Tapping the Market: Opportunities for

Domestic Investment in Water and

Sanitation for the Poor

Crawford School of Public Policy

September 13 2013

Bob Warner

Jae So

@WSPWorldBank

09/11/2013

Slide 2

NA

SSA

LAC

EA

SAR

ME

Water supply

128

22

333

Oceania

13

35

599

31

1,005

170

E. Asia

484

SE. Asia

184 Sanitation

Source: JMP, 2012

13 17

35

35 118

333

333

599

31 22

31

1,005

170

128 484

184 71

4

SE.ASIA

4

2.5 billion people lack access to improved sanitation

780 million people lack access to water supply

A market out of exclusion

Slide 3

World Bank Group Goals

1. End extreme poverty by 2030

2. Boost shared prosperity for the

bottom 40%

Slide 4

Benin

Burkina Faso

DR Congo

Ethiopia

Kenya

Mozambique

Niger

Senegal

Tanzania

Uganda

Zambia

Bangladesh

India

Pakistan Bolivia

Honduras

Nicaragua

Peru

Cambodia

Indonesia

Lao PDR

Philippines

Vietnam

Support poverty reduction by helping countries and their people achieve

sustainable access to water and sanitation and safe hygiene practices

WSP’s Mission Leveraging Global Knowledge and Country Presence

SIX BUSINESS LINES

1. Scaling Up Rural Sanitation and Hygiene

2. Creating Sustainable Services through Domestic Private Sector Participation

3. Targeting the Urban Poor and Improving Services in Small Towns

4. Mitigating and Adapting WSS Delivery to Climate Change Impacts

5. Supporting Poor-Inclusive WSS Sector Reform

6. Delivering WSS Services in Fragile States

Slide 5

The study - questions We set out to understand what constrains more private supply to the poor

Questions:

1. ‘Is investment constrained by low market potential and a lack of demand?’

2. or, ‘Are firms not viable and their business models poorly adapted to take

advantage of the market opportunity?’

3. and, ‘How does investment climate affect the costs and perceived risks of

firms?’

Commercial Factors

Costs Perceived Risks

Firm’s

Investment

Decision

Investment Climate Factors

Slide 6

Introduction to the study

• Approach

• Findings

– Market potential

– Water

• Demand, supply, investment climate issues

– Sanitation

• Demand, supply, investment climate issues

Slide 7

The study – approach

Sanitation

Customer focus groups (682 people)

Enterprise surveys (109 firms)

Supply chain reviews

Country policy & regulatory analysis

Water

Customer focus groups (1,100 people)

Enterprise surveys (89 firms)

Supply chain reviews

Country policy & regulatory analysis

Six countries, seven country studies

On-site sanitation Rural piped water

schemes

Bangladesh Indonesia

Tanzania

Bangladesh

Benin

Cambodia Peru

Instruments

Slide 8

Market Potential - On-site Sanitation

8

As yet untapped market is $2.5 billion: with replacement worth $500 million a year

• In 4 study countries, present sales are estimated at $ 300 million per year

• Market drivers

Rising incomes and falling poverty

Urbanization

BGD:$452 million; 80% poor

INO: $1.7 billion; 11% poor

TNZ: $240 million; 30% poor

PER: $155 million; 40% poor

Slide 9

Market Potential - Piped Water

Market Potential – Piped Water

9

Present market supplied by private sector is large and projected to increase

Country Specific Market Drivers

BGD: Water Quality Issues

BEN: Public Investment in Systems for Lease

CAM: Demand, Service Gap

In 3 study countries

projected revenues

in current systems

will expand to

$90 million annually

by 2025

120 piped water schemes , 30% of total, privately

operated: approx. 500,000 people

In addition to 200,000 using 75 piped schemes , + 60 M

supplied through hand pump supply chains

1.4 M people rely on 370 piped schemes: outside Phnom

Penh, private operators provide 60% of piped connections

Slide 10

• Open defecation can statistically account for all of the India-Africa height gap

• Sanitation alone explains 54% of international variation in child height

• GDP only explains 29%

• Height predicts adult cognitive achievement and productivity

Source: Each data point is a collapsed DHS survey round (country-year),proportional to population. Spears (2012)

Sanitation affects stunting

Lack of sanitation has serious

consequences for generations

India

Piped Water

Slide 11

Demand

Demand for network water is price sensitive

• Competition from other sources

Households prefer a private connection, and will pay

for them if prices are reasonable

• Convenience, and longer availability is valued

Ability to pay water tariffs is not an issue except for

the extreme poor

Slide 12

Business model

Three distinct models • Benin – public investment and ownership, private operation, standpipes,

volumetric charging, regulated tariffs

• Cambodia – private investment, private operation, private metered

connections, volumetric pricing

• Bangladesh – co-investment, private or NGO operation, private un-metered

connections, flat monthly fee

System

design

capacity

large (over

design)

Fixed fees

based on

design

capacity

High levels

of

depreciation

High cost

hurdle per

unit volume

sold

High price,

low

consumption

Low

revenues,

leading to

poor

profitability

BEN

Flat rates

and no

metering

High

uncontrolled

consumption

Total cost of

operations

goes up

High O&M

cost, flat

revenues

Poor system

maintenanc

e & reliability

Poor

profitability BGD

System

quality not

optimal, but

low cost &

low

depreciation

O&M

practice

sub-optimal

Energy cost

high, low

labor cost

Strong

revenue

managemen

t

Offsetting

effects

Positive

profitability CAM

Firm profitability is underpinned by ‘cost-revenue’ structure that is determined by government policy and practice

Slide 13

Investment Climate

Policy matters, since it shapes the opportunities available to the private sector

Access to finance and financial sector lending practices are a constraint to

investment

Energy – cost and reliability – is a major issue

0 50 100 150

Electricity

Telcomms

Transport

No. of mentions as moderate to

severe obstacle

Energy Costs are Large

Labor, 47%

Energy, 39%

O&M, 14%

BGD

Labor, 45%

Energy39%

O&M, 16%

BEN

Labor, 17%

Energy, 65%

O&M, 13%

Rent, 5%

CAM

Slide 14

• Profitability is the key to sustainability

• Right sizing if public sector builds

• Private connections

• Appropriate pricing

• Affordability best pursued by helping poor people

connect, not by suppressing prices or forcing non-

preferred solutions

• Energy supply and pricing a priority

• Facilitating access to finance

Factors affecting expanded private

sector supply

Sanitation

Slide 16

$55

average spend/year

on mobile phone

Demand

Sanitation is low in the expenditure

priority of households, often cited

last in the list.

10th out of 10

8th out of 10

66h out of 6

Income is not a reliable predictor

of use of improved sanitation, and

having improved sanitation does

not mean the person is satisfied

Many poor households

can pay if the product

appeals and costs can

be spread over time

vs $30

average cost of a

hygienic pit latrine

17m use unimproved

Non-poor

39m defecate in open

Priority

Slide 17

Demand

• The problem seems to be that households do not find the readily available and affordable hygienic sanitation solutions to be very appealing

Slide 18

Business Model

Except in Peru, most firms found catering to the poor are micro-firms

with small investments and low turnover

• Only in Indonesia did a

majority of surveyed

enterprises see

sanitation as their main

line of business

• Only between 50%

(BGD) and 20% (INO) of

firms spent on

marketing; many relied

on word of mouth and

public programs

63%

19%

7%

11%

Micro < 5

Small <20

Medium < 100

Large > 100

Investments Unit Bangladesh Indonesia Peru Tanzania

Reports no 34 32 3 13

Minimum investment $ 335 21 2 222 286

Maximum investment $ 24 450 60 963 506 556 31 807

Mean investment $ 5 310 4 663 173 296 11 747

Distribution of Firms Surveyed by Size and

Investment

Slide 19

Technology

The prevailing technology is very simple and non-proprietary: not

readily susceptible to consumer oriented marketing

19

• 70s technology developed for

artisanal production

• Not amenable to mass production

and distribution, nor to branding or

coordinated marketing

• Limited scope to reduce prices to

increase sales: cement, steel, sand

are the main components of costs

Slide 20

Supply chain

Supply chain structure poses significant constraints to articulating a sanitation

value proposition for the poor. Requires a lot of coordination by the

household who may not have the appropriate information.

Supply Barriers

• Fragmented agents

manufacturing or supplying one

or more general component

• No commercial support between

vertical agents

• Inputs pass between agents for

whom sanitation is a small part of

business

• Availability and price of materials

driven by general construction

business

The Bundle

The poor looked to a bundle of

service that includes:

Aspirational product

Turnkey solutions including the

collection of sludge

‘Lay away’ support

Warranty

Better buying experience from

credible sellers offering options

Slide 21

Investment Climate

• The impact of current policies is limited – neither hindering nor

promoting private investments

• National sanitation policies tend do little with regard to private

provision of on-site sanitation

• Most sanitation enterprises fly under the radar of business regulation

• Transport emerges as the most severe obstacle to their business

Slide 22

Constraints lie in weak supply chains

and current technologies

• No agent invests in research, development

and marketing

• No vertical and horizontal integration

• High embedded cost of transport

• Results in high costs of coordination for poor

households

• Lack of affirmative policy towards private

provision may be acting as a hurdle to

engagement of enterprises with capacity to

come to grips with these problems

www.worldbank.org/water

blogs.worldbank.org/water

www.wsp.org

@wspworldbank