Why scaling-up safe water has failed - the need for a new paradigm

The figures are known and frightening: According to the United Nations (UN ECOSOC 2016), 1.8 billion people use a source of water that is fecally contaminated, while about 3.4 million die every year from diseases associated with pathogens in water (UN ECOSOC 2016). Now, the number of people without an improved water source has declined, but the quality of water is often still an issue even in urban areas and even where water sources have been improved.

This gap cannot be closed with conventional methods of heavy subsidies and free gifts - a new approach is needed: a new paradigm should be looking at the challenge of reaching people with safe water more as an opportunity and not as a burden only. A Hystra (2011) report states: “Fortunately, a number of alternatives have emerged that can sustainably alleviate the burden on these populations in the short-term, in both rural and urban areas. These alternatives are led by social entrepreneurs, NGOs and corporations, which are both socially-minded and, for the most part, economically sustainable. As a result, safe water access has dramatically improved for millions of poor people, while also being less dependent on subsidies and grants.” However, these promising alternatives need to be scaled-up dramatically, and substantial investments will be needed. According to Hystra, it would need some USD 15 billion to bring these innovative approaches to full scale- of which one third from grants and two thirds in form of loans and equity financing. Also needed is a strong focus on financial long-term viability: it is not acceptable that so many water systems stop functioning due to poor financial sustainability of the water projects.

One small thing is evident: access to safe water cannot go to scale if it is sold below its cost. In this case, every new customer would be increasing the losses, while usually more customers make a business more profitable. In line with this, the old paradigm sounded: the more “beneficiaries” the more subsidies were needed. The secret behind the cell phone revolution is exactly this new paradigm of being profitable even at very low costs through innovative pricing mechanism. The same principles should guide us for scaling-up safe water.

There are, however, some issues and challenges:

• Is it ethical to make money with water? Access to safe water is a human right, and therefore, the ethical question is justified. However, being a human right does not mean free of cost. While it is true that the water falls at no cost from heaven, it is costly to make it available in the form of pumped or piped water, or at a tap. To make polluted water safe, water treatment at the point-of-use is necessary. What is needed is thus to make the water available at an affordable price and not free of cost. It is ethically imperative to be viable and being able to provide safe water continuously. It is – to the contrary - ethical to earn and unethical to lose money as the losses will interrupt the supply of water because of unsustainable delivery systems. This does obviously not justify exploiting people with excessive prices and delivery systems should be efficient, transparent and honest, not leaving out the poor, but also not subsidising those who could easily afford. Sure, often the lack of viability is also due to all types of “leakages”: corruption and bribery are definitively unethical attitudes, especially with the delivery of water and if the privileged pay much less for safe water than the poor.

• Pricing and affordability? It is quite obvious that poor people cannot pay much for their water, however they do often pay much more than rich people, at least for the same quantity of water (in m3). Delivering water is subject to economies of scale: the higher the consumption, the lower the cost per m3. Poor customers with a low monthly water budget are not interesting for a water utility because the costs of a connection cannot be recovered: poor people are not able to pay the upfront connection fee nor do they consume enough to make piped water connections viable. This is even more the case in rural areas where population density is low. Delivering water has a different cost in each location and especially piped connections are usually out of reach for poor households. However, promising pricing innovations have been introduced, especially making safe water affordable for people with lower budgets:
  • Filters, chlorine flasks: making aspirational water filters available through micro-finance and chlorine in flasks or tablets to treat the water at the point-of-use at affordable prices.
  • Solar pumps and taps rather than hand pumps: there is more and more evidence that people are willing to pay much more for water if they get a good service – public taps rather than pumping on their own – and introducing solar pump systems increase the willingness to pay considerably, because it is aspirational.
  • Tap stations: delivering safe water to a tap station where many people will buy water in jerry cans is an efficient way to increase volumes and deliver at low cost due to lower infrastructure investments that are needed (CapEx).
  • Kiosks: selling safe water in small quantities through kiosks and home delivery systems replacing informal water vendors through a branded and more secure service. Such model makes water more affordable, because it is a service and not an upfront investment.
  • Connection costs: lowering the fix initial connection costs through instalment payments, subsidies, and higher per m3 tariffs allows to include customers in slums, for example as means of cross-subsidies.

• How much is affordable? It is still debated what is the right price of water and how much means being “affordable”. Some water specialists mention a rule that the water should not cost more than 3 % of the daily income. But such formulas are not always appropriate, it is just a rough guideline. For example at USD 1 a day, this would mean a daily budget of USD 3 cents per capita. For such an amount, it is quite feasible to deliver some 10 litres of water, or USD 3 per m3. The figure below shows the options of using a fixed daily water budget for small volumes at higher prices or for higher volumes at lower prices. It clearly shows that the “utility” can only reach populations in dense urban areas and that all the other options such as kiosks or household water treatments are important options for the poor especially in rural areas.

• Lack of awareness – there is no market: very often, there is a lack of awareness about the safety of drinking water, especially in those areas where the water is most polluted. People say: “our father and grand-father drank this water, and we are still alive”, or, they say: “yes, the water may be contaminated, but diarrhoea is part of daily life” and is not perceived as a severe problem. These patterns can be positively changed by comprehensive social marketing and health education campaigns, but it requires long-term, massive and holistic campaigns, which do not just tackle rational thinking such as fear of bacteria. Without a risen level of awareness there is no market for safe water, or only low market penetrations are possible. For example there may be some 25% of the population regularly consuming safe water with a willingness to pay for it, but the majority may be either indifferent or not willing to pay. Such low safe water consumption rates do not only lead to high child mortality and morbidity, but make also the viability of a last mile delivery challenging. It is therefore recommended to invest (public) funds in awareness and market creation campaigns for safe water (see more below). There are significant regional differences in safe water awareness: for example, in Cambodia, boiling has become a standard procedure even for many rural families and more than 70 % boil the water. Once such a degree of awareness is achieved, people are much more likely to treat their water.

• People want aspirational products: most people – including the poor - have similar dreams and desires as everybody. Aspirational products, e.g. nicely designed filters, or prestigious services reach people more easily than solutions that only target fears and rational behaviours.
  • Antenna Foundation has tested several business models to deliver safe water both through filters, chlorine flasks and chlorinated water. The experiences are encouraging, despite the financial challenges to reach the poor. The subsequent examples illustrate some of these achievements:
  • Hydrologic – a social enterprise in Cambodia - has introduced the “Super Rabbit” ceramic filter. It is a nicely designed aspirational filter sold for USD 36. It is made available through micro-loans, and almost everybody prefers this model over the normal “Rabbit” filter sold for USD 18. A filter in Cambodia is a convenience good and saves time and money for boiling. But it also saves on medical expenses: a study has shown that total annual savings can sum up to USD 150.
  • Spring Health, a social enterprise in Orissa, India, is delivering chlorinated water in 20 litre jerry cans. Initially, there was an option to fetch the jerry cans at a mom-and-pop shop at a reduced rate of INR 3 (USD 0.045), or have home delivery for INR 4 (USD 0.06). Over 90 % of the people preferred home delivery and were ready to pay more. Home delivery is prestigious and is perceived as a higher status if the neighbour gets the water delivered home, especially by a - motorised - rickshaw.

• Cost of last mile delivery is high: the cost of last mile delivery is high, especially in rural, not-densely populated areas. The lower the market penetration rate, the more difficult it is for a last mile delivery service to break-even. Smart and effective social marketing campaigns can raise this awareness, increase the willingness to pay and thus significantly contribute to lowering the cost of last mile delivery through higher volumes. However, smart marketing strategies and highly efficient distribution logistics are crucial and a challenging task.
  • Hydrologic experienced that marketing through a direct sales force is much more effective to convince people in Cambodia than marketing through shops where the sales process is passive. But it is costly and requires higher margins that were not possible to achieve with the standard “Rabbit” model. With the more expensive “Super Rabbit” the mobile sales force can now make enough money.
  • Similarly challenging is operating a viable safe water home delivery in rural villages of Orissa, especially in view of raising rural wages: in 2010, a delivery boy was happy to earn INR 100 (USD 1.5) per day, but in 2016, rural wages have risen considerably and are higher than INR 200 a day. This means that it is not anymore sufficient to deliver 100 but over 400 jerry cans must be delivered per day to break-even, and this is the reason why Spring Health has switched to motorized rickshaws for home water delivery.

• No more product-subsidies or free gifts: for all this, it is essential to create a market and a culture of willingness to pay for safe water. Subsidies or free gifts cannot only distort the markets and create an attitude of “beneficiary” instead of creating a solid customer base. But even more important is it to create a viable supply chain network: If nobody can make money in delivering, safe water will not be available, especially when subsidies dry out. Many well-intended approaches to bring safe water to the poor have thus failed. For example, in Nepal, the price for chlorine sold in flasks has been kept artificially low – below the production cost – and before the earthquake occurred in spring 2015, production of chlorine had dropped from some 700,000 flasks a year to only 65,000 flasks per year. The reason for the under-pricing was always justified “because they are poor”, a totally misleading perception, as most customers buying chlorine in Nepal were from the middle class: chlorine was sold in urban pharmacies only.

• Plea for smart subsidies: This new paradigm is not against subsidies as such, but against distorting subsidies that hamper the creation of a market and a sustainable supply chain. In simple terms: all subsidies that stimulate a market – for example in comprehensive and long-term awareness and health education campaigns – are most welcome and necessary. These subsidies do not distort markets, they create them. Accordingly are smart subsidies all those subsidies that tackle CapEx types of cost such as:

1. Lowering connection fees for piped water.
2. Creating awareness for safe water through large-scale and comprehensive social marketing campaigns and
3. Providing financial aids for feasibility studies, validations of business models, micro-finance schemes and similar activities.

Un-smart subsidies are all those that:

1. Distort market prices and subsidize the operational costs (OpEx).
2. That give away goods free of cost (and thus discourage people to pay).
3. That will interrupt or kill the viability of a supply chain if they stop.
4. Lower the desirability of a product by creating the image of a “product for the poor”.

Dumping free products can destroy markets and kill firms and supply chains. This attitude should become highly penalised, because it can threaten lives!

• Effective social marketing campaigns: One of the examples of an effective and comprehensive social awareness program was the “Blue Bus” campaign in Nicaragua after Hurricane Mitch in 1998. It was comprehensive and had several components such as films, children songs, and demonstrations in all villages where a blue bus went and stopped for a day or so. The entire village could in this bus learn about safe water, children could see bacteria in a microscope, but the campaign was also joyful and had booklets for children, songs and plays. Unfortunately, this campaign stopped a few years after the hurricane, for lack of funds. The campaign was very nicely designed by local social marketing firms and supported by the Johns Hopkins University Communication unit.(AINSLIE R. 2005). A comprehensive campaign would combine mass media such as Bollywood films as a trigger and spread targeted messages that are not only communicated through rational means (flipcharts creating fear of bacteria) but also triggering a social process.

• Inclusion of the poor: it may be necessary to find a solution to include the poorest who may not afford to pay the regular retail price. But it is challenging to identify those groups of poor and not spreading subsidies over the entire population. Unfortunately, most subsidies are benefiting the middle classes. Subsidies to include the poorest should be very strictly targeted and not invite free-riders or depreciate the value of the product or service. It is recommended to use intelligent product differentiations that clearly distinguish between the subsidized versions for the poor (for example the “Rabbit” filter) from the more prestigious “Super Rabbit” filter.

The new paradigm is a radically different approach from the past and can be summarized with the following keywords:

• Customers not beneficiaries: people should be considered as customers with desires, aspirations and legitimate needs. They should pay for products and services but have the right to complain if the service is not up to the mark. For example, Hydrologic has a hotline and a 2-year warranty on each filter they sell.

• Subsidies for market creation: massive public investments are needed to create markets for safe water and raise the awareness levels in schools, through mass media and influencing village leaders, using idols such as sports people and film stars. This is a public task and cannot be performed by private companies, because the effect of creating a market is generic: it helps all the suppliers and if one supplier develops the market, he creates an opportunity for free-riders who have not invested in social marketing.

• Profitable businesses for delivery: the delivery of safe water solutions should be left to the private sector and should be profitable. Excessive prices should be tackled by creating and allowing for – fair – competition and not through product subsidies.

• Attracting investments: there are by far not enough public funds to invest in water delivery and unless such investments can become profitable, millions of people will simply not get access to safe water. The danger of exploitation is minimal compared to the mind-boggling absence of investments in this sector.

• Including the poor: there are poor people who may not have enough money to pay for the full service. Such groups can be supported by product subsidies, but the subsidies should be very well targeted to the really poor and not across the board. It is also preferable to offer a product differentiation for this subsidised market segment, for example the “Rabbit” filter which is still disseminated by NGOs but does not hamper the aspirational characteristics of the “Super Rabbit”.

• Smart social marketing: when Koch discovered bacteria as the main cause for cholera and tuberculosis, massive social awareness campaigns were initiated in industrialized countries during several decades to eradicate unhygienic conditions and attitudes. We need such types of massively supported public awareness campaigns to prepare the ground and create markets for safe water.

Focus on massive public awareness programs to create a market for safe water, but let the private sector flourish to deliver it. Strong and effective regulation is needed to attract investments, ensuring transparency of operations, but the main shift is to focus on “customers” rather than on “beneficiaries”. People are willing to pay for a good service and providing reliable services should be a profitable and respected business.