Image © Water Supply and Sanitation Collaborative Council
This week, water and sanitation professionals were planning to meet in Kenya for the conference “Innovate 4 Water: Accelerating Financing of Climate SMART water and sanitation solutions”. With the increasing spread of COVID-19, the event has been postponed. What shouldn’t shift, especially in light of recent events, is our focus on improving sanitation services worldwide. We take this opportunity to reflect on the role blended finance can play in advancing access to adequate sanitation for all.
Water and sanitation pose a significant development challenge, and access to adequate financing is a critical barrier to improving access to water and sanitation. According to WHO and UNICEF, 4.2 billion people still lack access to safely managed sanitation. The capital costs of achieving basic sanitation for all by 2030 are estimated at around $19.5 billion annually, while safely managed sanitation for all (the ultimate goal) will cost $49 billion annually. These staggering figures exclude operation and maintenance costs of existing infrastructure, such as wastewater treatment facilities and latrines. Closing the financing gap for sanitation will require tackling foundational issues, increasing the creditworthiness of sanitation service providers, and pooling investment opportunities to reach scale.
Tackle the stumbling blocks to unlock urgently needed resources
Water and sanitation receive much less blended finance than other sectors such as energy, financial inclusion, and agriculture. And, relative to water, sanitation projects are even less likely to mobilize blended finance. Looking across Convergence’s database, 70% of blended finance transactions in the sector have targeted water supply services, while only 11% have aimed at sanitation and wastewater. Several barriers need to be addressed to make way for the use of diverse financial instruments for sanitation:
1. At the enterprise level, seek transformation of small and informal businesses into financeable distributed sanitation service providers. Power companies and cell phone service providers often have a national mandate. By contrast, most sanitation services are provided locally by small, informal businesses that engage in emptying latrine pits and similar work. These companies cannot provide the required financial track record and scalability investors and funders are seeking. However, decentralized solutions are clearly needed, because universal access to sanitation for all will not be achieved with large, centralized sewerage systems only. There are ways to improve the financial and operational performance of off-grid service providers. For example, the local government of Wai, India, introduced a performance-linked annuity model for scheduled desludging. By switching from on-demand pick up of fecal sludge to scheduled desludging, this model brought down costs of fecal sludge management and introduced regular, steady payments from customers. At a policy level, improving the regulatory environment for sanitation is important because business models depend on secure mandates.
2. Build awareness and step up advocacy around sanitation. People too often regard sanitation as a taboo topic, locking important discussions about health, toilets, and human waste behind closed doors, away from public engagement. By contrast, safe water and clean energy are topics politicians and civil society groups often discuss publicly. Overcoming this taboo requires awareness campaigns, social marketing, and leadership among civil society and government alike. Placing sanitation higher on the agenda and openly discussing the sector’s challenges will generate interest from funders and investors.
Attract new actors and impact investors to the sanitation sector
We have seen successful blended finance transactions in sanitation. One example is Sanergy, a social enterprise in Nairobi, Kenya, that designs, manufactures, and then leases low-cost, high-quality “Fresh Life Toilets” that collect human waste in containers. Sanergy’s employees then collect and deliver that waste to a central processing facility for conversion into various products. The company initially received design-stage funding from Massachusetts Institute for Technology (MIT) and USAID, and later went on to catalyze growth-stage investments from Acumen, Grand Challenges Canada, SpringHill Equity Partners, and Eleos. More recently in 2019, Cambodia Rural Sanitation Development Impact Bond (DIB) launched, representing the world’s first Development Impact Bond for sanitation. The DIB targets the development of rural sanitation markets in six provinces in Cambodia through the NGO iDE’s Sanitation Marketing Scale Up program. It received upfront funding from The Stone Family Foundation. USAID will pay up to $9.99 million in outcome funding based on the achievement of pre-determined results by iDE.
Both the DIB and Sanergy demonstrate how blended finance can be used to bring new funders into the sanitation sector. However, these transactions remain small; each of these deals is under $10 million in size. Our 2019 data brief on water and sanitation reported that the average transaction size of blended finance deals in the water and sanitation sector was $76 million. Unsurprisingly, the vast majority of these transactions were water infrastructure deals. As discussed in an earlier blog post, pooling is one way to get around the ticket-size constraint, and diversify risks for investors. For example, the Karnataka Water and Sanitation Pooled Fund in India raised USD 22.7 million for water supply and sewerage infrastructure development in eight localities within the Bangalore Metropolitan area in Karnataka, India. It benefitted from a partial guarantee from USAID. Moreover, our case study on the WaterCredit Investment Fund 3 demonstrated how WaterEquity scaled affordable loans for safe water and for toilet construction in India, Indonesia, Cambodia, and the Philippines.
Mix traditional and innovative approaches to close the sanitation financing gap
Blended finance cannot be the primary answer to the sanitation challenge. ODA and philanthropic funding will remain crucial sources of financing for achieving SDG 6. However, private finance, bolstered by well-targeted subsidies from local governments and grant funding from donors and philanthropic actors, can offer an additional form of much needed financing to help achieve SDG 6. As sanitation practitioners increasingly get interested in blended finance, they should bear in mind this thought from Louis Boorstin of the Osprey Foundation: “Even the most creative of blended financing won’t go far without improving the sanitation sector’s fundamentals through stronger enterprises, clearer regulations, and innovative approaches.”
Are you working on a blended finance transaction in sanitation? Contact us to learn more about listing your transaction on our matchmaking platform. This can help you gain additional visibility with potential funders and investors to secure additional capital.