SPECIAL REPORT: Danone, Incofin, Water.org: WASH Sector is Already Investible

During one of the Friday sessions of European Microfinance Week 2020, Dina Pons of Belgium-based Incofin Investment Management explained a partnership with France-based food company Danone through which the organizations are building a 10-year equity fund to invest in expanding access to clean water in developing countries. Since 2007, the Danone Communities arm of Danone – mostly funded by its employees – has invested in access to drinking water on a proof-of-concept basis. Now Danone believes the sector has matured from the incubation stage to the investible stage. The company selected Incofin to help it invest in proven models, with a technical assistance component and monitoring of factors such as affordability, limiting plastic usage and replenishing water resources. The fund will invest in Africa and Asia in tranches totaling EUR 3 million (USD 3.5 million) to EUR 5 million (USD 5.9 million) per investee, taking minority stakes with board representation. These investees will fall into three categories: (1) “asset lite” firms such as bottlers offering delivery and pick-up service; (2) water-treatment technology firms; and (3) aggregators that build water systems in rural areas.

Ms Pons said, “We need to break the prejudice that people have in mind that this sector is not investible.” In closing, she pointed out that the COVID-19 pandemic is showing how the water, sanitation and hygiene (WASH) sector is resilient to market shocks. She also mentioned the potential of working with grant funders to move their cash from technical assistance donations to investing first-loss money that can leverage much greater amounts of investment capital.

Josien Sluijs of the Netherlands’ Aqua for All explained how her nonprofit is motivated to work with small and medium-sized enterprises (SMEs) in the water value chain to reduce the estimated 7 percent of GDP that many countries are losing due to medical costs to treat water-borne illnesses, lost productivity and other effects of poor access to water. Aqua for All does not work on large utility infrastructure projects due to the prohibitive cost. In terms of public versus private ownership, governments have shown limited success in meeting people’s need for water in developing countries. Ms Sluijs notes that 70 percent of water in Kenya, for example, is supplied by private firms.

Ms Sluijs cited the example of a firm founded in 2012 in East Africa that operates in water bottling, delivery and wholesale. Despite high upfront costs and low margins, the firm has grown to serve 90,000 people, bringing in EUR 1.6 million (USD 1.9 million) per quarter.

Aqua for All’s “Making Water Count” program has a five-year budget of EUR 40 million (USD 47 million) to build pathways from clean-water innovation to reaching scale with public and private capital. Part of the effort involves meeting with investors to learn about their needs in order to help WASH SMEs become investment-ready.

Bjoern Struewer of Germany-based advisory Roots of Impact explained his firm’s “social impact incentive” model that Aqua for All is using to enhance the returns and reduce the risks of WASH investments. Earning carbon credits is one way to increase returns. Another is to reward SMEs for achieving social impact. Aqua for All commits to pay cash to enterprises as they meet their social goals over two to four years, allowing them to raise impact investment in advance, knowing they will be able to repay investors with the cash incentives from Aqua for All.

Roots of Impact has closed six transactions using social impact incentives, and it has 10 more in its pipeline. One of these transactions was with Clinicas del Azucar, a private firm bringing diabetes treatment to low-income people in Mexico at 40 percent of the price charged by its competition. With USD 275,000 from Roots of Impact, the firm reached an additional 10,000 people and raised USD 7.5 million from impact investors and development finance institutions. Mr Struewer sees a major opportunity for governments to contract with providers like Clinicas del Azucar to improve health outcomes at scale, and at lower cost.

Darren Miao of US-based Water.org discussed his NGO’s use of its Global Credit Enhancement Facility (GCEF) to issue partial guarantees to encourage local commercial banks to lend for WASH. Mr Miao said while these banks don’t have much experience in the sector, they have excess capital on their balance sheets that can be deployed for WASH. Although it has been delayed until 2021 by the COVID-19 pandemic, the launch of GCEF in India is slated to deliver WASH to 3 million people over three years. This is made possible by USD 7.8 million committed by donors to cover a portion of first losses. Mr Miao stresses that banks must also cover a percentage of first losses. The World Bank Group’s International Finance Corporation (IFC) has committed to cover second losses of up to USD 5.4 million out of its first commitment to WASH, which totals USD 50 million and is priced at a “commercial” rate. Over time, Mr Miao says, the goal is for institutions like IFC to treat these types of investments like its other investments, thus rendering GCEF obsolete. After India, Water.org plans to bring GCEF to Kenya, Bangladesh, Indonesia and the Philippines.

This feature is part of a sponsored series on European Microfinance Week 2020, which took place online from November 18 through November 20. The event is held annually by e-MFP. MicroCapital has been engaged to promote and report on the conference each year since 2012.

Additional Resources

European Microfinance Platform (e-MFP) information on European Microfinance Week 2020
http://www.e-mfp.eu/european-microfinance-week-2020

MicroCapital coverage of European Microfinance Week, including the European Microfinance Award
https://www.microcapital.org/category/european-microfinance-week/