Guest Articles

September 8

Lauren Cuscuna

Filling the Water Access Funding Gap: Three Lessons to Maximize the Impact of Innovative Finance

More than two billion people still live without access to safe drinking water, and the global funding required to meet that need is estimated at $37.6 billion per year — which far exceeds available philanthropic and government funding.

This shortfall highlights the need for innovative finance mechanisms to fill the gap, but the water sector performs below other sectors in securing blended financing transactions. This may be partially due to market characteristics in the small water enterprise (SWE) sector, which lower the probability of sufficient financial returns and pose investment risks. For example, water systems require significant up-front investment and ongoing maintenance costs. Additionally, safe water production faces challenges with pricing regulations, power inefficiency and environmental hazards. Finally, affordability is critical when it comes to essential services like water and sanitation, which means the price for these services should not exceed 5% of household income. As a result of these factors, SWEs sustain low margins and slow growth and remain vulnerable to regulatory shifts and environmental risks.

The challenges of the SWE market highlight the need for experimentation with innovative finance to understand best practices. As part of our efforts to develop and demonstrate affordable, economically viable solutions to the global water challenge, Safe Water Network is exploring innovative financing approaches to meet the long-term needs of the water enterprises we work with, which operate locally owned water stations in Ghana and India. To that end, Safe Water Network Ghana launched loan financing pilots in 2014 and 2019, lending to SWEs in our network in partnership with individual and institutional donors. The 2014 loan financed a capital expenditure investment in the Kwabre District, while the 2019 loan funded capital upgrades to nine of our water stations spread across Ghana. The pilots allowed us to test whether water stations in peri-urban communities were capable of repaying financing for the initial capital investment and future upgrades of water infrastructure.

Ultimately, these loan pilots pushed us to maximize efficiency and provoked innovation that benefited our entire portfolio. Furthermore, we learned that there are ways of structuring a loan agreement that can improve the likelihood of repayment for organizations like SWEs that face multiple risks and varying cash flow. First, we found that rigorous financial reporting is the foundation for developing manageable terms in a loan and that partial grant funding, below-market interest rates and local currency denomination are important components of a successful loan. It is also important to build flexibility into the loan terms so that payments can be based on cash flow and borrowers can use extensions for unforeseen circumstances. Lastly, we learned that operational policy and co-creation with the community help mitigate risk and improve service delivery. We’ll discuss each of these insights in detail below.


Keep Debt to Capital Ratio Low and Invest in Rigorous Financial Reporting

In 2014, a private individual donor provided a loan of US $105,000 to finance infrastructure at two water stations that served 18,000 people in two Ghanaian communities. The loan was facilitated through Safe Water Network Ghana, but it was intended to be repaid through revenue from both stations. The loan covered capital investment and aimed to catalyze private capital to offset the upfront costs of expanding water access — a goal of sector-wide interest. The loan terms included a 10% interest rate, a 12-year term and Ghanaian cedi denomination to protect against currency devaluation.

However, the loan had a 71% debt-to-capital ratio — since higher ratios signify a greater risk of default, this is one measure of these enterprises’ limited financial sustainability. Simultaneously, the stations faced operational challenges like high electricity costs, higher-than-anticipated ongoing maintenance expenses and low collection efficiency. As a result, the two stations soon ran into repayment issues.

We experimented with multiple responses to these challenges. For instance, to increase revenues, we adopted new technologies like pre-paid meters and automatic water dispensers (ATMs). For ATMs, each customer receives their own radio frequency identification (RFID) card — a device that uses radio waves to establish users’ identities. With these cards, customers can top up their accounts using mobile money and retrieve water at the station at any time. Some customers could also purchase piped water connections installed directly into their homes, collecting water from them at any point using a pre-paid meter. These optimizations increased water stations’ revenue collection from 66% to 100%. We also installed solar panels, which enabled us to reduce stations’ electricity costs per liter of water produced by 35%. We scaled these innovations across our stations to improve operational margins across our entire portfolio, even for stations that were fully grant-funded. To address the high cost of long-term maintenance, we embarked on a multi-year project to quantify the total costs of sustainable water supply, including ongoing maintenance and complete replacement of the water treatment technology. We refer to these expenses as sustainability costs.

Quantifying sustainability costs and optimizing station finances is foundational for our mission to drive financial sustainability for small water enterprises. Since the completion of this research, we have incorporated the findings into the financial management of our entire business model. Our water stations now collectively contribute to a partially subsidized, centralized maintenance team and maintenance reserve fund, which have been instrumental in supporting the stations and the communities they serve.

However, even with these efficiency gains, the two stations were still not generating enough surplus to meet the original loan terms. Thus, following the reevaluation of our station finances, Safe Water Network Ghana requested a loan restructuring with our donor. We worked with them to convert half of the original loan amount to a grant, which meant the final capital structure included 65% grant funding and 35% loan financing. This approach reduced the ratio of debt to capital, which improved the financial stability of the two stations and increased their ability to meet their debt obligations. In addition, our lender worked with us to design better terms, such as a substantially lower interest rate with suspended payments during the free water mandate that the government of Ghana issued in response to the COVID-19 crisis. Our lender agreed that sustainability costs should take priority over loan repayments.


Build Flexibility into the Loan Agreement

The restructured loan terms included an income participation approach in which loan payments are based on a fixed percentage of the revenue surplus, after stations have paid their operating expenses and sustainability costs. These loans have no fixed term and conclude when the stations generate enough surplus to cover the principal and interest. This approach provides flexibility for enterprises with varying operating expenses and revenues due to market conditions like seasonality and power fluctuations. By anchoring payments to cash flow, stations are not required to make payments in months where expenses exceed revenue.

Flexibility can also be incorporated through extensions and grace periods. For instance, in 2019, we partnered with an institutional donor for a loan to upgrade nine of our stations with 54 water ATMs. ATM technology not only drives revenue by increasing collection efficiency, but it also has social benefits: It provides 24/7 access to safe water and provides additional financial flexibility and personal security by expanding payment options to include mobile money, rather than requiring cash. In structuring that loan, we took lessons from our 2014 experience, using partial grant funding and spreading the loan over many stations, which provides a larger pool of revenue to make payments and keeps the debt-to-capital ratio low. We also employed rigorous financial reporting in our projections and justification for the loan. Lastly, we built in flexibility for the payment schedule by including an optional two-year extension. We owe this flexibility to the generosity and patience of our donors: In the SWE sector, it is important to work with concessional lenders who are mission-aligned, since margins are low and there are many challenges that can impact repayment.


Operational Policy and Community Co-Creation Set Up a Sound Environment for Investment

This two-year loan extension was invaluable to us: Its advantages became clear when we faced several unforeseen challenges involving the negotiation of data ownership rights, community resistance to new technology, and Ghana’s free water mandate. These events delayed installation, but also highlighted the need for comprehensive operational policies in technology procurement and land acquisition.

We underwent long negotiations with our ATM supplier to determine data ownership, demonstrating the need for increased sophistication in our contract design and procurement policies involving technology suppliers. As our reliance on technology for operational efficiency grows, and we integrate APIs across different areas of our business model, it is important to require technology vendors to seamlessly integrate with our operations. Standardizing and advancing a policy for technology procurement and contract design is an important risk mitigation strategy.

ATMs eliminate the need for a vendor, which improves a water station’s operating margin — but the devices also prompted some resistance to new technology among our customers. In some instances, community members had agreed to let us use their land for a community standpipe in exchange for employment as a station vendor, who earns a commission on water sales in exchange for dispensing water and collecting fees. Under the self-serve ATM model, where customers make purchases with their RFID cards and operate the water tap on their own, these individuals’ jobs were no longer needed.

Safe Water Network Ghana addressed these issues in several ways: First, we acquired the land that any station vendors had lent for the use of a standpipe. Second, we provided alternative work to these vendors — including additional cleaning work that the stations required once their customers were operating the taps themselves. And third, we implemented a slow transition to ATMs, in which some customers received RFID cards to operate the ATMs themselves, and others used the vendors’ RFID cards, enabling vendors to still collect some commission on water sales made through their cards. This approach gave vendors three to five months to transition to new work opportunities. This experience highlighted the need for a new land acquisition policy, increased community engagement and co-creation with the communities we serve.

Overall, we found that engaging the community to convey the benefits of ATMs (such as 24/7 access) led most stakeholders to be supportive of them. This held true even for vendors who lost income from ATM installation. Our key takeaway: Starting the community buy-in process early can ensure a smooth transition to new technologies.

As these insights illustrate, strategic loan financing helped drive innovation in service delivery and financial management in ways that have benefited our entire portfolio. Our experience has shown us that favorable loan financing conditions are critically important to our ongoing success. We’ve also seen the value of investing in rigorous financial reporting and thorough risk assessments to determine the best conditions for our loan structures. Lastly, we’ve learned that anchoring loan payments to cash flow is a valuable mechanism for SWEs and other low-margin businesses. By taking these factors into account, organizations facing challenges to their financial sustainability can build a viable bridge to private capital.


Lauren Cuscuna is the Innovations and Insights Manager at Safe Water Network.


Photos courtesy of Safe Water Network.




Finance, Impact Assessment, Technology, WASH
blended finance, fintech, impact investing, impact measurement, innovation