Corinne Figueredo, Senior Investment Officer, IFC

There’s no such thing as a free lunch. This old adage, quoted by the famous economist, Milton Friedman, can be tweaked to "there’s no such thing as free water" in the Indian context. Free water in India often spreads water-borne diseases such as cholera and diarrohea. Over 25% of the population does not have access to safe drinking water (the actual percentage is closer to 65%. The 25% relates to "improved" water, which includes water provided through canals, with rudimentary treatment like sand filters).

Despite being one of the world’s leading emerging economies, India still struggles to distribute clean water to its population. Despite more than 450,000 people dying every year of waterborne diseases (according to the United Nations 2006 Human Development Report), it has done very little for its population in the area of providing clean and hygienic water.

The business of water purification and distribution, a highly subsidised subset of the municipal or non-profit organisations’ domain, was uncharted territory for private players on account of several financial, regulatory, as well as political conundrums surrounding this sensitive subject. A couple of years ago, if anyone was to talk about being in the business of water distribution and being financially viable, the discussion was scoffed at as a flight of imagination.

However, as well-known American author, Robert Schuller puts it: "Our greatest lack is not money for any undertaking, but rather ideas. If the ideas are good, cash will somehow flow to where it is needed." Inspired from the real life experience of a CEO, an innovative organisation found this lack of willingness by other private players as an opportunity for itself.

Led by a Ghanaian born chief executive, Tralance Addy, who himself used to wait in line at a water tap when he was growing up, WaterHealth International not only filled this opportunity gap but also exploited it well to its advantage. WaterHealth is an exception to the rule, both amid profit-seeking institutions, which rebuffed the water distribution business due to lack of profits; and amid non-profit organisations averse to user fees.

Founded in 1996 with the primary purpose of developing and marketing proprietary, decentralised water purification systems, WaterHealth provides affordable potable water to under-served communities worldwide.

WaterHealth today has placed more than 600 systems through its affiliate partners and subsidiaries in several countries, including over 200 systems in various villages of Andhra Pradesh and Gujarat. The company installs its purification systems in association with respective village panchayats and treads this path because water is such a sensitive issue.

The company charges a user fee (that even households that earn two dollars a day can afford), which is expected to cover all the operating and maintenance expenses and also services the principal and interest on the debt financing of the water purification equipment. WaterHealth International brings a successful financially feasible model with a high element of social additionality.

Ideas such as WaterHealth change lives only when execution transforms them into great businesses. The transformation of an idea into a business plan and its actual operationalisation is a blend of several ingredients that go far beyond the initial idea or invention—these ingredients include a resilient, creative management team, a committed workforce and, of course, financial resources.

WaterHealth started out selling water purification equipment, but did not really

Due to lack of funding from VCs and PE funds, early-stage companies take on debt too soon

begin to unlock demand until its management had radically recast its business model to that of a distributed micro-water utility using a public-private partnership model.

A hallmark of the company’s success has been the management’s responsiveness and adaptability to market needs. Particularly in its early years, the staff’s commitment to WaterHealth’s vision was also key to keep it going with limited financial resources. The management has also been savvy in approaching multilaterals like IFC, a member of the World Bank Group, for assistance and pulling in strategic investors such as Dow, which has just put up $30 million as a partial guarantee to entice local banks to lend into the micro-water utility projects in India.

While a good idea will not lack funding sources, the structuring of finance can make or break a good business. The prevailing argument, originally developed by Modigliani and Miller, is that an optimal capital structure exists which balances the risk of bankruptcy with the tax savings of debt. However, despite its theoretical appeal, one can rarely accurately measure business risk, especially with highly innovative companies. The best route is for high-risk, innovative ventures to steer clear of debt.

In high-growth companies, the management is fully absorbed with operational decisions, and cash flows can be volatile. That means loans could look cheap upfront but will turn out expensive if they have to be renegotiated, both in fees and penalties and in terms of the opportunity cost of management time, let alone the other costs of severe financial distress.

In India, currently, many early-stage companies take on debt too soon due to the weak legal framework for venture capital financing and the focus of the few Indian private equity funds on later-stage transactions in the IT field. There are some signs of increased investor appetite in clean-tech venture capital, but there is still a long way to go. That is why the International Finance Corporation (IFC), a multilateral known mostly for its project and corporate finance products, has begun to invest equity in early-stage "clean-tech" firms—in sustainable energy, water or pollution abatement, for example—and to look for fund partners ready to make a foray into this space.