15 November 2020

Circular (Waste) Economy Business Models | WASH waste blog series 3

This blog is the third in a series of 5 on waste management and the intersection of fecal and solid waste – both the challenges and opportunities. Based on learning experiences worldwide, solid waste management (SWM) and fecal sludge management (FSM) are closely linked. This blog series aims to demonstrate the opportunities for integrating FSM and SWM to improve how our world operates and creating financial value from these value chains. The blogs are a collaboration by Kim Worsham (FLUSH), Cuthbert A. Onikute (DalO Systems formerly Dechets a l’Or), Priska Prasetya, Sophie van den Berg and Verele de Vreede (WASTE), and Eline Bakker (LinkedIn).

Note: The WASH sector is the segment of the international development sector focused on water service delivery, fecal waste management, and personal hygiene – hence the acronym WASH.

Many municipalities struggle to ensure the financial sustainability of public services, like FSM and SWM. Even with Public-Private Partnerships (PPPs), it can take several iterations to get the contract and financial structure right. Sales of waste-based products (e.g., briquette, co-compost, biogas) and recyclables (glass, metal, paper, plastic) can be an essential revenue stream for financial sustainability. This blog makes a case for a reuse and recycling business model and integration of service. We know this blog post is particularly long – it is the longest in this series – but we felt that detailing the business model of integrating waste reuse and recycling services is critical to show WASH and solid waste sectors its value. For those interested in the big lines of the blog, just read the summary. For those who want to get into the weeds, read the Full Story version.

Summary of the Integrated Circular Waste Business Model Blog

We use the business canvas as the framework to explore the integrated circular economy business model and an overview of different essential aspects that need consideration before getting a reuse or recycling business started.

Value Proposition & Activities: From a municipal level, providing a bundled, unified effort to clean up waste gives local governments the ability to address two public issues with one partner.
Partners & Resources: The municipality may be a partner under either a PPP or service-level agreement. Primary resources needed for both solid and fecal waste management include collection vehicles and a materials recovery facility (MRF), human labor, land, and finance.
Customers: The integrated reuse and recycling business must consider two types of customers – the waste generators from whom the company collects, and reuse and recyclables buyers who want the new value-added end-products.
Revenue Streams: There are two revenue opportunities for an integrated circular economy business model for FSM and SWM – at the collection of waste and the sale of reuse products and recyclables. The beauty of integrating reuse for fecal sludge and solid waste is that there are ways to package the collection services together to develop multiple revenue streams. Customers can pay in some different structures, depending on the business, where their waste collection services are in the one fee they pay. Revenue models for solid waste and fecal waste operations are very similar, making it easier to bundle these services with one fee model for customers using both services. Examples of different fee structures include subscription fee, pay-as-you-go fee, group fee, sliding scale fee, and hybrid models.
Key Operating Costs: A profitable business model also ensures it keeps its operating costs as low as possible. Once the business spends capital costs, how much will it cost to run the business over time? We know that the business would need to cover many costs no matter the nuances, including personnel/labor costs, skip or transfer points & transportation, sorting, processing & cleaning, O&M, and refining for the final product.
Risks: Financing comes in many forms – from government grants to commercial loans to equity financiers. The riskier the business model and its environment is, the less likely private finance (e.g., debt and equity) will offer support. There are a few aspects that business risk should consider: finance, management, economies of scale, demographics & consumer willingness to pay, the environment, the regulatory environment, and government restrictions.

The end goal of revenue and costs is to make the math work without sacrificing the bottom line – positive social and environmental impacts. It can be difficult for public works to be profitable without subsidies and government support. This is where we believe that innovating the model and integrating similar waste streams could help improve profitability. However, this is also where financiers will need to consider the social return on top of the long return on investment compared to the more common business models.

The Full Story: Developing an Integrated Circular Waste Business Model

The business model design is a critical part of determining how to start working on integrating FSM and SWM. Many may vex over business plans, as they are often long, complex documents that require thinking through the different components of a business. Luckily, the business canvas is a great tool to develop the various parts needed to articulate the full business model. We encourage using it instead of more extended plans because it can visually help see how the different business components work together. We used the framework to explore the reuse and recycling business model below, starting at the top and working our way down.

The Details

For the sake of this blog series, we are focusing most of the discussion on areas that may not yet have full sewer coverage and have fecal waste stored on-site (either in pits or in container-based toilets), and treatment facilities are not yet available. Similarly, concerning solid waste, we focus on places where solid waste management exists insufficiently – both in terms of collection and treatment. These may be areas where uncollected waste piles up on the street and/or the local dumpsite disturbs the local community through smell and smoke from uncontrolled fires and contaminated runoff. Fecal waste collection can happen in tandem with solid waste. It may be possible to develop a similar business that also works in sewered communities.

The fecal sludge reuse aspect of the business would likely need to be based on a partnership with the local wastewater treatment plant to collect the biosolids for further reuse, making the customer base be both household and treatment plant. Similarly, the solid waste business’s reuse aspect likely needs to partner with local fertilizer companies or farmers directly to sell compost or go-betweens accumulating recyclables. Businesses can tailor models better based on the general one we share in this blog series.

Value Proposition & Activities

By integrating FSM and SWM services for customers at the household level, businesses can create a fundamental value proposition to customers – their living environment becomes suddenly filth free and more hygienic, which keeps them healthier and improves their quality of life. While many assume that households will not pay for the services that improve their quality of life, the experience at Dechets a l’Or and with numerous waste operators proves this false. Most customers speak of the importance of cleanliness and comfort as the reasons they are willing to pay for waste services. In this series, previous blogs discuss how these two waste streams cause problems for communities on their own and the similarities between the two value chains for solid waste and fecal waste. A business’s value proposition can be customized to include innovations and special focuses on customer service, performance, efficiencies, convenience – you get the idea – depending on what the business and its customers value the most.

Also, from a municipal level, providing a bundled, unified effort to clean up waste gives local governments the ability to address two public issues with one partner. For customers, one service provider collecting fecal and solid wastes provides clarity of service and enables planning. Fecal waste removal is a costly activity done once every two or three years. Prepayment models exist, such as a portion of property taxes (an example exists in Wat, India). As the operator can collect and transport waste to their centralised recovery facilities, it would enable cost savings and offer flexibility in planning. See the graphic below.

*Trajectory of solid waste and pit latrine contents*

Operators can select end-products for cost-effective and market potential tailored to the local area. The buyers of waste-based products (e.g., co-compost, briquette, biogas) can benefit from either cost savings for products they need, improved revenue from more energy-efficient products, or both. For example, co-compost is principally a nitrogen-rich compost made from fecal sludge and solid waste that can be applied to improve agricultural soil for farmers. Based on Nilgiris, India’s experience, the farmers save money from buying less chemical fertilisers and irrigation fuel while also increasing revenue from improved crop yields (SWFF – WASTE Performance Evaluation Report, 2019). Reuse products have some market risks, which we describe further below.

Partners & Resources

The business needs several resources to manage this kind of work. A list of essential primary resources for both solid and fecal waste would include:

A fleet of collection vehicles. Large trucks can carry segregated solid waste from communities to facilities, including a materials recovery facility (MRF). Smaller, more agile vehicles can pick up waste from places with narrow and unpaved roads and bring them to bigger transfer points, where larger trucks can safely collect the aggregated waste. For the collection of fecal sludge, specialized vehicles can move it around.
Human labour. Here is an opportunity to increase employment as waste collection is a labourforce-intensive sector. The three most critical roles: collection, transport, and sorting, for the waste from households to facilities, with employment opportunities at every step. Treatment and processing for managing the waste at the facilities for reuse. Both groups would need PPE for safer working environments and protect them from potentially hazardous waste and conditions. (Eline wrote about sanitation workers’ exposure to hazardous conditions). There would also need to be customer service representatives and administrative support to monitor service, engage with customers, collect payment, all necessary to keep the whole operation running.
The reuse and recycling facilities would need land for operation. A promising option would be to have the local authority provide land (perhaps through a PPP) to lease an operator. The campus can hold the different reuse types based on the fecal or solid waste collected and chosen technologies for reuse.
The solid waste’s actual sorting into recyclable fractions (glass, metal, paper, plastic) and processing the organic waste with the fecal sludge occurs in an MRF on the operating land. The processes can be manual or semi-mechanical.
Finance. The reuse facilities will, of course, need finance. This could come in the shape of partner organizations’ investments – whether it is the government or an angel investor – or come through commercial loans and grants. Most finance partners and resources will likely cover capital projects, but there may also be a need to get finance to support the facility’s running for the first few years before it breaks even.

A key partner for any business dealing with the movement and treatment of waste would be the government, preferably the local one. The government can help regulate the work, provide the needed licenses, and permits needed for collection and transport. It can offer designated space for the reuse activities that would be part of this business. The ideal model would be a PPP where the government provides the land and permits in-kind for the business to manage the municipality’s public works, or provide service-level agreements with service providers for their jurisdiction.

Customers

The integrated reuse and recycling business must consider two types of customers – the waste generators from whom the company collects, and reuse and recyclables buyers who want the new value-added end-products.

Some businesses may focus on higher-income communities that can pay more money. Others may target low-income communities that can have their services subsidized by higher-income groups or government supports. Others may even focus on businesses and commercials entities like hotels and hospitality groups. Perhaps a company targets a mix of different customer segments, providing various services for its customer groups’ diverse needs. Social enterprises like Sanergy currently have two different customer bases for their fecal waste and solid waste collection services – low-income informal settlement households pay for fecal waste collection services. In contrast, larger commercial businesses pay for solid waste collection, particularly organic waste used within the fecal sludge reuse process.

The end-product customers would vary depending on the products developed in the reuse and sorting process. For co-composted fertilizer, farmers, and farmer cooperatives would be the key customers. For biogas and briquettes, perhaps industrial producers may want the products for their energy. For plastic and other recyclables, resellers who wish to refine the waste for making new products like sneakers, roofing tiles, and toilet slabs, would be key.

*ECOPOST and ECOTYLE in Kenya produce beams, poles and roofing tiles out of plastic waste. (c)WASTE*

Revenue Streams

There are two revenue opportunities for a reuse and recycling business model for FSM and SWM – collecting waste and reusing reuse products and recyclables. This means that businesses can charge for the same pile of waste twice and two different customer segments. The beauty of integrating reuse for fecal sludge and solid waste is that there are ways to package the collection services together to develop multiple revenue streams. Customers can pay in some different structures, depending on the business, where their waste collection services is in the one fee they pay.

Alongside generating revenues from collection fees, the business can also make money by selling reuse products and recyclables (glass, metal, paper, plastic). The rule of thumb for this revenue stream is – the cleaner the different recyclable waste streams are, the higher the price buyers are willing to pay. This process can generate more revenue if the business can also process secondary raw materials (flakes, lumps, pellets) sold to the plastic manufacturing industry. A caveat about this revenue stream is that it can be complicated to manage and tricky to make financially viable in many settings. In particular, businesses may struggle to find demand and customers for the kinds of plastics collected from households. While recycling buyers exist in West Africa, few are sourcing recycled plastic because there are other, better choices available.

Revenue models for solid waste and fecal waste operations are very similar, making it easier to bundle these services with one fee model for customers using both services. Some revenue options could be:

A subscription fee: Customers pay the same recurring charge for standardized services.
A pay-as-you-go fee: Customers pay once they actively call and receive services. This model could be further broken down – do customers want to pay based on the volume (such as for solid waste) of waste collected or the frequency of collection (such as for fecal waste)? Would there be a hybrid model that could work to manage how much services people get?
A group fee: Customers living nearby can pay discounted rates if they can coordinate their collections simultaneously. This could help lower logistics costs for the company, which could also help customers pool money and make the services more affordable.
A sliding scale fee: Customers pay based on their income and type of customer (for example, individual households versus hotels). This way, companies can build a customer segment pricing structure that can let lower-income customers have subsidized fees, allowing them to get the same services.
A hybrid payment model: A single operator collecting for both solid and fecal waste would allow their customers to pay installments specifically to collect fecal waste. As some customers would need fecal waste collected less frequently than solid waste (e.g., every twelve months), clients could pay a regular solid waste fee separate from a less-regular installment of fecal waste collection payments. This system would offer the operators access to greater monthly recurring revenue that isn’t reliant on the actual provision of fecal waste emptying services.

The question is – how will the collection customers pay? We’ll look into that more in Blog 4. Some customers may not be able to afford the fees to make their service financially viable for the company on its own (see graphic below); having bigger customers like industries can help cross-subsidize the revenue. Businesses can also work with municipalities to receive operating cost contributions from municipal taxes.

*Sample pricing differentiated by property and sanitation type*

Once the waste is collected and treated for reuse, the other revenue stream(s) can be about selling the reuse products, including the sales of recyclables, co-compost, briquettes, and biogas and recyclables. Again, depending on the type of product(s) created, the customer segment wanting these products, and the dynamics between the supply and demand of these end products will help dictate the pricing structures that make sense. For example, having compost fertilizer during harvest season may be worthless to farmers compared to during the sowing season. Otherwise, a volume-based pricing structure may be the ideal way to price out the end-products for customers and make the revenue stream simpler to manage than the collection revenue.

Key Operating Costs

A good business model also makes sure it keeps its operating costs as low as possible. Once capital costs are spent, how much will it cost to run the business over time? We know that the business would need to cover many costs no matter what the nuances are, and have listed them below:

Personnel & labour costs: What would be the cost of the labour needed to run the business? For the Devanahalli co-treatment plant, the fecal sludge treatment part of the plant is gravity-based and does not require electricity, and just one operator can run it. The collection of solid waste is more labor-intensive: the business needs people to collect the waste, transport it, refine and process it for reuse, and then manage operations, etc. Labor would likely be the largest expense. Operators must weigh a lean team with minimal staff with sufficient hands to ensure the quality of output. Blog 2 briefly talks about the importance of fair wages and worker rights, and iterate fair wages and safe working conditions often ensure worker engagement and reduce turnover.
Skip points & transportation: Transportation costs will also be a key regular variable cost – including vehicle fuel and maintenance. Skip points would also cost money to maintain but, if strategically placed, could reduce transportation costs, especially if the skip points can aggregate waste manually.
Processing & cleaning: Once the waste gets to the reuse facility, there are the processing costs of the waste before the reuse process begins, including cleaning and checking the quality of products. Where municipal solid waste segregation is incorporated into the business model, it is often the most costly activity, like in Kumasi, Ghana, where it is 30% of operation and maintenance (O&M) costs.
O&M: Let’s not forget that whatever reuse business is running, there will always be some forms of costs for O&M. This could include facility capital repairs, buying of replacement parts, laboratory testing, and other larger things that need to happen over time in any facility.
Administration: A reuse business, of course, has administrative costs to consider – from controlling the finances to operations management to procurement. Key administration costs worth noting are those needed to manage marketing and sales (the nonprofit world may call “sales” awareness building and outreach). Marketing and sales take up about 5-10% of a company budget and is critical to getting more customers.
Refining: The reuse process may require technologies and techniques to make it successful. Think conveyor belts, greenhouses, industrial ovens, and climate controllers—the more sophisticated the reused product, the more complicated and costly its technology. For example, Waste-to-Energy facilities are cost-intensive, but it may make the most business sense for investments. The question then, too, is how much would it be to maintain these costs.

Risks

Congratulations – we’re almost ready to have a business! Let’s talk about financing for a second, though, since financing is a critical part of running any business, no matter where you work. Financing comes in a myriad of forms – from government grants to commercial loans to equity financiers. Which ones make sense for an integrated business that includes FSM and SWM?

It depends on the risks in and around the business from its unique risk factor that financial institutions assess to determine what funding they’re willing to give. The riskier the business model and its environment is, the less likely private finance (e.g., debt and equity) will offer support.

A few critical aspects that can influence the business’s risk should be considered:

Finance: Do you have the financial resources or support to start this business and keep it running while it loses money for the first few years? Many businesses start and fail quickly because there isn’t enough capital to pay for the running operations’ upfront costs while growing.
Management: Do you have the right leadership team to run a business and push it forward from the beginning? Like it or not, the business leaders’ makeup and capacity are critical to the business risk.
Economies of Scale: What is the potential to scale the business to hit economies of scale and accelerate its financial viability and profitability? Companies that are too niche for a specific geography or an unusually small cohort are risky for investors. One pain point articulated by an accelerator called Hatch CoLab is that many businesses in the social impact scene – particularly in water and sanitation – tend to be hyper-focused on a particular geography. This limits the opportunities for scale and high risks for investors who are keen to see profit growth. Integrating FSM and SWM can offer scalable business models, but the leadership must apply their models in different places.
Market: The market for reuse and recycled products may be a large barrier for entry. Recent research has highlighted that fecal-based compost alone has a rather low-value product, with revenue of only $5/person/year for collected fecal waste. Will the revenue potential be higher for co-compost? We think so, but it remains a risk. Additionally, some reuse products like briquettes may compete with more cost-efficient competitors like diesel fuel. Though diesel is not as environmentally optimal, it may be perceived as the best economic choice in some places if the environmental and health values are not realized (Mallory et al., 2020).
Demographics & Consumer Willingness To Pay: The background of your consumers and their willingness and ability to pay for your products and services are also vital for the business’s risk assessment. Targeting consumers who are in or near poverty will naturally have a high risk because there could come the point where they can no longer support themselves enough to pay for your services or a time where you may be forced to price them out.
The Environment: Climate in a region can help or hinder reuse processes – particularly those that require biological processes like composting and biogas generation. When looking at your business areas, you must understand what the climate changes and averages look like and how the technology you’ve chosen benefits or struggles in those environments. Also, climate change is real and hits certain regions more than others – make sure you understand the projections and how they could alter your business operations.
Regulations: The regulatory environment might already have appropriate regulation that ensures proper business conduct and pollution control. Where this does not yet exist, your business might want to work with the local government to establish these. Regulation might include proper containment at households, licensing and regulation of private operators, and plant operating licences. In Balikpapan, Indonesia, each service provided to households receives a unique barcode scanned again at the treatment plant to ensure safe delivery. In Devanahalli, India, desludging trucks are equipped with GPS and cameras to monitor safe delivery.
Government Restrictions: The enabling environment also impacts your business risk. How easy is it for your business to work where you are? The World Bank scores countries on these things, guiding investors in understanding the risk of investments in certain regions. The same business model applied in Somalia will be far riskier than when applied to Ghana, simply because the environment and government capacity to support and regulate industries are different. Governments need to have created institutional arrangements that foster private sector engagement – that means they need to have the policies to support business, the structure to facilitate business relationships, and the regulations to make sure businesses know their frameworks for working. In FSM and SWM, governments can also be key in guiding tariffs structures and develop PPPs that will better support the private work you endeavor to start.

The ultimate goal with revenue and costs is to ensure that simple math is applied to determine profitability and positive. The business also has to make sure it has done its best to maximize its financial bottom line without sacrificing its other bottom lines – namely, its positive social and environmental impacts. Sanitation businesses also need to build models that can thrive in the locales they are working and can be seen as supportive of public needs.

Admittedly, a substantial amount of public works have historically struggled to generate enough profit without subsidies and government supports. We believe that innovating the model and integrating similar waste streams could help improve profitability. Still, it will be essential to know that returns of investments (ROIs) may be lower than other industries with higher yields, such as medical services and food production. This is where financiers will consider the social return on top of the longer ROIs than other more common business models.