’s innovate in the WASH space together.

Arnaud Alt is the Lead Transaction Manager for the Impact-Linked Fund for WASH at Aqua for All, Annemarie Mastenbroek is the Technical Assistance Manager at Aqua for All, and Christina Moehrle is a freelance impact finance and communications expert working with several pioneers in the international impact space.

Photo credit: Jacob Kelvin.J