Introduction > Develop Project Plan > Assess Feasibility > Identify and Select Finance Source/Instrument > Mitigate Risks > Secure Permits and Approvals > Seek Project Funding/Finance > Structure and Close Financing > Case Studies > Acknowledgements
Step 3: Identify and Select Finance Source/Instrument
Access to capital is one of the biggest barriers in developing an organic waste management project. To choose the best funding source and structure, project developers can use a set of parameters to compare available financing options. In addition, by weighing the advantages and disadvantages of each funding instrument, they can make informed decisions about the optimal financing for the project.
Best Practice Activities for this Step
Identify potential sources of finance
Sources of project finance, whether public, private, or internal (owner equity), should be suitable for a potential project’s scope and size and for characteristics of the project developer.
- Owner equity financing is most relevant for the private sector. It involves the project owner paying for part or all of a project’s costs with their own capital to avoid paying interest and to avoid sharing the project’s profits with a third party. In many cases, owner equity may be insufficient to cover the upfront capital costs of a project. This method of financing entails some risk, as revenues from fees and sale of products are often difficult to forecast and may not be sufficient to cover operational expenses.
- Private sector financing may come in the form of debt financing, equity financing, or a combination of both. Private funding may include higher interest rates or cause developers to cede a partial stake in a project. This form of financing is typically the most readily available source of finance.
- Financial assistance, such as grants or low-interest loans, may be available from the public sector (e.g., governments), private sector (e.g., large, non-governmental organizations (NGOs), corporate foundations), or development banks (e.g., The World Bank, Inter-American Development Bank, and Asian Development Bank). In some cases, financial assistance will cover only part of the capital and operating costs, in which case additional sources of funding will be necessary. In other cases, large multi-year grants and loans will be too large for organic waste management projects. You should ensure the available funding is appropriate for your project.
Identify appropriate financial instruments
Financial instruments are monetary contracts between parties. The type of financial instrument(s) you choose, which can be a direct cash contribution from the owner or a third-party equity, debt, loan, or bond, has important implications for a project’s overall cost, cash flow, and liability. To finance an organic waste management project, you may pursue one or more instruments, depending on the complexity of the project, available funding resources, and stipulations (i.e., legal, financial, technological).
Financing instruments may include:
- Owner equity, as discussed above, involves the project owner paying for part or all of the project’s costs with their own capital.
- Private equity involves raising capital from third parties in return for partial ownership of the project. Equity financing is common for larger-scale projects that are more likely to attract third-party investors.
- Private debt involves borrowing money from banks, credit unions, or other financial institutions. Common debt financing methods involve bank loans, lines of credit, and mortgages.
- Public grants are cash awards provided by the government to support project development, particularly for the initial investment. Grants do not require repayment and may be received before project implementation.
- Public loans are provided by public agencies through one of two forms:
- Loan guarantees, in which a public agency assumes the debt obligation if the borrower defaults, reducing the risk for private lenders and potentially improving loan terms.
- Low-interest loans, in which a public agency or other organization provides loans with interest rates below the market rate, making project financing more affordable.
- Private grants are cash awards provided by private institutions (e.g., NGOs, corporate foundations) to support project development. Grants do not require repayment and may be received before project implementation.
- Specialized loans or grants from development banks or international organizations are financial instruments available to national governments. Municipalities or project developers need to propose their projects to the national government for inclusion in proposals submitted to specialized development banks, such as the regional development banks (e.g., Inter-American Development Bank, Asian Development Bank (ADB)) and to the World Bank (WB), and to international organizations focused on environmental sustainability and addressing climate change (e.g., the Green Climate Fund (GCF) and the Global Environment Facility (GEF)). These loans or grants provide upfront funding but have varying terms depending on the fiscal position of the borrower and currency fluctuations which can impact repayment costs for the borrowers.
- Public-private partnerships involve collaboration between a government agency and a private-sector company. Typically, the private partner designs, completes, implements, and funds the project, while the public entity defines and monitors compliance with objectives.
- Green bonds or environmental impact bonds are fixed-income debt instruments where a bond issuer (e.g., corporation, government, or financial institution) borrows money from investors to pay for sustainability-focused projects (e.g., organic waste management project). The borrower pays a fixed amount of interest to the bond issuer and eventually the full principal at a future set date.
- Blended finance involves the strategic use of public or philanthropic capital to lower the risk of investment projects and attract private investment. Private capital flows are often constrained by investors’ risk perceptions. Blending public or philanthropic capital provides a buffer to such risks, making the investment more attractive to private investors.
Select the most appropriate funding source and instrument
Knowing the parameters, advantages, and disadvantages of each funding source and financial instrument will help you select the most appropriate one.
- Availability of the instrument. Depends on the location, the type of project, and target client. For example, public grants may be difficult to secure compared to private financing through traditional banks. In addition, not all instruments are available for all types of projects. Development bank loans and grants are typically awarded only to national-level governments.
- Interest rates. Each instrument has its own interest rates for repayment. Private equity and private debt tend to have higher interest rates than public grants or loans.
- Ease of access. Instruments vary in the requirements for approval. Public sector loans or grants can have complex and bureaucratic approval processes, while the approval process for private sector finance can be more streamlined.
- Suitability. Restrictions on certain financial instruments, such as public sector grants, may not be compatible with project needs (e.g., a requirement to use only local technology providers).
The heat map shown below visualizes how each funding source or financing instrument compares.
| Favorable | |
| Moderately favorable | |
| Least favorable |
Comparison of Financial Instruments
| Financial Source/Instrument | Advantages | Disadvantages |
| Owner Equity | No debt repayment or profit sharing with third parties. | The owner must have a reliable revenue flow, either from user fees, gate fees, or product sales. Increases in user fees often require improvements in services to incentivize users to pay. Owner equity is often not sufficient to finance the entire project because the cost of capital investment is typically much higher than the available owner equity. |
| Private Equity | Useful for projects that may be ineligible for municipal bonds. Access to large amounts of capital enabling large-scale projects (i.e., over $100 million). Longer investment horizons allowing for more flexibility in achieving long-term goals. |
Private equity investors often require higher rates of return and steady cash flow because they take on more project-related risk. Developers may have to give up some control of the project to investors. |
| Private Debt | Retain business ownership. Interest payment on the debt may be tax deductible |
Qualifying for loans may be difficult. May be subject to high rates. Lenders typically demand collateral/security (e.g., pledge of owner’s shares or other property). Obligation to repay borrowed amount with interest, which can impact project cash flow and financial stability, especially during an economic downturn. Loans increase the capital costs of the project. |
| Public Grants | Do not require repayment. | Are awarded competitively and typically require grant applications, which can be resource-intensive to prepare. Depending on the program, funding may not be disbursed until after project completion or the achievement of pre-determined milestones or results. Complex bureaucratic processes and lengthy approval times. |
| Public Loans | Government loans have better-than-market rates. Origination costs are lower with loans than with other types of financing, such as bonds. |
Risk of decrease of loan’s value due to variability in interest rates. Closing and other financing costs can add to the overall costs of the project. Loans increase the capital costs of the project. May require proof of assets of 20 to 30 percent of the value of the loan. Complex bureaucratic processes and lengthy approval times. |
| Private grants | Do not require repayment. Complement funding from other sources |
In most cases, are awarded competitively. Have specific conditions or restrictions on usage of funds and require detailed reporting. Have limited funding amounts. |
| Specialized Development Bank Loans or Grants | Receive money upfront. In some cases, can have lower interest than loans offered by commercial banks. |
Vary depending on the fiscal position of the borrower. Large currency depreciation can result in increased costs for borrowers. These loans and grants are available mostly to national governments. Municipalities need to propose projects to the national government so they can be included in proposals for specialized development bank loans or grants. |
| Public-Private Partnerships (PPPs) | These arrangements help the public sector overcome financial constraints in establishing projects. | Can be difficult to execute; involve risks for the private partner and higher transaction costs than other types of funding. Success depends on regulatory efficiency. |
| Bonds (e.g., Green Bonds, Environmental Impact Bonds, Industrial Revenue Bonds) | Receive money upfront. Can have lower interest than loans offered by commercial banks. |
Necessary preparatory work (e.g., institutional set up, verification system) takes time and costs money. Lack of credit rating and rating guidelines. Investors may be reluctant to invest as a result. |
| Blended Finance | Reduces investment risk and attracts greater private funding. Offers innovative financing structure that can attract a broader range of investors and mitigate risks. |
Mostly available for higher-income countries with stable and well-regulated financial markets. More common for large projects. |
Sources: Anderson et al., 2019; CCAC, 2018; EPA, 2020b; EPA, 2016; Kim, 2016; Garcia-Zarate, 2021; World Bank, 2016a; World Bank, 2016b; International Solid Waste Association, 2017; Lindfield & Teipelke, 2017; Chen, 2021; Merritt, 2013; ICLEI, 2020; CCAP, 2023.
Key Tools/Resources Related to this Step
Handbook on Urban Infrastructure Finance
New Cities Foundation
2016. This Handbook, particularly Chapter 2, summarizes the types of infrastructure financing instruments available for cities.
Municipal Finances: A Handbook for Local Governments
The World Bank
2014. This Handbook helps local governments improve the strategic management of municipal finances.
Sustainable Financing and Policy Models for Municipal Composting
The World Bank and Climate and Clean Air Coalition
2016. This report, particularly Chapter 3, discusses financing sources and instruments for composting projects and offers global case studies. .
Public-Private Partnerships Reference Guide
The World Bank
2017. This reference guides offers good practices on policies and implementation for infrastructure and PPPs.
Private Sector Participation in Municipal Waste Services in Developing Countries, Vol 1, The Formal Sector
The World Bank
2013. This paper summarizes the decision-making criteria for private sector participation in the delivery of solid waste management services.
Integrated Solid Waste Management for Local Governments – A Practical Guide
Asian Development Bank (ADB)
2017. This publication, particularly the chapter on Contract Issues, offers guidance to deal with the most common contract issues experienced under public-private partnership arrangements.
Case Studies
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Mixed Financing Sources Successfully Fund Organic Waste Management for Households in Ningbo, China The city of Ningbo, China, worked to increase waste collection infrastructure and accessibility, developed an anaerobic digester for segregated organic waste, and promoted waste separation and treatment best practices at both the household and institutional levels. Read about Ningbo |
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Using a National Grant Program to Develop Composting Capacity in Sri Lanka In 2008, the Sri Lankan national government launched a $40 million national solid waste management project named Pilisaru, which provided grants to local authorities and public institutions for capital and construction costs, but excluded subsidies for ongoing O&M. Read about Sri Lanka |