Blended finance opens investment tap to water funds

The drinking water sector in emerging economies is investment-ready but impact investors are still becoming acquainted with it. Non-profit Aqua for All is backing a new blended finance equity fund, in a move they hope might inspire others

The UN’s Sustainable Development Goal 6 calls for clean water and sanitation for all. According to reports, it will cost approximately $114 billion a year to achieve that goal by 2030, an amount three times bigger than the capital that is currently dedicated to solve the water crisis.  

Non-profit Aqua for All, which has two decades of experience in the sector, believes that one of the ways to bridge this huge gap is through blended finance solutions.

“Private investments, especially if mobilised through blended finance structures, have the potential to help achieve universal access to safe drinking water and provide both social and financial returns”, says Shabana Abbas, lead innovative finance at Aqua for All.

Many investors however are not familiar enough with the sector to understand its risks, financing needs, and opportunities. They perceive the water and sanitation sector as too risky, unprofitable, or involving delayed returns on capital.  

Aqua for All supports innovative, impact-driven enterprises across Asia and Africa to become self-sustainable and investment-ready. To help attract investments into the sector, it has developed a range of innovative financial models, Abbas explains, including results-based incentives and carbon credits.

A new approach is to use part of the public money which Aqua for All receives from the Dutch government to facilitate blended finance solutions, by de-risking investments through first-loss tranches, guarantees and technical assistance.  

De-risking capital

Belgian impact investor Incofin Investment Management is soon to launch its €50 million Water Access Acceleration Fund (W2AF), a blended finance equity fund focused on accelerating access to safe drinking water globally. Multinational food company Danone is already on board as anchor investor, having committed €10 million.

Aqua for All will provide €1 million de-risking investment into the fund, in addition to technical assistance and grant funding for the fund’s investees.

Dina Pons, managing partner at Incofin and fund manager of the new W2AF, praises the role of Aqua for All. 

“Incofin has 20 years of track record of investing in impact in sectors like microfinance and sustainable agriculture,” Pons explains, “Now, we’ve set up this new water fund because we are aware of the need to invest in innovative businesses, to scale access to affordable drinking water to underserved populations.” 

“But we want to do this with experts, that have lots of market experience. So, we really appreciate that Aqua for All is becoming a partner in the fund, providing the most needed type of capital that is going to help de-risk the investments.”  

“We know this kind of thinking is still not common in the philanthropy world, so hopefully Aqua for All will act as an inspiration, helping other foundations to consider such an approach too. There is potentially a much stronger catalytic effect by investing one million in the fund and, by doing so, attracting millions of euros of additional funds from other investors, instead of making a plain vanilla donation.” 

Catalyst of change 

Historically, the core source of financing in the water and sanitation sector has been driven by government entities, public water sector providers, donors, grants and concessional debt.

“Private investments, especially if mobilised through blended finance structures, have the potential to help achieve universal access to safe drinking water and provide both social and financial returns”

Shabana Abbas, Aqua for All

In many cases, infrastructure projects have failed to meet their outreach goals, or missed opportunities to scale up, due to issues such as weak governance, lack of proper expertise, and insufficient growth capital, experts say. 

There is hope that likeminded capital providers, especially impact investors, will create a different mindset among water and sanitation enterprises, utilities and other actors, and catalyse change.  

Incofin’s new water fund will invest in water businesses which meet ambitious financial, social and environmental criteria and are in need of growth capital. As an equity fund, it will take significant minority stakes for an average period of 5 years. 

Pons says: “We will sit in the board of directors of these companies. We will co-design the strategy and future growth. By doing so, we aim to catalyse the growth of the water sector by demonstrating financial viability of scalable water businesses, and investment opportunities.” 

The focus of the new fund will be on safe water enterprises, like kiosks providing water for local communities. Water treatment solution services and  investments in decentralised piping infrastructure will also be targetted. Technical assistance is part of the ‘capital plus’ approach that Incofin adopts across its impact funds, and will be a key part of the water fund. 

Abbas adds: “The technical assistance that the fund will offer, pre and post investment, aims to increase the outreach and improve the capacity of selected companies. If Incofin judges that a company is not yet able to absorb a capital injection, we can use our funding in customized and targeted ways to support the companies in addressing specific gaps to become investment ready.” 

Radical approach 

“This is quite an innovative way of cooperating between a foundation and an impact investor”, says fund manager Pons. “Without this blended finance solution, it would be a lot harder to get investors to our table. It’s innovative because it allows to move the subsidised funding of the water sector, to private sector investment readiness. That’s a radical new approach.”  

According to Abbas, who is working at Incofin’s office in Cambodia for a few months, this type of approach is a next step for non-profits in the water sector.

“We need a fund like this to systematically address the financing gap which we, or other funders, cannot fill on our own. We know the market but we are not investment professionals. That’s why the blended structure works really well for us,” she explains. 

Abbas concludes: “While Aqua for All is not seeking a financial return, the fund aims for appropriate returns to prove the investment readiness of the sector and be able to attract investors for whom financial return alongside social return is important. We just want our investment to be catalytic. So this is a start. To really address the big financial gaps we need many more funds like W2AF.”