Appraisal Tools for Sanitation Micro Finance
The Swachh Bharat Mission (Rural), with mission to make India free of Open Defecation by October 2, 2019, aims to bridge the affordability gap for latrines and to improve sanitation coverage across rural India. The program provides incentives to households so that tangible assistance is available for creation of infrastructure in addition to extensive motivational and behavioural change interventions. As per the SBM (R) guidelines, the incentive amount provided for households shall be up to Rs.12,000 for construction of one unit of Individual Household Latrine (IHHL). The sharing pattern amongst Central Government from the SBM(R) funds is outlined in guidelines that explicitly state that beneficiaries are to be encouraged to contribute additional funds in the construction of the IHHL to promote ownership. The SQUAT Survey estimates the average cost of private toilets desired by rural citizens in India to be greater than Rs. 21,000, which brings the average individual contribution to Rs. 9,000. For Community Sanitary Complexes (CSC), the guidelines state that the maximum support prescribed per unit is Rs.2,00,000. Sharing pattern amongst Central Government, State Government and the Community shall be in the ratio of 60:30:10 – the contribution from the beneficiary or community is to the tune of Rs. 20,000, for a facility that can be assumed to serve 15 – 20 households.
The targeting schema for IHHL incentive funding includes all Below Poverty Line (BPL) Households and certain Above Poverty Line (APL) Households from marginalized groups. Per household contributions for CSCs come out to be lower than that for IHHLs, making them a lucrative option for poorer households or even local Self-Help Groups. However,CSCs require community-level mobilization, or some level of support from the Gram Panchayat, as the ongoing maintenance of such a complex is critical to its functionality.
Assistance with this last-mile funding throughmicrocreditinstruments hold the potential to play a significant role in amplifying the effect of the SBM(R) objectives, enabling households in the bottom of the pyramid gain access to critical sanitation infrastructure. Our hypothesis is that in cases where a pre-existing felt-need for sanitation services exists, microcredit schemes for the ownership or creation of sanitation assets would have an immense impact. Microfinance lending could provide the delivery of last-mile support to the poorest of the poor in Rural India, in the form of credit to invest in this important infrastructure, designed with their needs in mind, with the financial instruments catering to their conditions. While a number of micro finance entities have started looking at toilets (more commonly IHHLs and less so, CSCs) as an asset category, there are several gaps in this space, particularly around a 360 degree risk and viability assessment approach to guide portfolio creation. Given that such risk and viability decisions are a function of multiple factors (technological, hydrological, socio – economic, behavioural and cultural), there is a strong need for a decision support system to help MFIs and other financing agencies
We propose the development of an Augmented Risk Framework for the MFIs that work in partnership with water.org, to expand their access into these markets to supplement the reach of the SBM (R) program. At the outset, this Risk Framework will include both risks associated with lending and those associated with asset utilization and maintenance. This framework will build atop the existing expertise and deep knowledge MFIs have on individual and group lending, incorporating hard technical elements of sanitation infrastructure and soft elements of societal norms and the social dimension of sanitation behaviour. This is aimed at addressing the problems traditional microfinance ventures have faced in the field of (indirectly) income-enhancing assets like toilets, in comparison to direct income-generating assets or purely consumption financing. The augmentation of existing risk models should help MFIs differentiate among different asset models across the value chain, fine tuned for the local, sectoral and program context.
Fitment with Water.org
The current call for challenges focuses on “market based approaches to address water and sanitation challenges”. In this context, we believe that this idea fits in well into the overall theme, as it focuses on putting decision making tools in the hands of key market agents (microfinance agencies) to help them improve their penetration and risk management. Given that toilet financing is a relatively nascent market, tools for better risk assessment and management can significantly improve the growth prospects of the segment.
We also believe that the integration of water.org’s existing work on WaterCredit meshes well with the aims, ambition, and capacity of the Swachh Bharat Mission, and presents a valuable opportunity to improve the delivery of sanitation assets to households in the bottom of the pyramid, a section traditional microfinance approaches have found little success with. The common goals of asset creation and improved uptake of usage of toilets and associated behavioural changes aid the integration of and synergies between water.org’s WaterCredit program and the Swachh Bharat Mission (Rural).
Approach and Methodology – Augmented Risk Assessment Framework
The assessment framework aims to augment the existing risk appraisal models of MFIs, which are traditionally geared towards minimizing lending risks. In such a model, the key variable of interest ends up being the probability of repayment of the loan. By designing instruments on demographic parameters and not including asset characteristics or project lifecycle costs, the process is - by design - not attuned to risks of non-deliverance on outcomes.
In our proposed framework, the evaluation process begins with an identification of the asset in consideration, with IHHLs and CSCs presenting different sets of risks. Asset Risks are defined for each of these as parameters which are either linked to the sanitation infrastructure being built (Infrastructure risks), or those which affect usage, operations and management of the asset (Utilization risks). These are both risk categories which significantly impact the outcomes linked with the creation of the infrastructure. Lending risks, which fall into the existing domain expertise of the MFI firms, form the base layer which this framework integrates with.
Similar to the conjunctive elimination criteria used by sanitation decision support frameworks, a set of criteria, largely based on “hard” constraints such as hydrological and climatic conditions will be created. This will serve as a first filter to examine feasibility of options. Across the three stages of collection & storage/ primary treatment; desludging & transportation; and treatment & disposal, a comprehensive set of asset options will be identified. This will also include asset options for handling of grey water. There are existing tools and frameworks (e.g. SANEX), which detail out such infrastructure options. These frameworks will be augmented, keeping the SBM(R) contours in mind, and assets will be examined on these parameters.
This category pertains to risks of continued and sustained usage of the sanitation asset created, to achieve the goal of Open Defecation Free villages, a core goal of the SBM (R) program. It deals with societal perceptions of open defecation and that on the use of latrines, socioeconomic characteristics, and other parameters to identify potential uptake or even triggering of the creation of assets in the village. It also seeks to incorporate the presence of allied water and sanitation services, levers critical to the continued use and viability of latrines. In addition to this, for CSCs, estimates of utilization and per-day usage become vital in understanding the viability of such an asset. If the operation model of the CSC includes a user charge, the willingness to pay of the target audience has proven to be a critical determinant of success as indicated in the literature.
The SBM(R) guidelines for CSCs state that they can be run on a Public-Private Partnership model, with the requisite support from the Gram Panchayat authorities, which form the base unit for the program. Self-help Groups could also be viable targets for microcredit lending to build and operate CSCs, given the importance of community-based systems. This is particularly the case if those groups would also manage the CSCs and generate revenue from them. There is evidence that giving groups ownership of community water and/or sanitation infrastructure often incentivizes them to maintain the facilities in order to ensure future income. That being said, this is dependent on the groups getting training on both management and O&M. They need to be able to track income, and build in costs for maintenance
Management and governance structures for CSCs also have been shown to be important determinants of sustainability. These parameters all impact the Utilization Risk of the asset, and have a bearing on the outcomes of improved and continued sanitation access for all in rural India. This additional focus on utilization seeks to address concerns around abandoned or ill-maintained toilets and latrines strewn all over India. This iterative monitoring framework, which can be tied into the credit repayment schedule to the MFIs, serves to keep tabs on maintenance of the asset and thus plug in the gaps of follow-up in the system. This may have greater significance for CSCs designed for a pay-and-use model.
Plan of Action
We propose a study of select districts across select states to understand the role of the prescribed enablers in the risk framework and try to estimate how they impacted the operationalization and success of a variety of sanitation asset creation models.
Step 1: Preparation (Commencement – Month 2)
A set of blocks (tentatively covering ~ 80 – 100 GPs) will be identified for creation of case studies, covering the span of success and failure stories for individual and community toilets, across hard asset limitations highlighted. This data will be drawn from the database of participating Microfinance agencies (in water.org network), as well as through independent outreach to the Districts. The aim here will be to get a wide enough spread of cases to enable comparability, to understand the causal factors of attribution, to understand what contributes to the propensity of success or failure for a particular model of sanitation services. Review reports of the Total Sanitation Campaign shall provide a starting point of examination here. In addition, we will also anchor consultations with existing microfinance players who have a portfolio/ interest in this space, to understand current appraisal frameworks and identify key gaps in the same.
Step 2: Field Data Collection (Month 3 – Month 6)
Data will be collected across the value chain of sanitation for the identified blocks and GPs, beginning from environmental conditions and socioeconomic profile, to demand and supply of sanitation assets, data on the functionality and usage of said assets, to data on the estimated O&M costs for them and the willingness to pay for these services. This will be centred on the headers identified in the Augmented Risk Framework across the Infrastructure and Utilization risk categories. The field data collection exercise will follow a case study approach to integrate both quantitative and qualitative aspects of the experience (across failure and success stories), as this will be key to understanding causal factors impacting outcomes
Step 3: Analysis of Data and Identification of Enablers (Month 7 – Month 8)
After the collection of data, we’ll employ the Qualitative Comparative Analysis (QCA) tool to identify enablers critical to the uptake and operationalization of successful sanitation assets. A statistical tool, QCA allows us to assess causation that is very complex, involving different combinations of causal conditions capable of generating the same outcome. A variant of logistic regression, QCA will be able to help us gain insights into the causal chain between the inputs (perceptions, attitudes, knowledge) and outcomes (sanitation) involved. This will result in an ordering of various risk factors (by level of impact on manifestation), and mapping of the said risk factors to observable indicators at the time of appraisal (spanning technical, economic, socio cultural and attitudinal dimensions). This will translate to data mining of the existing portfolio of MFI sanitation asset data, for lowering risk profile of future investments
Step 4: Creation of Augmented Risk Framework (Month 9 – Month 12)
With enablers identified, a portfolio of key decision metrics will be drafted. These metrics are those that should have the greatest impact on the success or failure of the sanitation assets. Coupled with the lending philosophy of individual WaterCredit MFI partners and their own risk appraisal models, this risk framework will incorporate elements across the value chain of sanitation asset building and presents risk metrics across usage and repayment, providing a monetary and outcome-centric risk management approach.This will be validated through consultations with microfinance partner group (facilitated by watercredit). The output will be an easy to use sanitation asset appraisal decision support tool (along with a user manual), which will act as a simple support to lending decision making. This tool will be disseminated to microfinance agencies (again drawing from watercredit partners) through a workshop. Additionally, State Governments (where pilots are anchored) will be sensitized on the benefits of the tool (in supporting Districts and Gram Panchayats in optimally utilizing the SBM(R) programme).
 ‘Guidelines FOR SWACHH BHARAT MISSION (GRAMIN)’, Ministry of Drinking Water and Sanitation, 2014. [http://www.and.nic.in/archives/rdpri/downloads/guidelines_Swachh_Bharat_Mission_Gramin.pdf]
While State Governments can choose to provide a greater incentive (in addition to their minimum mandated 3,000 per IHHL, along with Central Governments’ contribution of 9,000, most States do not provide more than INR 5,000, which still leaves a gap of around INR 10,000 to be filled in by the households
‘Revealed preference for open defecation: Evidence from a new survey in rural north India’, SQUAT Working Paper No. 1, 2014. [http://squatreport.in/wp-content/uploads/2014/06/SQUAT-research-paper.pdf]
‘Evaluation Study on Total Sanitation Campaign’; PLANNING COMMISSION, GOVERNMENT OF INDIA, 2013. [http://planningcommission.nic.in/reports/peoreport/peo/rep_tscv1_2205.pdf]