Tobias Schmitz: The Sanitation and Hygiene Fund is a new UN entity on the international scene. Can you give us some background on the thinking around its emergence?
Wash has always been the poor cousin of the engineering dimension of water infrastructure. While there are people who are passionate about sanitation, within wash it is the ‘Cinderella’ and menstrual hygiene doesn't even get a mention in the fairytale, ironically.
The Sanitation and Hygiene Fund came into existence in July 2021 and became operational towards the end of that year with the appointment of a board. Some work had been done before that around the analysis of the funding gap - which is in the billions – as well as the model for the Sanitation and Hygiene Fund, which is to focus on becoming a global fundraising, or rather fund leveraging, entity for issues that have been woefully underfunded for far too long. I knew full well that ODA funding is on the decline: overall levels of funding are on the decline and beyond that a lot of the philosophy behind ODA is being called into question in some emerging markets which are evolving from lower income to middle income where the economy and the middle class is growing rapidly, but there are still communities without access to vital services such as water and sanitation. With this in mind, the development model needs to be oriented towards working with ODA, but also making sanitation more open to investment from other partners and sectors. We have been in discussion with partners and multilateral banks but also with the large investment houses which do not understand the sanitation economy or the revenue flows (yet) and need to see where the entry points are.
At SHF we see ourselves at the beginning of the evolution of the sanitation economy: you can put an economic value to the sanitation economy in terms of the economic value of the goods and services (and jobs) that flow around it. We want to raise awareness around this: it provides a route out of the pure reliance on ODA funding as well as playing into the increased interest of private capital in the sector and important small and medium enterprise growth. Beyond the social and human impact of investors, there is a good revenue stream to be recouped for investors.
Tobias Schmitz: Generally, the private sector will have an eye on revenues, and there are also low-income communities which may be more difficult to reach: how does the SHF approach sit in the context of ‘leave no-one behind’?
That is precisely where we see our value added in the sector: There is a bottom layer at the base of the pyramid such as humanitarian situations and refugee situations which require specific responses such as those of the ICRC. Above that, however, there are places where there is a massive potential for the sanitation economy and private capital, but it requires de-risking strategies through grant finance which can be done in the same way as has been done for off grid energy. As a UN organisation, we are not seeking to become a ‘regular’ investor. There are other organisations which are doing fantastic work: water.org, water equity, the IFC , the ADB, etc. - are all investing in the sanitation economy and often with utilities, which is essential but you need to take a very long term view particularly in low income countries. We are a grant-based organisation: we do use the language of investment but being a UN organisation, and some of what we are talking about is aspirational and does to some extent imply reform of how development finance, including at the UN, has worked so far.
Tobias Schmitz: Thank you for this clarification. Going back to the SHF itself, how did you go about building your portfolio in the period leading up to your launch?
Dominic O’Neil: When we started, we had an initial tranche of US $ 30 million from the Dutch Government and we now have a further US $ 16 million from the Swiss government. This is a significant amount of funding by itself, but we do know the overall funding gap runs into billions. We are therefore designing what we see as a very innovative form of sanitation financing which, had I known about this when I worked at the environmental health advisor for DFID, I would be walking down the corridors to the private sector department so say: there is an opportunity here for job creation in SME’s and to have human and social impact. But quite frankly as I have come back into the sector recently, I just have not seen that innovation being taken to scale. There is a lot of investment in utilities and multilaterals that are doing fantastic work. But you bring it back to what we want to do in the realm of ‘leave no-one behind’, a lot of the people we want to target will not be anywhere near piped water or piped sewerage. There are a lot of ideas around for off-grid sanitation such as container-based solutions, immediate waste recirculation, etc.
Tobias Schmitz: That takes me to the question around the investment opportunities that you mention: there seems to be a checklist which you are looking at in which guides your decision making?
Yes, exactly, we do, we have a long list in terms of our priority countries, which we have adapted to align with the investment climate as assessed by, amongst others the World Bank and the GLAAS report. That will become more refined as we go along because a lot also relates to government willingness to think differently on sanitation. The countries where we are currently engaging are Nigeria, Kenya and Uganda. We have others which we are considering such as Benin, Sierra Leone, Burkina and it will all become clearer when we have done our proof of concept. Kenya and Nigeria in particular are ready for a rapid explosion of the sanitation economies, and Kenya has some of the best examples in Sub Saharan Africa of such opportunities with companies like sanergy and sanivation where there are excellent examples of what is possible.
Tobias Schmitz: It is interesting that you mention Nigeria, Kenya and Uganda because all three of them are on the threshold of becoming middle income countries, they have huge backlogs on sanitation, and on this cusp of a wave towards middle income status and yet with huge disparities in access to sanitation. So, I am wondering what the opportunities are that you see in these countries.
Dominic O’Neil: Well, the opportunities lie in looking at our proof of concept and as we start off looking at our own portfolio, we need to be very conscious of risk. If we had a low risk appetite, we would perhaps be starting in countries like India where there is a lot of investment readiness. However, we have our own capacity issues as well to be mindful of and we are building our track record: we have one shot at this.
Tobias Schmitz: So how do you take those decisions and take the rights steps before committing your first dollars into a project?
We have a very strong board with expertise on global finance and development which is guiding us, and they are helping us to ensure that we do take the right decisions from the start and so that the first engagements we make in a country work. At the moment, we have three lines of activity: the Technical Assessment consisting of the prefinancing component, building a pipeline of grants, and the financing phase.
In the preparatory phase we are looking also at the enabling environment as well as working around existing blockages to the take up of financing, working through multistakeholder platforms, and communicating with the private sector about the potential for growth. We know that there is an existing set of actors in the sanitation economy, and we do not aspire to be a multibillion-dollar entity. We will be successful when we catalyse and activate the regular financial infrastructure to do what we want it to. Our focus will be on highlighting proof of concept cases and to be a disruptive force that highlights pathways to scaling up sanitation solutions.
We believe that if we can present cases which are working, they can be packaged for investments beyond impact investments and reach out to larger scale funds such as pension funds. Investors in many cases do not necessarily want the kind of data that is used by multilateral and bilateral donors: they are looking for a combination of numbers with more qualitative, experiential data and information from customers or clients. Of course, the types of impacts they are seeking would differ from one investor to the next.
We believe there is a compelling economic - and social - impact case to be made for investment in sanitation economies and that is what we at SHF are striving, and driving, for.