What’s the Matter with WASH?: Why Struggling Water, Sanitation and Hygiene Businesses Need More than Just Investment
At Water & Sanitation for the Urban Poor (WSUP), we have long grappled with a big challenge. Though our guiding strategy is built on the belief that market-based solutions will contribute significantly to tackling the world’s biggest challenges, the fact of the matter is that financially viable business models targeting the bottom of the pyramid (BoP) with water and sanitation solutions are few and far between.
How can we help more mission-led businesses achieve profitability? That’s one of the key questions I have been asking recently. My role at WSUP is to support local water, sanitation and hygiene (WASH) providers as they work towards greater business maturity, through capacity-building programmes that develop new tools, improve customer experience and demonstrate investor readiness.
Having transitioned into the development sector a couple of years ago from a background in small business marketing within creative agencies, I was surprised to discover that the challenges and opportunities in the two industries are almost reversed. High-quality products and proven consumer demand were typically a given when developing marketing plans for my small and medium-sized enterprise clients in the UK. But for the managing directors I currently support, this is far from reality. On the other hand, some of the challenges I was used to, such as identifying compelling differentiation strategies to help clients stand out against stiff competition, are simply not an issue with WASH enterprises at the BoP. There isn’t really any competition from other formal businesses.
For most WASH businesses, particularly those seeking to reach the poorest and most vulnerable, the products are not flying off the shelves, despite evident need. And the investment isn’t pouring in, despite limitless demand. In fact, even at times when investment is available, WASH startups lack the necessary strategy and governance to ensure it is utilised effectively.
Where are WASH businesses going wrong?
Despite early indicators of social, environmental and financial success, WSUP’s market-based approaches are proving slow to scale. Many enterprises are struggling to demonstrate credit-worthiness at the level expected by even the most forward-thinking impact investors – let alone mainstream investors seeking a more sustainable portfolio. A new publication from WSUP, A Meeting of Mindsets for SDG Success, explores how fairly fundamental practices – such as managing growth finance and creating and sustaining consumer demand are underestimated in importance by international development actors pursuing market-based solutions, likely because they are so naturally adopted by private sector enterprises in developed countries
Another challenge highlighted in the publication involves the need for businesses to both qualify for investment and prove they can use it. Local services providers in developing markets often struggle to qualify for investment, as they fail to meet the criteria needed for a compelling business case. The report observes that enterprises with the capacity to attract and absorb investment finance typically possess attributes such as a clear governance structure, comprehensive business plan, strong brand and obvious compliance with regulations. Many WASH businesses do not demonstrate these attributes.
As the publication points out, to win over investors, enterprises must also prove that there is a market for their product or service. That means creating customer demand and proving they can sustain it. Both public and private sector product innovation – be it the launch of a new sanitation solution or a new public health initiative – involve convincing people to change their behaviour. Evidence of such behaviour change validates market demand.
To create this demand, successful brands will execute simultaneous push and pull strategies, developing tailored marketing campaigns around well-researched customer segments, while investing in service experiences that encourage loyalty. However, customers are not always predictable, and neither are the environments in which they make choices. Businesses need to constantly focus on customer needs, adapt to changing environments and behavioural trends, and look out for disruptions from other innovators. Product and service providers who do this are far more likely to stand the test of time, achieve impact and prove to be a successful investment.
The problem we have found in the WASH sector is that the public utilities that serve a region generally choose to sub-contract water delivery services to a single area business. Hence, due to the lack of formal competitors, many of these businesses believe they are operating a monopoly, and therefore do not need to invest in demand creation or good customer experience. But this is simply not the case. Even in a location where there is just one official water supplier, customers can choose an illegal water connection or an alternative natural source. This may not seem like a preferable choice to an outside observer, due to the likely compromise in price and quality, but it may be worthwhile in the customers’ eyes – and that’s all that counts. Getting service providers to trust that investing in customer satisfaction is the key to sustainable profitability is no easy task.
Building greater collaboration among WASH stakeholders
Writing for the University of Minnesota’s Institute on the Environment, Will Sarni, CEO and founder of Water Foundry, argues that meeting the global market need for water requires “the characteristics of the business sector,” such as scale, speed in decision making, communication, marketing and innovation. But he explains that “entrepreneurs have speed but not scale, while the public sector has scale but not speed” – and academics, multinationals and non-governmental organisations occupy an important space in between. Clearly, greater collaboration is needed to enable each stakeholder to focus on what they are best placed to contribute.
We know there is a huge amount of investment ready and waiting for viable, growing businesses that can make a difference to the world’s poorest. The Global Impact Investing Network valued the impact investing market at approximately US $502 billion in 2019, and SDG 6 (“Ensure access to water and sanitation for all”) represents a huge opportunity for social, environmental and economic returns.
And yet, there is an irony here: In order to access that investment and scale their impact, WASH enterprises are reliant on funding from development actors such as international non-profits and civil society organisations, rather than private investors. Wouldn’t it be better for those investors to step forward now and support the development sector in making these enterprises bankable, rather than holding back until they are ready for investment? The businesses I work with would gain more from the support, and perhaps coaching, of experienced investors – especially investors who are successful entrepreneurs themselves – than they would from financial investment alone.
Only when working together can we design and deliver truly credible, investment-worthy business solutions, while implementing parallel initiatives that encourage the necessary market conditions for those business solutions to thrive. It’s time for investors to get off the sidelines, and to move boldly to support this emerging – and essential – sector.
Photo courtesy of Manuel Darío Fuentes Hernández.