Finding appropriate ways of financing sanitation for urban poor communities remains a key challenge. Approaches like output-based aid (OBA) are attracting enormous interest, and rightly so. However, OBA models aren’t appropriate for all contexts, and other approaches also need to be explored.
This report assesses the feasibility of a financing model, Progress-Linked Finance (PLF), designed to incentivise and support water, sanitation and hygiene (WASH) service providers to meet the needs of poor urban residents in a financially sustainable manner. Under the PLF model, international financing institutions (potentially including multilaterals, bilaterals, and foundations) would enter into commitment agreements with urban WASH service providers, notably utilities and municipalities.
In very simple terms, PLF can be summarised as an agreement of the following type: “If the service provider can demonstrate 3 years from now that they have met conditions A, B and C in relation to financial viability and pro-poor commitment and capacity, the financing institution will provide a grant or loan of amount X for WASH scale-up”. In reality, agreements would likely be more complex, for example entailing a series of agreements involving a number of financing institutions. Central to the model is positive incentivisation coupled with rigorous verification that conditions have been met.
On the basis of desk analysis and wide-ranging interviews with urban WASH financing experts, this initial assessment finds that the PLF concept is broadly feasible. This report explores different variants of PLF, and suggests various ways in which the concept might be put into practice.
This Discussion Paper is co-published by Water & Sanitation for the Urban Poor (WSUP) and the Overseas Development Institute (ODI). This paper is presented at this stage as a basis for sector debate, and should not be considered a definitive statement of the views of either WSUP or ODI.