Funding Water and Sanitation Business at the Bottom of the Pyramid

By Katie Bessert, Maximpact guest blogger

Today’s global water and sanitation crisis claims over 3 million lives every year according to data from the World Health Organization (WHO), the majority of these in communities at the bottom of the socio-economic pyramid (BoP). Finding answers to this problem will require more than government funds and charitable donations. According to recent World Bank research, in order to improve quality and availability for the poorest communities, we need to build sustainable independent businesses that meet a variety of water-related needs.

My colleagues from the Colorado State University Global, Social and Sustainable Enterprise program and I are now taking part in a project to identify innovative ways to fund small and medium-sized enterprises (SMEs) bringing solutions across the water and sanitation sector to BoP communities. Our findings so far shine a light on the water challenges facing the world, and they provide insight into how impact investors and funds can be part of the solution.

The need for private intervention

The WASH (water, sanitation and hygiene) sector has historically been an expensive and risky market for investment. Yet it has potential: For every $1 USD invested in global water and sanitation efforts $9 of economic value are returned.

However, to tap into this inherent economic value it has usually been necessary to leverage local government funding to finance massive infrastructure projects that often take several years to complete. These infrastructure projects are rarely directed towards the poorest BoP communities where the vast majority of deaths and illnesses from water-related diseases occur. For example, the majority (73%) of Calvert Investment’s water fund is invested in infrastructure projects and utility companies, of which 48% are based primarily in the U.S.

There is evidence, too, that the private sector is already bearing the costs and reaping the rewards of WASH projects. A large percentage of funding for improving water sources and increasing access to sanitation already comes from the domestic private sector in the form of tariffs, initial capital investments, and recurrent costs. A 2012 WHO report on sanitation and drinking water found that 44% of reported funding for the WASH sector came from household contributions in comparison to just 18% contributed by government. Currently, the WHO reports, the median government investment for water and sanitation is only 0.48% of GDP, indicating a lack funding for the projects that are necessary to reach the Millennium Development Goals for water and sanitation.

This makes it clear that it is time to shift focus away from government funding towards partnering with the private sector.

Promising models

Addressing this water issues at the base of the pyramid means first identifying appropriate technologies and solutions for individual communities. There are a variety of local solutions for these global problems; including in-house latrines, public latrines, borehole wells, decentralized water purification systems, safe household water appliances, water vending machines and community-based water distribution centers; and it’s important to find the right one for each case. Assuming that there is a blanket cure for the diverse problems of water access and sanitation can prevent growth in this important market while evaluating the specific needs and capabilities of each community is key to furthering models with promising financial return and successful impact. Once the right approach is identified, investors can provide working capital to those SMEs that offer appropriate solutions.

Several promising models are now emerging for investable WASH sector SMEs:

Sanergy employs a unique franchise model that allows for the installment of affordable latrines. These public latrines are owned and operated by individual entrepreneurs. The units are serviced on a daily basis and when possible human waste is converted into a biofuel or organic fertilizer which provides another revenue stream for the franchisee. 35% of the world’s population lacks access to adequate sanitation facilities so the market potential for businesses like Sanergy is massive.

Grundfos LIFELINK delivers clean water to rural communities by setting up community water distribution systems from uncompromised groundwater sources. Each project is funded through partnerships with local banks and private investments. Community members purchase water credits through mobile money transfers (M-Pesa) and once a month the money spent on purchases for the water credits are forwarded to the local community bank account and the savings from this account are used to repay the loans.

Montana-based Habihut LLC has successfully launched three solar powered water kiosks in Kenya. These kiosks deliver water, contain a solar-powered cell phone charging station, and sell prepaid phone cards. Based on this successful initial launch the company plans to deploy their technology with a Hot Spring Micro-Franchise initiative. Franchisees can generate revenue from four distinct streams: Billboard advertising, cell phone charging, prepaid cell phone card sales, and water sales.

Beyond capital

Poor communities and entrepreneurs serving the BoP are often in need of not only working capital but advice on the business skills necessary to make the projects self-sufficient. The lack of local financial expertise and business acumen is a challenge to this grassroots method of delivering sustainable change. The success of this approach depends upon a conscientious deployment of capital, yet it is crucial to leverage the local entrepreneurial capacity against the challenges facing each community to deliver significant social and financial return.

About the author: Katie Bessert is a graduate student in the Colorado State University Global, Social and Sustainable Enterprise program. This summer she will be working with the charity Water for People as part of research team investigating the uses of crowdfunding as a source of capital for small businesses in the WASH sector.

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