Convergence and the Swedish International Development Cooperation Agency (Sida) have co-led a Working Group on Blended Finance for Water Infrastructure Maintenance and Fecal Sludge Management (FSM). It convened over 50 representatives to discuss recommendations to mobilize additional financing for the maintenance of rural pumps and standpipes, and sanitation. This article highlights their reflections shared in the Outcome Document on Blended Finance for Water and Sanitation on the safe management of human waste.
Water and sanitation-related investments have a profound impact on other sustainable development objectives, including those tied to health, education, and the environment. In the urban and peri-urban areas of developed countries, centralized sewage systems collect human waste directly from toilets and transport fecal matter via pipes to centralized treatment facilities. In developing countries, where most toilets are not connected to central sewers, households call private operators to empty the septic tanks once they reach full capacity. Instead of delivering the waste to treatment plants, operators often dump the fecal sludge into water bodies or public lands.
The non-sewered FSM sector is primarily characterized by these small, often informal service providers, some with trucks and suction pumps but many who empty pits and transport the waste manually. Due to the lack of reliable revenue streams and scale, FSM does not attract private capital easily. And, the majority of FSM business models cannot be expected to reach break-even point within a five- or seven-year time span – a typical period for investments. Many FSM enterprises that are in business for 10 or more years are still operating at a loss. Unfortunately, in most developing countries, FSM is low on the list of investment priorities for governments, making additional government support a challenging ask. Even in developed countries, sanitation service providers receive subsidies from government budgets and cross-subsidies from other utility services to survive. Lastly, in developing countries, households are often reluctant to pay more for safer managed sanitation services.
The FSM Working Group, compromised of social enterprises, donor agencies, implementing agencies, non-governmental organizations, development banks, financial intermediaries, and impact investors, has identified several pathways to increase the operational and financial viability of FSM business models. These include waste-to-energy approaches (e.g., Safi Sana), franchise models (e.g., Jibu), and resource recovery models, that combine fecal sludge with solid waste management.
FSM needs impact-first, patient capital
Early stage grant funding can be catalytic in enabling an FSM enterprise or project to grow to a stage where it is ready to take on equity and/or debt. In this case, the blending happens at the individual enterprise level, and over time. Moreover, blended structures such as pooled, layered funds, can shift the financial risks onto funders and investors willing to bear those costs to create acceptable risk-return profiles for private investors with commercial mandates.
There must be a number of investable FSM projects/enterprises in the market to set up a pooled vehicle. Fund managers play an important role here. Fortunately, asset managers such as Developing World Markets, Total Impact Capital, and Incofin Investment Management – all Convergence members - are developing their water and sanitation capacities.
Technical assistance for capacity building
According to the FSM Working Group, FSM service providers require technical assistance to prepare the financial models and documentation necessary to effectively engage with private investors. Financial institutions, too, require technical assistance to get familiar with FSM projects/enterprises as new borrowers. While microfinance for the construction of household toilets is becoming common practice, not least through the efforts of Convergence members Water.org and WaterEquity, lending to FSM enterprises is still nascent. Technical assistance can build the capacities of financial institutions to assess the creditworthiness of FSM enterprises. When such measures are combined with credit enhancement instruments such as guarantees, funders are better positioned to incentivize financial institutions to build credit lines for FSM enterprises.
Crowdfunding to mobilize private capital targeting FSM enterprises
Several crowdfunding platforms make use of credit enhancement using donor funds, philanthropic, and impact-first capital. The platform Trine focuses on solar energy markets and received a first-loss guarantee from Sida, a Convergence member. Trine fully guarantees the first € 100 loan of each new investor. The crowdfunding platform EnergiseAfrica applies a similar model, with support from the British government and Good Energies Foundation, another Convergence member. Catalytic capital providers could work with existing crowdfunding platforms to expand their services to early stage sanitation enterprises.
Public money will remain critical for FSM
In other sectors, blended finance is often a bridging solution, leading to business models becoming fully commercially viable, with no more need for blending. However, for FSM (and many other water and sanitation services), public funding, whether through taxes or transfers, will always remain part of the solution, because the safe management of human waste is ultimately a public health objective. Therefore, funding from public institutions that include the indirect returns on improved health in their cost-benefit analyses will remain critical. Attracting private capital to investable transactions will allow traditional development aid and government funds to refocus on projects and enterprises that cannot attract private capital.
To learn more, download the Outcome Document on Blended Finance for Water and Sanitation.