Green Infrastructure

Green Infrastructure is Norfund’s newest investment area. The goal is to develop projects and companies by investing with partners to improve water and waste management – challenging investment areas, but vital parts of the infrastructure of our target countries.

Development rationale

Today, for the first time in history, more people live in urban than in rural areas. The total number of people living in cities is expected to grow from approximately 4.4 billion today to 6.7 billion in 2050. A city such as Lagos in Nigeria is forecasted to grow from 20 to 70 million inhabitants during the same time frame. The cities need to grow in a way that allows for economic growth, jobs and prosperity without putting a strain on the environment and human well-being.

While 93% of waste is dumped in low-income countries, waste management has the potential to be profitable, create many new jobs and build local supply of recycled raw material. Waste also contributes with 20% of global methane gas emissions, a gas which is up to 70 times more potent than CO2.

In Africa alone, 418 million people lack access to safe drinking water and a 12-fold increase in current rates of progress is needed to meet SDG targets.

By investing in urban infrastructure, such as the safe removal and management of waste as well as increased access to clean water and sanitation, we can help address urbanisation challenges while improving resource use, reducing pollution and contributing to job creation.

Investment needs

35.5 billion USD of investments are needed annually in Sub-Saharan Africa to reach SDGs 6.1 and 6.2. Green infrastructure-related areas have achieved increased global attention and funding. Several major funds are turning their attention to investments in waste, water and oceans. Still, the difficulty to secure funding to provide basic services and necessary water- and waste-infrastructure is a major challenge in Africa for many projects.

The African infrastructure paradox

While many projects are in search for financing and investor interest is high, it is difficult to find commercially sustainable and bankable projects. This is Africa’s infrastructure paradox.

Operational challenges and risks often lead projects to collapse before they can reach financial close. Only very few projects manage to get passed the feasibility stage and to financial close. Out of 130 reviewed water projects, only two have turned out to been at an investable stage. Within Waste to energy projects, the ratio is nine out of a hundred. Screening for those projects which are more likely to reach bankability has been a core focus throughout the first two years of this investment area.

Where Norfund can play a role

Water and waste management are especially challenging sectors given the limited willingness to pay for the services offered.

In developing countries, people are often not used to paying for access to clean water, and the responsibility for and ownership of waste collection is often lacking. This leads to complex projects with high inherent ESG and business integrity risks and therefore start-ups struggle with profitability and growth.

While commercial investors shy away from immature opportunities where risk adjusted returns become unattractive, Norfund can fill a gap by taking higher (but thoroughly considered) risks to validate nascent business models and pave the way for commercial investors.

Norfund strategy:

Green Infrastructure’s aim is to improve essential infrastructure services in:

Waste management, including waste-to-energy
Water supply and sanitation, including waste-water treatment

The priority is direct investments in Sub-Saharan Africa. During the year projects have also been explored in South East Asia with countries of significant development needs but more mature regulatory environments allowing for projects to collect revenues for e.g. waste treatment, thus making those projects investable.

The focus so far has been to carefully assess and understand market dynamics and business models to pinpoint commercially sustainable business opportunities. As described above, investments in this sector will require strong technology and market knowledge to identify commercially viable projects early on.

Norfund prefers to invest in collaboration with experienced industry partners who are able to transfer best practices to investee companies. Local or regional smaller players are also considered. During the year several such collaborations have been initiated with world leading companies in waste and water, however not yet led to investments. An additional pathway for building experience, network and footprint is to selectively invest in specialized funds, focusing on water and waste. Such fund investments also serve the purpose of offering co-investment opportunities and building companies which are yet too small for Norfund to invest directly in.

Strategic ambitions

Norfund has defined the following ambitions for Green Infrastructure:

Improve essential infrastructure, primarily in Sub-Saharan Africa and to some extent in South East Asia
Establish partnerships and make investments in waste management and water
Invest NOK 0.45 billion annually

Highlights

Portfolio taking shape

In Green Infrastructure, three commitments have been made since the inception in 2020; TransAfrica Water Systems, The Water Access Accelaration fund and InfraImpact Mid-market Infrastructure fund.

TransAfrica Water Systems

During its first year of operation, Green Infrastructure provided a loan of 2 million USD to TransAfrica Water Systems, a Kenyan water solutions company engaging in the production and distribution of equipment and services related to water pumping solutions, water treatment, wastewater management solutions, solar powered water borehole rigs and solar powered water heating systems. The company is one of the recognised distributors of world-renowned water and solar systems in East Africa.

The loan has accelerated access to clean and affordable water to households and institutions in East Africa, deepened the water sector, and facilitated jobs creation directly through the company’s expansion and indirectly through improved economic activities, for example, use of water for irrigation. The company itself has managed to expand its sales significantly following Norfund’s financing and a private investor has invested in the company, further strengthening its position.

Norfund has in addition during the year assisted the company through its business support financing in building a management system for improving environmental and social standards.

Water Access Acceleration Fund

As part of Green Infrastructure’s strategy of investing in specialized funds within water and waste, a commitment of EUR 5 million was made to the Water Access Acceleration Fund (W2AF), managed by the fund manager Incofin. Norfund’s early contribution contributed to unlocking an additional EUR 30 million in commitments.

W2AF invests in innovative water businesses that provide affordable, safe drinking water to underserved populations. W2AF is the first private equity initiative in a sector that traditionally gets its financing from governments, donors and foundations. The fund aims to demonstrate the financial viability of the safe drinking water market worldwide. It rests on a unique blended finance structure – an approach to use part of the public financing from governmental agencies to lower the risk for private investors to come in.

W2AF aims to provide safe drinking to 30 million people, mainly in Africa and Asia.

InfraImpact Mid-Market Infrastructure Fund

A commitment of ZAR 150 million was done to InfraImpact Investment Managers’ Mid-Market Infrastructure fund as part of a ZAR 1500 million fund. The fund aims to provide growth capital for South African focused mid-market infrastructure businesses, which own real assets that provide essential services and that have a value creation potential within primarily water and waste related sectors. Infra Impact is composed of a team of local specialist investors which are well positioned to unlock the many challenges when investing in this segment with a ZAR 1.7 trillion funding shortfall.

The fund targets to create 2200 jobs and contribute to the supply of one billion litres of water meeting the needs of 88 million people and to diverting 3.7 million tons of waste from landfills.

Norfund will actively work with the fund manager on deals as direct parallel co-investor where suitable.