Blended Finance Model for Infrastructure Upgrade
Summary
A blended financing model for infrastructure upgrades in Quang Tri enabled the implementation of pressure-reducing water infrastructure that resulted in water, energy and cost savings for the water utility and had a cost recovery period of 5 years.
Due to low tariffs and lack of incentives for private participation across the Vietnamese water sector, Quang Tri lacked the necessary funds to upgrade its degraded infrastructure, which caused frequent and significant losses throughout the water distribution network (P4G, 2019).
Intervention
Partnering for Green Growth and Global Goals 2030 (P4G) funded and facilitated the partnership of four organizations to enact a blended finance model to upgrade Quang Tri’s degraded infrastructure and upon which to base a study for the potential scalability of blended finance models throughout Vietnam’s water sector (P4G, 2019). The consortium consisted of: The Asia Society for Social Improvement and Sustainable Transformation (ASSIST), a Southeast Asia-based sustainable development NGO; the Viet Nam Water Supply and Sewerage Association (VWSA), a voluntary social-occupational organization of bodies and individuals involved in the water and sanitation sector in Vietnam; Grundfos, a private-sector global water solutions company headquartered in Denmark; and the Danish Investment Fund for Developing Countries (IFU), an independent fund owned by the Danish government specializing in the provision of advisory services and risk capital for companies seeking to do business in emerging markets (P4G, 2019). The local municipal government and national government of Vietnam allowed for the blended financing model to be deployed.
In relation to the actual costs of water and sanitation services provided, willingness to pay and prices charged in comparable countries, tariffs for water-related services in Vietnam are low. All these factors generate low revenue across the water sector and discourage utilities from investing in efforts to reduce water loss due to leakage throughout the system (P4G, 2019). As such, a blended finance model was implemented to overcome the lack of funds available in the water sector for necessary infrastructural upgrades in Quang Tri.
Grundfos served as the primary provider of pump technologies to reduce water loss in the respective networks. In Quang Tri, specifically, Grundfos refurbished all of the water pumps to optimize pressure management and reduce non-revenue water in the system (P4G, 2019). Although Grundfos undertook 70% of the risk, the entire project was backed by capital from the IFU, which acted as the donor institution and safeguarded the private company from incurring capital losses (Mathiasen, 2020; P4G, 2019).
Challenges
While the use of blended financing to fund infrastructural upgrades was successful in Quang Tri, it is unclear whether the model can be viably reproduced in other towns throughout Vietnam and to what degree. Furthermore, it is necessary to note that, although they are gaining popularity in many sustainable development models worldwide, blended finance models aren’t always met with open arms (Tan, 2019). While proponents of blended financing usually cite its deployment as crucial to project scalability—especially in the water and energy sectors—critics are concerned by the potential consequences of this “privatization of aid” (Tan, 2019).
Specifically, the involvement of private sector actors in traditionally governmental spheres raises concerns regarding potential conflicts of interests and the ability (and desire) of the private sector to safeguard the public’s sustainable development interests (Tan, 2019). Therefore, while blended financing had positive outcomes in improving Quang Tri Town’s water infrastructure and reducing water loss, it is not necessarily a “one size fits all” model. As such, each local context—including the interests and incentives of all stakeholders—should be carefully and individually considered before deployment or design of blended finance models in the water sector, so as to mitigate any potential negative impacts the financing model may produce.
Outcomes
Now completed, the blended finance program for infrastructural upgrades in Quang Tri proved to be a greater success than initially expected. The Quang Tri Town pump—as well as two of the other pumps—were able to pay themselves back faster than expected, resulting in a technology cost-recovery period of only 5 years (Mathiasen, 2020; Grundfos, 2019). This was largely due to the savings in water and energy consumption that the Quang Tri water utility was able to accrue using its new, state-of-the-art pressure reducing pumps. Specifically, the implementation of new pressure-reducing water infrastructure in Quang Tri Town resulted in an annual water savings of 20,985 m³ and an annual energy savings of 100,981 kWh. In total, these savings amounted to capital savings of 14,203 USD per year (P4G, 2019). Without the blended financing model, the local water utility would not have been able to invest in this new infrastructure because it would not have been able to overcome the finance gap resulting from low revenue (i.e. highly subsidized water) and a lack of willingness among the private-sector actors to undertake high-risk investments.
References
Blended Finance Model for Infrastructure Upgrade
Summary
A blended financing model for infrastructure upgrades in Quang Tri enabled the implementation of pressure-reducing water infrastructure that resulted in water, energy and cost savings for the water utility and had a cost recovery period of 5 years.
Due to low tariffs and lack of incentives for private participation across the Vietnamese water sector, Quang Tri lacked the necessary funds to upgrade its degraded infrastructure, which caused frequent and significant losses throughout the water distribution network (P4G, 2019).
Issue
Intervention
Partnering for Green Growth and Global Goals 2030 (P4G) funded and facilitated the partnership of four organizations to enact a blended finance model to upgrade Quang Tri’s degraded infrastructure and upon which to base a study for the potential scalability of blended finance models throughout Vietnam’s water sector (P4G, 2019). The consortium consisted of: The Asia Society for Social Improvement and Sustainable Transformation (ASSIST), a Southeast Asia-based sustainable development NGO; the Viet Nam Water Supply and Sewerage Association (VWSA), a voluntary social-occupational organization of bodies and individuals involved in the water and sanitation sector in Vietnam; Grundfos, a private-sector global water solutions company headquartered in Denmark; and the Danish Investment Fund for Developing Countries (IFU), an independent fund owned by the Danish government specializing in the provision of advisory services and risk capital for companies seeking to do business in emerging markets (P4G, 2019). The local municipal government and national government of Vietnam allowed for the blended financing model to be deployed.
In relation to the actual costs of water and sanitation services provided, willingness to pay and prices charged in comparable countries, tariffs for water-related services in Vietnam are low. All these factors generate low revenue across the water sector and discourage utilities from investing in efforts to reduce water loss due to leakage throughout the system (P4G, 2019). As such, a blended finance model was implemented to overcome the lack of funds available in the water sector for necessary infrastructural upgrades in Quang Tri.
Grundfos served as the primary provider of pump technologies to reduce water loss in the respective networks. In Quang Tri, specifically, Grundfos refurbished all of the water pumps to optimize pressure management and reduce non-revenue water in the system (P4G, 2019). Although Grundfos undertook 70% of the risk, the entire project was backed by capital from the IFU, which acted as the donor institution and safeguarded the private company from incurring capital losses (Mathiasen, 2020; P4G, 2019).
Challenges
While the use of blended financing to fund infrastructural upgrades was successful in Quang Tri, it is unclear whether the model can be viably reproduced in other towns throughout Vietnam and to what degree. Furthermore, it is necessary to note that, although they are gaining popularity in many sustainable development models worldwide, blended finance models aren’t always met with open arms (Tan, 2019). While proponents of blended financing usually cite its deployment as crucial to project scalability—especially in the water and energy sectors—critics are concerned by the potential consequences of this “privatization of aid” (Tan, 2019).
Specifically, the involvement of private sector actors in traditionally governmental spheres raises concerns regarding potential conflicts of interests and the ability (and desire) of the private sector to safeguard the public’s sustainable development interests (Tan, 2019). Therefore, while blended financing had positive outcomes in improving Quang Tri Town’s water infrastructure and reducing water loss, it is not necessarily a “one size fits all” model. As such, each local context—including the interests and incentives of all stakeholders—should be carefully and individually considered before deployment or design of blended finance models in the water sector, so as to mitigate any potential negative impacts the financing model may produce.
Outcomes
Now completed, the blended finance program for infrastructural upgrades in Quang Tri proved to be a greater success than initially expected. The Quang Tri Town pump—as well as two of the other pumps—were able to pay themselves back faster than expected, resulting in a technology cost-recovery period of only 5 years (Mathiasen, 2020; Grundfos, 2019). This was largely due to the savings in water and energy consumption that the Quang Tri water utility was able to accrue using its new, state-of-the-art pressure reducing pumps. Specifically, the implementation of new pressure-reducing water infrastructure in Quang Tri Town resulted in an annual water savings of 20,985 m³ and an annual energy savings of 100,981 kWh. In total, these savings amounted to capital savings of 14,203 USD per year (P4G, 2019). Without the blended financing model, the local water utility would not have been able to invest in this new infrastructure because it would not have been able to overcome the finance gap resulting from low revenue (i.e. highly subsidized water) and a lack of willingness among the private-sector actors to undertake high-risk investments.
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Financial Solutions for Water Security |
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Financial Solutions & Economic Incentives |
References
Grundfos. (2019, May 06). Partnership reveals low-cost ways to save water and energy in Vietnam [Press release]. Retrieved May 6, 2020, from https://www.grundfos.com/ph/about-us/news/partnership-reveals-low-cost-ways-to-save-water-and-energy-in-v
Mathiasen, Emil. (2020, January 23). Notes on EcoCiv’s Call with Emil Mathiasen, Head of Group Public Affairs at Grundfos.
Partnering for Green Growth and the Global Goals 2030 (P4G). (2019). Blended finance model to reduce non-revenue water and energy consumption in Vietnam (Rep.). Retrieved May 06, 2020, from https://p4gpartnerships.org/sites/default/files/2019-05/P4G_Blended%20Finance%20Model_Final%20report_20190423.pdf
Smets, S. (2014). Water supply and sanitation in Vietnam: turning finance into services for the future (English). Water and sanitation program. Washington, D.C. World Bank Group. Retrieved May 06, 2020, from http://documents.worldbank.org/curated/en/588551468197392348/Water-supply-and-sanitation-in-Vietnam-turning-finance-into-services-for-the-future.