Water Quality Is a Key Development Issue
Clean water, sanitation, and personal hygiene are key elements of human development in Vietnam’s growth. In the past two decades, the Vietnamese government put considerable effort to implementing water supply and sanitation reforms and programs with remarkable results. Access to clean water in rural areas improved from 17 percent in 1993 to 51 percent in 2020.
However, according to government figures, each year in Vietnam 9,000 people die and 250,000 more are hospitalized due to poor sanitation and water quality, while around 200,000 have cancer linked to water pollution. Urban wastewater is the largest contributor to water pollution, and in rural areas rising fertilizer and pesticide use affect water quality. Vulnerable groups like pregnant women, children, and the elderly are particularly vulnerable to waterborne diseases like cholera. In addition, millions of people endure poor air quality from burning biomass to boil water for safe consumption.
Despite the importance of clean water to achieving human development and the Sustainable Development Goals (SDGs) in Vietnam, only 1.6 percent of private investment went to water projects in the past three decades, according to the World Bank Group’s Private Participation in Infrastructure (PPI) Database. The country faces an urgent need for increased capital, technology, and expertise to upgrade infrastructure and expand water supply networks. Simple solutions, such as water purifiers, can be remarkably low-tech and inexpensive, yet significant financing challenges impede manufacture and distribution of these devices to reach the communities that need them.
Innovative Climate Finance Can Accelerate Access to Clean Water
The World Bank has been engaged with Vietnam’s rural water supply and sanitation (RWSS) sector for more than 20 years, support the government’s strong commitment to improving access to sustainable and reliable water services through its National Rural Clean Water Supply and Sanitation Strategy. Environmental sustainability and resilience was a main focus area of the World Bank’s Country Partnership Framework (CPF) for Vietnam between 2018 and 2022, with water resource management playing a crucial role in the country’s water security.
In this context, financial innovation plays a key role in mobilizing private capital for sustainable water projects by capturing the economic value of the environmental benefits achieved. One such innovation is a $50 million Emission Reduction-Linked Bond that the World Bank issued in February 2023 to mobilize private funds for a water purifier project in Vietnam. Under this project, in addition to supporting the delivery of reliable and safe drinking water, the distribution of water purifiers aims to reduce GHG emissions by replacing purification processes that rely on burning biomass to boil water.
The Emission Reduction-Linked Bond structure solves the timing mismatch between a project’s up-front financing needs and potential future revenue from carbon credits. The private sector supports climate-friendly projects through the purchase of carbon credits, which are generated after GHG emissions are verified to have been avoided or reduced. However, project developers often lack the up-front financing that is needed to begin implementation before a project can start to generate any carbon credits.
This first-of-its-kind outcome bond makes up-front funding available for a water purification project in Vietnam. This is done by creating a lump-sum payment that translates the annual emission reduction payments to be made by the carbon credit owner to the project sponsor. The World Bank Treasury accomplished this by diverting ordinary World Bank bond coupons to the project developer and linking investor returns to the carbon credits generated by the project. The project developer, Sustainability Investment Promotion and Development Joint Stock Company (SIPCO), a Vietnamese company specializing in the development of climate friendly projects, uses the upfront payment of future annual emission reduction payments to fund the manufacturing and distribution of water purifiers. A portion of SIPCO’s future carbon credit sales revenue is diverted to provide a return to the bond investors. With this financial structure, project performance risk is passed from the project developer to private bond investors.
This innovative financing mechanism supports local actors in leading the implementation of projects that will provide access to key infrastructure and services for their country’s population.
“SIPCO is proud to be associated with this innovative structure. It gives project developers like us access to finance in anticipation of future carbon revenues. That helps us move faster and expand programs that will positively impact thousands of kids across Vietnam,” said Mr. Hoang Anh Dung, Chairman, SIPCO.
Ambitious Emissions Targets, Real Social Impact
The project aims to manufacture and distribute 300,000 easy-to-use water purifiers to 8,000 schools and other community institutions across the country for free, which will provide clean drinking water to up to 2 million children. The project is expected to reduce carbon dioxide (CO2) emissions by about 6 million tons in the decade following its initiation. Each filter replaces a ton of CO2, which would otherwise be released into the atmosphere, every five years. By replacing biomass burning with water purifiers, this project expects to achieve carbon emission reductions equivalent to the quantity absorbed by 650,000 acres of forest each year.
Manufacturing and distribution of the water purifiers is in progress, with help from Vietnam’s Ministry of Education, which provides them for free to targeted kindergartens, nurseries, schools, and community homes selected for their lack of access to safe drinking water. Once the purifiers have been distributed, the project can begin to generate carbon credits after verifying the amount of emissions reduced for the previous year. When a project such as this has been operationalized, the carbon credits are often generated in a predictable pattern.