We have been in Cambodia this week to launch the world’s first Development Impact Bond (DIB) in the WASH sector. In this post, we share three reasons why we decided to invest.
The Foundation is providing the upfront investment for iDE to deliver the third phase of its successful sanitation marketing programme, SMSU 3. The aim of this programme is to achieve 85% coverage in six provinces of Cambodia and achieve 1,600 open defecation free (ODF) villages—in line with the Cambodian government’s national strategy.
Our investment will be repaid with a modest return, but only if results are achieved. USAID has committed up to $10m for outcomes payments, which will be triggered for every village that achieves ODF status.
Although this DIB is relatively straightforward compared to previous impact bonds, it is certainly a more complex arrangement than a grant, and has taken longer to get off the ground.
So why did we decide that a DIB was the right approach?
1. To align incentives and focus on achieving ODF
iDE’s sanitation marketing programme in Cambodia has successfully supported the uptake of latrines: between 2009 and 2018, sanitation coverage increased from 29% to 67% in the six provinces where iDE worked.
While that is a remarkable result, we know that the public health impacts of WASH are achieved when all households have use safe sanitation. The goal of SMSU 3 is therefore rightly on open defecation free communities.
The DIB structure helps reinforce that goal: by focusing on outcomes rather than inputs, iDE has more flexibility to adapt its programme to achieve results.
This is particularly important as the remaining population without latrines often has more complex barriers to securing access to sanitation. Part of the SMSU 3 programme will be testing new strategies to support these households.
2. To shift our role from grant maker to impact investor
This DIB is the culmination of a six-year partnership with iDE—we co-funded the first two phases of its sanitation marketing programme in Cambodia.
We were keen to support the third phase of their programme but—rather than being the scale funder—we wanted to shift our role to better reflect our core approach of using our funds as risk capital.
The DIB allows us to do that: our investment is 100% at risk and USAID will only make outcomes payments when a village achieves ODF status.
3. To demonstrate the role of innovative finance in WASH
The World Bank estimates there is a financing gap of $114bn per year to achieve SDG 6 for water and sanitation. New sources of public and private finance will be needed to meet this gap.
While this DIB does not in itself bring new funding sources, we hope it will demonstrate how impact investors—who have historically stayed away—can engage with the WASH sector.
And in the longer term, we hope it might be an example to help mobilise domestic public funding by minimising the risk for governments looking to invest for the first time in WASH services and ensuring they only pay for results.
This is just the beginning of the partnership, and the hard work of implementation is just getting started. We will report back on how the DIB is progressing over the four-year programme, and look forward to sharing the results.