New results-based financing tool targets clean water for schools

Devex
By Sophie Edwards

Schoolchildren in Uganda. Photo by: Impact Water

OXFORD, United Kingdom — The Rockefeller Foundation and UBS Optimus Foundation are backing a new financing tool to bring clean water to 1.4 million Ugandan school children, saying the model can potentially be replicated across other countries and sectors.

However, questions were raised about the sustainability of the “Social Success Note” model after the new tool was launched Thursday at the Skoll World Forum conference in Oxford.

Globally, nearly 850 million people have no access to a reliable, quality source of drinking water, the subject of Sustainable Development Goal 6. The World Bank estimates that securing sustainable and quality access to water and sanitation for all by 2030 will require an additional $114 billion annually. Official development assistance for the issue is now about $8 billion a year.

The SSN is the brainchild of nonprofit venture fund Yunus Social Business, which was founded by Muhammad Yunus, the father of microfinance. It proposes a solution to the problem of attracting sufficient financing streams to the WASH sector in developing countries, specifically to businesses seeking to provide sustainable water solutions to the poor.

In this first pilot of the SSN model, the UBS Optimus Foundation will provide a $500,000 loan to Impact Water, a social enterprise, to expand its work installing low-cost UV-based water purification systems in schools across Uganda. Schools pay approximately $1,000 to Impact Water to install the system.

Impact Water will pay back the loan after five years and the rate of interest will go down if certain outcomes are achieved. If Impact Water achieves agreed upon targets, the Rockefeller Foundation will pay up to $200,000 to both pay off some of Impact Water’s interest and pay UBS a performance-based return on its investment.

The goal is to reach 1.4 million children over five years. YSB will manage the Social Success Note and oversee its monitoring and evaluation.

Speaking to Devex ahead of the launch, Saskia Bruysten, co-founder and CEO of YSB, said the SSN is designed to help social businesses access scale capital while not being diverted from their social mission by the need to meet onerous investor demands for returns.

“The social business gets financing adequate to what they need and keeps them aligned to their social mission,” Bruysten said.

YSB’s chair, Professor Yunus, added in a statement: “Social businesses around the world are gaining momentum and young entrepreneurs are getting enthusiastic about them. To support their initiatives, social businesses need continuous funding and I hope the Social Success Note becomes the leading instrument to fulfill this need.”

The SSN is one of a string of results-based financing mechanisms that have emerged in recent years, including the development impact bond, a variation of the social impact bond pioneered in the United Kingdom in 2010. Despite strong interest in the DIB model within the development community, only a handful of DIBs are currently up and running.

Bruysten said there are key differences between the SSN model and DIBs. For example, under the SSN, outcome payers are only responsible for paying a return based on performance; they do not have to cover the original investment, making it more attractive to potential outcome payers.

She added that the SSN has a simpler structure than a DIB, to reduce transaction costs and time; and that complex impact metrics are avoided in favor of simple key performance indicators linked to the number of water systems installed.

“We really wanted to make it very simple because we were worried we would alienate investors [if] it’s just too complicated,” she said, adding that the high transaction costs associated with structuring complicated deals can be off-putting to would-be donors and investors.

The value of the SSN’s simplicity was echoed by others at the launch event, including Adam Connaker, program associate at the Rockefeller Foundation; and Maya Ziswiler, head of social finance at UBS Optimus Foundation, who described the low transaction costs as “a key component” in the design and success of the model.

However, some at the session said using installation-based key performance indicators as the outcome measure would not ensure sustainability in the long run — a problem that has dogged water projects in developing countries in the past. Studies have shown that around one-third of rural water projects are nonfunctional at any given time.

Ziswiler said that while the measure was “not perfect,” it was intended to make the SSN “simple enough for investors to be interested initially.” An independent evaluator would also track other outcomes, including how the investment impacts school attendance and improved health outcomes among students, she said.

Connaker added that it would be partly up to outcome funders to check sustainability, as they would do with non-SSN grantees.

Another issue raised during the session was whether, by offering social businesses a “subsidy” in the form of a low-interest loan, the SSN could distort markets. In response, Bruysten said social businesses focused on the poor still face major challenges in accessing capital and paying interest and returns, meaning such subsidies are still needed.

“While the business model is really a relevant tool, we still think this subsidy … can be instrumental in making these types of social businesses sustainable in the long run,” she said.

The Uganda pilot is funded through UBS’s philanthropic arm, Ziswiler said, but in the future she hopes the model could be funded through the bank’s impact investing platforms via a “fund-like structure.” That could see the model extended across more sectors and geographies.

Bruysten agreed that the long-term vision for the SSN model would be replicable elsewhere, as well as funding it through a “larger pot” that could include commercial capital. YSB is exploring the idea of setting up an SSN fund in India, Bruysten said, where social businesses are often pushed to become more commercial by investors, at the expense of serving the poor.

In a statement, Evan Haigler, CEO of Impact Water, said the SSN “has great potential as a financing model that social businesses can use to grow and deliver impact at scale. It crowds-in commercial and impact investment while aligning the financial incentives and social objectives of all partners involved.”