Pooling Resources Pays Dividends
For Paul Othim and Rose Achieng of Kimusu, Kenya, easy water access was a pipe dream. Paul would spend $14 a week, a significant portion of his modest mechanic’s income, to buy water for his large family. He was more fortunate than some of his neighbors. Rose, a mother of three, could not even afford this and spent hours hauling water-filled jerry cans between hyacinth-infested ponds and her tin-roofed shack.
But Rose, Paul, and 8,500 of their neighbors achieved the impossible when the Sustainable Water and Sanitation in Africa initiative (SUWASA), a USAID project implemented by TetraTech and Development Innovations Group (DIG), helped them to finance household water connections. SUWASA worked with commercial banks to enable commercial water utility companies to expand water access in Kenya. Now thousands of low-income Kenyan families can, for the first time, afford clean water for drinking, cooking, and washing. Innovative financing initiatives such as SUWASA are on the rise as a wide variety of actors realize it is in their interest to increase access to water and sanitation and work to achieve the Millennium Development Goals.
In 1970, the U.S. Government provided 70 percent of the financing for American foreign assistance. Today it provides just 20 percent of the financing as stakeholders around the world do more to close the financing gap. Increasingly, the global community is recognizing that, to achieve these goals, financing must come from a variety of sources, including governments, the private sector, and individuals. Development agencies like USAID are now able to accomplish more, leverage the resources of their partners, and better address growing health, livelihood, and development challenges. For banks and corporations, development is a worthwhile investment. And for the millions like Paul and Rose, these initiatives have made the difference between surviving and thriving.
Sharing Risks and Rewards
USAID established its Development Credit Authority (DCA) in 1999 to reduce local credit constraints and support initiatives like those led by SUWASA. DCA partially guarantees loans to encourage commercial banks to invest in projects that help reduce poverty. Worldwide, DCA has made over $2.7 billion in commercial capital available, including nearly $200 million in private capital leveraged in the water sector alone. Notably, 98 percent of borrowers have repaid these USAID-backed loans.
“DCA guarantees allow commercial banks to adjust their mental math and encourage them to lend to often-neglected sectors that stand to present the largest development gains,” said Anthony Cotton, Africa team leader for DCA.
In Kenya, these guarantees have the potential to make a big difference. The Kenyan government transferred management of water utilities from municipalities to decentralized water service boards with the 2002 Water Act, but commercial banks remained reluctant to lend to the water sector due to perceived risks and inefficiencies.
DCA guarantees in Kenya have opened new sources of financing from private banks for SUWASA’s on-the-ground work. For example, in the Kisumu, Kenya project, an obstacle for water utilities seeking to expand their operations was their customers’ inability to pay the $100 upfront charge for a private water connection.
“The Kisumu water company had invested in a treatment plant to double the supply of water to the city and had a strategic plan to extend the network to low income areas,” said Eric Adams, SUWASA Kenya team leader for DIG. “Our project linked financing from the bank to the company to the consumer to create a sustainable business model where everyone wins.”
A loan from private lender K-Rep Bank, enhanced by a USAID DCA guarantee, enabled the utility to front the connection costs of 1,500 low-income households, passing along their financing expenses to customers in a manageable monthly rate. Even with the financing charge, customer water bills were cut in half. A similar project in Nakuru, Kenya, involving public prepaid meters, reduced customer payments by 80 percent.
"By leveraging bank financing, water companies can scale high-impact projects and truly change peoples’ lives,” said Mr. Adams.
Encouraging Private Financing
DCA-supported project is helping connect private lenders to water utility projects. Established in 2008 by Japan’s International Cooperation Agency, the Development Bank of the Philippines, and USAID, the Philippine Water Revolving Fund (PWRF) is a co-financing arrangement that has mobilized more than $100 million to support the development of new or improved water access for 2 million people.
In 2004, a policy directive in the Philippines mandated sweeping reforms in the financing of water service providers and laid the groundwork for private financing of water projects. Previously, utilities relied on government financing alone. “This new policy was the impetus to support the flow of private finance,” said Amanda Femal, USAID’s Asia team leader for DCA.
Yet, as in Kenya, uncertainty about the risks and profitability of the water sector meant that funding from private institutions was limited.
DCA credit assurances coupled with USAID’s technical assistance on project development, water project appraisal, and the development of a water utilities credit rating system gave private banks the confidence they needed to lend money to fill this gap. In one agreement, a loan of approximately $13 million from the Development Bank of Philippines and the private Bank of the Philippine Islands allowed the Puerto Princesa City Water District to refurbish the city’s water system, which serves 117,000 and by 2014 will provide new water distribution services to an additional 48,000 people.
“Private banks are now actively originating loans and starting to close deals without credit risk guarantees,” said Alma Porciuncula, Philippine Water Revolving Fund chief of party.
Investing in development is not just about money, though. In addition to working with banks to finance water projects, USAID joins forces with private companies to achieve mutual water goals. The companies not only leverage funds, but also publicity, networks, and know-how.
The Water and Development Alliance (WADA), launched in 2006 with equal investments from USAID and from the Coca-Cola Company, is a prime example. The partnership began after Coca-Cola started investigating ways to mitigate risk to the watersheds in which their bottling plants were located. “They began asking questions such as, ‘If the community around our bottling plants does not have education about water and sanitation, how does that impact our operations?’” said Naabia Ofosu-Amaah, president of the Global Environment and Technology Foundation, which facilitates WADA activities.
USAID was a natural fit to partner with Coca-Cola on watershed protection activities, productive use of water, and WASH issues. Investments of $31 million in 24 countries have yielded benefits for Coca-Cola as well as for thousands of people who live and work near their plants. In Senegal, WADA has focused on community-led total sanitation and creating open-defecation free communities. The program helps communities build latrines and learn about ways to ensure sanitary conditions to protect their water sources. To incentivize achieving open defecation free certification, WADA pays for an improved water access point for the village.
“The value of the project is that staff are managing an integrated water, sanitation, and hygiene program; this is not just a well and latrine building project,” said Emily Rupp, the Global Development Alliances representative at USAID/Senegal.
WADA has seen results by involving local non-governmental organizations and engaging community members. Now villagers across the world have taken ownership over their water and sanitation. “We have accomplished something important, something we need to build on,” said Famara Diedhiou, a governing committee leader from the village of Francounda Bodiancounda.
Another beverage giant, PepsiCo, is likewise joining forces with USAID to engage those in need, optimize its value chain, and improve lives. The goals of that venture, Enterprise EthioPEA, are lofty: Increase food production, improve water resource management, and address malnutrition. But the means of accomplishing these aims comes down to a tiny legume: The chickpea.
Through Enterprise EthioPEA, PepsiCo is integrating 10,000 small-scale Ethiopian chickpea farmers into the supply-chain of their Sabra hummus. The partnership works to improve irrigation techniques and is expected to increase yields two-fold. These efforts will not only boost PepsiCo’s profits, but will significantly increase the incomes of thousands of farmers and their families.
Like any investment, development investments must be judged by their potential payoff. USAID’s Development Innovation Ventures (DIV) program works to find cutting-edge solutions that make the greatest impact per dollar.
“DIV is looking for solutions that will be more cost-effective than standard practice, and scalable to reach millions of people,” said Carolyn Edelstein, a program specialist at DIV.
In 2012, DIV and the Bill and Melinda Gates Foundation launched WASH for Life with $17 million over four years to find, test, and put into practice new approaches to provide sustainable water, sanitation, and hygiene.
One of the first proposals to be awarded seed funding was developed by Sanergy, a Nairobi-based company that converts human waste into fertilizer and biogas, gas produced by the breakdown of organic matter. A $100,000 grant allowed Sanergy to begin a pilot project by funding the construction of a waste-processing facility and 60 latrines in a Nairobi slum, where open sewage poses a chronic health hazard. The sanitation buildings are franchised to local entrepreneurs and youth groups, which earn revenues from issuing a small per-use charge and the sale of complementary products. Sanergy intends to push forward and scale up to more than 3,000 sanitation centers that will reach 500,000 people and widely reduce the risk of diarrheal disease.
Change that Lasts
As innovative financing gains prominence, USAID faces a new challenge: Ensuring that these new ventures are sustainable.
“USAID is looking carefully at sustainability issues in the water sector and how to create a financing stream that really works over the long haul,” said Heather Skilling, a water and sanitation specialist for USAID. “It’s one thing to determine the costs around putting something in place, but another to consider the costs of building service that will last.”
In the long term, said Ms. Skilling, true change in developing countries must take into account ways to generate a continuous financial flow to ensure that development gains can be sustained. “And that means looking well beyond the ribbon cutting.”
K. Unger Baillie
Microfinance Brings Savings to Villages
When Sylvain, a farmer and local leader in Madagascar, found he didn’t have the sand needed to complete the water infrastructure for his commune, he turned to a new source of social capital for help: A group of Village Savings and Loan Associations (VSLAs). This popular trend in microfinance is a rudimentary form of banking that brings together community members to save and manage their money collectively. These groups help households improve financial resource management, and provide access to short-term loans at reasonable interest rates for investments in projects like high quality water and sanitation services.
As president of his VSLA, Sylvain was able to link the resources of his VSLA together with those of 13 others, with 293 members in all, to help him acquire the necessary supplies for the stalled project. These groups hold weekly meetings at which time individuals bring their savings contributions and discuss possible investments and loans. VSLAs also pay dividends to members from the interest on loans, creating a new source of income. When Sylvain’s wife fell ill, he used his dividends to pay for critical treatment at a private clinic in a nearby village. Sylvain said this may have saved her life. “I would not have dared to borrow 100,000 Ariary ($50) from someone in the village, nor would I have had that much in savings at home,” he said.
USAID's Rural Access to New Opportunities for Health and Prosperity (RANO HP) project has increased demand for clean water and sanitation in the region by providing improved access to savings and credit. The project has also helped locals to better manage their water supply systems by creating water and sanitation business plans. To date, Rano HP has started 225 VSLAs.
VSLAs bring together small groups of people, usually 15 to 25 households. As the name suggests, the model is based on savings rather than debt and leaves the spending control in the hands of members instead of professionals. These groups can be empowering for members, particularly women, by improving their capacity to manage money and creating access to microloans generated from each group’s savings. In fiscal year 2012 alone, the project supported the creation of 107 new VSLAs with 1,982 members, 1,188 of whom are women, with savings of $24,758 and credit of $14,721.
“What is really interesting and powerful is that they (VSLAs) are self generating,” said Jonathan Annis, the project’s technical coordinator. “The cohesion between the people is really strong. They trust one another and are willing to experiment together.”
Humanitarian agency CARE started this type of banking in Niger in 1991. It was designed to help the poorest save, since many are distrustful of debt and not attractive to traditional microfinance institutions. This financial structure works well in a country like Madagascar, where 80 percent of the estimated 21 million people who live there make less than $1.25 a day.
A consortium led by Catholic Relief Services that includes CARE, Voahary Salama, Caritas Madagascar, and two local private companies implements RANO HP. The program’s goal is for rural communities in Madagascar to have broad access to sustainable water and sanitation services. One of its key activities is to use improved access to savings to encourage people to invest in water and sanitation. Health workers have also taken advantage of the associations’ weekly meetings to provide education on sanitation and hygiene. In 2012, the project reported that 2,417 VSLA members had adopted one or more of the three key water, sanitation, and hygiene messages it promoted. Throughout the life of the project, VSLAs have helped approximately 2,000 families to build their own latrines without subsidies from the project.
RANO HP will end in June 2013, and in preparation, Mr. Annis said they are trying to increase communication and mutual support between VSLAs within a geographic area to increase their sustainability. They are also developing communication and marketing tools for traditional microfinance institutions to help encourage continued household investments in sanitation beyond the life of the project.
Last updated: April 22, 2013