Risk-sharing for water initiatives in Africa

This past May, two members of the Water Portfolio Team visited Kenya, Uganda and South Africa, to explore investment opportunities and learn more about the major water challenges. During the trip, we gained important insights into the context for water and sanitation issues. On the one hand, in the face of significant unmet need, we constantly saw potential for entrepreneurial models. On the other, due to significant dependence on donor funds and systemic challenges such as corruption and lack of infrastructure, we witnessed major hurdles that could easily limit investment opportunities. Through a series of meetings with a cross-section of entrepreneurs, banks, not-for-profits or NGOs, foundations, donor organizations and community-based organizations (CBOs), it became increasingly clear that creative partnerships - between the private, public and citizen sectors - present the richest opportunities to support the growth of sustainable water systems.

Risk sharing is one such opportunity. In Uganda, local banks have only been willing to take on the risk associated with small start-up companies when provided with significant collateral - sometimes more than the amount being borrowed - so entrepreneurs are left without access to private capital. An innovative public-private partnership between multiple players could better balance risk and create an enabling environment for BOP entrepreneurs. For example, Acumen Fund could use a loan guarantee to mitigate the perceived risk to banks of financing entrepreneurs. Local banks could offer loans with only a partial guarantee (based on expected cash flows) to reduce the risk facing start-ups. And multilateral donors and local governments could tackle systemic problems to further mitigate risk - problems such as power failures, which lead to low water production; contract length, which limits incentives for private operators to invest; and tariffs, which have been fixed at a low level and can change without warning based on a “ministerial decree,” undermining revenue projections.

In a situation like this, then, innovative ways of spreading risk across multiple parties - in equitable portions - would help to bring more voices to the table and better align incentives for greater success. We will continue our efforts to better understand the role that Acumen Fund can play in driving such creative schemes.