No financial de-risking without policy de-risking, both are essential for making the water sector viable for investment. However, de-risking always comes at a cost to someone — often taxpayers or philanthropic donors.
Published on: 22/07/2025
During the June Finance Connect session, we gathered sector professionals to dig deeper into a concept that is both increasingly common and often misunderstood: de-risking in the water sector. With inputs from Mr. Adri Asmoro from Indonesia’s Public Development Bank PT Sarana Multi Infrastruktur, and a rich discussion among participants, we explored definitions, the instruments and implications of de-risking in water and sanitation finance.
There is an essential distinction between policy de-risking and financial de-risking:
Policy de-risking refers to non-transaction-specific measures that improve the overall environment for financing investments in water and sanitation. These include reforms in sector governance, regulatory clarity, or national investment plans.
Examples cited included the establishment of an independent water regulatory authority, such as in Kenya (WASREB), Rwanda’s national water investment roadmap (WASAC Vision 2050), and the Philippines’ dedicated public-private partnership framework for water and sanitation. These initiatives aim to create a predictable, transparent landscape that can attract long-term investment.
Financial de-risking, on the other hand, involves transaction-specific instruments that directly reduce, share, or transfer risks. These often come into play when policy reforms alone aren’t enough to bring investors on board – which is... very frequent.
Several instruments are used for financial de-risking. These financial instruments work by shifting part of the risk from the private sector to public actors — including donors, multilateral banks, and development finance institutions — to crowd-in (e.g. encouraging or attracting) additional capital.
To encourage investment in the water sector, especially where (perceived) risks are high, several financial de-risking instruments can be used. These, either spread the risk among multiple actors or transfer it to public or philanthropic institutions.
Below is a summary of six key instruments, accompanied by examples and indicative loan sizes:
What it does: Public or donor-backed guarantees cover part of the losses in case a borrower defaults. This reduces the risk for lenders and can improve access to credit for water utilities or service providers.
Examples: In India, a partial credit guarantee for municipal water infrastructure projects enabled commercial banks to lend to local water providers, where previously they had no track record (India Water Infrastructure Guarantee Fund). In Egypt, the Multilateral Investment Guarantee Agency (MIGA) backed a wastewater treatment public-private partnership giving investors assurance against political risk.
What it does: Combines concessional finance (e.g. grants or low-interest loans) with commercial capital. The concessional component helps make a deal attractive by absorbing more risk or improving returns for private investors.
Examples: In Cameroon, donor funds (PIDG and GuarantCo) provided a first-loss cushion to attract local currency loans for expanding peri-urban water systems (40 million USD loan and 27 million USD guarantee to leverage 105 million USD in private investment). In Kenya, the Water Sector Trust Fund unlocked concessional loans to small private water operators de-risking commercial bank lending to them.
What it does: Aggregates multiple small projects or borrowers into one larger investment vehicle, such as a bond issuance. This improves efficiency and risk diversification, making the investment more appealing to institutional investors.
Examples: In India, the Tamil Nadu Water Pooled Fund allowed municipalities to jointly issue bonds, reducing individual credit risk and attracting private capital for small urban water projects. Loan sizes were typically around 6 million USD. In the Philippines, Manila Water issues sustainability bonds (500 million USD) to finance wastewater infrastructure.
What it does: Public funds are disbursed only when agreed results (e.g., number of households connected to water supply) are achieved. This can align incentives and ensure public money is tied to performance.
Examples: In Mozambique, the output-based programme from the World Bank ensured private water utilities received payments only after providing water access to low-income areas totalling 42 million USD. Water.org provides concessional capital to incentivise microfinance institutions to offer small water loans, which are repaid based on uptake metrics (about 120 million USD).
What it does: Currency hedging or local currency lending help reduce the risk of exchange rate fluctuations, which is a major concern for investors operating in volatile currency environments.
Example: The Currency Exchange Fund (TCX) provides local currency lending options to avoid FX mismatches in developing countries. These are often large-scale portfolios across multiple countries. In Ghana, TCX de-risked a water infrastructure investment by converting USD liabilities into stable local currency obligations (more than 20 million USD for each project).
What it does: Instruments like political risk insurance or contingent credit lines help protect investors from specific risks (e.g. regulatory changes, natural disasters), giving them more confidence to invest. Quick access to funds in case of disaster is useful for maintaining water services during shocks (country limit is set at 1 billion USD or 0.5% of GDP (whichever is less).
Examples: African Risk Capacity provides a sovereign natural disaster insurance pool which can be linked to protecting revenues of water utilities during droughts. The Latin America & Caribbean World Bank’s Catastrophe Deferred Drawdown Option, which provides quick access to funds in case of disaster, is useful for maintaining water services during shocks (the country limit is set at 1 billion USD or 0.5% of GDP (whichever is less).
In practice, a public development bank (PDB) or a financial institution uses a combination of all these instruments when providing loans. The image below shows the different products from Indonesia PT Sarana Multi Infrastruktur (Persero) for financing SDG investments.
Beyond direct financial instruments, the discussion recognised technical assistance (TA) as a powerful form of non-financial de-risking. Helping governments and utilities prepare investment-ready projects (some bankable, some not), navigate complex financing options, and strengthen institutions is often just as impactful — if not more — than providing a financial guarantee.
In fact, many participants agreed that TA is the glue that holds de-risking efforts together. Without it, even the most generous financial offer might fail due to human capacity constraints.
While de-risking is often promoted as a way to attract finance efficiently, it always comes at a cost to someone — often taxpayers or philanthropic donors. This raises the critical point that de-risking instruments are, in effect, public subsidies, just dressed in different financial clothing. And like all subsidies, they must be optimised. When we deploy public money to absorb risk, it is not neutral — it has implications for equity, for incentives, and for sustainability.
For example, what happens after a donor-backed guarantee programme ends? Do microfinance institutions continue lending to the water sector, or do they withdraw once the subsidy disappears? This question of “sustainability beyond the instrument” is central. Participants in the discussion advocated for risk-sharing mechanisms rather than simply first-loss instruments — where both public and private actors bear a share of the risk, aligning their interests more meaningfully.
It was also noted that while equity principles are vital in how grants and loans are allocated in the sector (for instance, loans from commercial banks to large utilities that can repay loans, while public finance would ideally be allocated to non-bankable rural areas), financial instruments themselves are not inherently fair or unfair — they reflect market assessments and incentives.
Interest rates and high costs of capital in many low-income countries aren’t about fairness — they’re about risk. What a lender charges is driven by their perception of that risk. So, the real challenge becomes twofold:
If we want more equitable outcomes in repayable finance, then we must target existing de-risking tools carefully, guided by development objectives. For instance, when providing a guarantee to a microfinance institution, you need to ensure that the guarantee is associated with lending to specific marginalised population groups that would not have access to credit otherwise.
One message from the de-risking discussion stands out:
"Public money used to de-risk private capital must be used wisely, strategically, and transparently — because in the end, someone always pays the bill."
Financial de-risking is not just theoretical — it's actively reshaping the water finance landscape. But it also reinforces a core theme from this, and the previous sessions: each of these instruments represents, in fact, a public subsidy, since only the risks are shared, not the rewards. As such, it must be deployed with equity, transparency, and sustainability considerations in mind. Let’s make sure that de-risking delivers value not just for investors, but for the people and communities who rely on water and sanitation services every day.
Policy de-risking comes at a cost as well (having a well-performing regulator, having the capacity in public institutions to prepare projects, providing TA), and these costs come almost exclusively from the public sector. By investing public money into policy de-risking more scale can be achieved than by financial de-risking only. And often policy de-risking is a precondition for financial de-risking.
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