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Market Innovation: Water4’s household connections, called NUMA Nows, provide safe and convenient water at a customer’s home when they need it. Nows reduce the time a household spends fetching water which may be why, on average, Now customers purchase three times as much water as kiosk customers. Water4 enterprises operate more than 1,700 Nows across Sierra Leone, Ghana, Zambia, and Uganda. The majority of these Nows are managed by 4Ward Development West Africa (4Ward), Water4’s enterprise partner in Ghana.
Challenge: Water4 supports water businesses to reach complete reliance on customer revenue, both to repay capital investments and to cover all operating costs. In 2021, 4Ward covered 84% of its operating costs, 16% below its target. Government-fixed water tariffs don’t allow for much flexibility in pricing 4Ward’s products and services. Thus, selling more water at the prevailing water price is the best way to grow the business. To become profitable, 4Ward is expanding Now sales to household customers in Ghana, but has limited available cash to do so through grants and donations. 4Ward decided to assess whether Nows could be expanded through more available debt financing.
Research Questions: What would be the benefit of taking repayable cash today to build more Nows that will help the enterprise expand its future revenue base? What are the inherent risks and opportunities of taking on repayable finance rather than using non-repayable grants?
Financing Pilot #1 for Nows in Wassa East, Ghana in 2020
Design: In 2020, 4Ward sold Nows to 90 customers at 8.7% of the actual cost of a connection and the entire cost was financed through a low-interest loan made to 4Ward. The non-securitized loan was offered in local currency, or Ghanaian Cedis (GHS), at an affordable interest rate with a two-year grace period. 4Ward aimed to repay 100% of principal and interest from revenue generated from the 90 Nows.
Outcome: Under these loan terms, 4Ward can repay 40% of the total liability from revenue generated from Nows. The remaining 60% is considered the gap between Now revenue and the total amount owed by 4Ward and will be repaid but from other revenue sources.
Lessons Learned: The pilot has yielded substantial learnings, both in terms of how to modify the business model and how to best use financing in the future. The learnings presented below are being incorporated into a pilot #2, detailed on page 4.
*Net present value (NPV) calculates the current value of the future stream of payments from the investment.
** IRR is the Internal Rate of Return on the investment
What We’ve Learned about Nows:
The patient capital loan forced a major shift in mindsets at 4Ward, from just building infrastructure to continuously selling more water more efficiently, which is the most challenging aspect of ongoing service delivery
What We’ve Learned About Financing:
Financing Pilot #2 for Nows in Upper West, Ghana in 2023
Learnings from Pilot #1 are informing the design of a second pilot for financing Nows in a new customer service area in Ghana. The aim is to again repay 100% of the loan under the same terms as pilot #1. This requires blending loans and grants.
Design: In 2023, 4Ward will use the lessons from pilot #1 to conduct a second pilot. We assume a lower capital cost for Nows and a higher connection fee charged to customers (from 495 to 1,095 GHS).
Anticipated Outcome: Under these conditions, 4Ward could build 144 Nows with 50% of the cost borrowed as loans and 50% provided as grants. Assuming customers continue to purchase the same volume of water as under pilot #1, the revenue generated from these Nows would cover the full loan repayment (now only 290,000 GHS) and even cover operating costs as well. This results in an important breakeven point. The project would yield a 6.7% internal rate of return.
Conclusions. Low-risk debt can help Safe Water Enterprises become more profitable, but it must be designed for the specific market. Repayable finance, although more expensive, is more predictable and readily available than grant funding. 4Ward found that the loan worked as an incentive to both cut costs and increase revenues toward long-term sustainable service delivery. In essence, the business has started to focus more on customer satisfaction than simply fulfilling donor requirements to expand access to safe water points.
What’s Next? Water4 and 4Ward aim to make Nows fully financeable through loans in the future, based on the results of pilot #2. This strategy will incentivize the business to build out an established water system based on strong customer demand, rather than unpredictable and limited donor funding. Water4 will continue to identify potential financing opportunities with investors willing to take on currency risk, and continue to work with governments on more flexible water tariffs that hedge against inflation and reflect the true cost of service delivery.