The Potential for Blended Finance to Enhance Private Sector Engagement in the Indian WASH Ecosystem

Water for Women is the Australian Government’s flagship water sanitation 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.  

Supporting WASH infrastructure in India with Water for Women

In India, RTI supports the implementation of Water for Women. Our program seeks to enhance access to safe water and hygiene among the most vulnerable populations by increasing private sector participation in WASH. We developed this approach because WASH access in India is predominantly government-funded, and public funds alone are not adequate for India to achieve its objectives under United Nations Sustainable Development Goal 6.  

Unfortunately, enhancing private sector engagement is easier said than done in India’s WASH ecosystem. Based on lessons learned in the climate change sector, we believe that blended finance represents a potential option to attract and scale-up private sector investment and engagement in the sector. 

To explore the potential of blended finance in WASH and provide recommendations based on our experience in India, this three-part blog series aims to:

1. In the first part, unearth reasons for limited private sector financing, esp. in WASH infrastructure, and if introducing blended finance may improve this outlook.
2. In the second part, list prevailing options in India for blended financing in WASH infrastructure projects and how these can be scaled up.
3. In the third part, assess reasons for limited blended finance in WASH programs, list prevailing examples for blended financing therein, and how these could be scaled up.

Systemic Challenges of the Private Sector across Stages of WASH Infrastructure Project Development

WASH Infrastructure Design Stage 

WASH project design continues to be unilaterally undertaken by relevant government agencies. This usually results in untenable expectations from the private sector like short delivery timeline, unrealistic penalty clauses, skewed payment terms, etc. Additionally, project design often fails to consider emergence of innovative WASH technology and continues to retain tried and tested low-cost solutions. 

WASH Infrastructure Procurement Stage 

Private-sector partners start receiving detailed information of the WASH project at this stage, i.e., when most technical parameters are frozen and there is little scope for exploring private sector recommendations for technical and commercial modifications. This creates gaps in communication, information, and project appreciation between the public and private sector. At the same time, proposed bidding terms have often made it difficult for small and medium enterprises to qualify or place themselves competitively against larger and more well-established players. 

WASH Infrastructure Construction and Operations Stage 

Delays in land acquisition, design approvals, regulatory clearances, etc. result in cost overruns for the private sector. Delayed payments are another significant challenge for private sector WASH project developers and investors. These financial risks hinder debt raising processes. Equity investors, even if they do agree to higher risks, are unclear about exit options and project returns. Availing blended finance options also remains a challenge as such options are miniscule and financing institutions offering these solutions continue to deploy conventional due diligence and risk estimation mechanisms.  

The balance sheets of most public entities are stressed. Thus, even if budgets are allocated, our financial partners have requested for sovereign guarantee before deciding to invest. – Rajneesh Chopra, VA Tech Wabag

In summary, challenges such as lack of collaboration at the planning stage, imbalanced contracting terms, information gaps etc. leads to caution and, in some cases, reluctance on the part of the private sector to invest in WASH infrastructure development. 

There is limited awareness amongst financial institutions (FIs) about the FSSM sector; this combined with limited openness amongst FIs in using government payments as collateral creates challenges for private sector in credit raising. – Sakshi Gudwani, BMGF 

Potential Solutions to Enhance Private Sector Investment in WASH Programs

Engaging private sector as WASH project co-developers 

The government should explore ways to undertake ongoing private sector consultation starting from the design stage. The objective of this consultation would be to secure public-private convergence and co-develop WASH projects by understanding each other concerns and brainstorming potential solutions. While the government may not be in a position to accept all suggestions, such consultations will help unearth opportunities and resources (new ideas, finance, technology, knowledge, etc.) from the private sector. Similarly, for the private sector, it will help address some of the information gaps, reduce risk, and potential cost overrun. 

While this approach can initially be piloted through aid-funded programs, similar to our Water for Women-funded work, scaling up will require policy support.  

Change in mindset is required… The Government has to see private sectors as a partner in development and not just vendors. – Diane Jegam, Proparco

Enhancing bankability of WASH projects  

While efforts are being undertaken by the government to reduce the financing gap through CAPEX & OPEX efficiencies, mobilizing tariffs, taxes, and transfers are equivalently important. There is an urgent need to rationalize citizen expectations towards tariffs and taxes, which will help the government enhance their WASH budget and repay the private sector.

While policies are already in place, deeper community engagement would be required to instill behavior change in this context.

Scaling-up blended finance ecosystem 

Blended finance facilities from donor and multilateral agencies can provide security to private sector and encourage private investment. Blended finance instruments, like concessional debt/ equity, technical assistance, credit guarantees, etc., should be developed to leverage private sector investment. We will discuss specific blended finance options in part 2 of this blog series. 

Authors

Rajneesh Chopra, Global Head – Business Development, VA Tech Wabag Limited 
Diane Jegam, Regional Head, South Asia Proparco Groupe AFD 
Ankit Tulsyan, Sector Portfolio Management – WASH, AFD 
Sakshi Gudwani, Senior Program Officer, Bill and Melinda Gates Foundation 

Views expressed by the experts are personal and do not necessarily reflect the official policy or position of the organization they represent.