Explorations 08

Financingand Public-PrivatePartnerships in Water, Sanitation& Agri-Food sectors

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22

Contents

Glossary 4

1 Introduction 6 1.1 Context

1.2 Key messages and structure

1.3 Exploration

2 PartA:BuildingblocksandcommercialfinancingofSDGs 8 2.1 Introduction

2.2 The need for trillions

2.3Scalingandfinancing

2.4Grantfinancingversuscommercialfinancing

2.5Publicfinance:Considerationsandconditions

2.6Commercialfinancing:Considerationsandconditions

2.7FinancingforSDGs:Blendingpublicandcommercialfinancing

2.8 Main points

3 PartB:CommercialfinancingforPPPsinpractice 20 3.1 Introduction

3.2 Financing the SDGs

3.3 Money looking for impact?

3.4 What’s next?

3.5Mainpointsandobservations

Annex: More resources 30

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3 Colophon

PPPLab Food & Water is a four-year action research and joint learning initiative (2014 - 2018) to explore the relevance, effectiveness, and quality of Dutch supported public-private partnerships (PPPs). PPPLab is commissioned by the Dutch Ministry of Foreign Affairs and is driven and implemented by a consortium of the Partnerships Resource Centre, Aqua for All, the Centre for Development Innovation at Wageningen UR and SNV Netherlands Development Organization.

This publication is a joint production between the PPPLab and Waste Foundation.

Comments and questions about this document are welcome. Please send them to: info@ppplab.org For more information, please visit our website: www.ppplab.org

Any part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form and by any means, electronic, mechanical, photocopying, recording or otherwise, with proper referencing © 2018, PPPLab Food & Water

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4 A short description of key concepts used in this exploration. Investment: Agenericfinancialterm,referringtoassetsusedtogenerateincome,suchasamachineinafactory.Investmentcanalsohaveabroadermeaning,asin‘foreigninvestments’,werethetermreferstoprivateforeignmoneythatflowsintobusinessesinacountry.Inthisexploration,theterm refers to funds used for the SDGs.

Investingandfinancing:We use these terms assynonyms.Thesameistrueforinvestorandfinancier.

Financing,funding,(re)payments:Thefirsttwoofthesetermscanbothrefertoprovidingmoneytostartactivities,thoughfinancingcanalsobeemployedinthesenseof‘moneyusedtostartactivities’,andfundingcanreferto‘moneyusedtorepayfinancing’.Forexample:investmentinawaterkioskisfinancedwith€1000,therepaymentofwhichisfundedwiththepaymentsfromcustomerswhobuythewater.Forsakeofclarity,wewillusetheterms‘financing’and‘funding’tomean‘theprovisionofmoneytostartactivities’,while(re)payments,revenue,andrecoverywillreferto‘moneyusedtorepaythefinancing’.

Publicfinancing:financingprovidedbygovernment(public)bodiesorgovernmentagents.Itssourceisusuallytaxes,fees,orlevies.Publicfinancingisusedtopromote,developorsustainapublicgood(suchasroads,education,andhealthcare)orapublicinterest(likepromotingexportsorencouraginginnovationortheuseofsustainableenergy).Theprimeobjectiveofpublicfinanciersisnotfinancial,butimprovedservicelevelsforcitizens.

Commercialfinancing:Inthisdocument,referstofinancingprovidedbyprivatefinanciersonarepayablebasis.Acommercialfinancierhastwoobjectives:1)recoveringtheprincipaland2)gainingafinancialreturnthatreflectstherisk.Providingfinancingisthebusinessofcommercialfinanciers,thewaytheymakemoney.Thisexplorationpredominantly takes the perspectiveofthecommercialfinancier.

Impact investors: A group of commercial financierswillingtotradefinancialreturnforimpact-thatis,investorswhoarewillingtoacceptlowerfinancialreturnsifimpactiscreated.Mostimpactinvestorsareregularcommercialfinancierswithaspecificinterestinsectorsthatcreateimpact.

Seealso:• https://ppplab.org/2016/11/insight-series-04-financing-public-private-partnerships/ foranexplanationofinnovativefinanceconceptsrelevantforPPPs.

Foreigndirectinvestment(FDI): Direct investmentfrombusinessestosubsidiaries,ortootherbusinessesindevelopingcountries,whichmaycontributetoachievingtheSDGsandarethusapotentialsourceoffinancingforSDGs.Thisexplorationwillfocusoncommercialfinancingonly,andwillnotdiscussFDI.

Glossary

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5Figures used Annual Other in $ billions Source

Total SDGS

InvestmentsneededtotalSDGs 5000-7000 a

Investmentsneededindevelopingcountries 4000 a

Investmentmetindevelopingcountries 1400 a

Investmentgapindevelopingcountries 2500 a

ODAavailabletotal 142 a

SDG6 - Water and sanitation

Investmentsneededforwater 400 a

Investments neededinglobalwater 1000 b

Financing needed for SDG6 114 c

Other

Costsdoingnothinginwater/sanitation 300-600 d

Availablefundingincapitalmarkets 218000 d

ReturnperUSD1invested 4.3 e

Sources: a http://www.undp.org/content/undp/en/home/librarypage/poverty-reduction/2030-agenda/financing-the-2030-agenda.html

b https://wwf.panda.org/our_work/water/?336390/Banking-on-private-finance-to-tackle-the-worlds-water-crisisc http://www.worldbank.org/en/news/feature/2017/03/22/world-water-day-2017d https://project1800.org/e http://www.who.int/water_sanitation_health/monitoring/economics/en/

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6 1.1 Context

Whatevertheideaorambition,financingisneededto make it a reality. This also applies to SDG ambitions.Ifyouhavetheideasandtheambition,butyoulackthefunds,thenthequestforfundingstarts.Thisisindeedaquest,becausetheprocessofidentifyingandconvincingfinancierscanbelong.

TheSDGsmayformulatetheambition,butthespecificapproachesthatcanmakeithappenandthefinancingthatisneededremainquestionmarks.Stakeholdersindevelopmentmayhaveapproachesandbusinesscasesthatscale,butnonetheless lack funding. The traditional source of funding,officialdevelopmentaid(ODA),amountstoaboutUSD142billionperyear,butUSD5–7trillionis needed annually to meet all SDGs. If ODA funds donotincrease,wherewilltheremainingtrillionscome from?

Privateinvestorsareincreasinglyaskedtotakeuparoleandfillthegap.Insomesectors,suchasenergy,theprivatesectorisveryactive,butinthewaterandsanitationsector,theinterestofprivateinvestorsislimited.Whyisthis?Areprivateinvestorsinterestedinfinancingthesesectors?ODAfundsalsoonlyprovideasmallpartofthetotalfunding;whatistheroleofODAinfinancingSDGs?IstherearoleforPPPs?Ifso,whatisthatrole?

Inthisexploration,thesequestionswillbeaddressed. The intended audience is mainly stakeholdersfromthedevelopmentworld-e.g.,professionalsworkingfororwithgovernments,NGOs,andcharities.Theseprofessionalsareusedtooperatinginaworldwheregrantfundingisprovidedfordevelopmentprojects,inwhichtheprojectissuccessfuliftheagreed-uponresultsaredeliveredontimeandwithinbudget.Thisisquitedifferentfromtheworldofprivateinvestors.Privateinvestors,orcommercialinvestors,haveadifferentperceptionofprojectsandPPPs,withadifferentlanguage,differentcriteria,anddifferentfinancingprocedures.Bringingtheseworldstogetherbeginwithrespectandawillingnesstounderstandeachother’sperspectiveandlanguage.

Processesrelatedtograntfundingareusuallywellunderstoodbyprofessionalsinthedevelopmentworld.Ontheotherhand,theseprofessionalsoften

havelimitedknowledgeandunderstandingoftheprocessesanddecisionmakingintheworldofcommercialfinancing.ThisdocumentexplorestheworldofcommercialfinancinganditsrelationtoPPPs,andprovidesideasonhowtocombinepublicandprivatefinancingtofurtherdevelopandscaleactivitiesinthewater,sanitationsectorandthefood and agri sector.

Crucially, to spark the discussion, this explorationwilldiscussthefinancingofdevelopmentprojects(SDGs)primarilyfromtheperspectiveofthecommercialfinancier.

1.2 Key messages and structure

Thisexplorationhastwomainsections:PartAcoversthebuildingblocksforcommercialfinancingofSDGs,whilePartBdealswithcommercialfinancingforPPPsinpractice.

Part A is theoretical and discusses the basic conceptsofcommercialfinancing,whilePartBismorepracticalandattemptstoanswerthequestionofhowPPPsshouldbefinanced?However,theseparationbetweenthesetopicsisnotclear-cut,andsimilarissuesmaybediscussedinbothsectionsthoughfromdifferentangles.

Toassistbrowsingthroughthedocumentandjumpingtospecificsubjects,hereasummaryofthecontents using the key messages.

Part A: Building blocks for commercial financing of SDGs

• Theneedforcommercialfinancing:Reaching theSDGsrequiressubstantialinflowofcommercialfinance.

• Unlikegrants,commercialfinancingmustberepaid.Allprojectsandbusinessesfinancedusingcommercialfinancingthusneedtoincluderevenue mechanismsthatallowthefinancingtoberepaid.Businessmodelsincluderevenuemechanismsbydesign,butstructuresthatincluderesults-basedpaymentmechanismsofferinteresting opportunities.

• Needforbankablebusinesspropositions. Privatecommercialmoneywillneedtobeunlocked,butcommercialfinanceonlyfocuseson bankable propositions.

1. Introduction

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7 • Impact investorsarecommercialinvestorswithaspecificfocusoncreatingimpact.However,theystillwanttheirmoneyback.

• DespitetheurgencyoftheSDGs,commercialinvestorshaveproblemsfillingpipelineswithprojectsthatfittheircriteria.Comparedtoothersectors(e.g.,energy,transport,andIT),thewater,sanitation and food security sectors are not seen asattractivetocommercialinvestorsforvariousreasons; one important reason for this is their embedding in the public domain.

• Risk:Inthefoodsectorandwaterandsanitationsector,projectsorbusinesses-especiallywhenservingbottom-of-the-pyramid(BoP)markets-aregenerallynotconsideredcommerciallyviable,onaccountofthelackofaconvincingandstablebusinesscase.Perceivedhigh-riskelementsincludethepoorhavingalimitedabilitytopayandgovernmentbeingunpredictable,andmayregulate or interfere.

• Some approaches that can overcome bottlenecksforinvestmentsinthefoodandwatersectortargetingthepoorareemergingandindicatethewayforward:

- Service delivery models that can scale. - Partnershipsbetweenprivatecompaniesand

governments-PPPsthatareformallystructuredforcommercialfinancing.

-Blendedfinancemechanisms,wherebygrants or public money are used to mobilize commercialfinancing.

• In-countryfinance.With economies in developingcountriesbecomingstronger,in-countryfinancing(bothpublicandcommercial)isbecomingmoreimportantassourceoffinancing,including for funding the SDGs.

Part B: Commercial financing for PPPs in practice

• SDGprojectscompeteforscarceprivatefunding.Commercialfinanciersprefersectorsotherthanwaterandsanitation.

• PreviouslygrantfundedPPPsareunlikelytoacquirecommercialfinancing.

• Financial instruments blending grants and commercialfinancingareemerging.

• Stakeholders-projectowners,grantproviders,andcommercialfinanciers-needtoworktogether,requiringachangeofthinkingandperhaps of mandates.

Thisisanexplorationthatwillnotprovideclearanswerstoaprojectspecificissue.Thisisnotaguide-book,amanual,oraPPP-financinghandbookorchecklist.Nosuchbookexists,becausefinancingstructuresarealwaystheresultof(long)discussionsandnegotiationsthatareverycase-specificandverycontext-specific.

ThisexplorationbeganwiththequestionofhowtofinancePPPs,includingFDW/FDOVPPPs,usingcommercialfunds.Theansweristhatitishighlyunlikelythatcommercialinvestorsareinterestedinfinancingsuch‘grantPPPs’,eveniftheyaresuccessful in the eyes of their implementers anddonors.Theanswercanbesurprisingtostakeholders,butitisobvioustocommercialinvestors.

Thisquestionanditssurprisinganswerpointtotheexistenceoftwodifferentworlds:theworldofdevelopmentandtheworldofcommercialinvestment.Thisexplorationtriestoshedsomelightontheseworlds,andspecificallyontheworldofcommercialinvestments,becausethethinkingthereisunknowntomanydevelopmentpractitioners.ConsideringtheSDGs,itisveryimportantthattheseworldscometogether.

Inanexploration,wecanaskquestionsandtrytoanswerthemwithoutevidencethatouranswersare correct. An exploration is neither guidebook nor afinancinghandbook.Anexplorationshouldcreateawarenessandtriggerthinking.ThisexplorationisanintroductiontofinancingSDGsthatexploresmobilizingfinancialresourcesotherthanODAfunds or charities. The thinking and terms of commercialinvestorsaredifferent.Thisexplorationprovidesbasicinformation,referencesforfurtherreading,boldstatements,andfoodforthought-andhopefullyprovidesinspirationandcouragetostartdiscussionswithcommercialfinanciers.Good luck!

1.3 Exploration

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2.PartA:BuildingblocksforcommercialfinancingofSDGs

2.1 Introduction

Financeisnecessarytorealizeideas.Ifwedon’thavefundsourselves,wemustconvinceotherswhodotoallocatethemtoourproject.Theownersofthesefunds-thefinanciers-arepowerful,astheycanshapetheworldthroughtheconditionstheyset.Whetherthesefinanciersarepublic(e.g.,governments)orprivatefinanciers,theywillonlyfinanceprojectsthatfittheircriteria.

Financingisanoldfieldandhasdevelopeditsownterminologyandjargonovertheyears.Theprocessleadingtotheactualprovisionoffinanceisoftenfuzzy:eventhoughmanyoftheunderlyingdocumentscontainnumbers,decidingonwhethertofinanceanactivityis,toalargeextent,irrational,for the simple reason that the decisions are based onestimatesofeventsinthefuture.Thenumbershelp to reduce or understand opportunities and risks,butintheend,financiersmustmaketheirbestguessaboutwhatwillhappeninthisfuture:Willtheprojectsucceed?Willtheexpectedreturnsmaterialize?Whatmighthappenalongthewaytounderminethesuccessoftheproject?

Thefinancingprocess,especiallywithcommercialfinanciers,takesalongtime:itrequiresdocumentation,discussions,moredocumentation,and more discussions. Most of the process is about risk reduction.

Thischapterstartswithashortdiscussionofthebasic concepts. The sections are short because most topics are already described in large numbersofarticlesthatcanprovidemoredetailedinformation.

Thefirstsectionisaboutthefinancinggapandthe search for the trillions that are needed to financetheSDGs.Theremainderofthechapterdiscussesthedifferencesbetweengrantfinancingandcommercialfinancing,andtheconsequencesfordesigningprojects.Thefinalsectiontalksaboutblendingthetwosourcesoffinancing,grantsandprivatefinancing.

2.2Theneedfortrillions

ItisestimatedthataboutUSD5–7trillionisneededeachyeartomeettheSDGs.Thefundsavailablefrom ODA amount to only USD 142 billion annually. BesidesODA,thereareotherdevelopmentfundsfromgovernments,philanthropy,andremittances.TheestimatedinvestmentgapfordevelopingcountriesisUSD2.5trillionperyear,ofwhichtheneedforinvestmentinthewaterandsanitationsectorisaboutUSD400billion;intheagrisector,thegapisaboutUSD500billion.

See:• http://www.undp.org/content/undp/en/home/blog/2017/7/13/What-kind-of-blender-do-we-need-to-finance-the-SDGs-.html

Howcanthisgapbeclosed?Wherecanthesemissingtrillionscomefrom,ifnotfromODAandcharities?Privatecapitalmarkets?Ithasbeencalculatedthataslittleas2%ofthevolumeoftheprivatecapitalmarketissufficientforallSDGs.However,mostoftheprivatefundsarelockedonbalance sheets for purposes other than the SDGs. Anoptimistwillnotethatthemoneyisthereandthe challenge is to change the allocation of only a small percentage of these funds.

WhyaretheseprivatefundsnotalreadyflowingtoSDGs?Answeringthisquestionbeginswithlookingatinvestmentopportunities.Wherearethe interesting SDG propositions? Where are the models that are both scalable and bankable? When thedevelopmentworldmeetsthefinancingworld,thedevelopmentsectoroftenstressesthelackof(andneedfor)fundingfortheirprojects:theyarguethatvalueislookingformoney.Thefinancingworldarguestheotherwayaround,thatthereisalackof(andneedfor)bankableprojects:theyarguethatmoneyislookingforvalue.Howcantheseworldsbebroughttogether?Andrelatedtothis,howcanphilanthropyandODAunlockprivatecapitalmarkets?

Onaprivatelevel,investorsjudgeinvestmentproposalsontheirindividualobjectives:return,risk,andimpact;theythendecidewhetheraprojectisworthinvesting.Onahigher,morepubliclevel,thereareotherfinancialconsiderations,includinghowtoreducethecostsofdoingnothing.

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9 IthasbeenestimatedthatnotinvestinginSDG6resultsinaneconomic‘loss’rangingfromUSD300billion(inapositivescenario)to600billion(negativescenario)annually!Thentherearethepositivebenefitsonthepubliclevel:theWHOhascalculatedthateverydollarinvestmentinwaterandsanitationreturnsavalueofUSD4.3duetoreducedhealthcarecostsforindividualsandsociety,greaterproductivity,andsoon1.

To summarize:

• aboutUSD5–7trillionperyearisneededtomeetthe SDGs;

• theannualmissingUSD2.5trillionisavailableinthecapitalmarkets,butissittingthereorbeingused for other purposes;

• foreachyearnothingisdone,thepubliccostsinthewatersectoraloneareUSD300–600billionper year.

Simpleandstraightforward?Absolutelynot!Becauseagooddealoftheinvestmentissupposedtocomefromprivateinvestors,whilethepubliclevel(government)enjoysthecostssavingsandthepositivereturns.Tomakethishappen,thegreatchallengeistomaketheseworldsmeet.

1 http://www.who.int/water_sanitation_health/monitoring/economics/en/

WWF example

WWFprovidesanexampleoftheabovediscussion.WWFhascalculatedthatthefundingneedforwaterinfrastructure(SDG6)ishigherthanUNDP’sestimateatUSD1trillionannually.Thefigurebelowillustratesthefundinggapofapproximately700billion.IfthisgapistobeclosedwithannualcommercialfinancingofUSD700billion,thentheremustbebankableprojects.WWFbelievesthat(partof)thegapcanbeclosedwith‘bankableprojects’. Reaching SDG6 requires above $1 of investments in water infrastructure annually

• Addresswaterpollution• Manageexcessiveconsumption• Preserveecologyandenvironment• Provideadequate,sustainablesuppliesfordomestic,industrialandagriculturalneeds

1 Includes wastewater treatment facilities and water supply systems. Real need likely to be larger due to need in industrial and agricultural improvements related to freshwater as well as investment in ecosystem conservation 2 Estimated Freshwater related portion of aid and philanthropy (of $1T total); shown ratio as for ODA (~5%) 3 Investment in water related projects, excluding Hydropower Source: OECD, GWI, Hudson Institute

Required funding for Freshwater1

Available funding

Aid and philanthropy2

Currentinvestment3

Partofthisisbankable

FUNDIN

GG

AP

$ 1T +

~$ 0.3T +

Source: powerpoint WWF OECD Case Study, For Corporation and their financiers, water related, 2018

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10 TheambitionssetbytheSDGsarehigh:theneedforscaleinapproaches(leavingnoonebehind)andtheneedtomobilizefinancialresourcesotherthangrants-ofwhichcommercialfinancingconstitutesoneofthelargestuntappedfinancialresources.

Whydofewdevelopmentprojectsscale?Lackoffinancing,ofcourse.Butcoulditalsobeduetothetypeoffinancing(grants)andtherelatedconditions? Grant funding has dominated the developmentsector,notonlyinthesupplyoffinancing,butalsointermsoftheconditionsthatcomewiththefinancing.Coulditbethatgrantsarehampering scaling?

Thegraphbelowillustratesthechangingrealities:initially,developmentprojectswerefullyfinancedbygrants.Thevolumeoffinancialresourcesincreasedovertimeas,nexttoODA,otherfinancialflowsareadded.Forexample,inFDW/FDOVprojects,ODAiscombinedwith‘owncontributions’.

Moneytalks:projectsarestructuredtofulfilthefinancier’sconditions.Asmostdevelopmentprojectsarecurrentlygrantfinanced,theyarestructuredtopleasethegrantprovider.Theturningpointiswhencommercialfinancingcomestoformaconsiderablepartofthefinancing;theseprivate

financierswillthenrequireprojectstobestructuredinlinewiththeirneeds.ODAandothergrantscanstillplayanimportantrolewhentheyareused,forexample,buildinganenablingenvironment,providingtechnicalassistance,de-risking,andclosingaffordabilitygaps.

Butitismostimportantthat,whilegrantfinancierspreviouslysettheconditionsforfinancing,commercialfinancierswilltaketheleadinsettingconditionsforstructuringprojectsandtheirimplementation.Thishasconsequencesforgrantproviders-forexample:Howcangrantsbecombinedwithcommercialfinancing?Whatinfluencecomeswiththegrant?Whataretherisks(e.g.,stateaidandmarket)?whatarethemandates?Isadaptationrequired?

Combininggrantswithcommercialfinancingwillincreasethevolumeofavailablefinancingandislikelytoopenupnewpathstoscaling.

2.3Scalingandfinancing

Only ODA

ODA+“own

contribution”(e.g.from

CSR)

With commercial finance the “pie” will increase significantly

Source: authors

ODA+CSR+Concessional

Finance

ODA+CSR+Concessional +Commercial

Finance

Mainly structured around grants Requires structuring around repayable/ commercial financing

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11 Private sector involvement or commercial financing?

Manyprivatesectorplayersarealreadyinvolvedindevelopmentprojectsforavarietyofreasons.Suppose there is an international business that is supporting a local consortium to construct toilets and build a sludge disposal and treatment facility in a community in Kenya. This international business mayhavethefollowingreasonsfordoingthis: • Corporatesocialresponsibility(CSR).Inthiscase,thebusinessfinancestheactivitiesfromtheirreservesinaCSRfundandthelocalconsortiumisthebeneficiary.Thesourceofthefundsisthebusinessreserveandthefundsareprovidedasgrants.

• Keeping human resources healthy. The internationalbusinesshasalocalsubsidiarywithemployees coming from the community. It is in the interest of the business to keep them healthy.

• Marketdevelopment.TheinternationalbusinessmaywishtoexplorebusinessopportunitiesinsanitationinKenyaandtheprojectprovidesanopportunity to explore the market.

Theseareallexamplesofprivatesectorinvolve-ment,butnoneofthemarecommercialfinanc-ing.Commercialfinancingisprovidedbyfinancialinstitutions,investorsinthebusinessofearningmoneybyinvestingmoney.Thebusinessofcom-mercialinvestorsistoprovidefunds(theprincipal)andtoearnareturn(income)fromthat.Intheory,commercialfinancierscanfinanceanythingiftheygettheirprincipalback,alongwithadecentreturn.Inpractice,commercialfinancierswillfocusonspecificthemesorsegments,asunderstandingthedynamics of a sector reduces their risks.

Impact investors are commercial investorswhofocusonsegmentsoractivitiesthatcancreateimpact.Likeothercommercialfinanciers,impactinvestorsalsowanttheirprincipalback.Someimpactinvestorsarewillingtosoftenthetermsoftheirfinancingandtoacceptreturnsthatarerelativelylowfortherisktaken.

The difference between grant financing and commercial financing

A grant is money that is given away; grantors requireanimpactanddonotwanttheirmoneyback.Commercialfinancingisgive back money; thefinancingmustberepaidtothefinancier.Theworldofcommercialfinancingisthusverydifferentfromtheworldofgrantmoney(asinthedevelopmentworld),andthishasanimportantconsequence.Toattractcommercialfinancing,theprojectorbusinessmustbestructured in such a waythatthefinancingcanberepaid.Onlythenwillcommercialfinanciersbeinterestedandwillingtodiscuss.

Ifcommercialfinancingneedstoberepaid,thentheprojectmusthavearevenue-generating mechanism or revenue model. A business casealwaysincludesarevenue-generating mechanism.However,inSDGprojectsandactivitiesforthepublicgood,inparticular,therearerevenuemodelsthatdonotrequireabusinesscase.Inaprevioussection,wementionedthatthereturnsoninvestmentsinSDGsareoftenenjoyedby the public sector; these returns can then be transferredtotheinvestor-forexample,intheform of outcome payments or carbon credits. An examplecomesfromIndia,wherethegovernmentpaysforeverytoiletthatisconstructed.2 The next sectionswilldiscussvariousrevenue-generatingmechanisms.

Grant providers and providers of commercial financing

Whoarethegrantproviderswhogivemoneyaway,andwhoarethecommercialfinanciersthatrequiretheirmoneyback,withanextrareturn?Mostlikely,grantprovidersarepublicentitiesandthecommercialfinanciersareprivateentities.Butthisis not as clear-cut as it seems.

Thereareverylargeprivateentitiesthatprovidegrants-charitiesliketheBill&MelindaGatesFoundation,privatelyownedlotterieslikethePostcodeLoterij,andprivate-sectorplayersfinancingfromtheirCSR.Thentherearepublicentitiesthatmayproviderepayablefinancing.

2 https://sbm.gov.in/sbmdashboard/IHHL.aspx and http://swachhbharaturban.gov.in/ihhl/

2.4Grantfinancingversuscommercialfinancing

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12

Types of financing for public and private entities, examples

Financial instruments

Grants (gift,nonrepayable)

Grant (repayable)

Repayablefinance

Public entity

• Subsidies(e.g.,ODA)• Results-based payments

• Recoverablegrants(e.g.,loansforinnovation)

Concessionalfinance(withsoftconditions-e.g.,reducedinterestrates)

• Loan• Guarantees• Insurance for currency

exchange or for country-risk • ...

Private entity

• Philanthropy • Results-based payments• Crowdfunding(grants) • Corporatesocialresponsibility(CSR)

• Recoverablegrant

Commercialfinancingintheformof:• Debt• Equity• Crowdfunding(debt)• Microfinance• Impactinvestments• ...

Often,theydothisbecauseprivatesectorfinanciersfindthesegmenttoorisky,especiallyininnovations,start-ups,andrenewableenergy,suchaswindmills.Oftenwhenthebusinesscasehasprovenitself,thegovernmentwillpulloutandprivatesectorfinancierstakeover.

Thentherearefinancialinstrumentsthathavethecharacteristicsofbothcommercialfunding(need

toberepaid)andagrant(agift).Forexample,‘recoverablegrants’,inwhichfinancingisprovidedand has to be repaid only if the business generates sufficientrevenues;otherwisetherepaymentiswaived.

Belowisanoverviewofplayersandfinancinginstruments.

Note: The perspective of this exploration is that of commercial financiers - the Private entity/Repayable finance cell in the table.

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13 Objectives

Fromthegeneralresponsibilityofthegovernmenttopromotegeneralwelfare,manyotherrolescanbederived,includingthedutytoensureavailabilityofbasicgoodssuchasfood,waterandsanitation,education,healthcare,roads,etc.Manygovernmentsindevelopingcountriesfailtodeliverbecausefinancingisscarce,becausecapabilitiesarelacking,orformanyotherreasons.TheSDGsallcontribute to these public responsibilities.

Economic and Social returns

An earlier section mentioned that the cost of no actionorwaterandsanitationisUSD300–600billionperyear,andthattherewouldbeareturnofUSD4.3foreverydollarinvestedinthewatersector.Ifthisreturnoninvestmentcanberealised,whyisitnothappening?Thereasonisthatonapubliclevelthesereturnsarevaluationsonlythatare not directly related to real money. Commonly usedindicatorstoestimateorvaluethereturnonpublicinvestmentsareeIRR(theeconomicinternalrateofreturn)andSROI(thesocialreturnoninvestment).

An indicator for privateinvestorsisthefIRRorfinancialInternalRateofReturn.Asimpleexampleistheinterestrateonasavingsaccount:iftheinterestrateis3%,thefIRRis3%andeveryyearrealmoneyisaddedtothesavingsaccount.Thisisdifferentforpublicinvestments.EveryUSDinvestedonapubliclevel,e.g.inhealthcare,education,roads,generatesareturn,butitislesstangiblethantheinterestratepaidonsavingsaccounts.Tobeabletorationaliseandjustifytheinvestmentsonapubliclevel,oftenindicatorslikeeIRR(economiceInternalRateofReturn)andSROI(SocialReturnonInvestment)areused.

ForexampleaneIRR(economicInternalRateofReturn)of10%meansthatevery1USDinvestedhasanestimated10%economicreturn.ThiseIRRreferstoa10%growthofeconomy,causedbye.g.increasedproductivitydueto,forexample,healthierpeople(becauseofinvestmentsinhealthcare),bettereducatedpeople(investmentineducation),betterlogistics(investmentsinrailways).Butwhatisthevalueoftheincreasedproductivityofhealthierperson,orabettereducatedperson?

Overtheyearspublicinvestmentshaveproventoincreaseeconomicgrowth.Basedonthiseonomistshavedevelopedestimatesorproxiestovalueahealthierpersonorabettereducatedperson,sometimesalsocalledshadow-prices.Regardless,indicationsforareturnonpubliclevelisanestimatedvaluation.Thechallengeistotranslatethesevaluationsintorealmoney.Thiswillinterestcommercialinvestors(whoaremainlyinterestedinfIRR).

TheSROI,SocialReturnonInvestmentshassimilarcharacteristics as the eIRR. The SROI is a method to measure and monetarise social returns.

Follow the real (!) money

Recognizingthedifferencebetweenlongtermreturns(likeeIRR)andshorttermreturns(likefIRR)isimportant.Developedcountrieshavealreadyinvestedandcontinuetoinvestmoneyinfunctioninginfrastructurelikehealthcare,education,roadandthesecountriesenjoytheeconomicbenefitsintheformofahealthyGDP.Somenewinvestmentsmaybedonetoincrease efficienciesoftheinfrastructureandthussavemoney.Thereturnsoftheseinvestmentsonefficiencymayleadtoimmediatesavings:lessmoney spent. This is interesting territory for commercialinvestorsastheymaybewillingtoinvestinefficiencyandearnfromthesavings(realmoney).

Developingcountriesoftendonothavetheinfrastructure yet. They are still at the phase that theyhavetoinvestandthatthereturnmayonlymanifest itself on the long term in the form of economicreturn/growthofGDP.Argumentslike‘every1USDinvestedinwaterandsanitationwillgenerate a return of 4.3’ relate to longer term benefitsfortheeconomy.Thisisamuchmoredifficultareaforcommercialinvestorsasthereisnoclearrevenue(realmoney)forthem.However,interestingmodelshaveemergede.g.outcomepaymentmodelswherebyagovernmentoranoutcomepayermaybebewillingtopayservices.AgoodexampleisSwachhBharatAbhiyaninIndiawherebythegovernmentispayingforeverytoiletsrealised.

Asmentionedearlier,thebenefitsofinvestmentin

2.5Publicfinance:Considerationsand conditions

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14 SDGsareenjoyedonthepubliclevel.Thechallengeistoencouragethegovernment(orotherlike-mindedorganizations,suchasdonors)totranslatethesebenefitsinpaymentforresults-forexampletoexpandthesafewatersupply,toincreasethenumberoftoilets,ortoreduceCO2emissions.Thiswillingnesstopayforresultswilltriggernewservicedeliveryapproaches,includingcommercialfinancing.Consideraclientwhoiswillingtopayforcertainservice-inthiscase,theclientisagovernment(oroutcomepayer)andtheservicesareSDG-relatedachievements.

Variousorganizationstrytomonetizeeconomicbenefitsandcosts-e.g.,Trueprice.

Seetheselinksfororganizationsandactivities:• https://en.wikipedia.org/wiki/Carbon_credit• http://trueprice.org/businesses-and-financial-institutions/what-do-we-do/true-price/

• https://www.copenhagenconsensus.com/

Structure and scaling

Governmentsandgrantprovidersprefertofinanceprojectsratherthanbusinesses/organisations.Usually,aPPPprojectinthedevelopmentsectoris implemented through a contingent coalition withoutaspecificlegalentity,andthemainfinancingcomesfromsubsidies.Thegrantproviderusuallyrequiresaleadpartner,butthatismainlyforadministrativereasons.Insuchcontracts,riskandaccountabilitytrickledownfromtheleadpartners to the other partners in the consortium (e.g.,FDWandFDOV).ThesePPPsarenotsuitableforfinancingbycommercialfinanciers.

ProjectsandPPPsfinancedbygrantsarestructuredforgrantsandhavedifferentcharacteristicsthanprojectsandPPPsthatarefinancedbycommercialfinanciers.Inaddition,althoughdonorscommunicatetheimportanceofscaling,thesegrantstructuresaredifficulttoscale(seethenextsection).

Onscalingmechanisms,see:• https://ppplab.org/wp/wp-content/uploads/2017/11/PPPLab-Series-06.pdf

Objectives

Commercialfinancierswillalwaysthoroughlyassessanyprojectorbusinessbeforeinvesting.Acommercialinvestorsimplywants1)toputhisorhermoneytoworkinasegmentthatisunderstood,2)togettheinitialinvestmentback,and3)toreceiveafinancialreturnthatreflectstheriskor-inthecaseofcertainimpactinvestors-acombinationof return and impact.

All the considerations and conditions described belowarederivedfromthesestartingprinciples.

Ownership

Ownership!Thisisoneofthekeyissuesforcommercialfinanciers.Whoexactlywillreceivethecommercialfinancing?Whowillrunthebusiness?Andwhoisresponsibleforrepayment?Ownershiphastwodimensions:thelegalentityandthepeoplebehindtheentity.Ifownershipiswellorganizedandlegal,andifthepeoplehaveagoodtrackrecordandreputation,thechancesofrepaymentare high.

Grantprovidersalsorequireownership,butonadifferentlevelthancommercialfinanciers.Companiesareusuallywellstructured,registeredlegalentities.Projects,however,areoccasionalstructures that can take many shapes and may havefuzzyownership.Thislackofownershipandstructuremeansthatcommercialfinanciersarenotinterestedinfinancingprojects,unlesstheprojectisstructuredinsuchawaythatthedrawbacksareovercome.Acommonwaytostructureaprojectforcommercialfinancingistosetupaspecialpurposevehicle(SPV)-aspecialcompanytodelivertheproject.FoundinganSPVcanbecomplicatedandtime-consuming;itinvolvessettingupacustom-madebusinessentityinvolvingseveralprojectpartners,avarietyofinterests,andhighriskswhicharealsonotalwayseasytoidentify.Butintheend,anSPVthatisregisteredwillhaveaclearownershipstructureandagreementswilldescribewhichpartyisresponsibleforwhichrisk.Fromtheperspectiveofcommercialfinanciers,aPPPisaprojectandcanonlybefinancedifitisincorporatedintheformofanSPVorotherlegalentity.

2.6Commercialfinancing:Considerations and conditions

PPPLab Explorations 08

15 Revenue (recovery) models

Commercialfinancingmustberepaid.Howcanthisbedone?Therevenuemechanismswilldependonthetypeofbusiness:inaproject,thefinancingisrepaidfromthecashflowsgeneratedintheproject;inabusiness,revenuecancomefrommultipleactivitiesandthefinancingisrepaidfromtheoverallincomegeneratedinthebusiness.

Revenuescancomeinmanyforms-suchasfees(peoplepayingforaproductorservice),outcomepayments(e.g.adonorpayingforwatertapsbeinginstalledandoperational),orcredits(e.g.forreductionofcarbonemissions).

Project finance versus business (corporate) finance Commercialfinanciersclearlydistinguishbetween‘projectfinancing’and‘businessfinancing’.Banks,forexample,havedifferentdepartments:aprojectfinancedepartmentandaseparatecorporatefinancedepartment.

Thekeydifferenceisrelatedtotheriskprofileandfinancingstructure.A projectissetupwithaclearobjectiveandhasafinitehorizon that matches thelifetimeoftheproject.Inaproject,thedebtwill

thusberepaidfromthecashflowgeneratedwithintheproject(suchasfromamandatetocollectfeesonatollroadfortwentyyears).Toensureclearownership,theprojectmustbestructuredasanSPV.AttheendofthelifetimeofsuccessfulSPV,theserviceshavebeendelivered,thefinancinghasbeenrepaid,andadecentreturnhasbeenearned.Inthevocabularyofcommercialinvestors,conceptslike‘growth’and‘scaling’arenotrelatedtoprojects.Inprojects,theagreeduponservicesaredelivered,andthenitisover.

Abusinesscanhavemanyactivitiesandthelegalentity has anindefinitehorizon. Often a business canbefinancedagainstthebalancesheetandtheoverallcapacityofthebusinesstorepay.Financiersmayfinanceaspecificprojectinabusiness,suchasamachine,butthentheymayrequirerepaymentfromrevenuesearnedwiththatmachine,andtheywillregistertheassetascollateral.Abusinessissetuptogrowandscale.

See:• https://en.wikipedia.org/wiki/Corporate_finance• https://www.investopedia.com/terms/d/death-valley-curve.asp

Seeforprojectfinance:• https://youssef-serghini.weebly.com/project-finance-for-dummies.html

Business financing, financing growth

Fastgrowthisrisky.Whileinvestmentsareneededtofinancethegrowth(e.g.,additionalmachines,morepersonnel),itwilltaketimebeforetheseinvestmentsstartgeneratingrevenues.Thisisthe‘valleyofdeath’:thephasewheredebtincreasesandabilitytorepayfinanciersislimited.

Source: https://tapmiblogs.wordpress.com/tag/startup-financing-cycle/

REVE

NU

E

TIME

PUB

LIC

MA

RKET

Seed Capital

Breakeven

1st

2nd

3rd

Mezzanine

<<<VCs,Acquisitions/Mergers&StrategicAlliances>>>

SecondaryOfferings

Angels,FFF LaterStage IPO

Valleyofdeath

Early Stage

Financing a business-valley of death Startup Financing Cycle

PPPLab Explorations 08

16 Risks

Investorsgenerallypreferlowerriskswithlowerreturnstohigherriskswithhigherreturns:aboveall,theywanttheirmoneyback.Thisalsoholdsforimpactinvestors,whoarefirstandforemostinvestorsandthereforewanttheirmoneyback. Risksexistsonvariouslevels-suchassectorrisks,projectrisks,businessrisks,countryrisks,politicalrisks,andcurrencyrisks.Whilegrantfunderswantprogress reports in order to understand if the objectiveswillbemet,commercialfundersrequiredocumentationtounderstandwhetherriskshaveincreased or reduced.

Risk is big business. There are companies insuring currencyrisks,countryrisks,andotherrisks.Obviously,anyriskthatisinsuredaddstothecostoffinancing.Thentherearecompaniesthatspecializeinmappingtherisksofaspecificbusiness,aspecificsector,aspecificcountry.Theseagencies(suchasMoody’s,Fitch,andlocalagencies)maprisksandprovidecreditratings.Recently,aratingagencycalledGEMShasbeenestablished,focusingspecificallyonnondevelopedmarkets.

See:•http://www.gems-riskdatabase.org/

Structuringforcommercialfinancingisallaboutriskmanagement.Businessfinancingisrelativelyeasy as the business is in place and generating revenues.StructuringanSPVforcommercialfinancingiscomplexandmaytakeoneortwoyears;itisthereforecostly.TheseeffortsareworthwhileforlargePPPsonly,suchasthosewithaninvestmentneedofatleastUSD20–30million.

See:• https://ppp.worldbank.org/public-private-partnership/financing/government-risk-management

Financing instruments

Thedecisionontheactualfinancinginstrumentswillbemadewhenallotherissueshavebeenwellunderstoodandarranged.Thefinancingpackagemayincludeequity,loans,subordinatedloans,workingcapital,andlettersofguarantee,andeachtypeoffinancingmaycomewithitsowncontract.

VariousfinancinginstrumentsaredescribedinpublicationsofPPPLabandothers:• https://corporatefinanceinstitute.com/resources/knowledge/finance/

• https://ppplab.org/topic/finance/• https://ppplab.org/2018/07/3552/

PPPLab Explorations 08

17 Thissectionwilldiscussthecombinationofgrantfundingandcommercialfinancing,theopportunities,andcurrentinstruments.

Grants

Publicentitiesandcharitiesprovidegrantswhichthebeneficiariesarenotexpectedtorepay.Grantmoneyis‘consumed’.Overtheyears,thethinkingonhowtousegrantshasdevelopedanddonors(grantors)haveadaptedtheirconditionsaccordingly.Forexample,inthepastgrantswerecommonlyusedtopay(makeinputpayments)fordevelopmentactivitiesliketraining,establishinginfrastructure,lobbying,advocacy;however,nowadaysthereisawarenessamongdonorsthatgrantsonlyarenotenoughtosolvedevelopmentissues.

Thereisagrowinginterestinalternativeusesofgrants-andspecificallyinusinggrantmoneytomobilize commercial money. An indicator for the successofusinggrantmoneyis‘leverage’,orthequantityofcommercialfundsmobilizedforeverygranteuroordollarinvested.

Thenew‘flavours’ofusinggrantmoneyinclude: • Results-based grants can range from process-focused(inputpayments)tomoreresult-focused(results-basedpayments).Examplesinclude:

-results-basedpayments(moreexplanationbelow);

- impact bonds; -credits,suchascarboncredits.• Risk-reduction:Herethefocusisonusinggrantmoneytoreduceriskstoalevelthatiscomfortableforacommercialinvestortostepin.Examplesinclude:

-firstlossreduction; - guarantees; -grantstobuildanenablingenvironment,thus

reducing commercial risks.

See:• https://en.wikipedia.org/wiki/Grant_(money)

Blended financing

Blendedfinanceisatermusedtodescribefinancingstructuresthatcombinegrantsandcommercialfinancing.Ablendedfinancingstructure can take many forms and is the result of

negotiationsbetweencommercialfinanciersanddonors.

Thesenewgrantinstruments,whetherresults-basedpaymentsorarisk-reductionapproach,enableagreatvarietyofblendedfinancestructures.Commercialfinanciershaveanequallylargeboxoffinancialinstruments.Ifthereisaprojectwithagoodpotentialtodeliverbothimpactandfinancialreturns,ablendedfinancingstructuremay be possible. All that is needed is interested grantorsandcommercialinvestorswithaclearwilltomakeitwork.

Notethat‘blendedfinance’isnotafinancinginstrument,butratheraconceptindicatingtheneedtobringpublicandprivatefundingsourcestogether.Also‘blended’doesnotmeanthatvariousfinancingsourcesare‘shakenandstirred’insomekindoffinancingcocktail.

Aswediscussedabove,eachfinancierhashisorherveryclearconditions.Therefore,ablendedfinancingstructureisbuiltuplayer-by-layer,witheachlayerreflectingthefinancingfromonespecificfinancier,accompaniedbytheconditionsforrepayment(inthecaseofacommercialfinancier)or impact.

Moreonblendedfinance: • http://www3.weforum.org/docs/WEF_Blended_Finance_A_Primer_Development_Finance_Philanthropic_Funders_report_2015.pdf

Results-based payments

Results-basedfinancing(RBF),alsocalledperformance-basedfinancing,isrelativelynew.RBFgrantsarepaidafterthedeliveryofpre-agreedandverifiedresults.OutputandoutcomepaymentsarealsoaformofRBF.

Thetermresults-basedfinancingmaybeconfusing,astheapproachinvolvespaymentsafterservicedeliveryratherthanfinancingbefore.Forexample,RBFcanbeusedtocoveraffordabilitygaps,whereacustomerpays60%ofthepriceofinstallationofawatertapandtheremainingpartiscoveredbytheresults-basedpayments.Inafinancingstructure,thecustomerpaymentsandtheRBFpaymentareonlyrecoverymechanisms.Thefinancingmuststillbearranged.However,whenrecovery(repayment)

2.7FinancingforSDGs:Blendingpublicandcommercialfinancing

PPPLab Explorations 08

18 issecured,itwillhelptofindcommercialinvestorswhowillprovidethefinancing.

Result-based/Output/outcomepayerscanbepublicentities,charities,oranystakeholderinterestedinpayingforaspecifiedoutputoroutcome.Anexampleofanoutputpayermightbeaflowergrowerwhoiswillingtomakemonthlypaymentsforrecoveredwetlandsinthearea.Anotherreason

couldtoprotectabusinessresource,intheformofwater.Themostcommonandbest-knownformofoutcomepaymentiscarboncredits(moreexplanationbelow).

See:• http://www.gpoba.org/• https://www.sida.se/contentassets/1b13c3b7a75947a2a4487e2b0f61267c/18235.pdf

Impact Bonds

Theterm“bond”referstoarelativelysafefinancialproductwithcarefullycalculatedrisksandandreturns,andthereforeapreferredproductforinvestorsthatseekfixedincome.Inrecentyearsanewtypeofbondwasdeveloped,theimpactbond.Impactbondsblendimpactinvesting,results-basedfinancing,andpublicprivatepartnerships.Inanimpactbond,privateinvestorsprovideup-frontcapitalforsocialservicesandarerepaidbyanoutcome funder if the agreed-upon results are achieved.Inthecaseofasocialimpactbond(SIB),theoutcomefunderisagovernmententity.Inthecaseofadevelopmentimpactbond(DIB),where

‘development’referstoanapplicationinlow-incomeormiddle-incomecountries,thefunderisusuallyathirdparty,suchasadonororfoundation(CenterforGlobalDevelopmentandSocialFinance,2013).

SIBSandDIBsarerelativelynewinstrumentsandexperienceofthemislimited.Aswithallresults-basedpaymentinstruments,theirdesign,negotiation,andcontractingarecomplicatedprocesses,whichleadtohighdevelopmentcosts.These costs increase if the country is high risk. Likeotherresult-basedinstruments,impactbondshavepotentialadvantages:driveperformancemanagement,incentivizecollaboration,buildacultureofM&E,andreduceriskforgovernment.

Source: Savekoff et al 2015 https://www.brookings.edu/wp-content/uploads/2017/09/impact-bonds-in-developing-countries_web.pdf

INVESTORS

DEVELOPMENTIMPACTPARTNERSHIP

SERVICEPROVIDERS

TYPICALLY AN INTERMEDIARYWILLBRING

TOGETHER PARTIES TO FORMADIB

PARTNER GOVERNMENTScanperformarangeof

roles including as Outcomes Funder and/or Service

Provider

OUTCOMEFUNDER(S)Payment based on

impact

Money in

Returnoninvestmentdepends on success

Up-front capital and performance management

Servicedelivery

Independentverificationof agreed metrics

TARGET BENFICIARIES

PPPLab Explorations 08

19 Green bonds and blue bonds are not impact bonds (withanoutcomepayer),buttraditionalbonds:greenbondsfinanceearmarkedforprojectsthathavepositiveenvironmentalorclimatebenefits,whilebluebondsbenefitthewatersector.Asanexample,theWorldBankGreenBondraisesfundsfromfixedincomeinvestorstosupportWorldBanklendingforprojectsthatseektomitigateclimatechangeorhelpaffectedpeopleadapttoit.TheGreenBondmarkethasgrownquickly,alsoopeningopportunitiesforwell-structuredPPPs.Since2008,theWorldBankhasissuednearlyUSD11billionequivalentinGreenBonds,throughmorethan145transactionsin19currencies.

See:• http://treasury.worldbank.org/en/about/unit/treasury/ibrd/ibrd-green-bonds

Credits

Some desired outputs are standardized; these outputscanbedescribedinacommonlanguage,canbemeasured,haveaprice,andcanbetraded.Theseoutputare‘credits’.Carboncreditsarethebest-knownexample:Allsortofinterventionsthatdirectlyorindirectlyleadtowardsareductionofcarbondioxideemissionscanbecertified(e.g.bytheGoldStandard)and,oncetheCO2reductioncontributionhasbeendetermined(astonsofCO2),credits can be traded on the carbon credit markets.Othertypesofcreditsarebeingdeveloped.Organizations such as the Gold Standard Foundationaredevelopingcreditsandstandards.

See:• https://www.goldstandard.org/our-work/what-we-do

Creditsareanoteworthyattempttomonetize‘externalities’.Forexample,activitiesthatreduceCO2emissionscangeneraterevenuesfromcarboncredits.However,likeRBFschemes,creditincomeisnotafinancinginstrument,butratherarecoverymechanism.Theactivitiesgeneratingcarboncreditsstillrequirefinancing.

• Financingiscomplex;designingafinancingstructure acceptable to all stakeholders takes time.

• InfinancingSDGs,impactisagivenandisnondiscriminatory. The challenge is the bankable proposal.

• Commercialfinanciersonlyfinanceentitiesthathaveaclearownership.Thisisself-evidentforbusinessesbutnotforprojects.Projectsshouldbestructured,forexample,intoSPVsthatcanthenattractcommercialfinance.

• Economic returns and social rate of return are usefulindicatorsthatpublicfinanciersandsocialimpactinvestorsusetoweightheimpactofprojects.

• Blendedfinanceisadelicatestructureoflayersoffinancing,andnotacocktailoffundsthatis‘shakenorstirred’.Ifusedwell,blendedfinancecanbeinstrumentalallowingdonormoneytounlockprivatecapitalmarketsfortheSDGs.

2.8 Main points

PPPLab Explorations 08

20 3.1 Introduction

This section is practical. While Part A discussed theneedforcommercialfinancingandtheconsequencesthereof,thissectionappliestheseprinciplestothefinancingofPPPs.WhyPPPsagain?BecausetheDutchFDOVandFDWPPPprogramstriggeredthisexplorationandspecificallythequestionofhowtoscaleandfinancethesuccessfulPPPs emerging from them.

Inpracticalterms:howcansuccessfulFDOV/FDWPPPsattractfinancingtocontinueandscale?Andasdiscussedintheprevioussection,alargepartoftherequiredfinancingwillmostlikelycomefromcommercialfinanciers.ThePPP,ortheappropriatelegalform,mustthereforefulfiltheconditionsofthistypeoffinancier.

Commercialfinancingisscarceandthefinanciersareselective.Thissectionthusbeginswithadiscus-sionofthecompetitionforcommercialfinancing.WhatisthepositionofthewaterandsanitationsectorandthefoodsectorwithintheSDGs?Howinterestedarecommercialfinanciers?Ifthereisinterest,whataretheconditions?WhatisneededforanFDOV/FDWPPPtoobtaincommercialfinanc-ing?ThereareimportantdifferencesbetweenPPPsstructuredforgrants(asintheDutchPPPprogram)and PPPs that are considered bankable by commer-cialfinanciers.ThisissueisdiscussedinSection3.3.

Section3.4dwellsonfinancialinstruments.Thissectionisshort,asmostoftheinstrumentshavealready been discussed in Section A.

Thissectionendswithconsiderationsonthenextsteps.WhatneedstohappenforFDOV/FDWPPPs?HowcantheDutchPPPprogramandpublicfinancingcontributetothis?Thisisabroadinvitationtostartdoingthingsdifferentlytofindoutwhatworksandwhatdoesnot.

3.2FinancingtheSDGs

The competition for financing All data in this section are taken from the UNDP 2030guidebook• http://www.undp.org/content/undp/en/home/librarypage/poverty-reduction/2030-agenda/financing-the-2030-agenda.html

TheestimatedannualinvestmentrequirementsforallSDGsisestimatedatUSD5–7trillionperyear.UNDPhasmadeanoverviewofthecoresectors.

Inthepower,transport,andclimatechangesectors,theestimatedfinancingneedisbroadlyhigh.Theseareallsectorsthatrequirecapital-intensiveinfrastructure.Theestimatedannualinvestmentforthewaterandsanitationsectorandtheagrisectoraremorepreciseat,respectively,aroundUSD400billionandUSD500billionperannum.(Notethatfiguresmaydifferdependingonscope.E.g.theWorldWideFundforNature(WWF)hascalculatedthefinancingneedsforwaterandinfrastructureatUSD1,000billionperyear.)Ifinvestmentneedsinthewaterandfoodsectorcannotbemetwithgrantfundsalonewhataretheothersourcesoffinancing?

3.PartB:CommercialfinancingforPPPs in practice

Source: UNDP calculations based on UNCTAD, World Investment Report 2014

Estimated Annual Investment Requirements, Core SDG Sectors (US$ billions)

Education

Health

Eco-system biodiversity

Climate change adaptation

Climate change mitigation

Food security and agriculture

Water and sanitation

Telecommunications

Transport

Power

0 100 200 300 400 500 600 700 800 900 1000

PPPLab Explorations 08

21 Sources of financing

First,thereistheSDGfinancingneedofUSD5–7trillion per annum. Then there is capital already flowingtodevelopmentcountries.IntheUNDP’sfigurebelow,thisisaboutUSD2trillion.Itisimportant to note that this is an indication of the totalcapitalflows:itincludesfundsrelatedtoSDGs,aswellasotherfunds.Inaddition,thispictureshowsonlyinternational capitalflows;there are also national capitalflows.

ThislocalfinancingforSDGsisusuallyrelativelysmall.Beforediscussinghowtoincreasethecapitalflow,letuslookatthecurrentflows.Whatarethesourcesofthecurrentinternationalcapitalflows?

Briefly,thecategories(whicharealsorelevantfortheagri,water,andsanitationsectors)are:

• FDI(USD646billion):Foreigndirectinvestmentgenerallytakeplacewhenaninvestorestablishesaforeignbusinessoperationoracquiresforeignbusinessassets.IntheframeworkoftheSDGs,thisisprivatefinancing;forexample,awatercompanysettingupoperationsinadevelopingcountry.

• Bonds(USD102billion):InTreasuryBondsorT-bonds,investorslendmoneytothegovernment.Thegovernmentthusgainsaccessto this money and become in debt for it. This is publicfinancingwhichcanbeallocatedtotheSDGs,includingagriandwatersectorsunderthegovernmentbudget.

• Remittances: USD 575 billion is yearly remitted by migrants to their country of origin. Remittances areusuallystablemoneyflows.Thisisapotentialsourceoffinancing,butismoneyfromhouse-holds and cannot be accessed through regular financingprinciples.Howeverastudyonremit-tancesconcludedthatvillagesmaybe‘money-rich,butdevelopment-poor’andremittersarewillingtoinvestindevelopmentoftheirhomeland.See:http://www.eib.org/attachments/country/femip_workers_remittances_en.pdf http://www.worldbank.org/en/topic/migrationre-mittancesdiasporaissues/overview

• ODA(USD142billion)andPrivateaidflows(USD88billion)yieldatotalpotentialofaroundUSD230billionforgrants.

• Commercial banks and other investments receivearoundUSD385billionyearly.Theseareinterestingprivatelocalfinancingresourcestotap into.

Source: United Nations Development Programme, Financing the 2030 Agenda: An Introductory Guidebook. http://www.undp.org/content/sdfinance/en/home.html

International Capital Flows: Developing Countries (2016)

US$ billion, 2016

FDIinflows646,030

Remittances 575,191

Commercial banks and other investments 385,649

ODA142,600

Bonds 102,646

Privateaidflows88,000

PortfolioEquityinflows41,711

South South Cooperation 20,000

PPPLab Explorations 08

22 Insummary,taking2016asanexample,thesourcesoffundingalreadyflowingtodevelopingcountriesare:

• Grant-likefinancing(ODA,privateaid)ofaroundUSD 233 billion

• Commercialfinanceresources(commercialbanks,bonds)ofUSD487billion

• Businessresources(FDI)ofUSD646billion• householdresources(remittances)ofUSD575

billion

Wheredoesthemoneygoto?Again,thereisnoone-to-oneconnectionbetweenthefiguresinthissection;thefiguresprovideanoverallideaofwherethemoneyiscomingfromandhowitisused.Forexample,thepicturebelowonlyshowsprivatefundsmobilizedthroughblendedfinance,inwhichtheblendingisanindicationthatthefundsaremobilizedforimpact.However,certainfundslikeFDImaynotbelinkedtoblendedfinance,andthereforeareneglectedinthisfigure.

Morespecifically,whichimpactsectorsaremostattractivetoinvestors?AccordingtotheOECD,theenergy sector has been most popular for some years,followedbyindustryandthebankingsector.Actualinvestmentsintheagrisectorarerelativelysmallbutincreasing,whilethewaterandsanitationsectorhadarevivalin2013andthendecreased.

See:• https://oecd-development-matters.org/2016/11/24/what-does-the-evidence-on-blended-finance-tell-us-about-its-potential-to-fill-the-sdg-funding-gap/

• http://www.sdgfund.org/finding-pipeline-project-preparation-sustainable-development

Thesearenotcurrentdata,butthereislittleindicationthattheinvestmentappetiteofinvestorshasshifted.Whyhaveinvestorsfavouredothersectors? What is there to learn for the agri and watersector?

Infrastructure and productive sectors receive most private finance mobilised through blended finance

Source: Development Initiatives based on OECD survey “Amounts mobilised from the private sector by official development finance interventions”

US$ billions

8 others

Communications

Trade policies and regulations

Health

Water supply and sanitation

Other multi-sector

Agriculture,forestry,fishing

Transport and storage

Bankingandfinancialservices

Industry, mining, construction

Energy

16

14

12

10

8

6

4

2

0

2012 2013 2014

2.8

2.2

3.3

2.6

2.3

1.73.1

4.43.9

PPPLab Explorations 08

23 Box 3.1: Reducing financing needs and information technology

WhatifthefinancinggapforSDGscanbereduced?Everydayinformationtechnology,intheformofsmartphones,providessomeinterestingopportunities.

Consideraninvestmentinamultimillion-dollarinfrastructure,suchaspipedwatersystem.Thissystembeginstogeneraterevenuesonlyoncethesystemisfullyupandrunning.However,smallscaleinvestments,suchasinnonpipedwaterandsanitationservices,couldberecoveredindaysorweeks.Whereaspreviouslyitcouldtakemonthsbeforefeeswerecollecteddoor-to-doorandpaidtotheoperator,nowadaysmobilemoney,paymentsystemsonwatermeters,andothertechnologyallowforalmostinstantpayment.Suchpaymentsmechanismsaredevelopingquickly-forexample,agri-wallets,pay-as-you-usesolarenergy,andpay-as-you-growinagriculture.Blockchaintechnologyalso has the potential to boost markets for small instant digital payments.

Many of these technologies are being used in the energysectorandhavenotyetfoundtheirwaytothewaterandsanitationandfoodsectors.Butwhentheydo,thefinancinggapmaybereduced,simply because payments can be collected much faster.Promisingtechnologies,especiallyforSDGservicesthatdonotrequirelargeupfrontinvestmentsininfrastructure,maybenefitfrominvestingin(almost)instantrecoverymechanisms.

See:• Afinancingandpaymentsystemforfarmers:https://agri-wallet.com/

• Asimilarsysteminhealthcare: https://www.pharmaccess.org/update/m-tiba-mobile-health-wallet-featured-on-dutch-national-news/

ThereisamassivefinancinggaptobefillediftheSDGsaretobeachieved.Inthepreviouschapter,theSDGfinancinggapwascalculatedasUSD 2.6 trillion per annum.. Depending on the sourceandstartingassumptions,thefigurescandiffer,bedebated,andarenoteasytoreconcile.Nonetheless,theoverallpictureisthatatleasthundreds of billions of dollars are needed for agriandwaterandsanitationprojects,butthatcommercialfinancierspreferothersectors.Theconcepts discussed in Section A can help to understandthisdifferenceinappetite.

Objective. Regardlessofsector,allinvestmentsinSDGsectorswillcreateimpact.Objectiveistherefore not a strong discriminating argument. SomescholarshavemadeattemptstoratetheSDGsbytheirvalueformoney,butsuchrankingsseemmorerelevantforpublicstakeholdersinsettingprioritysectors.Forcommercialfinanciers,investmentsinSDGsareallimpactinvestments.

• https://www.copenhagenconsensus.com/post-2015-consensus/nobel-laureates-guide-smarter-global-targets-2030

Revenue model. Dothesectors(e.g.energy)thatarefavouredbycommercialfinanciersoffermoreattractiverevenuemodels?Interestingly,inthewaterandsanitationsectorstoo,investmentsflowmostlytopipedinfrastructure,withlessgoingtoon-site solutions.

Onekeyquestionis:Canconvincingrevenuemodelsbedevelopedinthefoodandwaterandsanitationsectors?Also,whyareinvestmentsinpipedinfrastructurepreferredinthewaterandsanitationsector?Fewinvestmentsflowtowardspoorareas.Whyisthisthecase,ifitleavessomanypeopleunserved?Isitbecausepeoplelivingintheseareascannotaffordtopay?Inrecentyears,ithas become clear that the poor pay more for basic servicesthantherich:itcanbe‘expensivetobepoor’(e.g.,waterinsachetsismoreexpensivethanwaterfromatap).Also,severalnewapproacheshaveshownthatpeopleinpoorcommunitiesarewillingandabletopay(as,forexample,intheFDWFINISHsanitationproject).Thechallengeistodeveloprevenuemodelsthatprovidethereassurancethatthatrepaymentswillbemadewhilealsoallowingforscaling.

3.3Moneylookingforimpact?

PPPLab Explorations 08

24 Structuring. Ownershipisakeyconditionforcommercialfinanciers.Thefavouritesectorsforcommercialfinanciersaresectorswithclearrevenuemodelsandclearownership(energy,industry,andbanking).Butownershipisanissueinwaterandsanitation.Thesectorisdominatedbyutilities(oftenrelatedtogovernment)thatmainlyservetheurbanrichandbyNGOswhoservetheurbanandruralpoor.Inshort,fewarestructuredforabsorbcommercialfinancing.

Risks. Therisksinthewaterandsanitationsectorarehigh.Governmentsandpoliticalpartiesconstitutethemainrisk,astheytendtointerveneinthetariffssetforbasicserviceslikewater.

This is only a summary of factors that can hamperingtheinflowofcommercialfinancinginnon-pipedwaterandsanitation.Theobservationisthatinvestorswhowanttocontributetoimpacthavemoreattractivesectorstoinvestin,becausesectorssuchastheenergysector,haveamoreattractiverevenuemodelandthereseemstobelessriskofgovernmentinterventionsinthem.Results-basedpaymentmechanismsmayofferopportunities to reduce the unpredictability ofgovernments,asthegovernmentwillbeastakeholder,willbeinvolvedindefiningtheresults,andwillthereforecommittopayfortheresults.

Financing PPPs

Aswementioned,commercialfinancinghasalreadybegunflowingtowardsSDGprojectsandbusinesses.Sofar,itsvolumeisonlyafewhundredbilliononly(estimatedat400billion),whiletheyearlygapis2.5–3trillion.Sotheavailablefinancingisnotenoughand,ontopofthat,itseemstoflowtosectorswithobviousrevenuemodelsandmanageablerisks.Ifthereareinvestmentsinthewaterandsanitationsector,theygomainlytopipedinfrastructure,andnottoon-siteinfrastructureinpoorerareas.Attractingcommercialfinancingforthese sectors is a great challenge. What are the implicationsfortheFDOVandFDWprojectsthatareseekingcommercialfinancingtocontinueandto scale?

Structuring the PPP

TheDutchPPPgrantprogramsrequireaproject-basedcontingentpartnershipofprivateandpublicpartnerstoimplementtheproject.CansuchaPPPattractcommercialfinancingtocontinueandscale?Theanswerfromacommercialfinancier’sperspectiveisno.SuchPPPsarenotstructuredforcommercialfinancebecause:

• ThePPPwassetupasacontingentalliancetoreceivegrants.Itisnotalegalentitythatcanbefinancedanditlacksclearownership;

• ThePPPisaprojectandhasended;• Projectsarenotset-uptogrowandscale;

IfFDOV/FDWPPPsassucharedifficulttofinance,thenwhatisneededtoattractcommercialfinancing?

Revenue / recovery model

Firsttheremustbearevenuemodel.Arevenuemodelprovidestheresourcesforrepaymentofthecommercialfinancing.Inaregularbusinessenvironment,thecustomerusuallypaysthesupplier in the form of direct payments or through regularfees.Inapublicdomain,suchasthewaterandsanitationsector,thepayerisnotnecessarilytheimmediatecustomer(orbeneficiary);agovernmentorcharitymaybewillingtopayfortheservice-forexampleintheformofoutcomepayments.

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25 Inthelastcoupleofyears,anumberoforganizationshavegainedexperiencewithresults-based approaches.

Revenuemodelsthatincluderesults-basedpayments modalities are potentially interesting for commercialfinanciers.Oneinterestingadditionalbenefitisthatarevenuemodelthatincludesthegovernmentasoutcomepayerreducesthepoliticalrisks.

Project or business?

Howwilltheactivitiesbeincorporated?Whatisthelegalentity:aproject(SPV)orabusinessentity?Asdiscussedintheprevioussection,inthepublicdomainandinthedevelopmentsector,projectsarethe structures of preference. This is because in a project,thedeliverablesaredefined,thereisatimeframe,andthereisanagreedprojectbudget.Theseprojectcharacteristicsareeasytocommunicateandgovernmentsandorganizationsimplementingprojectscanthuseasilybemonitoredandheldaccountable.Projectsaresetuptoprovidedeliverables,ontimeandwithinbudget.

Businessesaresetuptomakeaprofitfortheirowners,andtheactivitiesareoflessimportance.Ofcourse,everybusinessoffersspecificproductsorservices,butthismaychangeifcircumstanceschangeorbetteropportunitiesarise.Becauseofthisflexibility,abusinessismuchbettersuitedtoscalingandgrowth.Inabusinesstoo,therevenuesdonotnecessarilyhavetocomefromonespecificactivity(asinprojects)butcancomefromalltheproductsorservicesthebusinessisoffering.

Inrecentyears,hybridformshaveappeared,suchassocialbusinesses.Legallythesearestillbusinesses,buttheyoperateinsocialsectorsorstriveforreasonableprofits,ratherthanpursuingprofitmaximization.

The preferred structure is a result of consultation processesanddiscussionbetweenallstakeholders.Structuringisacomplex,time-consuming,andthereforeexpensiveactivity.

Investing in an enabling environment

NorevenuemodelrelatedtoSDGswillbesuccessfulinisolation;inotherwords,theenvironmentmustbeconducive:thereshouldbemarkets,peoplewillingtopay,businessesabletosupplyservices,governmentthathavepoliciesandenforcethem,localfinancierswhoarewillingtoprovideloans(includingsmallloans),etc.Animportantquestionis:Whowillpayforthedevelopmentoftheenablingenvironment?Iftheactivityisorganizedasaproject,thatprojectcan include the costs for building the enabling environment.However,abusinessoperateswithinthatenablingenvironmentandwillonlycontributeto the costs through taxes.

Ultimately,thecostsofdevelopingtheenablingenvironmentwillbepaidfrompublicfundsorgrants.Thepublicfundsdonotnecessarilyhavetobe‘inputfinancing’;ifresultscanbeclearlydefinedandtheoutcomepayersarewillingtopaythem,commercialfinanciersmaybewillingtofinancetheactivitiesandtotakeontheriskuntiltheagreed-uponresultshavebeenachieved.

Cooperation with government

BothSPVsandbusinessesinthewatersectorwillfocusonthedeliveryofthepublicservicesortheestablishmentofpublicassets.Inonewayortheother,governmentmustbeinvolved:asapartner(providingthelandforwatertreatmentplant),asasupervisorandsourceoflawenforcement(e.g.,lawsforsanitationandsludgemanagement),asaclient(commissioningthebuildingofthewatertreatmentplant),orotherwise.

Fromtheperspectiveofcommercialfinanciers,therelationshipwiththegovernmentwillbeanim-portantpointofattention.Agovernmentcanbeastrongdriverforsuccess,butatthesametimemayconstituteamajorrisk.Anyfinancierwillrequirethattheroleofthegovernmentiscomprehen-sivelydiscussed,agreeduponanddocumented.Agovernmentshouldbepredictableandtrustworthy,butthisisoftenanissueindevelopingcountries,socommercialfinanciersmaynotfeelcomfortablewithsigneddocuments.Afterall,anelection,anewgovernment,andnewinsightsmayputboththeprojectandtherepaymentsatrisk.

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26 ManyOECDcountriesthereforehavetheirown‘guaranteefacilities’thatcoverthecountryrisk. • https://group.atradius.com/• https://www.miga.org/

Financing and payment

Ensuringpaymentsorrevenuesisthefirststepintheprocessofobtainingcommercialfinancing;or,theotherwayaround:ifpaymentsareuncertain,fewcommercialfinancierswillbeinterestedindiscussingtheprojectorbusiness.Thisissimplybecauseonlypaymentsorrevenuecanensurethatthefinancingisrepaid.

Triggeredbytherevenuemodel,discussionswillstartonothermodalitiesoffinancing:thoseofstructure,risks,recourse,andfinancing.Theexactmodalitiesarethenagreeduponbetweenthefinancier,thebusinessorprojectowner,andtheother stakeholders.

Ifallconditionsofthecommercialfinancierarefulfilled,thefinancingitselfcancomeinmanyflavours.Thetypewilldependonthefinancingneedoftheprojectorbusiness,thetimeframe,theliquidityprojectionoftheprojectorbusiness,theliquidityprojectionofthefinanciers,andsoon.

Blendinginthefinancingstructureoftheprojectmeansthatpublicfundswillbeusedtoreducerisks,makingcommercialfinancingpossible.Thesepublicfundsalsomaycomeinvariousflavours,depending on the risk perception and risk appetite ofthecommercialinvestors.

Examplesofpublicfinancinginstrumentsinclude:• Subsidyforcapitalinvestments• Subsidyforspecifiedactivities,e.g.,ininnovation• Guarantee,coveringcommercialinvestoragainsthttps://www.sida.se/English/partners/our-partners/Private-sector/Innovative-Finance-/

• Insuranceforcountryandcurrencyrisks:https://group.atradius.com/andhttps://www.miga.org/

IntheNetherlands,suchsourcesoffinancingincludeRVO• https://english.rvo.nl/andFMOhttps://www.fmo.nl/

EvenifagrantPPPisverysuccessful,mobilizationofcommercialfinancing(evenincombinationwithpublicfinancing)doesnotcomenaturally.Itbegins,however,withasoundfinancialproposalincombinationwithclearobjectivesrelatingtoimpact.Acommitmenton(partof)thepublicfinancingneededtoreducetherisksintheprojectwillcontributegreatlytocreatingenthusiasmamongpotentialinvestors.

Thefinancialproposalshouldatminimumincludearevenuemodelindicatinghowthefinancingcanberepaid. The proposal may include a proposal for a financingstructure,butthisisnotanecessity.Afterall,thisstructurewillbedesignedindiscussionswithallthestakeholders:theprojectorbusinessowners,thepublicandprivatefinanciers,localgovernments,andothers.

It is too early to conclude anything about the numberofcompletedFDOV/FDWprojectsthatwillcontinueonandinwhatform,orabouthowmuchcommercialorotherfundingwasmobilized.TheFDOV/FDWprogramobjectivesrequirelocalsustainability-soawatertreatmentplantshouldremainoperationalforatleast20years.However,theprogramdoesnotrequirecontinuityofthepartnershipandtheiractivities.

LetusassumethatsomuchhasbeenlearnedinthePPPproject,expertisehasbeenbuilt,productshavebeendeveloped,partnershavelearnedtocooperateinthepartnership,andthatthisisworthcontinuinginonewayortheother.Evenmore,let us suppose that an entity can emerge out of theprojecttoprovideservicesthatcontributetotheSDGsandwhichisattractivetocommercialinvestors.

Nowwhatcouldbedonetoincreasethechanceofthishappening?Heresomeideas

For project owners

Projectownersshoulddevelopasolidrevenuemodel and prepare ideas about structuring based ontheinputsdescribedabove.Wheneverpossible,involvelocalandcentralgovernmenttoreducethe risks. Consider using results-based payment models,becauseiftheyaresuccessfultherearemanybenefits,includingthat:1)paymentsaresecured;2)governmentisinvolved,reducingrisk;

3.4What’snext?

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27 and3)governmentmaybemorewillingtotakeuparoleinbuildinganenablingenvironment,onaccountoftheirinvolvement.

To grant providers

Grantprovidersplayanimportantroleinmobilizingcommercialfinancing.

Financing. Grantprovidersshouldconsiderfinancingmodalitiesotherthanthetraditionalinputfinancing.Grantscanbeusedforresults-basedpayment,reducingrisksforcommercialfinanciers,payingforthedevelopmentofenablingenvironments,andmore.

Changinggrantfinancingmodalitieswillrequirewillingness,determination,flexibility,modifyingmandates,andevenalteringorganizationalstructures.Noneofthiscomeseasily,butitisneededifgrantproviderswanttoreallycontributetoachievingtheSDGs.

Think beyond sustainability.ThefocusinFDOV/FDWprojectisonsustainabilityoftheprojectdeliverables-butwhataboutgrowthandscaling?Iftheseareobjectives,thenservice providers shouldbeincentivizedtogrowandscale.Thecurrentfocus,onethatisinherenttoprojects,concernstheirimplementation,deliverables,andsustainability.Incentivesandmodalitiesforgrowthandscalingwillneedtobeintroduced. Investor relations. Grantprovidersmayhave,ormaybeabletodevelop,goodentrypointswithcommercialfinanciers,thusprovidingaplatformforinterestingprojects.Forexample,itmaybeworthinvestingindrawingabiggeraudiencefortheresultsoftheseprograms,say,throughinvestorconferences or publishing a bid book.

Someexamplesofbidbooksinclude:• https://wle.cgiar.org/resource-recovery-waste-business-models-energy-nutrient-and-water-reuse-low-and-middle-income

• https://www.viawater.nl/files/bidbook_spreads.pdf

These bid books do not contain elaborated bankableproposals.Infact,manyoftheproposalsmaynotevenbebankable.Whatismostimportant

isthatcommercialinvestorsandstakeholders(businesses,NGOs)workingonSDGprojectsbegindiscussingopportunitiesandhowtostructureproposalsinsuchawaythattheybecomeattractive!

To commercial financiers

Someimpactinvestorsoperateunderthemotto‘putyourmoneywhereyourmouthis’.Butthat’sjustthetheory;inpractice,manyinvestorschoosetoinvestinrelativelysafesectors(suchasenergyorpipedinfrastructure)incombinationwithguaranteesfromgovernments.Astherearestillmanyinvestmentopportunitiesinthesesafesectors,theyhavelittleappetitetoexploreothersectors,suchaswaterandsanitation,whicharenoteasily bankable.

TheWWFismakingabraveattempttoattractcommercialfinancierstothewatersector.Theultimateobjectiveiscommercialfinancingfortheagrisectorandthewaterandsanitationsector.Intheshortterm,theprovisionofinvestors’expertiseand their cooperation in pilots are already good nextstepstowardsfinancingandscalingsectorsthatarenowconsideredlessbankable.

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28 TheWWFisalsofollowingthisapproach.Itseestheneedforcommercialinvestmentandacknowledgesthedifficultiesandcomplexitiesofattractingcommercialfinancing.Ithasthuslaunchedacampaignprovidinganoverviewofopportunities,includingprojectsrelatedtotheenablingenvironment.

See:• http://wwf.panda.org/our_work/water/bankable_projects/

Option A: Single project investments

• Projectsarefundedassingleinvestments• Investorscandecideperprojecttoinvest

or not• Investorsgetareturnperproject

Option B: Combined investment

• Projectsarefundedfromonededicatedinvestmentfund/vehicle

• Investorsparticipateintheinvestmentfund/vehicle• Investorsgetareturnbasedonoverallreturnoftheprojects

Investments can consist of different financial mechanisms, blended to be able to realize all projects

Approach for Kafue Flats could consists of a constellation of different bankable projects

Projects can be funded as single projects or together as a combined investment

Manage Cattle Farming• Reduce pressure of

cattle farming• Use smart grazing managementtoallowvegetationofFlatstogrow

Restore National Park Blue Lagoon• Restore area around BlueLagoontoallowformorebiodiversity

• Expand tourism facilities togeneraterevenues

Fish processing plant• Reduceharvestingofjuvenilebreamtomaintainsustainablefishpopulation

• Providelocalfisherieswiththeopportunity to increase their price pointgrow

Irrigation improvement• Improvesugarcane

irrigation system• Regulatewater

allocation and farm expansion

Water treatment system• Reducewater

pollution• Treatwaterfrom

cities of Kafue and Mazabuka

$12 M $5M

$50 M

$8 M

$15M

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29 • Projectscompeteforprivatefunding.Thewaterand sanitation sector and the agri sector are not attractivetofinanciers.

• APPPisaprojectandhasaclearendoflife.• Fromacommercialfinancier’sperspective,thegrantPPPcannotbecontinued.However,thetake-awayfromtheprojectcanbestructuredinanewformat(businessorSPV)thatisacceptable.

• Structuringiscomplex,cantakealongtime,and is therefore costly. These costs need to be financed.Torecoverthesecostsfromtheprojectitself,aprojectshouldhaveaminimumsize(probablyaminimumofUSD20–50million).

• Scaleisaconditionforcommercialfinancing(especiallyforPPPs)andnottheresultoffinancing.Forsmallprojects,thisimplies‘bundling’andcreatingfundsforsharedfacilities,like public toilets.

• Smallerprojectsofferopportunitiestotapintootherfinancingresources,suchasremittancesorcrowd-funding.

• Theneedforcommercialfinancingcanbereducedbyapplyingsmartpaymentandrecoverysystems.Thismaybeanopportunity,especiallyinprojectsorbusinessesthatdonotrequirelarge upfront infrastructure.

3.5 Main points and observations:

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30

Annex: More resources

1. Easing the Transition to Commercial Finance for Sustainable Water and Sanitation, Word Bank Group’s Water Global Practice, 2017

https://openknowledge.worldbank.org/bitstream/handle/10986/27948/119048-WP-P159188-PUBLIC.pdf?sequence=5&isAllowed=y

2. Blended Finance: Understanding its Potential for Agenda 2030,DevelopmentInitiatives,2016

http://devinit.org/wp-content/uploads/2016/11/Blended-finance-Understanding-its-potential-for-Agenda-2030.pdf

5. Impact Investing: Who are we Serving?OxfamDiscussionPaper,April2017,Oxfam&SumerianPartners/

https://www.oxfamamerica.org/static/media/files/dp-impact-investing-030417-en.pdf

6. Impact Bonds in Developing Countries: Early Learnings from the Field, Sept 2017

https://www.brookings.edu/wp-content/uploads/2017/09/impact-bonds-in-developing-countries_web.pdf

7. The Potential and Limitations of Impact Bonds, EmilyGustafsson-Wright,July2015

https://www.brookings.edu/wp-content/uploads/2015/07/impact-bondsweb.pdf

8. Blended Finance Vol. 1: A Primer for Development Finance and Philanthropic Funders

http://www3.weforum.org/docs/WEF_Blended_Finance_A_Primer_Development_Finance_Philanthropic_Funders_report_2015.pdf

9. Making Blended Finance Work for the SDGs, OECDreport2018

https://issuu.com/oecd-dcd/docs/making_bf_work_highlights_web_opt

10. Results Measurement in Impact Investing: A Preliminary Review,DCED2016

https://www.enterprise-development.org/wp-content/uploads/DCED-RM-in-Impact-Investing-Review-Brief.pdf

11. Better Finance, Better World, by the BlendedFinanceTaskforcefortheGlobalGoals(CochairedbyLordMarkMalloch-BrownandJeremyOppenheim)oftheBusinessCommission, 2018

• http://s3.amazonaws.com/aws-bsdc/BFT_BetterFinance_final_01192018.pdf

• http://www.undp.org/content/undp/en/home/librarypage/poverty-reduction/2030-agenda/financing-the-2030-agenda.html

• https://www.oxfam.org/sites/www.oxfam.org/files/bp-private-finance-blending-for-development-130217-en.pdf

• https://www.brookings.edu/wp-content/uploads/2016/07/PPP-Press-Release.pdf

• https://www.epsu.org/sites/default/files/article/files/EC-PPPs-crit-final.pdf

12. Output and outcome payments

• https://pppknowledgelab.org/guide/sections/1-introduction

• https://ppiaf.org/

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