WHAT IF... you raised your revenues by selling different parts of your offers to different customers?
By identifying and strategically deploying different funding, investment and revenue sources, you may be able to close the financing gap of your water, sanitation or resource management business. This can be done through e.g. a co-financing agreement with a local utility where you share the costs and revenues for providing a certain service. Alternatively, you can also integrate new innovative financing approaches like blended finance or result-based payments. In this way, you may be able to attract private investors that would be willing to cover the remaining capital required.
Generally, by combining various sources of financing via customers, public institutions, development organisations or investors you may be able to overcome the initial financing hurdles. This may allow you to meet your investment requirements and successfully maintain and expand your business in the water, sanitation or resources sector.
Turning challenges into opportunities
The willingness and (particularly for customers from the base of the pyramid) the ability to pay for basic services around water, sanitation and waste management as well as environmental conservation are low. Furthermore, prices or tariffs for basic services are often regulated. This applies e.g. to drinking water or treated wastewater for irrigation. This becomes challenging for entrepreneurs who seek to close service gaps in such areas, as revenues from services are often not sufficient to cover the costs of setting up and running a business.
Another challenge for businesses, particularly in water and waste related sectors, are high initial investment costs. As these cannot be recovered quickly, businesses sometimes have to financially bridge very long pay-back periods (OECD, 2018).
On the other hand, public institutions, donors or impact investors struggle to invest their resources effectively and efficiently to sustainably extend services to underserved communities. The Take Money from Everybody strategy provides an approach through which your business may be able to connect the limited willingness and ability to pay of customers with the investment challenges of other actors.
Moving towards a strategy
To overcome financial gaps in your business model, you should analyse if you generate added value that could be relevant for third parties, who could then become additional customers beyond the direct users of your service or product. If you extend water supply services to underserved people for example, this may benefit utilities who have the objective to close service gaps, or donors who seek to contribute to SDG 6.
For this purpose, it is recommended to analyse if you generate a type of impact that is relevant for others (government institutions, donors, or impact investors) or if your services or products are supporting the mandate or strategic objectives of any sector institutions.
In case of the former, there is an increasing number of innovative impact-oriented financing approaches such as blended or results-based finance. To access such funding, you sell the impact you generate to a third party to cover your costs. The case example of SOIL below shows how these can be used to extend funding sources for your business.
In case of the latter, you can explore options for co-financing, e.g. in cooperation with water utilities, local governments or development partners, with the intention of securing funding for your business operations or infrastructure investments. In return, you manage construction or service provision tasks that would otherwise have to be taken care of by the co-financing partner.
When gearing your business model towards blending different types of investments, funding and revenue streams, you have to consider that you will also increase the range of customer segments and partners you have to manage. They may need to be reached differently, could have different reporting requirements or may even be looking for completely different value propositions. In consequence, you have to distinguish and tailor marketing and communication strategies or set up different mechanisms for managing customer relations.
Despite such additional requirements, taking advantage of a wide range of financing sources and integrating funding from both public and private sources bears the potential to leverage investments and complementary income to successfully maintain and expand water, sanitation, waste or other environmental services (OECD, 2011).
Case Study 1
The social enterprise Drinkwell aims to provide access to safe and affordable water for customers in underserved urban areas. Up until now (April 2020), it employs around 50 people and is based in the US while operating in Bangladesh and India.
Drinkwell’s model combines a patented purification technology, filtration and an ATM water dispensing system. With a simple turnkey solution, customers can easily purchase clean water via prepaid cards at water ATM booths. Drinkwell is operating and maintaining these systems in cooperation with small NGOs or public utilities that provide water at a local level.
To cover capital investments and operation costs, Drinkwell closely collaborates with the utilities to co-finance the efficient and sustainable provision of local water supply through their system. Drinkwell provides the filtration technology and water ATM booths for the utilities at no cost. With the help of a micro-franchise model, Drinkwell employs local entrepreneurs to operate and maintain the water filtering system as a service. The franchisee sells the clean water directly to the whole village, thereby extending water provision to the most underserved areas.
The utilities, on the other hand, provide system housing, land, water and electricity (Chowdhury, 2019) and benefit from Drinkwell’s more efficient, franchise-based, modular filtration system with its high potential for scalability. The utility sets the price per litre with a follow-on revenue share or offtake agreement with Drinkwell and its franchisees based on end-user willingness-to-pay, the utility’s balance sheet and project financing sources (Chowdhury, 2019).
The water utility in charge of water and sanitation in the city of Dhaka, DWASA, is one of Drinkwell’s main utility partners and has already adopted more than 100 booths (figure from August 2019) from Drinkwell across the capital city of Bangladesh (Chowdhury, 2019).
Drinkwell’s model has also attracted the attention of private sector investors, allowing it to access additional funding to successfully scale its business across different developing countries. With the influx of funds from private investments, Drinkwell has expanded its operation to the city of Chittagong with a population of four million people (Chowdhury, 2019).
By building key partnerships with local utilities and taking private investors on board, Drinkwell was able to tap new sources of financing. With the additional funding from public and private sources (besides the regular revenues from its operation), Drinkwell is able to close its financing gap and is now scaling its operations to other regions.
Drinkwell water points. Source: drinkwellsystems.com
Case Study 2
SOIL (Sustainable Organic Integrated Livelihoods) is a non-profit organisation that focuses on developing sustainable and innovative sanitation services in order to increase access to safely managed sanitation in vulnerable urban communities in Haiti. Its business model takes a circular economy view by providing sanitation services from containment to treatment to reuse (see figure). SOIL mainly operates in Cap-Haitien and Port-au-Prince where customers can sign up for SOIL’s container-based sanitation service in exchange for a monthly fee (around USD 3-3.75). With this subscription, customers can benefit from the whole service including installation, weekly collection, repairments as well as treatment of waste. The collected material is then transformed by SOIL into compost. SOIL currently reaches more than 60’000 households in the cities they are operating in (World Bank, 2019).
Looking at the costs, the organisation had high initial investment costs that cannot be recovered quickly. SOIL’s initial capital investments amount to USD 200’000 including the cost of trucks, handcarts and the construction of the treatment facility (RAO et al. 2016). At the same time, the revenues from its toilet rental service as well as the sale of the compost only marginally contribute to cost recovery (RAO et al. 2016). Both user fee and compost sales are able to cover only an estimated 20 to 40 percent of its respective operational costs (World Bank, 2019). Willingness and ability to pay remains quite low for both services (World Bank, 2019). Thus, SOIL’s wiggle room to increase its prices is rather limited.
To cope with this challenge of low ability to pay, SOIL identified alternative revenue streams by selling its impact to third parties. Currently, funding from donor and government allows covering the remaining cost gap. In order to cover their capital expenditures, SOIL has further attracted the support of numerous public, philanthropic, but also to private funds (Russel, K. C., 2019), making it a good example for the Take Money from Everybody strategy.
In order to close the gap in the long run and ensure sustainable financing for scaling, SOIL is currently developing an innovative financing scheme in collaboration with the Haitian government, the World Bank and the Inter-American Development Bank based on a results-based financing mechanism. According to this mechanism, SOIL is responsible for the implementation of the service, the development banks leverage additional financing and the Haitian government disburses subsidies (World Bank, 2019).
SOIL workers in plant. Source: https://www.oursoil.org/
This policy perspective summarises key messages about the economic case for water investment, the barriers to investment and the financing gap. It charts a course for action to better value water and to facilitate water investment at scale. The Roundtable on Water Financing, a joint initiative of the OECD, the World Water Council and the Netherlands, will continue to deepen the evidence base and broaden engagement on these issues.