The Hard Reality of Sanitation: Why Public Sector Support is Key to Entrepreneurial Success in Emerging Markets
The provision of safe sanitation is a universal human need that is not being adequately met. In 2015, 2.3 billion people lacked even a basic sanitation service (WHO/UNICEF 2017), while best estimates suggest over half the global population lack a safely managed service. For entrepreneurs looking to achieve positive social impact, this spells opportunity. Around the world, a number of businesses are developing new, innovative business models and attempting to take them to scale.
However, entrepreneurs aiming to provide sanitation solutions to the people most in need face huge systemic challenges. As a result, financially viable business models targeting the bottom of the pyramid are currently few and far between. For social entrepreneurs and the private sector to embrace the opportunities in sanitation, we need to accept a hard reality: Sanitation enterprises in BoP communities cannot succeed without support.
What is holding businesses back?
To understand why, let’s look more closely at waste collection – a process that illustrates the complexity of providing sanitation services safely to low-income households. Safe sanitation at the city level requires well-designed, accessible toilets. But in the vast majority of poor communities where sewers don’t exist, containment structures like pits or septic tanks must also be emptied, and the waste transported, treated and safely reused or disposed of. The private sector can play a critical role in this process – but in many cities, businesses that perform waste collection must deal with some intractable challenges, including but not limited to:
- The high fuel cost of transporting waste to treatment sites, which may be at the edge of the city, far away from informal settlements;
- Competition from informal providers, who empty toilets at night and dispose of the waste illegally in nearby watercourses;
- The low level of income available to these households, who have other, more urgent spending priorities.
The reality is that the amount people are willing to pay is lower than the cost of providing a safe and formal service – and emerging findings from ongoing research in Kenya, commissioned by Water & Sanitation for the Urban Poor (WSUP), suggest it may be up to three times lower. At the same time, cheaper but unsafe alternatives are available.
Entrepreneurs who hope to enter this space can have a huge positive impact, but they must know two things. First, they cannot go it alone: Perhaps to a greater extent than other sectors, they will be dependent on direct or indirect support from a willing public sector. This may come in the form of infrastructure investment (for example, decentralised treatment facilities that reduce their transport costs); effective regulation; and potentially tax-based incentives and other forms of subsidy. Second, they have little room for error. Their business model must be fully optimised, which means an intelligent pricing model and measures to control costs.
WSUP has observed this first-hand in the six countries where we have a permanent presence in sub-Saharan Africa and South Asia. Whenever we have targeted our support directly and narrowly towards sanitation businesses, we have failed. But when we have supported solutions to the wider systemic challenges that hold businesses back – including financing, institutional frameworks, policy and regulation – we have made progress.
Trigger points for sanitation business growth
Based on the above factors, it might seem counterintuitive to say we are optimistic about the potential for sanitation business growth in emerging markets. But we are, because we have seen it with our own eyes. Sanitation businesses can succeed with the right internal business model and a supportive external environment. Across the cities where WSUP works, we have observed how a change in either area can have an outsized impact. Where businesses and development actors can identify and push these trigger points, rapid progress can be made in business growth.
A new report from WSUP, “Triggers for growing a sanitation business aimed at low-income customers,” explains this dynamic using case studies from across Africa and Asia. Let’s explore a few of the triggers that are delivering results.
In some contexts, a single but fundamental change to the external environment can catalyse business growth. In Kisumu (Kenya), the introduction of Standard Operating Procedures (SOPs) for regulators has helped a licensed sanitation business serving low-income customers, Gasia Poa, to achieve a positive gross margin. Without the SOPs – which are intended to raise standards across the sector – Gasia Poa would have no realistic prospect of competing with the informal pit emptiers who proliferate in Kisumu.
But internal changes to the business model can also drive growth. A striking example is Clean Team, which provides in-home toilets for a monthly fee in Kumasi, Ghana’s second largest city. Having relied on donor support to cover costs since its inception in 2012, recent adaptations to the business model have triggered an upturn in performance and placed Clean Team on a long-term path towards self-sustainability. The company’s transition to a mobile money-based payment system has been fundamental, contributing to reduced operational costs, reduced bad debts, improved payments and improved cashflow – all supported by a shift to advance payments. Coupled with wider changes – including a move to minimum 12-month contracts – this has resulted in movement from a negative gross margin to a positive margin of over 30%.
In Dhaka, Bangladesh, the performance of SWEEP – a public-private partnership for waste collection – gives further cause for optimism. SWEEP operates through a lease-based agreement: Dhaka Water Supply and Sewerage Authority (DWASA) leases their vacuum tanker to the SME, Gulshan Clean & Care, who pay a monthly fee. In this case the trigger was SWEEP’s differential pricing structure: The cost of serving households in poorer communities is partly covered by higher prices charged to institutional and high-income customers. The business initially targeted the latter group, enabling it to achieve commercial viability within five months. Once the company was established as viable, DWASA (with WSUP’s support) introduced a clause into the lease-based contract, requiring the entrepreneur to ensure that 30% of customers are in low-income communities.
As a result of this public sector support, the business in Dhaka has served 260,000 people, generating $110,000 in total revenue. This has generated $20,000 total profit for the entrepreneur, while maintaining 30% of the customer base from low-income communities.
A virtuous circle
Business development and efforts to improve the external environment are sometimes viewed as alternative solutions. In fact, they are two sides of the same coin. Sanitation businesses aimed at low-income customers need some level of public support to succeed. But once established, the very existence of these businesses can help transform the environment in which they operate. In Lusaka, Zambia, for instance, the demonstration of a business model for waste collection services targeted at low-income customers has helped persuade the local utility of the role it can play in facilitating citywide private sector service provision.
So what should aspiring entrepreneurs take from this experience? In our view, partnerships are key. So is perseverance. And the business model must be continually assessed and adapted to reduce costs and increase revenues, as in any sector. But if we get it right, the potential for impact is huge.
Sam Drabble is Head of Research & Learning at Water & Sanitation for the Urban Poor (WSUP).
Photo provided by author.