Across the African continent, water infrastructure is under increasing strain. The compounding pressures of accelerating urbanisation, decaying legacy systems, climate change and chronic underinvestment in public infrastructure over decades mean that both the public and private sectors must urgently mobilise towards solutions.

The African Development Bank estimates that the continent's water and sanitation infrastructure financing gap runs to tens of billions of dollars annually. Already constrained public budgets, development finance institutions and multilateral lenders cannot close that gap alone. Private capital markets, with their scale and appetite for yield, represent the most significant untapped source of infrastructure finance on the continent.

Private investors require predictable, risk-adjusted returns underpinned by credible legal frameworks, which infrastructure projects in emerging markets cannot always realistically offer. Yet sustainable development imperatives and ESG incentives continue to drive the need for investment in these areas. Green bonds have played an important role in growing the sustainable finance market but have also attracted criticism for their susceptibility to greenwashing, with a high risk that sustainability drivers are not matched by substantive outcomes, creating ongoing risk for investors.

Outcomes-based bond structures are a transformative instrument in this context. These instruments create a formal, legally enforceable link between financial terms and independently verified real-world outcomes, offering private investors a direct connection between capital and impact. They are characterised by a variable component of financial return to investors, where that variability is determined by whether agreed environmental or social outcomes are achieved and verified. This model ensures that the sustainability incentives of the bond are matched by substantive outcomes. For developing economies in particular, these structures are compatible with blended finance approaches, enabling the strategic use of concessional or philanthropic capital to de-risk investment and enhance returns for private investors.

The application of outcomes-based finance to nature-based solutions for water security is a natural fit. By monetising environmental outcomes, it becomes possible to construct a financial instrument that is credible to capital markets investors while directly funding the kind of innovative solutions that water security demands.

Webber Wentzel recently advised FirstRand Bank on the structuring and issuance of South Africa's first outcomes-based water bond. The bond finances a large-scale, nature-based water security initiative focused on removing invasive alien plants (IAPs) in strategically important Western Cape catchments — a proven method of increasing streamflow into major dam systems and strengthening long-term regional water security. The science underpinning this intervention is well established, providing confidence to investors and translating into greater water availability across the user base.

The legal architecture required to establish this instrument is complex and novel in African development finance, demanding robust and objective outcome metrics, clear contractual frameworks and co-ordination across multiple stakeholders. The transaction structure developed for this bond is designed to be replicable and deployable across different catchment systems, issuers and capital markets throughout the continent.

As investor confidence in these structures matures, outcomes-based water bonds have clear potential to become a standard tool in the African infrastructure finance toolkit, channelling private capital at the scale the continent’s water crisis demands.

Written by Khurshid Fazel, Partner at Webber Wentzel