h o w an a t ric k le e o m e a t o rrentfile/ey-unilever-how-can-a-trickle-become-a-torrent.pdf6ow...

H o w c an a t ric k le b ec o m e a t o rrent ?With the right focus, impact entrepreneurs and investors can play an even bigger role in bringing safe, affordable drinking water to millions.

03 Welcome

06 Executive summary

07 Onesizedoesn’tfitall 07 Insight 1 — Don’t over-engineer your business 09 Insight 2 — Focus on differentiators 10 Insight3—Focusonkeyfinancialdrivers

11 Scale matters 11 Insight 4 — Sweat your assets 11 Insight5—Managethosesiteslikeaportfolio 12 Insight6—Stayleanoncapital

13 Metrics matter 13 Insight7—Thinkimpactreturns,notjustfinancialreturns 15 Insight8—Buildabalancedscorecardtoblendperspectives

18 Conclusions

19 Glossary of terms

Contents

Welcome

EYandUnileverareunitedinthebeliefthatimpactentrepreneursarecrucialtoachievingtheUnitedNationsSustainableDevelopmentGoals(SDGs).Fusingthesocialmissionofanonprofitwiththemarket-drivenapproachofbusiness,theirenterprisesarecriticalenginesforpoweringinclusivegrowth,humandignityandpotential,whilecraftingadifferentnarrativeaboutpovertyaltogether.

Safewaterenterprises(SWEs)arealreadychangingthelivesofmillionsbybringingsafedrinkingwaterwithinreachofsomeoftheworld’spoorestandmostmarginalizedcommunities.Withthisreport,weaimtoillustratetheirpotentialtochangehundredsofmillionsmore,acceleratingprogresstowardtheGlobalGoalofequitableaccesstosafe,affordabledrinkingwaterforallby2030.

Whilewedon’tclaimtohavealltheanswers,webelievethatwhatweshareherecanhelpimpactinvestorsandentrepreneurstokeepaskingtherightquestions—questionswhoseanswerscanstimulatetherapidgrowthofmorepromisingSWEsandbringabetterqualityoflifewithinreachofmanymorepeoplelivingatthebaseofthepyramid(BoP).

How can a trickle become a torrent? 3EY and Unilever: Accelerating social business models

AtUnilever,webelievebusinessgrowthshouldnotbeattheexpenseofpeopleandtheplanet.That’swhywearechangingtheway we do business and want to change thewaybusinessisdone.TheUnileverSustainableLivingPlan(USLP),launchedin2010,isourblueprintforachievingourvisiontogrowourbusinesswhiledecouplingourenvironmentalfootprintfromourgrowthandincreasingourpositivesocialimpact.TheUSLPincludesaspecificgoaltohelpmorethan1billionpeopletakeactiontoimprovetheirhealthandwell-beingby2020.

SafedrinkingwaterisessentialforgoodhealthandisakeycomponentofoneoftheUNSustainableDevelopmentGoals(SDG6).In2017,theWorldHealthOrganizationestimatedthat2billionpeoplelackedaccesstosafedrinkingwaterand,withaboomingpopulation,weareunlikelytoreducethisnumberwithoutnewapproachestosafedrinkingwaterprovision.Bytheendof2017,throughourPureitbrand,weservedover55millionpeoplewith96billionlitersofsafedrinkingwater.

However,weknowthatthebiggestchallengesfacingtheworldcannotbeaddressedbyonecompanyaloneandthatwemusthelptransformthesysteminwhichbusinessisdone,includingcatalyzingnewinclusivebusinessmodels.Safewaterenterprisessuchasthoseoperatingdecentralizedwaterkiosksareonecriticalmethodtochangethegame.Webelievesuchmodelscanbemadefinanciallysustainablethroughcollaborationsbetweencompanies,NGOsandgovernments.Thiswillreducetheirrelianceonphilanthropiccapitalandincreasetheavailabilityofprivatecapitaltoacceleratetheirgrowthandprovidemillionsmorepeoplewithsafewater.

Kees KruythoffPresident, Home Care,Unilever

EY and Unilever: Accelerating social business models4 How can a trickle become a torrent?

AtEY,webelieveabetterworkingworldisonewhereeveryonecancontributeto,andshareinthebenefitsof,sustainableeconomicgrowth.

Withbillionsofpeoplestilllivingwithoutaccesstovitalgoodsandservices,suchascleanwater,reliableenergyandimprovedsanitation,thatmayfeelalongwayfromreality.Butanewbreedofimpactentrepreneursismakingittheirbusinesstotacklethisinequality,drivinginclusivegrowth by innovating better answers to some of society’s toughestchallenges.

EYisproudtosupportthesechange-makers,extendingthevalueofourknowledge,skillsandexperience,onanot-for-profitbasis,tohelpimprovetheirbusinesses’resilience,productivityandcapacityforsustainablegrowth.

We’reequallyproudtohavehadtheopportunitytocollaboratewithUnileverandbepartofitsdrivetoidentifyandsupporthigh-potentialSWEs.Aswithsimilarrecentreportsoncontainer-based sanitation and last-mile distribution,wehopethatsharingtheinsightsandanalysisfromthisworkcanhelppropeltheentireSWEsectorforward.

Thereasonissimple.Whenimpactentrepreneurshipworksbetter,theworldworksbetter.Whetherbyexpandingaffordableaccesstovitalgoodsandservices,acceleratingcreationofqualityjobs,oradvancingtheeconomicparticipationofwomen,youngpeopleandotherunderrepresentedgroups,scalingimpactentrepreneurshipcreatesripplesthatcanchangemillionsoflives.

Alison Kay Chair of the EY Global Accounts Committee


http://www.ey.com/Publication/vwLUAssets/ey-the-world-cant-wait-for-sewers/$FILE/ey-the-world-cant-wait-for-sewers.pdf

http://www.ey.com/Publication/vwLUAssets/report-by-EY-acumen-and-frontier-markets-are-your-customers-in-the-loop/$FILE/report-by-EY-acumen-and-frontier-markets-are-your-customers-in-the-loop.pdf

http://www.ey.com/Publication/vwLUAssets/report-by-EY-acumen-and-frontier-markets-are-your-customers-in-the-loop/$FILE/report-by-EY-acumen-and-frontier-markets-are-your-customers-in-the-loop.pdf

Executivesummary

Imaginealifewithoutsafedrinkingwater.Itisn’teasy.Mostofustakeitforgrantedthatwecanjustturnonatapandfillaglass.Butthat’snotanoptionforroughlyoneinfouroftheworld’spopulation—the2.1billionpeoplewhostilllackaccesstosafedrinkingwater.

Withhalfofallhospitalbedsinlow-incomecountriesoccupiedbypeoplewithwater-bornediseases,it’shardtooverstatetheimportanceofreachingtheSDGofequitableaccesstosafe,affordabledrinkingwaterforallby2030.

Whilethecurrentrateofchangeisn’tfastenoughtohitthattarget,westillseegroundsforoptimism.Weseeit,inparticular,inthegrowingnumberofimpactentrepreneurswhoareinnovatingnewmodelsforthescalableandsustainableprovisionofsafewaterinunderservedcommunities.

Unitedinourdesiretoacceleratetheirprogress,it’swhyUnileverengagedEYtohelpidentifythemostpromisingSWEsaroundtheworld,andtodevelopadeeperunderstandingoftheirbusinessmodeldynamicsandbarrierstogrowth.

Themarket-leadingSWEswhosebusinessesformthebasisofthisreportarealreadyservingmorethan15millionpeopleacrossAfricaandIndia.What’smore,it’sourbeliefthat,withtherightfocusandsupport,theycanreachhundredsofmillionsmore.

Ourresearchandanalysissuggeststhisrestsonthreethingsaboveall:

1. RecognizingthehighfixedcostsinherentinanySWEoperatingmodel,whichmeansthatonlySWEsthatoperateatscalecanachievetruesustainability

2. Recognizingthatthereisno“ultimate”SWEmodelthatworksbestinallcircumstancesandthatthepathtoscalethereforedependsonfindingthebestfittoaparticularblendofmarketconditions

3. RecognizingtheneedforinvestorstotakeabalancedviewofSWEs’potentialtogeneratereturns—fromasocialimpactaswellasfinancialperspective—inordernottooverlookpromisingandscalablemodelsforsafewaterprovision

We’reextremelygratefultotheextraordinarySWEmanagementteamswithwhomwehaveworkedtocompiletheinsightsinthisreport,andtotheimpactinvestorswhobackthem.

Byshiningalightontheseissuesandofferingpracticalguidanceonwhattodoaboutthem,wehopetomakeiteasierfortheirlife-changingbusinesses—andotherslikethem—tofindapathtoevengreaterimpact.

peoplelackanyaccess to safe water

500 million

Over

havetotravelmore than an hour to fetch safe water

300 million

Another


Onesizedoesn’tfitall

Ourresearchsuggeststhereisno“ultimate”modelforanSWE.Ratherthereareonlymodelsbetterorworsesuitedtodifferentmarketconditions,sincethechallengeofsustainingaviableSWEvariesfromplacetoplace.

Amongotherthings,itdependsonthedailyincomeofpotentialcustomersandhowmuchofittheycanaffordtospendonwater.Itdependsontheparticulartreatmentchallengethatneedssolvingtomakewatersafetodrink(e.g.,whetherthisrequiresremovingheavymetalsorsimplykillingpathogens).Anditdependsonthelevelofcompetitionandhowthisaffectsachievablepricesandoperatingmargins.1

Aswe’llcomeontoinmoredetaillater,scaleisthesinglemostimportantfactorinbuildingself-sustainingSWEswiththepotentialtoreachhundredsofmillionsofpeople.Beforewegettothat,though,it’simportanttounderstandthatachievingscaledependsonfindingthebestfitforaparticularblendofcircumstances.

Insight 1 Don’t over-engineer your business

Succeedinginmakingsafewateraccessibleandaffordabletoallby2030meansacceptingthatthe“ideal”answertowatertreatmentmaynotalwaysbethebestone.Counterintuitivethoughitmayseem,sometimes“goodenough”isbetter.

Reverseosmosis(RO)isthepreferredtreatmenttechnologyforraisingthequalityofwatertoWorldHealthOrganization(WHO)guidelines,asithandlesbothbiological(i.e.,pathogens)andphysicalcontaminants(e.g.,arsenic,fluoride).Butit’snotalwaysnecessary.

ThepotentialcustomerbaseforanySWEislimitedbythepriceitchargesforitswater,asshowninFigure1.Thistakespricescharged—rangingfrom10centsper20litersofwatertoaroundadollar—andmapsthemtotheamountthatcustomersofagivendailyincomecanaffordtospend,overthelongterm,tomeettheirdailywaterneeds(basedonWHOestimates).

Dailyincomessetlimitsontherevenuethatcanbegeneratedatagivensite,whichinturndetermineslevelsofoperatingmarginandeconomicviability.ThisfactalonerulesoutsustainablydeployingROincertainpartsoftheworld.

Whiletheeconomicsmayworkinurbanorperi-urbanlocations,wheresufficientlyaffluentcustomerscanbefoundinsufficientlyhighdensities,it’slikelytobeaverydifferentstoryinruralandverylow-incomecommunities.TheupfrontinvestmentinROequipment,orthecostsofleasingit—whilealsopayingforotheroverheadssuchassalaries,siterentalsandenergy—maysimplybetoohighforSWEstorecoup.

Ente

rpri

se p

rice

per

20

liter

s of

wat

er (U

S$)

Customer daily income (US$)

0.20

0 0

0.40

0.60

0.80

1.00

1.20

1.40

1.00 2.00 3.00 4.00 5.00

Unaffordable to these customers

Affordable to these customers

Figure 1: Affordability of safe water

1Seetheglossaryfordefinitionsofallfinancialtermsusedinthisreport.


Especiallyintheseareas,it’simportantnottooverlookcheaperpurificationtechniquesthat,whilenotachievingthe“goldstandard”ofRO,arenonethelessfitforpurposeandprovideopportunitiestotreatmuchmoreofthewaterbeingconsumedbyhugenumbersofpeopleattheverybaseoftheglobalincomepyramid.

Forexample,electrochlorinationenableswatertobedecontaminatedusinglittlemorethantablesaltandanelectriccurrent.Perfectlysuitablewherethesourceofcontaminationisbacterialratherthanphysical(i.e.,fromfecalmatter),itcanmakepotablethedrinkingwaterofhundredsofmillionsofpeopleatsignificantlylowercost.

Buteventhisradicallycheaperapproachtopurificationhasitslimits.WhileachievingsubstantiallylowercoststhanitcouldhavedonewithRO,oneSWEweworkedwithinIndiabelievesthismodelisstillonlyfinanciallyviableforaroundoneinsixofthevillagesitwantstoreach.Beyondthatpoint,populationsizesanddensitiessimplydon’tallowsufficientsalesvolumestocoverfixedcostsandbreakeven.

“Thehealthconsequencesofpoorwater,sanitation,andhygieneservicesareenormous.Icanthinkofnootherenvironmentaldeterminant that causes such profound,debilitating,anddehumanizingmisery.”

Margaret Chan WHO Director General 2007–2017


I ns ig h t 2 Focus on differentiators

TheprimaryactivitiesofanSWEvaluechaintypicallyinvolvewaterextraction,treatment,distribution,retailandqualitymonitoring.AtypicalSWEisamodularassemblyofoptions,suchasthetypesofwatersources,ortreatmentanddistributiontechnologiesdeployed,ateachpartofthisvaluechain.

Gettingthesebasicsrightisimportant,butthereareanothersetofcriticalenablersthatourresearchsuggestsareevenmorevaluable.ThesearewhereSWEscanreallydifferentiatethemselvesfromoneanother:

A dap t ive m anag em ent

Acultureofcontinuousimprovementandadaptivemanagementwasfoundinallsuccessfulorganizationsweobserved.SWEsneedtobewillingtotweaktheexistingmodels(seeInsight3),trimunnecessaryoverheadsandseekoutpartners(whethergovernment,corporate,foundationsorindividualinvestors)tobringinnovativenewideasandbusinessmodelconfigurationsintoplay.

Life cycle financing

BythiswemeanhowanSWEconfiguresitsfinancialmodelsoastogeneratesufficientreturnstosustainexistingassets(e.g.,carryingoutcapitalmaintenanceandaccountingforeventualassetreplacement)andgrowthebusiness.

ApproachestofinancinggrowthvarywidelybetweenSWEmodels.Forexample,someopttoapplyheavilyforgrantstoprovideearly-stagefundinguntiltheyreachsufficientsizeandcanbecomeself-sustaining.Thisapproachtendstobemorecommonin,andmoresuitedto,India,whereanabundanceofprivateinvestorsandmandatorycorporateresponsibilityrequirementsenshrinedintheCompaniesActmeanthereisplentyofcapitalinsearchofsocialimpactprojects.

Othermodels—morecommoninAfrica—areconfiguredforhigheroperatingmargins,basedontheneedbothtorecoupupfrontinvestments(e.g.,capitalexpenditureandloanstofranchises),whichtheymustoftenfundthemselves,andtoattractventurecapitaltogettoscale.

Insuchcases,franchisingcanbeanimportanttoolforaccessingadditionalcapitalfromawidegroupofentrepreneurs,whoeachhaveskininthegame.WefoundthisapproachgenerallymoresuccessfulinIndia,whereentrepreneursaremoreabletoaccesscapitalthaninotherlow-andmiddle-incomecountries.

F ig u re 2 : S W E valu e c h ain

A dap t ive m anag em ent

Life cycle financing

T alent and inc ent ives

T ec h no lo g y

Ex t rac t io n

• Exisitingborehole

• Newborehole• S urface w ater• Tapwater

T reat m ent

• Chlorination• Distillation• Filtration(sandor

carbon)• R ev erse osmosis• Ultra-ornano-

filtration• Ultraviolet

disinfection

D is t rib u t io n

• Customercollection

• Deliverytok iosk s

• Homedelivery• Pipedto

satellites• Treatedatpoint

of use

R et ail and m ark et ing

• Adv ertising• Cashondelivery• Company-owned

k iosk s• F ranchised k iosk s• Localretailers• Pre-paysolutions• Unattended k iosk

(ATM)

S ervic e delivery

• Asset management andrepairs

• Communityand customer relationshipmanagement

• Waterqualitymonitoring

Diff

eren

tiat

ors

V alu e c h ain

H o w c an a t ric k le b ec o m e a t o rrent ? 9EY and Unilever: Accelerating social business models

Talent and incentives

Findingtherightentrepreneurstorunsitesormanagefranchiseesrequiresrigorousrecruitmentprocessesandinvestmentinskillsdevelopment.SWEsthatexcelintheseareasalsocreateincentivestructuresthataligneachother’sinterests,allowingentrepreneurstogeneratemoremoneyforhighperformance.

SWEsbasedinAfricatendtobuildintrainingprogramsfortheirentrepreneurs,notunlikeabusinessfinishingschool.Conversely,IndianSWEstendtobenefitfromawiderpoolofentrepreneurialtalent,typicallyworkingwithexistingentrepreneurs,aswellasbeingabletotapintoaburgeoningskillsbaseofsoftwaredeveloperscapableofbuildingin-housethetoolsneededtomanagethebusinessatscale.

Technology

Developingorinvestingintechnologycanseemchallengingforanorganizationoperatingwithfinelytunedeconomics,butit’sanimportanttoolforreducingcostandimprovingthecustomerexperience.Forexample,oneoftheSWEsweworkedwithhasbeenabletodeployautomatedwaterdispenserswithwirelessreportingina“hub-and-spoke”formationarounditspurificationsites.Waterlevelsattheautomateddispensersaretrackedremotelyandarefillingtruckissentbeforethetankrunsdry.ThishasallowedtheSWEnotonlytoincreaseitsreachfromonewatersitebyafactorof15,butalsodeliveratotallyreliablewatersourceforitscustomers.

Insight 3 Focusonkeyfinancialdrivers

Asanascentsector,manyofthemostpromisingSWEsaroundtodayhavespentyearsincrementallytweakingelementsoftheirmodel,testingnewstrategiesandironingoutcreases.ThedifferencebetweenasuccessfulandunsuccessfulSWEoftenrestsintheseseeminglyminorvariances,informedbymaintainingafirmgriponkeyfinancialdrivers.Aboveall,theseinclude:

Revenue

Acombinationoftheachievablepricethatcanbechargedforthewaterandthevolumeofsales,themaindriverofrevenueisasite’sproximitytoasufficientnumberofcustomers.Siteselection—eitherplacementnearbytohighdensitypopulationsorusinghomedeliverytoclustersofsmallersettlementsinahub-and-spokeconfiguration—isthereforeadecisivefactorinfluencingsalesandsustainability.

Fixed operating costs

Varyingwidelyfromcountrytocountry,theseincludestaffcosts,energynotusedinwaterproduction,rent,maintenanceandrepairs,andvehicles.Theyareinfluencedbytheavailabilityoftalent,localwages,aswellasthemodesofretailingthatakioskoperatoremploys.Useofautomateddispensingtechnologiescanbringdownthecostofemployingstaff.SomeSWEshavebeenabletodrasticallyreducetheiroperatingcostsbyagreeingconcessionsforlandusagewithlocalgovernments(similartoapublicprivatepartnershiparrangement),generallypassingthesesavingsontocustomersinthepricechargedforwater.

Marginal costs of water treatment and distribution

TendingtobehigherinAfricathaninIndia,thesetypicallyincludeconsumables(suchasbottles,capsandchlorine),energyusedinwaterproduction,distributioncosts(driversalariesandvehiclefuel)androyaltypayments.Theprincipaldriveristhemethodofwaterdistribution,e.g.,bymotorizedormanualvehicle,orthroughgravity-fedoverheadpiping.

Webelievethislatterapproachcouldtransformtheeconomicsofwaterdistributionindenselypopulatedareasbycreatingsalesvolumeshighenoughtorapidlyshrinkmarginalcosts.

Site development costs

Theseincludestructures,fittings,treatmentsystems,boreholedevelopmentandsolarinstallation.Thebiggestcostelementisthatofmaterials,whichisagaindrivenbythelocationoftheSWE.WesawevidenceofcostsforbuildingasiteintheAmericasat87%higherthaninsub-SaharanAfrica,and250%higherthaninIndia.Thechoiceandconfigurationoftreatmentsystemisalsoanimportantfactorhere.

250%highercostforbuildinga site in America than in India


Scalematters

Whetherearlystageormaturebusinesses,SWEoperatingmodelshaveveryhighfixedcostsrelativetothemarginalcostsofwaterproduction.Thismeansthatthemoresitestheyhave,themoreprofitabletheycanbecome,andthemorelikelyitisthattheycangeneratelargeenoughreturnstofundfurtherexpansion.Inshort,onlySWEsthatoperateatscalecandososustainably,withoutrelianceongrantfunding,andit’sonlyatscalethatsafewaterprovisioncanbebroughttohundredsofmillionsofpeople,ratherthanthemillionsweseetoday.

Insight 4 Sweat your assets

AnSWEisanasset-intensiveenterprisewithalow-pricedproduct.Likethebudgetairlinethatneedstominimizethetimeitsplanesareonthegroundtoturnaprofit,makingsurethoseassetsarehighlyutilizediscriticaltooperatingsuccessfully.

Constructioncosts,treatmentequipment,leasesforland,operatorsalaries,andenergyandmaintenancecostscanallmeanit’scostlytogetasiteupandrunning.However,actuallyproducingtreatedwaterinvolvesverylittleadditionalcost.Thegrossprofitoneachliterofwatersoldcanbemorethan80%,whichrepresentsahighcontributionmargin.

Thismeanstwothings.Onthedownside,itmeansthatanSWEneedstoconsistentlysellstrongvolumesofwatertobreakeven.Ontheupside,oncethatbreakevenpointisreached,salesofeachadditionalliterofwaterproducedbeginaccruingdirectlyasprofitonthebottomline,asillustratedbyTable1.Thismatterswhenyouconsiderthat,onaverage,noneoftheSWEsweanalyzedwasoperatingequipmentatmorethan50%ofcapacity.

Table 1 — Marginal increases in water production can drive significant increases in profitability

Liters of water sold daily Site internal rate of return (IRR)

2,500 -24%

2,750 -7%

3,000 7%

3,250 19%

3,500 30%

3,750 40%

4,000 50%

Simplyput,ahighlyutilizedwatersitecanoutperformanaverageoneexponentially.It’swhySWEsshouldtakegreatcarebothintuningtheirbusinessmodelsandinsiteselection,takingintoaccountpopulationdensity,willingnessandabilitytopayforwaterandsiteaccessibility.

Insight 5 Manage those sites like a portfolio

Justlikeanyotherportfolio,overallreturnsaredictatedbytheindividualperformanceoftheinvestmentsitcomprises.Forthisreason,webelieveSWEsshouldbepreparedtodivestsitesthatcannotachieveaminimumstandardofperformance.Thisisnottosuggestthepursuitofprofitshouldoutweightheirsocialmission;itissimplytorecognizethedependencyofportfolioeconomicsontheeconomicsofindividualsites.

AteverySWEwestudied,therewerewidevariationsinperformancebetweensitesanditwasn’tuncommonforSWEstocarryloss-makingsites,aswellashighlyprofitableones.Thiscanbejustifiedongroundsofmeetingasocialneed,butitshouldbegroundedinaconsciousanddeliberatestrategyofcross-subsidization,notaccidentallyallowingunderperformingsitestodragdowntheperformanceoftheoverallportfolio.


Optimizingacrosstheportfolioandminimizingthenumberofunprofitablesitescanhelpimpactinvestorsseewheretheireffortscanbebestplaced.SWEsneedtounderstandthedriversbehinddifferencesinperformanceanddesigncorrectiveactions.Forexample,itmaybenecessarytodeploymoreadvertising,runpromotionstoattractnewcustomers,oradjustpricestobettermatchthemeansofthelocalcommunity.Evenifthismeansacceptingbreakevenatsomesites,itwillhelpbringuptheaverageofthewholeportfolio.

Insight 6 Stay lean on capital

WorkingcapitalrequirementscanactasasignificantbrakeongrowthforSWEs,whichiswhyitpaystoberuthlessinpursuitofcapitalefficiencies.

WefoundsignificantdifferencesinthecapitalintensityofdifferentSWEbusinessmodels,atleastpartiallyattributabletobusinesses’willingnesstoinnovateandexperimentwithdifferentcombinationsofchoicesalongtheSWEvaluechain.

Forexample,someSWEshavebeenquickertoinstalltechnologiesthatdrivedownworkingcapitalrequirements,suchaspre-paymentcards.Thesenotonlyreducethenumberofproblemsassociatedwithcashhandling,butcruciallyalsoreducethewholeorganization’snettradecycle(i.e,thedifferenceindaysfromwhensuppliersmustbepaidtowhencustomerspay,orfranchiseesremitfunds).Thismeanslessoftheenterprise’sfundsarelockedupinunproductiveassets,freeingthemupforuseinrevenuegeneratingassetsormakingnewinvestments,suchasopeninganewkiosk.

OtherSWEshaveattemptedtousesecondarysales—suchashealthandnutritionproducts—asameanstoincreasetheirimpactandstrengthencustomerloyalty.However,SWEsadoptingthisapproachneedtobesuretheycancopewiththeworkingcapitalrequirementsinvolvedincarryinglargerinventoriesandthatsecondaryproductswillincreasemargins,notdilutethem.

Weobservedrevenuecompoundannualgrowthrates(CAGR)ofover50%inthepastthreeyears—aclearsignofagrowingsector.Blendedmodels,basedonsellingproductsotherthanwater,runtheriskofdilutinggrowthbystraddlinghigh-growthandmaturesectors.Competingformarketshareinestablishedsectorscouldrisklockingupcapitalinlessprofitableassetsandactingasabrakeastheytrytoscale.

WebelieveSWEswillhaveaneasiertimecapturingorganicrevenuegrowthbecauseoftheoverallexpansionofthemarketsegmenttheyserve.Thishasbeenshowntobeamorestraightforwardroutetoscaleinmanyindustries.

“Diarrhoeacausedbydirtywaterandpoortoiletskillsachildunderfiveeverytwominutes.”

WASHWatch.org

“Aroundtheworldupto443millionschooldaysarelosteveryyearbecauseofwater-relatedillnesses.”

Human Development Report, 2006


Metrics matterIfonesizedoesn’tfitallintermsofSWEbusinessmodeldesign,thenitfollowsthatonesizeshouldn’tfitallwhenitcomestoevaluatingtheirpotentialtogeneratereturns.JustastoonarrowafocusonROmayleadtooverlookingalternativetreatmentmethods,sotoonarrowafocusonreturnsoninvestedcapital(ROIC)mayleadtooverlookingviableinvestmentopportunitieswiththepotentialtobringsafewaterwithinreachofhundredsofmillionsmorepeople.

The“magicmetric”ofgramsofcarbondioxideperkilometer(gCO2/km)hasillustratedthepowerofasinglemetrictochangeperspectivesandbehaviorsacrossthecarindustry.Webelieve“impactreturnoncapital,”orIROC,hasthepotentialtoachievethesameacrossSWEsandinothersocialsectors.

Insight 7 Thinkimpactreturns,notjustfinancialreturns

TraditionalmethodsofmeasuringcapitalefficiencycenteronROIC,whichprovidesfinancierswithawayofcomparingeconomicreturnsacrosspotentialinvestments.Foranimpactinvestor,thisisanecessarybutinsufficientlensthroughwhichtojudgecapitalefficiency,becauseitdoesnottakeintoaccountthepurposefultrade-offsSWEsmakeinthecleanwatersector.SWEsareoftenintentionallyrunasclosetobreakevenaspossible,generallytofacilitatelowerpricesforcustomers.

Inlightofthis,wedevelopedanalternativeview—IROC—whichlooksatthenumberofpeoplecapableofsubsistingeachdayfromthewaterproductionachievedbyeachSWE.Toarriveatthismeasure,wetookSWEs’waterrevenuesandpriceschargedtocalculatetheamountofwatersold.WethenworkedouthowmanycustomerscouldliveoffthatamountofwaterusingWHOdailywaterconsumptionrequirements.IROCthereforerepresentsthenumberofdailywaterconsumersperthousanddollarsofinvestedcapital.


Ret

urn

on in

vest

ed c

apit

al (R

OIC

)

D aily w at er c o ns u m ers p er US $ 1 , 0 0 0 o f inves t ed c ap it al ( I R O C )

60%

50%

40%

30%

20%

10%

0%

– 10%

– 20%

– 30%

– 40%

100 300 400 500 600 7 00 800 9 00

SWE “A” SWE “B” SWE “C” SWE “D” SWE “E” SWE “F”

200

F ig u re 3 : F inanc ial vs . im p ac t ret u rn o n c ap it al f o r s ix leading S W Es , 2 0 1 6 – 2 0 2 1

SWE “A” SWE “B” SWE “C” SWE “D” SWE “E” SWE “F”

Priceper20litersofwater(UScents)

35 9 6 40 16 14 15

W ater treatment method

RO RO RO RO Chlorination RO

Actual2016rev enues (US$thousands)*

418 549 236 9 26 284 12,803

Forecast2021rev enues (US$thousands)*

8,067 24,884 7 9 6 5,051 13,266 103,514

*Actualandforecastrevenuesarereflectedbythesizeofbubblesinthechartabove.ForecastrevenuesarebasedonEYanalysisandprojections.

EY and Unilever: Accelerating social business models14 H o w c an a t ric k le b ec o m e a t o rrent ?

Viewedthroughthislens,wesawmassivevariationintheperformanceofdifferentSWEmodels—fromaslowas12toashighas70dailybeneficiariesperthousanddollarsofinvestedcapitalamongROoperators,andoftenexceeding200inthecaseofchlorinationmodels,whichbenefitfrommuchlowercapitalrequirements.

CombinedwiththemoretraditionalROIClens,asshowninFigure3,aninterestingpictureemerges.WhilesomeSWEsareclearlygearedtowardsstrongereconomicreturns,othersareconfiguredforhighersocialimpact.

SWE“E”isparticularlynoteworthyastheonlyfeaturedenterprisetousechlorination.Ashighlightedearlier,whilethisisonlysufficienttoremovefecalpathogensandnotsuitablefordealingwithothercontaminants,itslowercapitalcostscomparedtoROallowforaveryhighIROC.

SWE“D”alsostandsoutforitshigherIROCcomparedwithotherenterprisesusingRO.Thisislargelyduetoitsuseofinnovativemonitoringandreportingtechnology,whichallowsittoutilizeitsassetsmuchmoreefficiently.

WhileallfeaturedSWEscurrentlyshowanegativespreadintermsoffinancialreturnsoncapital,allarealsoforecasttoachievesubstantialimprovementsinROICby2021.Webelievetheseforecaststobebroadlycredibleinthecontextofanascentsector.Itcouldbearguedthatagreaterthan20%returnforinvestorscanbejustifiedbyadesiretoattractcommercialcapital,ratherthanimpactinvestment,tofuelearlygrowth.Equally,itcouldbearguedthattheycreateroomforpricereductions.

ThepointisnotforSWEsandimpactinvestorstobuildorevaluateaninvestmentcaseonthebasisofonemeasureortheother,beitROICorIROC.Ratherit’storecognizethevalueandimportanceoftakingabalancedviewandlookingatvaluecreationfrommultipleperspectives.

Insight 8 Build a balanced scorecard to blend perspectives

Takingintoaccountalltheinsightswehavepresentedinthisreport,werecommendthatSWEsadoptabalancedscorecardsimilartotheoneshowninTable2inthenextpage.Thisblendstraditionalinvestormetricswithimpactmetricsandsufficientfinancialdatatoprovideclarityonhistoricalandforecastperformanceatbothsiteandportfoliolevels.Itcouldalsobesupplementedwithadditionalmetrics—forexample,inrelationtooperationalefficiencyorcustomerandemployeesatisfaction—accordingtoSWEboardwishes.

Bringingallthesemeasurestogetherinoneplacewouldprovideasolidmanagementdashboard,focusedonthecriticalmetricsthatreallydriveperformance,andwhichempowerSWEstostrikeanappropriatebalancebetweenfinancialandimpactreturnsoncapital.


Table 2 — Example scorecard based on a real SWE with numbers changed for anonymity

USD $ thousands Historic Forecast

2015 2016 2017 2018 2019 2020 2021

Financial, enterprise level

Revenues 125 406 759 2,305 5,748 11,077 18,414

Revenuegrowth(yoy) 0% 226% 87% 204% 149% 93% 66%

Grossprofit 107 226 432 1,310 3,268 6,297 10,468

Grossprofitmargin(%) 86% 56% 57% 57% 57% 57% 57%

EBITDA (98) (296) (886) (403) 1,383 4,224 8,188

EBITDAmargin(%) –79% –73% –117% –17% 24% 38% 44%

Operatingprofit(EBIT) (98) (325) (1,069) (730) 797 3,299 6,882

Operatingprofitmargin(%) –79% –80% –141% –32% 14% 30% 37%

Financials, site/franchise level year

0 1 2 3 4 5

Sitediscountedcashflow (22,000) 226 5,663 10,373 9,020 7,843

SiteROI 1% 26% 47% 41% 36%

Five-yearinternalrateofreturn(IRR)

29%

Netpresentvalue(NPV)@ 15%

11,125

Capitalefficiency

Totalinvestedcapital 554 1,504 6,727 6,909 9,361 12,252 13,705

Returnoninvestedcapital(ROIC,%)

–18% –22% –16% –11% 9% 27% 50%

Operatingfixedassets 249 612 1,579 2,701 4,703 7,165 9,669

Returnonfixedassets(ROA,%)

–39% –53% –68% –27% 17% 46% 71%

Fixed-assetturnoverratio 0.50 0.66 0.48 0.85 1.22 1.55 1.90

Enterprise value

Enterprisevalue(EV) 7,164,189

EV/EBITDA (73.13) (24.22) (8.08) (17.78) 5.18 1.70 0.87

EV/Revenue 57.43 17.63 9.44 3.11 1.25 0.65 0.39

Yearsofoperation 5

Impact

Priceper20Lwater(US$) 0.65

Affordability(customerincome,US$perday)

2.32

Estimatedwaterdispensedannually(thousandliters)

7,162 18,769 47,500 144,188 359,604 692,993 1,152,035

LitersofwaterperUS$totalinvestedcapital

9.6 9 5 15 28 42 62

Waterconsumersperday 7,848 20,568 52,055 158,014 394,087 759,444 1,262,504

Payingcustomersperday 1,570 4,114 10,411 31,603 78,817 151,889 252,501


Conclusions

Whilesubstantialprogresshasbeenmadeinrecentyears,thestarkrealityisthatroughlyaquarteroftheworld’spopulationstilllackseasyaccesstosafedrinkingwater.IfwearetochangethatpictureandreachtheSDGtargetofequitableaccesstosafe,affordabledrinkingwaterforallby2030,thenidentifyingandsupportingscaleableSWEsisundoubtedlyavitalpartoftheequation.

Theinherentchallengeinthisisthatthereisno“cookiecutter”approachtobuildingSWEsthatareindividuallycapableofbecomingself-sustaining,andcollectivelycapableofreachinghundredsofmillionsofpeople,ratherthanthemillionsweseetoday.ThereisnoultimateSWEmodelthatworksbestinallcircumstances;thereareonlymodelsthatarebettersuitedtodifferentmarketconditions.

ThisrequiresthatSWEspaycloseattentiontotheparticularblendofcircumstancesinwhichtheyareoperatingandtailortheirbusinessmodelsaccordingly,inparticularbeingcarefulnottoover-engineersolutionstotheextentthattheylimiteconomicviabilityandcapacitytoscale.Further,aclearfocusondifferentiatorsandkeyfinancialdrivers,andaportfoliomanagementapproachtooptimizingperformanceatbothindividualsiteandenterpriselevels,canofferinvestorsamorecrediblegrowthstory.

TransformingthereachandimpactofSWEsalsorequiresthatinvestorsadoptamorebalancedviewofreturnstoencompassnotonlyfinancialreturnsoninvestedcapital,butalsoimpactreturns.Estimatingthenumberofdailywaterconsumersreachedperthousanddollarsofinvestedcapital,anew“impactreturnoninvestedcapital”(IROC)measureoffersthemeansforamoreholisticapproachtobuildingandevaluatinginvestmentcasesthatcanhelpguardagainstpromisingandscalablemodelsforsafewaterprovisionbeingoverlooked.


Glossaryofterms

T erm Definition

Breakevenpoint Thepointatwhichrevenuereceivedequalsthecostsassociatedwithreceivingtherevenue.

Compoundannualgrowthrate(CAGR)

Themeanannualgrowthrateoftheenterpriseoveraspecifiedperiod(inthiscase,threeyears).

Contributionmargin Theproduct’spriceminusitstotalvariablecosts.Itisusefulindeterminingproductionefficiencywithouttakingintoaccountfixedcosts(whichareoftenoutsideofthecontroloftheSWE).

Discountedcashflow(DCF) DCFisavaluationmethodusedtodeterminetheattractivenessofaninvestmentwithconsiderationtothetimevalueofmoney.Itanalyzesprojectedfuturefreecashflowsanddiscountsthemusinganinterestratetounderstandthepresentvalue.

Fixedcosts ThecostsincurredbytheSWEthatdonotchangewithincreasesordecreasesinsalesorproductivity.

Grossprofit Profittheenterprisemakesafterdeductingthecostsassociatedwithmakingandsellingitswater.

=revenue–costofsales

Internalrateofreturn(IRR) IRRisthediscount(orinterest)rateatwhichthenetpresentvalueofnetfreecashflowsis0%.

Marginalcosts Themarginalcostsofproductionisthechangeintotalcostfromproducingoneadditionalliterofwater.Itishelpfulinidentifyingtheoptimumproductionlevel.

Netpresentvalue(NPV) Thevalueofthecostoftheinvestmenttodaynettedoffagainstthevalueofthecashflowstheinvestmentisexpectedtogenerateinthefuture,discountedtoreflectthedecreasingvalueofmoneyovertime.Itisusedtoanalyzetheprojectedprofitabilitypotentialinvestments.

Operatingprofit(EBIT) Earningsbeforeinterestandtaxes(EBIT)isanindicatorofacompany’sprofitability,calculatedasrevenueminusexpenses,excludingtaxandinterest.

Operatingmargin Operatingprofitexpressed(EBIT)asapercentageofrevenue.

= E B I T / rev enue

Overheads Allbusinessexpensesnotrelatedtothedirectlaborormaterialsinvolvedinproducingwater.Thisincludesmanagementtime,R&Dandheadofficecosts.

Return on invested capital (ROIC)

Usedtoassessacompany’sefficiencyatallocatingthecapitalunderitscontroltoprofitableinvestments.Returnoninvestedcapitalgivesasenseofhowwellacompanyisusingitsmoneytogeneratereturns.

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