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

The water, sanitation, and hygiene (WASH) sector is ripe for change. Unfortunately, it is far from being on track to achieve universal access to safe drinking water (Sustainable Development Goal 6). This is mainly due to large investment and capacity gaps, which prevent the WASH space from taking off. In light of these challenges, it comes as no surprise that the U.N.’s Summary Progress Update 2021 for SDG 6 urged all water actors to ramp up their game and increase their current rates of progress by fourfold, which would represent a substantial uptick in investment activity.

This growing need and intensifying focus have important implications for both businesses and funders. In the complex global WASH arena, with its multitude of public and private actors operating in diverse local realities, regulatory frameworks and water scarcity challenges, impact entrepreneurs have emerged as the sector’s new champions. They bring innovative, business-savvy and complementary solutions, and they’ve attracted the attention of funders. Though the WASH sector has been largely publicly funded to date, non-traditional capital providers such as impact investors, corporate funders, family offices and foundations are increasingly streaming into this important impact space. The most recent GIIN survey confirms that WASH has seen the quickest rise in capital flows among the 13 sectors tracked, with a staggering annual increase of 33% from 2015 to 2019 among GIIN’s repeat respondents.

But for this influx of capital to have maximum impact, funders will have to adapt their approach. In the last decade, a large number of water enterprises were born with an initial injection of grant funding. However, the usual grant models are not optimal nor sufficient for enterprises that are building sustainable business models and are striving to scale. It takes time to build relationships with grant funders, grant money is limited in size and scope, and it’s an unsustainable funding source for future growth.

To support these companies as they grow, investors will thus need to take approaches that are as innovative as the enterprises they’re funding, and that allow them to scale faster and better. Social Impact Incentives (SIINC) are one such innovative financing mechanism. SIINC, co-created by Roots of Impact and the Swiss Agency for Development and Cooperation, are part of the larger family of Impact-Linked Finance instruments, which provide entrepreneurs with better terms for better impact. Below, we’ll explore how these incentives work, and how they’re being applied successfully to support enterprises in the WASH sector.

Understanding Social Impact Incentives

Social Impact Incentives are a funding instrument that rewards high-impact enterprises with time-limited, premium payments for achieving social impact. The SIINC approach recognizes that supporting enterprises across different stages requires more needs-driven, rightly sized and appropriately timed financing solutions, which allow them to achieve both financial self-sustainability as well as larger and/or deeper impact. Due to this flexibility, out of the array of blended finance instruments that can support growth stage enterprises, SIINC is particularly valuable for enterprises that struggle to balance the goals of scaling commercially and delivering deeper impact.

The approach has shown encouraging results in sectors such as health and agriculture, where it has been successfully tested by pioneers that include development agencies and other catalytic funders. This success has inspired additional SIINC applications that explore bigger opportunities in other sectors, with ecosystem players such as impact investors, service providers and accelerators.

Aqua for All, a not-for-profit funded by the Dutch government, decided to test the SIINC solution, implement learnings from other sectors, and explore innovative applications of the approach in the context of WASH. Partnering  with Roots of Impact, Aqua for All launched its pilot SIINC for WASH program in August 2020, which has supported three enterprises to date.

One of these enterprises is Khmer Water Supply Holdings (KWSH), a private water company in Cambodia. With a unique business model, KWSH has demonstrated that it can thrive and scale with the help of private investment. The enterprise is committed to expanding access to clean and affordable piped water across rural Cambodia, and it operates a portfolio of small-scale piped water stations that it acquired and optimized over time. But it has faced a major challenge in reaching more remote and often poorer households – something that requires high investment cost, and that has kept KWSH from deepening its impact.

Incentivized by SIINC, the enterprise has now started to push these boundaries. Within the SIINC for WASH program, Aqua for All provides KWSH with payments that reward it for deepening its connectivity in two existing service areas, as well as adding new service areas that are much more impactful. Fuelled by the additional revenue stream that the SIINC payments will provide, KWSH is preparing to enter a new phase of rapid growth. In addition to the US $3.5 million in private investment raised as a condition of the SIINC contract, the enterprise is currently in final negotiations for a new investment round of US $7 million.

SIINC for WASH: A more effective use of catalytic funding

These early applications of SIINC in the WASH sector are promising. But how exactly can SIINC open greater opportunities for scale and impact among the many inspiring and innovative WASH enterprises out there? We’ve identified four key learnings from our pilot program to date, which highlight how SIINC can be successfully leveraged in the sector:

1. Make sure to start with impact data and an impact-driven growth plan:

Basic impact measurement and management systems are an absolute must. For Impact-Linked Finance solutions such as SIINC to be successfully designed and executed, impact enterprises need to be ambitious and committed to boosting their impact. Also, impact and financial additionality are key: They are essential to determining the future value-add of the incentives in terms of supporting the business model and unlocking its full impact potential.

2. Always co-design the incentives with an enterprise-centric approach:

SIINC is truly enterprise-centric – the enterprise’s growth plans and impact ambitions determine the type and size of the incentives. This also means that the enterprise needs to be cognizant of the (commercial) tensions it faces in order to go the extra impact mile. Because of this business-centric focus, the SIINC process requires equal participation from the enterprise in defining incentive metrics: This ensures that the incentives are challenging enough to create impact additionality.

3. Use smart technical assistance for market preparation and pipeline building:

Technical assistance is critical for preparing the market to benefit from instruments such as SIINC. Smart technical assistance support, both before and alongside SIINC transactions, can strengthen the enterprises and enable them to deliver better products and services, while building purposeful impact measurement and management systems and becoming investment-ready.

4. Think ahead and be wise in designing the right support:

The real art of developing a successful SIINC approach lies in providing the right type of support at the right time. A scalable approach to reaching the most promising innovations in WASH requires funders to understand what it takes for these enterprises to reach impact at scale, and to cater their approach to meet these needs. As outlined above, SIINC is one of several instruments in the broader Impact-Linked Finance toolbox that can support enterprises for optimal impact.

It’s time to explore Impact-Linked Finance for WASH

Building on the promising results of SIINC in WASH, Aqua for All and Roots of Impact are now taking the next big step: expanding access to innovative finance for WASH enterprises with the new Impact-Linked Fund for WASH. As a dedicated, open-ended fund with initial commitment from Aqua for All, the Impact-Linked Fund for WASH will empower more enterprises with impact payments and tailored technical assistance. The fund will also put a special focus on businesses at the gender and climate nexus.

With this promising blueprint to work from, we invite other catalytic funders and impact investors to be bold and innovative in working to systematically support the new generation of impact enterprises working in WASH — or other sectors — through effective Impact-Linked Finance solutions.

Shabana Abbas is Lead, Innovative Finance at Aqua for All; Bjoern Struewer is founder and CEO, and Patrizia Baffioni is Lead, Impact-Linked Finance Programs at Roots of Impact.

Photo courtesy of USAID Nepal.