At the beginning of the pandemic, COVID-19 put a break on a vast majority of businesses around the world. Logistical chains were broken, borders were closed, planes could not fly, people could hardly move. This created massive disruptions in many sectors, including hospiratlity, tourism and any other industry reliant on imports or exports. Slowly, in some regions and sectors, businesses have begun to recover from the impact of the pandemic by adapting to this new situation.
Meanwhile, sectors that work to produce and provide a basic good, embedded in domestic economies dynamics, serving local populations, are not only surviving… in certain cases, they are even growing faster than expected. It is the case of local small scale agriculture production. For instance, Incofin IM noticed that the agricultural portfolio in comparison to its financial inclusion portfolio tends to face less risk.
Similarly, water businesses that increase access to drinking water to local populations seem to manage well in these times. Since the start of the pandemic, Incofin IM, along with its partner Danone Communities, have been monitoring a number of water businesses around the world to better understand the impact of COVID-19 on their operations.
This article is part of a series of articles titled “Water businesses in COVID-19 times, even more needed, even more wanted”. In the first article we discussed the case of water kiosks (safe water enterprises). Today, we explore the realities faced by small scale, decentralised piping water companies. These companies typically operate where public utilities do not go, serving as “last mile water providers” for many of the bottom of the pyramid population. They directly connect a pipe from a neighbouring water station to household premises.
All around the world, COVID-19 awareness campaigns have sensitized people on the need to keep a strong immune system. In fact, drinking water consumption has been increasing and these decentralised piping water companies have been there to provide the supply, while reinventing themselves.
Four key conclusions can be drawn from the decentralised piping companies during COVID-19 times:
- Where public utilities fail, privately-owned piped water companies play a crucial water access role, as they help address households’ water needs while complying with the social distancing constraints linked to COVID-19.
- Despite offering one of the lowest prices per litre, revenues of decentralised piped water supply companies are highly resilient, since water consumption, a necessity, is non-cyclical. In fact, many pipe networks, especially in developing countries saw consumers’ demand increase.
- Because of its strict requirements on social distancing at best, full lockdowns at worst, the pandemic has accelerated the need and implementation of digital solutions including digital finance, automated services, and remote monitoring to be more efficient and resilient in the future.
- Decentralised piping water companies’ advantage of steady cashflows has become more prominent during the pandemic. Combined with the social impact of providing a necessity at an affordable price and offering better hygienic and health options to underserved populations, the business model makes a strong proposition to impact investors.
CONCLUSION 1: Piped water supply’s ability to provide on-demand on-premise water access addresses households’ water needs of high public health relevance in a social distancing-compliant manner.
While access to safe tap water is usually taken for granted in developed countries, in the developing world, a vast population lives off grid and needs to venture out to collect water. This water may not be adequately treated and expose people to risks of various water borne diseases. During the time of COVID-19, these daily water collection journeys carry greater risks. Without on-premise piped water supply and sewage systems, quarantined people essentially lose access to water and sanitation services. Stock-outs of bottled water, interrupted water transport and increased prices are other risks that many face in this context.
But it doesn’t have to be so. Well managed, small scale, decentralised piping companies can extend the water grid to the underserved population and equalize the on-demand on-premise access to safe drinking water.
In Cambodia, while access to water in urban areas is catered by public utilities, rural populations often have no other solution than to collect rain water or buy from water trucks. While the government has put water access high on its agenda, it also recognizes that it does not have the means to reach the whole country. The private sector needs to play a role. In such context, the government decided to grant a 20-year exclusive license in rural Cambodia to attract private investors.
Khmer Water Supply Holding (KWSH) runs a portfolio of water stations across 4 provinces in rural Cambodia. Each station serves thousands of households in one to two local districts. A centralised engineering team ensures the stations are efficiently managed and adhere to the high quality standards, which are more stringent than national standards. KWSH is also pilot testing a project to install handwashing sinks for connected households at a below market price, with the hypothesis that the sinks would not only improve household hygiene practices but also increase water consumption by an amount that is more than enough for KWSH to recover the losses in the sales of the sinks. In this context commercial and social interests are well aligned.
Another example is 3BL, a water business in Ethiopia, that provides affordable piped water to rural homes and farms. Ethiopia is considered as a ‘water stressed’ nation, due to the accelerated increase in population size over the last 10 years. In 2017, 89% of the people had no access to safely managed drinking water creating a demand that can be filled by the water businesses. Ethiopia aims to invest in water related infrastructure to address the obstacles to safe drinking water and to increase its access.
3BL works with communities that have already existing infrastructure: 3BL connects the pipes to the households and is responsible for the maintenance. The water is first treated at the source before it is released through the pipes. The company uses technology like water meters to quickly detect and repair leaks so that the communities have a continuous water supply.
The pipe network supply is an ideal model in times of lockdowns and social distancing because on-demand, on-premise access to drinking water makes physical contact avoidable.
CONCLUSION 2: The revenues of decentralised piped water supply companies are highly resilient
While the economic impact of the outbreak prompted people to cut back on spending, heightened public health awareness has made it clear that safe water is not the commodity to save on. This is especially the case in underserved areas in developing countries, as those “fresh onto the grid” tend to consume based on need rather than want: a person with a tap at home in rural Cambodia typically consumes 70 litres water per day, a data point that is easily upward of 200 litres in the United States. As such, what KWSH has observed among its clients during the COVID-19 crisis is that water consumption outperformed projections and strong bill payment rates.
This increase in water consumption was also observed at 3BL in Ethiopia. However, in the beginning of the pandemic, the company faced delays of payments because many of their clients who were economically negatively impacted did not have any savings to pay their water bills.
Both companies explain that once a certain level of trust has been reached and the customers understand the value of having clean water at home, the demand increases as the access becomes more convenient, particularly when compared to other water sources that are not on premise.
CONCLUSION 3: the pandemic has accelerated the need and implementation of digital solutions, including digital finance, automated services, and remote monitoring.
The first impact of COVID-19 made many companies realise that in order to ensure business continuity and to remain competitive in this quickly changing context, accelerating and analysing their digitalisation strategy was a necessity. Although this entails an initial (capital) investment, which is less favourable in times of a crisis, the positive long term effects are clear and the pandemic has shown that digital applications can be crucial to ensure business continuity. Digital innovations in the water sector can contribute to reducing water loss and increasing operational efficiency. Digital solutions have been developed for billing and payment, pre-paid systems, quality and process control and operation, water loss reduction, and consumer relations.
3BL uses digital technology for real time tracking activities, maintenance and invoicing. All these functionalities can also be used offline considering the low internet penetration rate in Ethiopia. The company further recognised the importance of the digital tools that came in handy during the pandemic in ensuring the smooth running of the operations.
KWSH already planned before the pandemic to prepare for a move to a cloud based solution for customer relationship management and work-order. This will enable the company to scale efficiently. Additionally, auto-head meters are introduced at water treatment plants to execute real-time monitoring and reduce non-revenue water. KWSH will continue to invest in these types of digital solutions, as this improves overall business continuity.
CONCLUSION 4: Steady cashflows and the social impact of providing a necessity at an affordable price and offering better hygienic and health options to underserved populations, make that decentralised piping water companies’ have a strong proposition to impact investors.
The COVID-19 pandemic has posed a significant challenge in the progress towards the Sustainability Development Goals (“SDGs”). In 2017, the World Bank pointed out that USD 29 billion is needed on a yearly basis to achieve basic WASH needs and USD 114 billion to achieve safely managed WASH needs in 140 developing countries. Already pre-COVID, in 2019 the World Bank indicated that the present value of additional funding needed in the WASH sector through 2030 would exceed USD 1.7 trillion. In addition to other crises such as the accelerating climate change and the growing debt crisis in many developing countries, COVID-19 has had a negative impact on financing the WASH sector and SDG 6, and has widened this financing gap even more. The pandemic reinforced the importance of access to safe and affordable drinking water.
Small-scale, off grid decentralised piping water companies is a more CapEx intensive business model with a longer payback period, thus they have traditionally faced a more challenging funding landscape when compared to a franchisee water kiosk model. However, in a crisis environment like COVID-19, piped water supplies’ resilience, backed by steady demand and stable cashflows truly stands out. Part of this resilience also lies in the fact that compared with other sources, piped water is typically priced at a level affordable to low income populations, who during a crisis time would rather economize other discretionary spending over water consumption, which is necessary and affordable. Multilateral organizations such as OECD, UNDP and ADB typically define affordable water as households spending less than 3-5% of their income on water. In the case of KWSH, a typical monthly water bill for a household of 5 individuals is around USD 5, which is well below the affordability threshold, even for those living on less than USD 1.9 a day, the international poverty line. The model thus makes an appealing case to impact investors who can bring patient capital and a comprehensive value creation strategy in exchange for stable financial return and social impact achievement.
In these turbulent times, Incofin IM is actively working on creating short-term solutions to support our investees, while also continuing to build initiatives that will support entrepreneurs to drive growth and impact in the long-term together with our partners such as Danone.
By investing in the water companies and by offering technical assistance, the Water Access Acceleration Fund (W2AF), aims to contribute to SDG 6 and accelerate the development of the water sector in developing countries.