Water for Women is the Australian Government’s flagship Water, Sanitation, and Hygiene (WASH) program and is being delivered as part of Australia's aid program. It is supporting improved health, gender equality and wellbeing in Asian and Pacific communities through socially inclusive and sustainable WASH projects. www.waterforwomenfund.org
RTI India is exploring the potential of blended financial structures for increased private-sector participation towards WASH initiatives. WASH programs in India are faced with the challenge of limited private funding. In our first blog, we attempted to unearth reasons for limited private sector financing, specifically in WASH infrastructure, and whether or not introducing blended finance may improve this outlook. In the second blog, we listed prevailing options in India for blended financing in WASH infrastructure projects and how these can be scaled up.
The last in our three-part series aims to assess reasons for limited blended finance in WASH programs, list prevailing examples for blended financing, and how these could be scaled up. In this blog we will provide examples of successful innovative blended finance deployments.
Context for Discussion
What is blended finance in the context of WASH?
Blended Finance often uses philanthropic funding to mobilize private investments, through a variety of financial instruments and mechanisms. Each dollar of concessional capital deployed, on an average, mobilizes AU$4 of commercially priced capital. At this pace, the Indian WASH ecosystem will require AU$3.5 billion of concessional finance annually.
Philanthropic capital in India increased by 23% to approximately AU$12.5 billion in 2020.This stemmed from four sources: foreign (24%), domestic corporate (28%), domestic high net-worth individuals/ families (20%), and other retail investors (28%). Despite the availability of significant philanthropic capital, there are only a few instances of it being deployed for blended finance facilities for sustainable development, including WASH. There are two potential reasons for this:
- WASH is not a focus/ favored sector for philanthropic action in India.
- Market barriers prevent philanthropy being used for creating blended finance options.
Insights from the Consultation
Philanthropic capital flow in WASH is limited: In FY 2019-20, WASH represented just 3% of total domestic corporate philanthropy. Amongst high net-worth individual and family contributions, WASH is a subset of ‘others’ category which cumulatively adds up to just 6%. Empirical extrapolation of these results suggests that annual domestic philanthropic contribution to WASH is barely AU$0.3 billion compared to the annual concessional finance demand of AU$3.5 billion (<10%).
Awareness of blended finance concept is limited: There are a handful of cases where blended finance has been successfully implemented in India. While small- and medium-sized donors remain conceptually unaware of blended finance facilities, a lack of detailed research on these case studies deters larger donors from exploring them. Thus, they usually prefer to adopt traditional grant-making approaches with low risk and visible impact.
Regulatory constraints exist: Philanthropic capital flows in India is governed by two regulations: the Companies Corporate Social Responsibility Rules (CSR), which govern domestic CSR flows, and the Foreign Contribution Regulation Act (FCRA), which regulates receipt of foreign contributions or aid from outside India to Indian territories. Certain provisions in both these regulations affect donors’ ability to engage in blended finance facilities:
- Rule 4(5) of the CSR Rules require CSR funds to be disbursed and utilized for a pre-determined purpose. Blended finance mechanisms, like revolving funds, are never fully and irreversibly expended and cannot be substantiated as ‘utilized’ through fund utilization certificates.
- Section 7 of the FCRA prohibits sub-granting foreign donations. Restrictions on sub-granting limit participation in blended finance facilities, which often involve several collaborating agencies.
Examples of Innovative Blended Finance Structures in WASH and Beyond
Despite these limitations, certain programs, of the WASH sector and beyond, have still been able to pursue blended finance structures due to innovation in the business model adopted. This suggests that these structures have been able to overcome the regulatory barriers. In the following examples, philanthropic capital is non-refundable and completely utilized. Hence, if the source of this philanthropic capital is CSR funds, such spends are eligible to receive the fund utilization certificate.
One-time Non-returnable Grants (Concessional Finance) for Prompting Equity Investments (Commercial Finance)
Context: Under the Water for Women Fund initiative, RTI International fosters partnerships between WASH-based private sector, non-government organizations (NGOs), and prospective entrepreneurs, from marginalized groups, identified by these NGOs. The partnerships facilitate increased access of WASH products/ services, offered by the private sector in the marginalised communities. The entrepreneurs act as a WASH awareness and product/ service sales medium, earning a margin against sales. The NGO trains and coordinates efforts among several identified entrepreneurs.
Need for Concessional Finance/ Additionality: Ordinarily, any business venture requires upfront equity investment from the entrepreneur. However, in this case, the entrepreneurs hail from economically weak and marginalized backgrounds and are not financially able to make upfront equity investments.
Deployment Mechanism of Concessional Finance: CSR funds (say, AU$100) is extended as a one-time, non-returnable grant to NGOs. The NGOs use the grants to procure the first batch of WASH products on behalf of the entrepreneurs. The entrepreneurs sell these products along with a premium (say, 20%). From the 2nd cycle onwards, the NGO retains just a supervisory role while the entrepreneur invests most of the earned funds (say, AU$110 out of AU$120) to purchase the next batch of products. These are again sold at a premium so that the entrepreneurs’ total fund corpus swells and the cycle repeats.
